OFG Bancorp Q3 2024 Earnings Report

OFG Bancorp EPS Results

• Actual EPS: $1.00
• Consensus EPS: $1.02
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $0.95

OFG Bancorp Revenue Results

• Actual Revenue: $174.10 million
• Expected Revenue: $178.25 million
• Beat/Miss: Missed by -$4.15 million
• YoY Revenue Growth: +1.10%

OFG Bancorp Announcement Details

• Quarter: Q3 2024
• Date: 10/16/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, October 16, 2024
• Conference Call Time: 10:00AM ET

OFG Bancorp (NYSE:OFG) is a financial holding company headquartered in San Juan, Puerto Rico. Through its principal subsidiary, Oriental Bank, the company provides banking and financial services to individuals, businesses and government entities in Puerto Rico.

Oriental Bank offers a range of products and services, including checking and savings accounts, commercial and consumer loans, residential mortgage lending, credit cards, cash management, online and mobile banking, and investment and trust services. The company also provides wealth management, brokerage and insurance-related services through affiliated businesses.

OFG Bancorp traces its history to 1964 and has built a regional banking franchise focused primarily on Puerto Rico. José Rafael Fernández serves as the company’s president and chief executive officer, as well as chief executive officer of Oriental Bank.

OFG Bancorp Q3 2024 Earnings Call Transcript

Key Takeaways

• Q3 Financial Results: Diluted EPS of $1.00 was up 5.3% year-over-year on 1.1% growth in total core revenues, with net interest margin at 5.43% and total assets rising 12% year-over-year to $11.5 billion.
• Digital Adoption Gains: Ninety-five percent of routine retail transactions and 97% of deposit transactions were conducted through digital channels, driving 13% growth in digital enrollment and 53% growth in digital loan payments.
• Loan and Deposit Growth: Loans held for investment grew nearly 7% year-over-year to $7.8 billion with $572 million in new production, while customer deposits reached $9.5 billion despite a modest shift from demand to savings and time deposits.
• Credit Quality & Capital: The net charge-off rate was 0.90%, provision expense totaled $21.4 million, and the CET1 ratio stood at a strong 14.37%, supporting continued capital strength and potential shareholder returns.
• Outlook & Strategy: Management expects Q4 net interest margin of 5.3%–5.4%, anticipates two Fed rate cuts by year-end, plans non-interest expenses of $91 million–$93 million, and remains opportunistic on dividends and share buybacks while investing in digital innovations.

Presentation

[Operator]

Good morning. Thank you for joining the OFG Bancorp's conference call. My name is Connie, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and César Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the third quarter twenty twenty-four section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise.

[Operator]

After the speaker's remarks, there will be a question-and-answer session. At that time, I will give instructions. I would now like to turn the call over to Mr. Fernández. Please go ahead.

[José Rafael Fernández, CEO at OFG Bancorp]

Good morning, and thank you for joining us. We are pleased to report our third quarter 2024 results. It was another solid performance. Earnings per share were up 5.3% year over year on a 1.1% increase in total core revenues. We continue to produce consistent core operating results, and digital adoption of our new and upgraded product services and self-service tools keep steadily growing. Puerto Rico's economy continues to do well, with high levels of business activity and employment. In addition, today marks our 60th anniversary in business. While that is cause for celebration, it is a time to renew our commitment to bring progress to our customers, employees, shareholders, and the communities we serve. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow.

[José Rafael Fernández, CEO at OFG Bancorp]

Before I go on, I would like also to comment on the recent hurricanes in the Southeast United States. As an island where people have suffered through many of them, our prayers and heart go out to everybody who has been affected by Helene and Milton. Please turn to page three for a summary of our second quarter results. Looking at the income statement, we reported earnings per share diluted of $1 on total core revenues of $134.1 million. Net interest margin was 5.43%, provision was $21.4 million, non-interest expenses were $91.6 million, and pre-provision net revenues total $83.1 million. Turning to the balance sheet, total assets were $11.5 billion, up 12% from a year ago and up 2% from last quarter.

[José Rafael Fernández, CEO at OFG Bancorp]

Customer deposits were $9.5 billion. Loans held for investment totaled $7.8 billion, and new loan production was $572 million. Investments were $2.6 billion, up 26% from a year ago and up 5% from last quarter. Cash at $681 million was up 28% from a year ago and down 8% from last quarter. Looking at capital, the CET1 ratio was 14.37%. There were two corporate developments of note during the third quarter. Durbin took effect, which reduced debit card interchange fees by $2.7 million, and we acquired servicing rights in late August to a $1.7 billion Puerto Rico residential mortgage loan portfolio. Please turn to page four for an update on our digital-first strategy.

[José Rafael Fernández, CEO at OFG Bancorp]

As of the third quarter, 95% of all routine retail customer transactions, 97% of retail deposit transactions, and 67% of retail loan payments were made through our digital and self-service channels. This has been driven by year-over-year growth of 13% in digital enrollment, 53% in digital loan payments, 40% in virtual teller utilization, and 4.6% in customer growth. In addition, customer reception to the Oriental Servicing Portal continues to expand. By the end of September, 30% of all retail clients were using it to transact business with the bank, up from 24% at the end of June. All this frees up our branch bankers to grow business and provide value-added advice to our customers.

[José Rafael Fernández, CEO at OFG Bancorp]

As I mentioned on our last call, we launched the Elite Deposit Account for retail customers, a combined checking and savings account that rewards customers for expanding their relationship with Oriental. This represents a unique value proposition in our market. Since then, we have further enhanced the account with the launch of the first-of-its-kind debit card in the Puerto Rico market, offering World Elite benefits exclusively for Elite account holders. In addition, we offer fully digital account opening with funding for all our retail checking and savings accounts. Now, here's Maritza to go over the financials in more detail.

[Maritza Arizmendi, CFO at OFG Bancorp]

... Thank you, José. Please turn to page five to review our financial highlights. Starting with the components of core revenues, total interest income was $189 million, up 1% or $1.4 million from the second quarter. This mainly reflects higher balances of investment securities and yields, higher balances of loans, and the absence of a $2 million loan recovery in the second quarter. If you recall, since late last year, we have been growing the investment portfolio to help manage the anticipated lower rate environment going forward, adding higher-yielding U.S.-guaranteed longer-duration securities. Total interest expense was $41 million, an increase of less than $1 million from the second quarter. This mainly reflects higher balances, higher average balances of higher cost borrowings and brokerage deposits, as well as slightly reduced average cost deposits, core deposit balances, and costs.

[Maritza Arizmendi, CFO at OFG Bancorp]

Total banking and financial service revenues were $26 million, a decrease of $5.8 million from the second quarter. This mainly reflects the $2.7 million in reduced interchange fees that José mentioned, $2.1 million in reduced MSR valuation due to lower long-term rates, $300,000 in one-month revenue from the new mortgage servicing portfolio, and the absence of $1.1 million from the second quarter's loan prepayment fees and annual recognition of certain insurance commissions. If you exclude the reduced MSR valuation, total banking and financial service revenues were in line with our original expectations. Please turn to page four. Looking at non-interest expenses, they total $91.6 million, down $1.4 million from the second quarter.

[Maritza Arizmendi, CFO at OFG Bancorp]

This mainly reflects a $2.3 million one-time credit and debit card processing business contract annual rebate in general and administrative expenses, and $1.3 million in expenses related to lower gains on real estate owned sales. The second quarter efficiency ratio was 52.6% or 79 basis points higher than the second quarter. This was generally in line with trends we have seen over the last five quarters. Other performance metrics remained high. Return on average assets was 1.66%. Return on average tangible common equity was 15.94%, and tangible book value per share was $26.15. That's up 8% from the second quarter due to our earnings performance and increased value of our investment securities portfolio. Please turn to page six to review our operational highlights.

[Maritza Arizmendi, CFO at OFG Bancorp]

Average loan balances were $7.6 billion, up slightly from the second quarter. End of period balances of loans held for investment increased 1.5% or $111 million from the second quarter. This mainly reflects growth in Puerto Rico and U.S. commercial and Puerto Rico auto and consumer loans. Also, the regular paydowns and securitization of residential mortgages. Year over year, third quarter loans held for investment increased almost 7%. Loan yield was 8.05%, down 10 basis points from the second quarter. Third quarter new loan origination mainly reflects a higher amount of U.S. commercial loans and Puerto Rico consumer loans, and a lower level of Puerto Rico commercial and auto loans.

[Maritza Arizmendi, CFO at OFG Bancorp]

In Puerto Rico, we continue to have a strong commercial pipeline, and as we have said, we had anticipated auto lending would moderate at some point from record levels. Now that interest rates are falling down and inflation has come down in the U.S., we expect our U.S. lending pipeline to strengthen. Average core deposits were $9.6 billion, down slightly from the second quarter. End of period balances decreased $72 million or 0.7%. This mainly reflects increases in time and savings deposits and reduced demand deposits. Core deposit cost was 153 basis points, down 1 basis point from the second quarter. Excluding public funds, cost of deposits was 91 basis points, compared to 87 basis points last quarter.

[Maritza Arizmendi, CFO at OFG Bancorp]

Average borrowings and brokerage deposits were $262 million compared to $221 million in the second quarter. The aggregate rate paid was 4.6%, down two basis points. End-of-period balances were $346 million, compared to $201 million in the second quarter. Net interest margin was 5.43%. Excluding the previously mentioned loan recovery in the second quarter, NIM was basically flat from the previous quarter. Please turn to page seven to review our credit quality and capital strength. Credit quality continues to be stable. Net charge-offs total $17 million, up $2 million from the second quarter. Sequentially, auto net charge-offs were higher at 1.64%, but lower than the high point last year.

[Maritza Arizmendi, CFO at OFG Bancorp]

Consumer net charge-off, now at 4.70%, appear to be resuming the traditional level for this business, which typically runs in the high 4% range. At the same time, there were continued recoveries in mortgage and in both Puerto Rico and U.S. commercial loans. As a result, the net charge-off rate was 90 basis points, up 11 basis points sequentially, but below 1.05% in the year ago quarter. Provision for credit losses totaled $21.4 million, up $5.8 million from the second quarter. This mainly reflects $11.7 million from increased loan volume, $5.2 million related to the annual update of auto risk drivers, consumer loan loss factors, and the extension of cash flows of a Puerto Rico commercial loan up for renewal in the fourth quarter.

[Maritza Arizmendi, CFO at OFG Bancorp]

A $2.7 million reserve relief, mainly due to an improved U.S. macroeconomic perspective. Looking at other credit metrics, the early and total delinquency rates were 2.78% and 4.10% respectively. The non-performing loan rate was 1.11%. The total delinquency rate increased from the second quarter. This was due to booking of the Ginnie Mae buyback options programs related to the mortgage servicing portfolio acquisition. To sum up, during the third quarter, net interest income grew, driven by the investment portfolio and loans. Deposit balances have held pretty steady since the beginning of the year, with a shift from demand into savings and time deposits, as we continue to grow and deepen customer relationships with recent value-added products and services.

[Maritza Arizmendi, CFO at OFG Bancorp]

Loan growth continues to be strong, credit quality is well-maintained, and the trends are mostly positive, reflecting the good economic environment in Puerto Rico. Our fourth quarter NIM outlook is now between 5.3% and 5.4%, given the size of the first Fed rate cut. We continue to expect two additional 25 basis points Federal Reserve Bank rate cuts by the end of the year. Non-interest expense should range from $91 million-$93 million going forward, with an efficiency ratio in line with the trends we have seen during the last several quarters. We will update you with more precision on the fourth quarter call about our interest rate, net interest margin, and credit outlook for 2025.

[Maritza Arizmendi, CFO at OFG Bancorp]

Regarding capital allocation, we continue to remain opportunistic, focusing on Puerto Rico and U.S. loan growth, and always looking at dividends and share buybacks. Now, here's José.

[José Rafael Fernández, CEO at OFG Bancorp]

Thank you, Maritza. Please turn to page eight. Our outlook for both Puerto Rico and OFG continues to be positive. The island's economy is steadily growing, wages and employment are at high levels in Puerto Rico, and the start of a lower interest rate cycle by the Federal Reserve supports the continued strong financial condition for both businesses and consumers. Altogether, the business environment here remains optimistic. As always, we remain vigilant regarding the big macro uncertainties, changes in interest rates and inflation, the impact of unfortunate weather events, and ongoing geopolitical conflicts. Turning to OFG, we continue to be well-positioned for growth of loans, deposits, and our customer base. Consumer credit trends should remain at current levels. Our digital-first strategy will continue to evolve. Now that we have established a strong platform for fast, easy-to-use, convenient customer self-service, we plan to further enhance experience through increased personalization.

[José Rafael Fernández, CEO at OFG Bancorp]

And that means we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model, while at the same time, increasing efficiencies. Altogether, we look forward to a strong finish to our 60th year, more than ready to make progress possible for our customers, employees, shareholders, and the communities we serve. Our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and excited for what's to come. With this, we end our formal presentation. Operator, please start the Q&A.

[Operator]

... Thank you. If you have any questions at this time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. And we'll take our first question from Kelly Motta from KBW.

[Kelly Motta, CFA at KBW]

Hi, good morning. Thanks for the question.

[José Rafael Fernández, CEO at OFG Bancorp]

Hi, Kelly.

[Kelly Motta, CFA at KBW]

I thought I would kick it off with the loan growth that you've had. It's been very strong the past 2 quarters. You know, kind of broad-based, but continued strength in auto. And on the commercial side, you mentioned, José, in your pre-prepared remarks about the U.S. pipelines. So I was hoping to get a sense of what you're seeing on the island as well, what pipelines look like there, and how we should be thinking about, you know, the loan growth that you're—sounds like you're continuing to expect as we look ahead here.

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah. So, Kelly, thank you for your question. It hasn't changed. I mean, we feel that there is quite a bit of economic activity here in Puerto Rico that supports a strong growth in terms of our commercial as well as our auto and consumer. We feel that the forecast hasn't changed. So, what we have seen this quarter is kind of steady origination, steady loan production. We had some delays on the commercial in Puerto Rico, the loan originations that are gonna be pushed into the fourth quarter. But all in all, we have a pretty strong pipeline on the commercial side.

[José Rafael Fernández, CEO at OFG Bancorp]

And then, as to your question on the U.S., we have been quite cautious in the last, let's say, four to six quarters with regards to our U.S. business. Simply because we felt that the U.S. economy was still kind of figuring out if it was a soft landing or a hard landing or a no landing. Frankly, I don't have the crystal ball. I don't think anybody does, but we feel more encouraged with what's going on in the U.S. economy in terms of inflation coming down and economic growth remaining steady with low unemployment.

[José Rafael Fernández, CEO at OFG Bancorp]

It's similar to what we have seen in Puerto Rico for the last couple of years, where we kind of called it out and said, "Look, Puerto Rico is gonna do well, and we're gonna have a good economy." And what we're seeing now going forward here in Puerto Rico, and I'm trying to compare here, we continue to see Puerto Rico having a pretty steady growth in the economy. It's a different paradigm that we have been living in the last couple of years, and I think it will continue for the next several years, given the low employment levels, high wages, higher wages that we have, as well as the support from the construction funds continuing to flow down to Puerto Rico.

[José Rafael Fernández, CEO at OFG Bancorp]

You know, really, really optimistic about Puerto Rico, more constructive on the U.S. side. All in all, we're excited to finish the year, a record year this year, and looking forward to start 2025 with strong momentum.

[Kelly Motta, CFA at KBW]

Okay, that's, that's super helpful. And then on the other side of the balance sheet, on the deposit side, your demand deposits fell. It looks like that wasn't government deposits, it was more retail and commercial. But looks like there was some migration among accounts, and in your slides, you highlight, you know-

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah

[Kelly Motta, CFA at KBW]

... the optimism about the ability to grow deposits. I was hoping we could spend a moment, you know, talking about, you know, with rates cut, is this-- do you see the leveling off of migration, or is there a continuation of that? As well as, you know, with the growth you're expecting, how much of that is market share gains versus-

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah

[Kelly Motta, CFA at KBW]

... you know, continued growth in deposits on the island?

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah. So there's some variables that we can't control, as you clearly point out, in terms of how interest rates move and how demand and flow of liquidity into the island flows, right? But we can control some things that internally, and I think the way we're seeing our business model evolve and how we have invested in technology and bringing in the new products and services with digital account opening and funding, something that is unique in the Puerto Rico market, it's giving us a competitive advantage in a slight way, so that we feel into 2025, as we see interest rates starting to trickle down, we see deposits starting to level off, and we potentially see core deposits growing into 2025.

[José Rafael Fernández, CEO at OFG Bancorp]

What we have seen so far in this quarter, you have seen ups and downs on the government deposit balances. If you look at it from average balances or as end of the period, because we do have a pretty big deposit from the government that is still on the books. But all in all, what we're seeing is a transition from checking towards slightly savings and mostly time deposits. We think that that is going to start shifting into twenty 2025, and we continue to build our core franchise on the retail side. On the commercial side, we're very excited, given what we're seeing in terms of the liquidity levels in Puerto Rico, in terms of the businesses.

[José Rafael Fernández, CEO at OFG Bancorp]

We see our small base accounts, which is a small and mid-sized type of checking accounts, getting good momentum on the market. Again, we look at 2025 as a year where we see deposits stabilizing and starting to grow back steadily.

[Kelly Motta, CFA at KBW]

... That's super helpful. And can you remind us, my notes on the government deposits, I think you were projecting, at least at the last quarter, that they would be staying through-

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah.

[Kelly Motta, CFA at KBW]

-September.

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah.

[Kelly Motta, CFA at KBW]

Any updated thoughts about flows on those?

[José Rafael Fernández, CEO at OFG Bancorp]

Yep. So, you know, we have a large deposit that was supposed to exit the balance sheet in September. It did not, and it extended until November. So right now, what we're seeing is a tentative exit in November of this year. Reminding everyone in the call that this is an index government deposit fund, in the index government deposit, which is indexed to the three-month treasury bill at a discount to that rate. So, so it as interest rates have gone down, that is helping us also on the cost of funds as the deposit remains in the books. So again, it's gonna stay until November, and, you know, we will update the market accordingly.

[Kelly Motta, CFA at KBW]

Okay. That's helpful, and then turning to your margin guidance, the 5.3%-5.4% margin, it seems like it's trending lower than what we expected, you know, this time last quarter, but your balance sheet is also bigger. It looks like you purchased more MBS securities. Just wondering, how much of that kind of reduction in the outlook is a function of rates versus potentially, you know, if you could discuss the reason, perhaps the securities purchases and kind of the outlook for and appetite for additional ones to the size of the balance sheet?

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah. I'll let Maritza give you the answer.

[Maritza Arizmendi, CFO at OFG Bancorp]

Yeah, Kelly, it's mostly related to rates. When we share with you last quarter, the estimate and the expectation was based on a three Fed three 2025 basis point Fed cuts. The actual one in September was fifty basis points. So given the size of that cut, we adjust the estimate for the fourth quarter. Okay?

[Kelly Motta, CFA at KBW]

Okay. Then, again, the securities, it looks like EOP was about $2.6 billion. It was higher than what I was modeling. Just any appetite-

[Maritza Arizmendi, CFO at OFG Bancorp]

Sure.

[Kelly Motta, CFA at KBW]

around securities repurchase, purchases from here and kind of managing the size of the balance sheet?

[Maritza Arizmendi, CFO at OFG Bancorp]

Yes. Yeah, and that's part of what I mentioned also in the prepared remarks about we have been since last year extending the duration of the assets, prepare the balance sheet for the new low-rate environment in the long term. So that's why we did this quarter also.

[José Rafael Fernández, CEO at OFG Bancorp]

Again, you know, adding to that, we will continue to look into the investment portfolio as we use it as a way to reduce our asset sensitivity. We used to be 5% asset sensitive. We're now in the 2-handle asset sensitive and extending the duration at 5% on mortgage-backed securities from the U.S. government kind of makes sense for us. So we are going to be constructive about the investment portfolio going forward as we manage the lower interest rate environment, as Maritza mentioned.

[Kelly Motta, CFA at KBW]

Got it. I guess kind of tying into that is capital return. You guys, even with Durbin kicking in, you make, you're super profitable, and even growing the loan book from here in kind of the low mid-single-

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah

[Kelly Motta, CFA at KBW]

-digit range, you're going to accrete capital. Any updated thoughts on dividends, buybacks, and-

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah

[Kelly Motta, CFA at KBW]

Higher management?

[José Rafael Fernández, CEO at OFG Bancorp]

So we will review dividends and buybacks with the board in our off-site strategic session coming up, and we will also look at it in the January board. But if you ask me, Kelly, if we kind of were a little behind the ball in the third quarter from our management perspective, is that we could have been a little bit more intentional about the buyback, and we did some repurchases, but not significant. And with the level of capital that we're accumulating and the earnings that we're generating, and the loan growth prospects that we're seeing, we again look at loan growth, we look at dividends, we look at buybacks.

[José Rafael Fernández, CEO at OFG Bancorp]

But, if you put a fault into us, it's probably that we are kind of a little bit slow on the capital return.

[Kelly Motta, CFA at KBW]

Great. Thanks for the color. Maybe the last one for me is on the servicing portfolio you purchased this quarter. I'm hoping you can provide some insight as to the strategic, you know, the decision around that, and any thoughts on how that contributes to the servicing income from here?

[José Rafael Fernández, CEO at OFG Bancorp]

Yeah. So, you know, first, it's a portfolio that we had a sub-servicing agreement with. So in the end, it's just us owning the whole servicing rights and having the ability to own the customer relationship from a servicing perspective. And it's part of us building our servicing book, which, as you know, requires a critical mass. And here in Puerto Rico, it has these opportunities, but it also has its limitations. So that's kind of the logic behind it. I think it was just complementary to what we have been doing. It was part of our operating model already, except that now we own it versus sub-servicing it.

[José Rafael Fernández, CEO at OFG Bancorp]

We're gonna be generating approximately $900,000 if you use the balance today, a quarter, in terms of mortgage banking fees. You know, we felt that it was the right thing to do.

[Kelly Motta, CFA at KBW]

Great. Thank you so much for the time and all the color. I will step back.

[José Rafael Fernández, CEO at OFG Bancorp]

Thank you, Kelly. Have a great day.

[Operator]

And once again, it is star one for questions. And at this time, with no questions in the queue, I'll turn the call back over to José.

[José Rafael Fernández, CEO at OFG Bancorp]

Thank you, operator. Thanks again to all our team members, and thanks to all our stakeholders that have listened. Have a great day.

[Operator]

And this concludes today's conference. We appreciate you joining us. Have a great day.

Participants

Executives

• José Rafael Fernández, CEO
• Maritza Arizmendi, CFO

Analysts

• Kelly Motta, CFA at KBW