OFG Bancorp Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 7 speakers on the call.

Operator

Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Melinda. I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors and Maritza Arasmindi, Chief Financial Officer.

Operator

A presentation accompanies today's remarks. It can be found on our Investor Relations website on the homepage in the What's New box or on the quarterly results page. 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.

Operator

We disclaim any obligation to update information After the speakers' remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Speaker 1

Good morning, and thank you for joining us. We are pleased to report our Q1 2023 results. All our businesses performed well and contributed to another strong quarterly performance by OFG. The quarter's results also reflect the strength of our franchise supported by high levels of liquidity and capital. This places OFG in a strong position in today's banking environment.

Speaker 1

Now let's turn to Page 3 of our conference call presentation. Core revenues, net interest margin, credit quality, operating leverage and customer acquisition trends all remain at high levels or improved compared to the Q4. Deposit balances were stable with only a 10% cumulative beta. We continue to execute our digital first strategy, placing more banking kiosks and interactive teller machines in the field. Clients digital adoption increased 10% year over year.

Speaker 1

Our key performance metrics also continued at strong levels. Businesses and consumers are in good financial shape in Puerto Rico and the economy continues to do well. We look forward to ongoing progress in 2023. Thanks to our teams for their excellent execution, commitment and drive helping customers and the communities we serve achieve their financial goals. Looking at the income statement.

Speaker 1

Earnings per share diluted was $0.96 up 26% year over year. Core revenues totaled $164,000,000 up 21%. Net interest margin was 5.89 percent, up 142 basis points. Provision was $9,400,000 non interest expenses were $90,200,000 and pre provision net revenues totaled $74,600,000 up 34%. When we look at our balance sheet, customer deposits were $8,600,000,000 up slightly compared to the 4th quarter.

Speaker 1

Loans held for investment totaled $6,900,000,000 also up slightly over the 4th quarter. New loan production remained strong at $561,000,000 Investments totaled $1,900,000,000 down slightly from the Q4 due to the maturities of treasuries and the normal pay down of mortgage backed securities. Cash was $847,000,000 almost $300,000,000 higher than the 4th quarter. We continue to build capital. The CET1 ratio was 14.07% compared to 13 point 6 4% in the 4th quarter.

Speaker 1

All in all, excellent quarter, very strong performance. Now, here is Maritza to go over the financials in more detail.

Speaker 2

Thank you, Jose. Please turn to Page 4 to review our financial highlights. Let me start with total core revenues. Net interest income of $136,000,000 held steady compared to the Q4. This primarily reflected the full effect of Fed's Q4 2022 increase trade increase of 50 basis points, but only a partial effect of the 50 basis point increase in the Q1 of 2023.

Speaker 2

Also higher yields on higher average balances of loans in particular auto, commercial and consumer. And we did have 2 fewer days during the quarter compared to the 4th quarter, which reduced net interest income by $2,200,000 Banking and Wealth Management revenues were $29,000,000 compared to $33,000,000 in the 4th quarter. This primarily reflected reduction of $2,000,000 in mortgage service and write valuation, dollars 1,000,000 in wealth management revenues from the annual recognition of insurance fees in the December quarter and $500,000 from the sale of the retirement plan administration business that we announced at the end of last year. Looking at the efficiency ratio, it was 54.87% in the first quarter. That's a minor change from the Q1 and significantly better compared to a year ago.

Speaker 2

This reflected our increased positive operating leverage in line with trends we have seen over the last year. Non interest expenses totaled $90,000,000 compared to $92,000,000 in the 4th quarter. That primarily reflected lower general and administrative costs. In part that was due to a $500,000 of lower costs as a result of the sale of our pension and real estate agent business. Non interest expenses should continue to average about $90,000,000 to $92,000,000 per quarter in 2023.

Speaker 2

Our efficiency ratio target should also continue in the mid-fifty percent range. Looking at our performance metrics. Return on average asset was 1.87% and return on average tangible common equity was 19.13%. Looking at tangible book value per share, that was $20.57 That's an increase of about $1 compared to the Q4 ago the 4th quarter. This reflected increased retained earnings and lower other comprehensive loss.

Speaker 2

Please turn to Page 5 to review our operational highlights. Looking at average loan balances, they increased $96,000,000 from the 4th quarter. End of period loans increased to $6,850,000,000 That is 1.1 percent annualized increase from the previous quarter and a 4.7% increase year over year. Sequential growth reflected increased balances of auto and consumer loans. This was partially offset by pay downs of mortgages and commercial lines of credit.

Speaker 2

Profit at loan yield, it was 7.58%. That's 26 basis point increase from the 4th quarter. That's due to Fed rate increases combined with a higher proportion of auto consumer and commercial loans versus residential mortgages. Looking at newer loan origination. This reflected continued high levels of auto lending and increased commercial lending in the U.

Speaker 2

S. Puerto Rico commercial lending was lower compared to the 4th quarter. However, our commercial pipeline remains strong. Looking at core deposits. Compared to the 4th quarter, average balance decreased, but end of period deposits increased.

Speaker 2

Over the course of the quarter, we saw a shift from demand deposits to savings account, time deposits and to a lesser degree to our wealth management business. During the quarter, government deposits went down from $295,400,000 to $231,400,000 We also saw a marginal decline in retail deposits of 0.3% and a noticeable increase in commercial deposits of 2.3%. Looking at core deposits. That was 53 basis points, an increase of 14 basis points from the quarter ago. So far, our cumulative deposit beta has been about 10%.

Speaker 2

We expect cumulative beta deposit beta for up about 25%, well below expected maintenance levels through this cycle. Borrowings increased that reflected a $200,000,000 2 year advance from the Federal Home Loan Bank. Looking at net interest margin, that was 5.89%, an increase of 20 basis points from last quarter and 100 and 42 basis points year over year. Our NIM outlook generally remains the same. Our tax rate for the Q1 was 29%.

Speaker 2

For the year, we are anticipating an effective tax rate of 32%. Please turn to Page 5, seeks to review our credit quality and capital strength. Looking at net charge offs, they totaled $10,000,000 compared to $11,000,000 in the 4th quarter. That reflected a significant reduction in auto loan net charge offs. In addition, delinquency and non performing loan trade fell across the board.

Speaker 2

Looking at provision for credit losses, that totaled $9,400,000 reflecting $6,200,000 due to increased loan volume, $2,100,000 from a commercial loan held for sale and a $1,100,000 increase adjustment due to increase increasing recessionary risk in the United States. Looking at non performing loans, the total NPL the total NPL rate was 1.32%. That was down 29 basis points from the 4th quarter and 34 basis points from a

Speaker 1

year ago.

Speaker 2

Overall, credit improved noticeable from the 4th quarter. Looking at some of our other capital metrics. Soledarex stockholders' equity was $1,100,000,000 that's up $47,000,000 from the 4th quarter and TCE ratio increased to 9.85%. Now here is Jose.

Speaker 1

Thank you, Maritza. Please turn to Page 8 for the outlook. The Puerto Rico economy continues to show strength on the part of both businesses and consumers. Business activity is robust and building momentum as reconstruction projects continue to roll out. This is helping to create a more resilient infrastructure, but we must continue to keep a watchful eye on interest rate changes, inflation and a probable mainland recession.

Speaker 1

Within this environment, our deposits overall have remained stable with retail customer flows moving to higher yielding products like CDs and to our wealth management business. High levels of liquidity put us in a strong position in the current banking environment. And this enables us to continue to focus on our plans by adding value to our customers and building stronger relationships, investing in people, technology and infrastructure to provide easy, fast, around the clock, self-service digital solutions for clients and growing market share in our main businesses. I want to thank again all our dedicated team members for their commitment to the customers and the communities we serve. With this, we end our formal presentation.

Speaker 1

Operator, please open the call for questions.

Operator

Thank And we go to our first question from Timur Braziler with Wells Fargo. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 1

Good morning.

Speaker 3

Maybe starting, I just saw the bigger picture question. So can you take us back to the week of March 13, when things were kind of falling apart on the mainland? What was the feeling on the island? What was the level of dynamic that was taking place in Puerto Rico?

Speaker 1

Sure. Thank you for your question, Timur. I'd like to take the opportunity receiving your question to kind of share my thoughts on the overall banking environment right now in the United States and how does that translate, if at all, to Puerto Rico. And I think that the current banking environment in the United States brings to light in a very positive way the differences that exist between Puerto Rico Banking market as well as the difference with the peers in the States. I think when you look at the Puerto Rico banking market, what you're seeing and you will see in this quarter, you're going to see an economy that continues to build momentum and a banking industry that is strong and it's supportive of the island's economic development with higher capital levels, higher liquidity levels, much more stable deposit trends with lower betas and really no credit deterioration and or concentration.

Speaker 1

All of these compare very favorably to our peers in the States. So to your question, I think whenever it was in the middle of March that the events that transpired in California and New York regarding the 2 financial institutions. In Puerto Rico, the news come and everybody is aware of it, but there is strong understanding that the banking sector in Puerto Rico is solid and it's rational and efficient. And I think all you guys have been talking about this for a while. And I think this moment in terms of the banking environment in the States puts a spotlight in a positive way to the Puerto Rico banking market.

Speaker 1

So that's kind of how I view what's going on and what has happened. Certainly, we have a very competitive market here in the island. But it's a market very different from what the last 25, 30 years investors are accustomed to see in Puerto Rico. It's a market with excess deposits. It's a market that does not have irrational players.

Speaker 1

And it's a market that really is also playing in an economy that is growing. And it's an economy that is being turned around as we as the money is coming to rebuild and reconstruct. So as I said a couple of years ago, in my 20 years almost as CEO of OFG, These last couple of years have been building the momentum and today I'm sitting here and I see the island being rebuilt and that is extremely positive. And for us is a way to get closer to our customers and support them to help the economic development of the island also. So that's kind of how I view this.

Speaker 3

Great. Thank you. That's great color. And then maybe just taking that and expanding on that just a little bit. So as you're looking at the deposit base for the remainder of the year, have the activities on the Mainland kind of stem the outflows that we have seen in the back end of 2022 where you might have some migration within DDA to higher costing or higher yielding products from a depositor basis, but not as much leaving the institution?

Speaker 3

Or is there still an element of deposits that are at risk for either going to a larger institution, heading into treasuries or otherwise leaving the banking system?

Speaker 1

So the trends are the trends, right? And remember that in the Q4 of 2022 as well as in the Q4 of 2021, we were managing below the $10,000,000,000 mark. So that is really what kind of drove particularly in 2021, but also in 2022 to some degree. So what has happened in the Q1 is that you're seeing that kind of stabilizing and to some degree we have higher deposit balances. Certainly the remix is taking place and that is the normal thing to happen.

Speaker 1

And we're seeing some savings deposits moving towards a 1, 2 year CD. We're also seeing, as I said on my remarks, and I think Melissa mentioned it too, we're also seeing Wealth Management benefiting from also some of the flows going to our business in Wealth Management. But our expectation throughout the year is, as Maritza pointed out, 25% beta cumulative. That's how we're modeling the year. And the reason for that is we're seeing the real remix playing out.

Speaker 1

And again, based on what I just said earlier, our expectation is to deposits to remain stable and it's just going to depend on how we do business development. But I really don't see the same dynamics that are occurring in the U. S. Banking market.

Speaker 3

Okay, great. And then just last for me, looking within your commercial buckets, can you fill us in on kind of broader commercial real estate exposure, what you have in terms of, if any, commercial real estate office exposure on the Mainland? And then more broadly, kind of how you're thinking about commercial real estate in Puerto Rico versus commercial real estate on the Mainland?

Speaker 1

Yes, yes. So we don't have anything on commercial real estate in the Mainland really. What we have here in Puerto Rico, we do have in Puerto Rico an office building is around 3% of the commercial portfolio, office building CRE. So overall I'm sorry, 8%, I made a mistake. So it's 8% of the commercial portfolio is office building.

Speaker 1

So yes, so that's kind of how the exposure that we have.

Speaker 3

Okay. And as clearly the risk around the office space is being widely publicized on the mainland. Can you just maybe talk about the dynamics in office more broadly in Puerto Rico and what the risk or perceived risk is to those loans?

Speaker 1

So Timur, let me correct myself on the numbers, if I just pointed them out to you. So our office building is 8% of our CRE portfolio. And it is and we have a CRE portfolio of around 36%. So and again, the CRE portfolio has an ample gamut of different office real estate loans. So that's kind of just making sure I got the numbers right for you.

Speaker 1

And in terms of the I'm giving you color in terms of office building here in Puerto Rico. So Puerto Rico is an island. So there are concentrations of office buildings, particularly or primarily in the metropolitan area. So that's where you see it. And we're seeing the same global trends of hybrid office and work and all that stuff.

Speaker 1

But my take from this is that we are not seeing the same acute issues and challenges that the office building market is having in the large cities in the United States. We really don't have those type of issues right now. So from our perspective, even in spite of the trends towards hybrid work and the post pandemic kind of dynamics, we're seeing quite a bit of office occupancy, high levels of office occupancy and we're not seeing any significant deterioration there.

Speaker 3

Got it. Thank you for the color. Much appreciated.

Speaker 1

Yes. You're welcome.

Operator

Next, we go to the line of Brett Rabatin with Hovde Group. Please go ahead.

Speaker 4

Hey, good morning, everyone. I appreciate the questions. Wanted to first start Jose with auto. And on the mainland, you've seen things like Capital One pull back from their floor plan lending platform. But in Puerto Rico, it's obviously a different environment.

Speaker 4

There's not a great public transportation system and so people need their cars, but I was a little bit surprised to see the improvement linked quarter in credit across the board and auto specifically. And I get you talked earlier about the economy, I get that the EAI index is a little bit in March to 126, and I think March sales of auto were 10,700,000 for the island. But I was just hoping to maybe get some color around credit improvement and auto specifically, you would describe that to anything in particular?

Speaker 1

Yes. I think you pointed out the differences and what we're seeing in the way we manage our auto business is high FICO scores. We are making the adjustments to interest rates also. We're originating on loans right now around 9% handle with FICO score average of around 720. So we are what we're seeing in terms of the credit and the delinquency rates on auto is another confirmation of the liquidity of our consumers and how the excess liquidity that they have.

Speaker 1

They're deploying it into buying autos and remodeling their homes and there's optimism. So I think it's kind of a multiple factors. We have always been very conservative on the writing side of the auto business, but we also recognize that the economy is also very supportive today.

Speaker 5

Okay.

Speaker 4

And wanted to ask, in my mind, PREPA is the remaining big piece to kind of getting things continued headed in the right direction and I've seen the wrangling around that. Any as you see it from your vantage point, any update on PREPA and just the cost of electricity, if you think that could be resolved here in the near term or do you think that might be a longer term situation?

Speaker 1

PREPA is a long term situation. The things that are being executed on it now like privatization of the transmission and now recently the generation also has been privatized. There's a lot of noise. But it's the noise that is required to get things done, right? So it's going to take a while.

Speaker 1

In the meantime, I think there's quite a bit of momentum for solar panels on the private sector. I think the federal government is also supporting that. And I think let's not lose sight of Puerto Rico being a beneficiary of the focus that Washington is putting on us from an economic perspective. And I think that is another reason why we are sitting where we are today. So PREPA is going to take longer, but it's I think they're going to be private forces.

Speaker 1

They're going to be public forces. I mean, the Secretary of Energy from the U. S. Has visited 3 or 4 times already. So PREPA and electricity for Puerto Rico is a high focus for the executive branch in Washington.

Speaker 1

And I think together with the local government and the private sector, we as banks supporting also the financing of solar panels for businesses as well as for residents. I think it's going to accelerate this kind of shift towards lower, more diversified, more resilient electricity production in Puerto Rico. So I think that's as much as I can share in terms of electricity and PREPA in itself. So don't get discouraged by hearing too much noise on PREPA. The rails are in place to kind of bring it down in terms of cost and improving its quality and the resiliency.

Speaker 4

Okay. Appreciate that. And then maybe just lastly, wanted to make sure I understood you're still talking about guidance of mid-50s efficiency ratio. And so if I'm just thinking about the implications of that, it would seem like your margin maybe is as teaked out here, but in terms of the net operating income, it would seem like your expenses would maybe climb $500,000 $2,000,000 quarterly from here, and fee income doesn't change too much. Is that a fair way to think about the implicit guidance from the mid-50s efficiency ratio?

Speaker 1

I think you're looking at the right way. Remember, we have some variability throughout quarter over quarter in terms of the non interest expenses just simply because we are deploying technology and as the deployment comes out, we need to capitalize those investments. But But you're looking at it the right way, Brett. I don't know if Maritza wants to add anything.

Speaker 2

That's correct. That's why we're providing a guidance from of $90,000,000 to $92,000,000 quarterly expense range. And Marisa, do you want

Speaker 1

to add anything on the margin?

Speaker 2

Well, yes. In the NIM probably, as I mentioned in my prepared remarks, we continue to have the same expectation for the full year that we will be in the same level as the last quarter. That was around 5.69%. So we will be between that range. For the full year and that's our expectations.

Speaker 1

Part of it has to do with our I think you guys are pointing it out in your write offs, our higher yielding assets. And that's kind of what's driving it and helps us mitigate some of the shifting on the deposit side that I mentioned earlier.

Speaker 4

Okay, great. Thanks for the color.

Speaker 1

Yes. Thank you for your questions. Have a good day.

Operator

Next we go to the line of Alex Twerdahl with Piper Sandler. Please go ahead. Your line is open.

Speaker 1

Hey, good morning. Good morning, Alex.

Speaker 5

I first wanted to go back to the commentary on the 25% through the cycle deposit beta. And I was just curious if you can just really break that down for us in terms of is that total deposits, interest bearing deposits only? And when you think about the beta, how does potential rate cuts later this year play into that? Because it just seems to me that the we actually called around this morning and tried to get the highest rate we could get at any of the Puerto Rican banks. And I'm having a hard time getting to that 25% beta based on what we're hearing in the market today.

Speaker 2

Yes. So Alex, when and I think we have explained how we're seeing things this quarter, how we have been shifting through from DDA and savings to high yielding time deposits. So we are expecting to continue to see that type of migration through the rest of the year. So far the cumulative beta has been 10%. So we continue to see that customer will continue looking for high yield.

Speaker 2

So we continue to see the time deposit book of us growing. And that's the reasoning that we're in our base case scenario, we are targeting or estimating a 25% EBITDA

Speaker 1

for the end of the year. I think Alex also when we look at the beta and you break it into retail versus commercial, the beta on the commercial is higher. So we're also going to see some commercial clients asking for higher rates. And that's also part of what our base case scenario of 25% data means. So if you kind of think about it, our beta for retail is going to be our expectation is to be significantly lower than that 25%.

Speaker 1

But we're going to see the commercial beta trending higher in the next the rest of the year just simply as Maritza mentioned, clients being more efficient in their cash management.

Speaker 5

Okay. And then as we think about that playing out over the rest of the year, is it I mean, do you think the increases will be roughly straight lined? Or are we sort of in the have you seen more increase or more pressure to increase deposit rates in the Q1? And you think that will slow? Or how are you kind of thinking about it playing out over the next couple of quarters in terms of deposit cost pressures?

Speaker 1

So I really don't feel that we are operating in a kind of pressured environment. I think you need to think about this and I don't have an answer for you in terms of when because who knows, right? But I think we need to think about this on also how do we continue to build and retain good profitable customer relations too on the commercial side. And that's how we're thinking about this. There's a competitive market here too.

Speaker 1

It's not irrational, but it's competitive. So that's how we look at this. And it's very hard to pinpoint how or when interest rates are going to be kind of how our customers going to be asking us for higher rates or not. But in general, what we're doing here, there's it looks to us that throughout the year, there's going to be that continuing shift. But I wouldn't call it pressure.

Speaker 1

I would call it more of a normal trending of rational clients doing the right thing in terms of their cash management?

Speaker 2

Mostly in this type of cycle. Correct. And we have we still have maturities on time deposits that had lower rates. So that will happen through the year, just the maturity of time deposits and replacing with higher rates.

Speaker 1

You also mentioned lower interest rates. If the Fed turns around and starts lowering interest rates, well, that's not the base case scenario that we are modeling ourselves on. We are modeling ourselves on that the lower interest the Fed moves rates lower next year, not this year. So what we're seeing is Fed moving up rates a bit more from these levels and then holding on until later in the 1st part of 2024. But again, I don't have a crystal ball and we're just modeling it.

Speaker 2

And just to add there, so far and the beta on the asset side has been much higher than the deposit side. And we have still have room through the year to continue having that type of dynamics through the beta in the asset side versus the beta on the deposit side.

Speaker 5

Okay. Yes. I mean that was the next question I had is just in terms of, 1, loan yields, if there's anything in there that's non core that's pushed that higher in the Q1 that we should be aware of? And then secondly, sort of how much more lift there could be assuming rates basically stay here, maybe we get one more hike in the next couple of months? And then yes, I'll let you start with that.

Speaker 2

Yes. So if you think about the expansion of this quarter, the 19 basis point NIM expansion, about 7 basis point came from cash and investment and the other 24 came from loans. So and there is nothing extraordinary there. So we would have we still have that benefit in the next quarter that we will have the full effect of the 50 basis points that we that effect increases during this Q1. So we will have that full effect.

Speaker 2

But also just wanted to mention that we still have some maturities coming from the treasury book. We have $40,000,000 maturity in May then in August, dollars 200,000,000 in August. And we will replenish that with a high yielding asset in the base. We can invest in what we want, but I think if we assume cash, cash would be yielding more than the current carrying yield of that asset. So there is a room for us to continue having a very good positive data on the asset side.

Speaker 5

Great. And then so I guess as you boil that down, I mean, is the NIM I think one of the earlier questions alluded to the NIM potentially peaking in the Q1. I'm just curious how you're seeing the trajectory of the NIM over the next couple of quarters?

Speaker 1

Well, as Maritza mentioned, we're seeing it equal to what we saw in the Q4. The NIM should end for the year around the 5.65%, 5.67%, 5.68%. So that's kind of how we're modeling the NIM for the full year. So definitely there is a little bit of a trending down throughout the year as we have as we kind of talked about last on the Q4 call and we're repeating it here, Alex. So it hasn't changed.

Speaker 5

Okay. That's helpful. And then I just wanted to ask one other question on buybacks. You guys certainly have managed the balance sheet very well to have excess liquidity, excess capital levels, or at least what I would consider excess capital levels. I'm just curious with the share price pulling back with every other bank out there, how you guys are thinking about buyback activity or possible for buyback activity over

Speaker 3

the next couple of quarters?

Speaker 1

Yes. So thank you for your question, Alex. And we've been patient on the investment portfolio. We've also been patient on

Speaker 2

the capital management.

Speaker 1

We've always felt in the investment investing securities and lower rates. And the same thing we felt about capital management. We did the buybacks. We kind of put a pause to it last year. And so now it's actually the patience is becoming I think it's the way we see ourselves is patient.

Speaker 1

We're patiently opportunistic. And I think now there is an opportunity for us to look at investment and investment opportunity, investment portfolio and now it's yielding 5 handle with tax benefits. So that's another kind of another point that we put in the bag of alternatives. The same thing When we look at capital, we've looked at the dividend. We can increase the dividend very consistently throughout the last several years.

Speaker 1

We've also been opportunistic on the buyback and we will continue to be opportunistic on the buyback too. So we still have around $60,000,000 of change in the authorization. Thanks for taking my questions. You're welcome. Have a great day.

Operator

Next we go to the line of Kelly Motta with KBW. Please go ahead.

Speaker 6

Hi, good morning. Thanks for the question. Great quarter. I think maybe I will circle back to the funding. Just from a high level perspective, unique to Puerto Rico, you guys have a lot of relief money still flowing in and that's accelerated at least in the last year or 2.

Speaker 6

Do you guys have a sense of how much of that incremental relief funding ends up sticking in Puerto Rico and kind of staying in the deposit accounts, whether it be in consumer accounts or business accounts and wondering if that can help stem the outflows that we're seeing on the Mainland?

Speaker 1

Yes. So Kelly, it's a good question, hard to answer because money is fungible and there are some U. S. Businesses here, retail businesses that really have operations in the island, but their banking is outside of Puerto Rico and those are kind of the nationwide kind of franchises. And that's a lot of the consumer kind of activity.

Speaker 1

But all in all, what we're seeing is higher balances on the retail individuals and we're also seeing higher balances on the commercial. And it's all because of the liquidity that is running through the system and it has stayed. It hasn't stayed at the same level as it was a year ago, but certainly it has stayed at a higher level than before all the stimulus and all the reconstruction activity starts flowing in started to flow in. So I wish I could give you a specific answer to that question, but I really don't have the data for that.

Speaker 6

Thanks. I appreciate entertaining it. I don't think we've talked much about the $200,000,000 of 2 year FHLB funding you guys brought on. I'm just wondering kind of the thought process behind that, if that was kind of a defensive measure in the midst of mid March and any kind of color to around what the rate is on that would be helpful for modeling purposes?

Speaker 1

Yes. So I think Timur asked the question at the beginning of the call regarding mid March, how did you guys look at deposits and all that stuff. So now how do we look at the world? We read the news. We see what's going on.

Speaker 1

So we were being prudent and saying let's just we have ample liquidity here. We have availability at the Federal Home Loan Bank and all kinds of liquidity. We have different other places. And we said let's just be prudent. Let's just take a 3 year $200,000,000 advance from the Federal Home Loan Bank.

Speaker 1

And by the way, the yield is or the cost is around $450,000,000 $455,000,000 or something. And really just be defensive in case that anything trickles into Puerto Rico. The good news is that it didn't and it hasn't. So I think we're in a good position overall in terms of our balance sheet and that's how we're seeing it.

Speaker 6

Got it. Maybe last question for me is on credit. Your early stage and total delinquencies are down, NPAs down as well. As you look ahead, charge off rates are running a lot lower than they were pre COVID. Do you have a sense of a cadence of normalization from here on out?

Speaker 6

Do you think where you've been the past couple of quarters is a good estimation near term on a go forward basis or is there anything you're seeing that may indicate there could be a tick up in credit losses?

Speaker 1

Yes. We are not seeing any reversal. We are not necessarily seeing a trend a continuation of the trend downwards in terms of the delinquency rates and all accelerating because it's hard for us to envision that. But certainly what we're seeing from the consumer side on the credit is very encouraging. And we've been kind of waiting for the last year or so when it is going to kind of revert closer to the levels before the pandemic and it hasn't.

Speaker 1

So I think it's time for us to say there's a paradigm shift here and there is a lower level. And Puerto Rico's economy has also done that shift in terms of unemployment, in terms of business activity, manufacturing and all. So it's logical that credit trends will continue to trend positive in the foreseeable future. All

Speaker 6

right. I'll step back. Thank you so much for the questions.

Speaker 1

You're welcome. Thank you for your questions

Operator

At this time, there are no further questions. I'll now turn the call back over to management for any closing remarks.

Speaker 1

Thank you, operator. Thanks again to all our team members and to all our stakeholders who listen in today. Have a wonderful day and enjoy the upcoming weekend.

Operator

Thank you. This does conclude today's teleconference. We

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Earnings Conference Call
OFG Bancorp Q1 2023
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