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OFG Bancorp
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[Call starts abruplty]
Higher yield. This accounted for 43% of the increase in net interest income. Two, the increase in higher-yielding investment securities. This accounted for another 43%. And three, higher yield on lower volume of cash. This accounted for 23%. In turn, all this was slightly offset by the small increase in the cost of interest-bearing liabilities.
Please turn to Page 6 to review our credit quality and capital strength. Looking at net charge-off, they totaled $11.3 million in the third quarter. About half of that came from 2 commercial loans we provisioned from in the second quarter. The remaining balance came from auto and consumer loans. In part, that was due to higher loan volumes. Also, late payments as a result of Fiona were a factor.
Looking at provision for credit losses. Total provision was $7.1 million. Two main factors affected the non-PCD portfolio. One was higher auto and consumer loan balances. This added $8 million. The other was an increase in the qualitative component of the allowance to account for potential Fiona-related losses. This added $1.3 million. The PCD portfolio benefited from reduced balances and an improved performance of residential mortgage loans. This led to a recapture of $2.8 million. Third quarter allowance coverage ex PPP was 2.33%. That's down 5 basis points from the second quarter.
Looking at nonperforming loans. The total NPL rate was 1.55%. That's down 6 basis points from the second quarter and 53 basis points from a year ago. Overall, credit was stable with a little glitch at the end of the quarter due to the effects of Fiona.
Capital remained strong. The CET1 ratio was 13.34%. That's up 12.8% in the second quarter. Total stockholders' equity dipped a little below $1 billion. This reflects reduced other comprehensive income, partially offset by the increase in retained earnings. The TCE ratio held fairly steady at 8.83% compared to the second quarter.
Now, here’s José.
Thank you, Maritza. Let's turn to Page 7 for our outlook. We're finishing the year with good momentum. We plan to continue to expand our digital-first solutions to provide customers with an easy-to-use 24/7 self-service capabilities. We also plan to continue our focus on growing retail and commercial loans and customer relationships as well as our investments in people, technology and network infrastructure. Ultimately, we're focused on exceeding our performance metrics, specifically efficiency ratio, return on average assets and return on average tangible common equity.
As for the Puerto Rico overall picture, consumer and businesses continue to have high levels of liquidity with excess deposits in their accounts. However, we remain vigilant for any economic repercussions from the worldwide inflation trends and the higher rate environment we operate in.
Having said that, we continue to believe that on a relative basis, Puerto Rico will perform better economically than the U.S. given the flow of reconstruction and rebuilding funds coming to the island. Thanks again to our resilient team members for always being more than ready to help our customers achieve their financial goals.
This ends our formal presentation. Operator, please start the question-and-answer session.
[Operator Instructions] We will take our first question from Alex Twerdahl with Piper Sandler.
First off, I was hoping you could expand a little bit on some of the comments you made about Hurricane Fiona. I think you mentioned credit stability with the exception of some impact from the hurricane. And I was hoping maybe you can sort of expand on that a little bit. And is that what attributed to a slightly higher level of early-stage delinquencies that you saw at the end of the quarter?
Sure. So we continue to see credit trends relatively stable. Unfortunately, we had at the end of the quarter the Hurricane Fiona strike the Southern West part of Puerto Rico. So it kind of -- kind of clouds a little bit the picture. But I can share with you a little bit of what has happened after the quarter end in terms of the delinquency levels or at least the delinquent auto loans. So just to share a little bit color here, the additional delinquencies that we had at the end of the quarter, so far, 30% of that have already put themselves back current. So that's kind of an indication of end of the quarter kind of disruption due to Fiona.
Also, just as part of the deferrals that the customers have requested, Alex, on the consumer side, we're talking around 600 to 700 of them, a total of $13 million to $14 million. So we're really not seeing that significant effect. So we feel that things should normalize after that end-of-the-quarter event. You can also say that on the commercial side, there was no effect whatsoever and we didn't see any effects from Fiona. So that's from the credit side. So at this point, we continue to see credit stable and encouraged by what we're seeing in the -- on the ground in terms of the economy.
Great. That's helpful color. And then maybe the same point on loan growth and, obviously, a hurricane hitting with 2 weeks of the quarter remaining and I imagine there was probably some disruption on everything down there. Did you see loans that maybe would have closed at the end of September get pushed into October? Or maybe just sort of comment on that piece and then also kind of what you're seeing from the pipelines overall. And then just the third part of the question, just the seasonality that you alluded to on the C&I book, is that going to reverse anytime soon?
Yes. So we are still seeing loan growth in the -- for this year in the mid-single digits. End of the quarter, we might have had some closings that were postponed but I don't want to make too much of a deal out of that. I actually think that the biggest impact on loan growth in the quarter were a couple of commercial account lines of credits that were fully paid because of excess liquidity that our customers have and that accounts for in the vicinity of $50 million to $60 million. So, I'm just giving you a little bit of the detail of what's happening within our commercial book. We do have a very good pipeline coming into the end of the year and we continue to feel optimistic about, again, our target here of mid-single digits for the end of this year.
When you look -- when we look at loan growth, we're seeing positive origination trends. We're seeing positive strong pipeline. But certainly, pay-downs and the line utilizations are down. So that's kind of what's having that effect. Hopeful that next year, we'll have more line utilization.
And frankly, I also need to point out that higher interest rates are also putting a little bit of a dent on loan originations because rates are significantly higher. And as everybody knows in this call, they've gone fast -- higher, faster than in the last 100 years. So it's having an effect on our commercial clients thinking about financing projects for the longer term. So I'm not saying that we're slowing down but it's certainly going to have an effect.
Got it. And then next question for me, just on the overall size of the balance sheet with some of the deposit outflows. The balance sheet is now sitting just over $10 billion. Last year, you guys were able to defer Durbin by a year. And I'm just curious how you're thinking about sort of balance sheet management going into the end of the year, especially considering that obviously pushing Durbin out another year would be a substantial savings.
Yes. So we are a lot better positioned this year than last year to achieve it. So let's see how the fourth quarter plays out. Deposit trends are stabilized after the end of the quarter given what I mentioned earlier about the -- some commercial clients using their excess cash to pay down lines and stuff. So we'll update on what the outcome is about the $10 billion mark by the end of the year. But certainly, we're -- at this point in time, we're closer than we were last year in terms of total assets. I can say though that at the bank level, we closed below $10 billion. So the CFPB gets postponed because it requires 4 consecutive quarters of compliance, so of -- above $10 billion. So in that end, we are kind of pushing it for 4 more quarters.
That's great. And roughly how much does that save, the CFPB component?
I'm sorry?
Does that CFPB component result in any savings that you can point to?
Not really because we already are planning on being above the $10 billion at some point in time in the near future. So we are preparing ourselves to be fully compliant. It just gives us more time. So it doesn't have an effect on that.
Great. And then just one final question for me. I was hoping you could just remind us what the tax treatment for the purchases of U.S. treasuries are down in Puerto Rico. My understanding is that there are some differences to how a U.S. bank might report taxes on those purchases. I’m just wondering if you could remind us if that’s the case.
Yes, I'll let Maritza answer that one.
Yes, we do have benefits on the income from the treasuries that we invest. So there is a tax effectiveness that we would benefit from that investment.
So, those don't -- so on a tax-affected basis, those might even be higher than you might see in a U.S. bank. Does that wind up having a material impact on your tax rate over the next couple of quarters?
Yes, that's correct.
We will take our next question from Kelly Motta with KBW.
Great quarter here. I thought I might start on efficiency. Last quarter, you lowered your efficiency outlook to the mid-50s range and you’re currently there given the strong NII growth you’ve had. Just wondering if you could maybe update us on your outlook for efficiency and kind of how you’re managing expenses to that, whether stronger NII should maybe allow efficiency to move lower than the mid-50s or if you’re going to continue to invest and have expense pressures that will kind of keep you there. Just any color on that would be very helpful.
Thank you, Kelly, for your question. So we will and we are and we will continue to invest in our infrastructure, our network. It's our path towards differentiation in this market, the 24/7 self-service digital-first kind of perspective. And that requires us to continue to maintain our efficiency targets in the mid-50s. Having said that, we're benefiting from operating leverage, as Maritza mentioned and we work towards surpassing the goals that we set ourselves on a quarterly basis and on a yearly basis. So we're sticking to our mid-50s efficiency ratio because we want to also have the flexibility to accelerate some of the investments that we might need to make in terms of technology. But -- and that's kind of our view of this from a business strategy perspective. So that's the best I can give you in terms of color.
That’s super helpful. And circling back to the Hurricane Fiona impacts. One of the items you called out were fee waivers and the reduction in activity that made fees slightly lower this last quarter. Just wondering if those fee waivers have ended and we should expect a more normalized quarter or if that’s something that’s going to continue into Q4 be a consideration.
Yes. So we offered -- as you know, when an event like Fiona hits us, we got to be on the lookout first for our people and then for our customers. And we did -- we do both. It's kind of our standard operating procedure. And in terms of our customers, we waived the fees and we waived the fees until September 30. So the fourth quarter should not have an impact on the waiving of the fees. So that's kind of a one-quarter event.
Got it. And last question for me on the buyback. It doesn't look like you repurchased any shares in the quarter. I believe $36 million remain on the authorization. Just wondering about your appetite for buybacks and thoughts about completion, yes.
Yes, got you. Look, Kelly, we are -- we remain extremely optimistic on our outlook for the fourth quarter and 2023. We also are vigilant for the clouds that are getting closer and closer in terms of inflation and interest rates going up and all the recessionary talk and reality that we will probably be operating in. So when we look at our balance sheet, the key to our long-term success has been operating with a very strong balance sheet and operating with strong capital levels. And that has allowed us to weather all the storms that we've had to dealt with in the last 20 years that I've been almost CEO. So when we are looking at buybacks today, yes, we might be able to go out there and be more aggressive on the buybacks. We will remain opportunistic but we also want to have the strong balance sheet in the event that there is an economic situation in the world and the repercussions that it might have in Puerto Rico.
So that's kind of how we view this. That doesn't mean we're not going to be in the market if there is a good opportunity for us to do so. But we feel at this point in time, we have to operate with a stronger balance sheet than normal and making sure that when the clouds subside, we'll be in a lot better shape and position. So that's kind of how we view this. And that's been our recipe for success and, in some instances, survival in this market and that's -- ain't going to change in the near future.
We will take our next question from Brett Rabatin with Hovde Group.
Wanted to, first, José, just talk about – you mentioned Fiona and talked about that. Can we talk about maybe just the reconstruction, so to speak, of Puerto Rico since the last big hurricane? I saw that the GAO warned the subcommittee for the House of Representatives here recently that the reconstruction wasn’t advancing as fast as maybe it should be. Can you just talk about what you’re seeing besides the hurricane activity in terms of rebuild and what progress has been made in your mind?
Sure. Thank you for your question, Brett. So if there's a silver lining for -- on the Hurricane Fiona hitting the island, it's the awareness and the fact that Washington and Puerto Rico leaders realize and makes it patently clear to them that the reconstruction and rebuilding efforts need to have higher urgency than what they have exhibited in the last several years. So to me, after Hurricane Fiona and the focus on Puerto Rico again and the fragility of the electric grid, I actually think that there is a lot more focus and it's an opportunity for local and federal officials to collaborate and kind of get things going. Because at the end of the day, we need to have a more reliable, resilient, low-cost, diversified, well-governed not only electric grid but also infrastructure, public services.
So to me, that's the silver lining. I can't quantify it but I certainly see a lot higher-level federal officials being involved in this reconstruction process and trying to look at ways to facilitate the flow of funds into the island. So the jury is still out there though. The proof is in the pudding, right? That's what you see. That's what you hear. But the proof is in the pudding. And hopefully, they deliver.
Yes. Let’s hope that the LUMA uses this as an opportunity to improve the grid and its resiliency and maybe cost as well.
And Brett, if I may add, Brett, I also think that it doesn't change the thesis. Actually, it enhances the thesis that Puerto Rico's economy will, on a relative basis, perform better than the states. Because simply, the size of the economy relative to the amount of funds coming in and hopefully accelerate coming in, it should certainly solidify the thesis. So that's kind of how we see it.
Okay. And one of the other questions I had, I think people were concerned about, to some degree, as the Manheim Index has finally turned lower, that as car prices possibly decline, maybe both new and used, that, that might have an impact on your credit quality. Can you just talk about auto for a second and just how you think about the potential decline in auto values impacting your portfolio?
Yes. So I read the same reports. I just want to point out regarding the auto market in Puerto Rico. First, Puerto Rico is an island without a mass transportation system to rely on. So automobile sales are skewed positively, simply because if you don't have a car, you can't go to work. So that's kind of the first differential. The second one is, I think there was -- there has been pent-up demand for many years. And I think after the pandemic or during the pandemic and all the cash coming in into consumers allowed them to kind of change their vehicles. So I am surprised at the sales of new auto still at the level they are. I think it was exacerbated because of the inventories and some brands did not have the inventory levels here in Puerto Rico, so that was affected. And in that sense, I think we will see a little bit of a normalization in terms of the sales.
In terms of the prices, I think they're also going to normalize. I think at the end of the day, when you're lending to an auto client, you look at the auto collateral as an important component of the credit but it's all about the consumer. I mean it's something that we've been focused on for 12 or 11 years now. And what we have done is really increase the credit profile or with a better consumer profile, credit profile originations all throughout the last couple of years. So at the end of the day, it's a high-yielding asset for us. It's yielding on -- our book is yielding north of 8.5%. And as you are seeing, charges are significantly lower than what they were in the prior cycles in the island. So we're actually really encouraged and actually gaining market share against our competitors.
So it's an area where we see it normalizing and stabilizing. I don't think we're going to keep the same origination levels but we are not seeing any deterioration in -- or significant deterioration in prices of the cars and/or the credit profile of the consumers.
Okay. I appreciate that color as well. And then maybe just last, on the margin, given you only had 4 basis points of deposit cost increases this quarter which was really nice versus the mainland and I do believe that betas will lag the U.S. Can you talk about maybe the margin from here? It seemed like it would continue to move a little bit higher. But then as you mentioned, as rates continue to move higher, it gets tougher to originate loans maybe at higher rates. What do you think the outlook is for the margin maybe past the fourth quarter?
Yes. So as you pointed out, our betas are significantly lower than the U.S. peers. And that's given us the ability to -- this is the first cycle in many decades where the banking system is operating with excess core deposits. So that's number one. Number two, we only have 3 or 4 banks in the island versus 10 or 12 that we had. So those components are definitely going to, in my mind, make us perform differently, positively different, versus the U.S. mainland banks in terms of the deposit betas. So that's number one.
Number two, I -- in terms of the margin, the speed and magnitude of the interest rate increases by the Fed is certainly benefiting us and it will continue to impact positively our margin. And we are still seeing that. We're not going to see the same rate of increase. We're not going to see the same magnitude of the increase in margin as we've seen in this year because we expect cost of funds creep up a little bit. But in general, to me, the biggest kind of thing that we need to be vigilant on is how our higher interest rates on variable commercial loan's going to potentially affect commercial clients. So far, we're not seeing anything and we have a pretty close eye put on that.
So that's kind of how we see margin. That's how we see betas. And that's a little bit how we are seeing the effect of higher interest rates on our commercial clients.
[Operator Instructions] We'll take our next question from Timur Braziler with Wells Fargo Securities.
Maybe just a couple of follow-ups first. Going back to Alex’s question on the $10 billion balance sheet size, José, you said you’re better positioned this year to achieve it. Are you meaning you’re better positioned this year to kind of go below $10 billion in the fourth quarter and delay Durbin? Is that the…
That's correct, yes.
Okay. And I know that as the balance sheet had been growing through the year, that was less of an emphasis and you guys are better positioned to absorb Durbin. Does this just kind of fall in your hands somewhat just given the outflow of deposits you saw in the third quarter? And maybe just talk longer term about, as we go into '23, overall balance sheet size and how that factors into the strategy.
Yes. So what we're seeing right now is interest rates -- I'm sorry, balance sheet growth is probably going to be somewhat challenging given what we're seeing with interest rates. So it's an opportunity for us this year to fall below the $10 billion mark but I don't want to precipitate the outcome here. I'm just saying that we're in a better spot today. Into next year, we still have excess deposits. So we will deploy those deposits primarily into loans if we have the opportunity to and we see the opportunity to grow on the commercial side as well as on the consumer side but primarily on the commercial side. So when you look into 2023, loan growth is probably on the low single digits. And that is still going to be a scenario where we're going to be in the vicinity of the $10 billion mark into 2023. We're going to be up or down there, depending on how our commercial customers behave in terms of their liquidity and also how the competition in Puerto Rico reacts to higher interest rates. We're already seeing some of it.
So at the end of the day, those are the variables that we are looking at in terms of how the balance sheet size moves. But it doesn't seem to us that we're going to explode above the $10 billion anytime soon, so we're going to be navigating this level.
Okay. And for that type of loan growth assumption for '23, just looking at the puts and takes, I'm assuming you're expecting continued strength on the commercial side. I know commercial originations have declined for a couple of quarters in a row now. I'm assuming you're expecting that to kind of turn and then the offset would just be lower production out of consumer and auto. Is that the right way to think about '23 loan growth?
Yes, yes. We're -- the macro base case scenario that we're using for next year is basically the global economy is going to come into a recession and there's going to be an impact at some level in Puerto Rico and, therefore, it's going to have an impact on loan originations across the board. Having said that, we talked about it earlier, we do have a different dynamic here in the island given the rebuilding and reconstruction funds. So we are seeing single-digit loan growth mostly driven by commercial. And we're going to still see mortgage balances going down. And consumer and auto will move up but it won't -- I don't -- we don't expect them to increase at the same level that they have increased this year.
Okay. And then just putting the funding base in context with that line of commentary, it seemed like some excess liquidity was used to pay down lines this quarter. I guess, what's the incremental capacity? Or I guess, what's the incremental level of kind of excess deposits, as you called it, that they're still on the balance sheet? And with that willingness to kind of let some of that money be used to pay down loan balances, Maritza said that the beta is going to outperform prior cycles. Can you give us a sense of what you're expecting for through-the-cycle beta and kind of how that transitions here in the fourth quarter and then through '23 after the Fed stops hiking?
Yes. So the first part of your question is hard to answer, what's the excess liquidity that our clients have right now. But certainly, higher interest rates on their lines of credit is motivating them to use their cash, to bring them down. So I can't give you an answer to the first part of the question. But I can share with you a little bit of data here in terms of the beta in a different cycle. When we were in the 2016-2019 cycle where interest rates went up, our beta was around 17%. So that's kind of what we had in that scenario in 2016-2019, where the competitive landscape was somewhat different than it is today. And -- but certainly, the speed and the magnitude of the rate increases was also different. So one might negate the other. Right now, we have a beta of around 3%, little less than 3%.
So as Maritza mentioned, we feel that in this cycle, what we're seeing today, we will have a beta that it will be lower or, similarly, if you want to be conservative, to the last cycle where we had around 17% beta. But the jury is still out there simply because, in my mind, rates have gone up significantly and very -- in a very short period of time. So let's see how the Fed manages the whole transition from growth to stabilization and reduction in inflation. So we'll give you more details in the next couple of quarters.
Okay, that's great. And then just last for me, going back to Kelly's question on the buyback and kind of your response. Is that implying here that we're kind of through the excess capital position? I mean capital ratios improved in the third quarter versus the second quarter where you guys were active in the buyback. So I'm just wondering, is that just increased caution on your end and then trying to be opportunistic or...
Exactly. So it doesn't change the long-term view. We know we have a good strong capital position. We're seeing the landscape shifting in terms of the global macros. And we just want to be careful. We want to make sure that we get our hands around what's really going to happen. Typically, when interest rates go up in this amount and at this speed, typically, there is a moment of truth. It could be junk bonds. It could be a housing bubble, you call it. So we need to be vigilant. We need to be good stewards of capital. And that's what we're doing. But that doesn't change the longer term. We understand the benefits of buybacks. And we understand the benefits of dividend increases. And we've been delivering it this year. And we'll be on the lookout. And if we need to execute on any opportunity, we will do so.
But I just want to -- my comment comes from more of the macro environment that we're seeing. And typically, it ends in a bad spot globally at some point in time. And I just want to make sure that we're not caught off guard.
Got it. No, that makes sense. And sorry, I know I said that was the last question but if I can just ask one more on the allowance. So it looks like over the last couple of quarters, we've seen some level of normalization of credit. And in that dynamic, allowances still trended lower. Just looking at the allowance ratio here at 2.3%, is that fairly stable? Is there still some room to take some reserves off the table here just given maybe the more broad improvement off of when you originally put that on? Or should we expect that level to be more or less flat here going forward?
Maritza will take that one.
Yes. Timur, how we see it at this point, 2.33% and given the scenario with marine [ph], we feel that the delinquency is stable. We have some glitch during the quarter due to Fiona but we will keep an eye on how the payments will continue to come in. But in general, we think that, so far, we see that coverage stable at this point. We don’t see any potential releases of reserves. I think it’s adequate at this level and that’s the scenario we’re managing at this point.
[Operator Instructions] At this time, there are no further questions. I would now like to turn the call back over to you, Mr. Fernández, for any additional remarks.
Thank you, operator and thanks again to all our team members for their hard work and dedication. Thanks also to all our stakeholders who have listened in. Until next time. Have a great day.
We would like to apologize for anyone who had problems listening to the first part of the webcast. A webcast replay should be available shortly after the call ends. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.