OFG Bancorp Q1 2024 Earnings Call Transcript

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April 18, 2024

There are 7 speakers on the call.

Operator

Thank you for joining OFG Bancorp's Conference Call. My name is Jamie, and I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors Maritza, Chief I'm sorry, apologies Maritza Arizmendi, Chief Financial Officer and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Q1 2024 section.

Operator

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 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. Please go ahead.

Speaker 1

Thank you for joining us. We are pleased to report our Q1 2024 results, which reflected good solid performances across all our businesses. Growth was in line with both our short and long term strategies and plans. Our digital first strategy continues to drive customer acquisition and engagement. Business activity, consumer liquidity and employment levels in Puerto Rico continue to do well in a strong economy.

Speaker 1

And our balance and our interest rate environment. Thanks to the entire team for their hard work and commitment, helping our customers reach their goals and our communities to achieve progress. Please turn to Page 3 for a summary of our Q1 results. Looking at the income statement, earnings per share diluted increased more than 9% year over year to $1.05 on close to a 6% increase in total core revenues to $174,200,000 Net interest margin was in line at 5.4%. Provision was $15,100,000 non interest expenses were in line at $91,400,000 Pre provision net revenues totaled $83,000,000 Turning to the balance sheet.

Speaker 1

Total assets were $11,200,000,000 2% less than last quarter and 11% higher than a year ago. Customer deposits were $9,500,000,000 reflecting the $1,200,000,000 public funds deposited in mid December. Loans held for investment totaled $7,500,000,000 approximately level with last quarter and up 10% from a year ago. New loan production was $536,600,000 totaled $2,500,000,000 down from the 4th quarter, mainly due to the sale of the treasury build position. Cash increased to $754,000,000 from last quarter.

Speaker 1

Looking at capital, the CET1 ratio was 14.45%, up from 14.12% in the 4th quarter. We increased the quarterly cash dividend 14% to $0.25 per share and approved a new $50,000,000 stock repurchase authorization. Please turn to Page 4 for an update on our digital first strategy. As of the Q1, 94% of all routine retail customer transactions, 96% of retail deposits and 64% of retail loan payments are being made through our digital and self-service channels. This is being driven by year over year growth of 12% in digital enrollment, 68% in digital loan payments and 32% in virtual teller utilization and 3% in customer growth.

Speaker 1

Another factor is the continued success of our Oriental servicing portal, which was introduced in mid-twenty 23. The portal, as you know, is a cornerstone of our self-service strategy. Customers can manage all loan and deposit accounts. It enables digital account opening for checking and savings and CDs, applying for and accessing loans, managing automatic loan payments and downloading bank letters and tax documents among other things. Every quarter, we add new features and this quarter was an exception.

Speaker 1

The addition additional functionality to manage IRA accounts and IRA funds. All of this continues to validate our detail first strategy and investments. Our goal is to use technology to provide more value added service, increase our efficiency and have more staff dedicated to new business development activities. Now I'd like to pass the call to Maritza to go over the financials in more detail.

Speaker 2

Thank you, Jose. Please turn to page 5 to review our financial highlights. Starting with the components of core revenues, total interest income was $183,000,000 up 4% from the 4th quarter. Key factors were increases of $5,000,000 from investment, dollars 1,000,000 from cash and $800,000 from loans. Investment securities benefited from an 18% higher average balance and a 24 basis points higher yield.

Speaker 2

Cash reflected a 16% higher average balance and a 6 basis point higher yield. And loans had a 2% higher average balance and 2 basis points higher deal. There was one less day in this Q1 compared to the Q4. This reduced net income by $1,400,000 Total interest expense was $39,000,000 an increase of $6,700,000 from the 4th quarter. This reflected the full effect of the $1,200,000,000 in government funds deposited this past December.

Speaker 2

Barrowings and broker deposits declined due to the reduced need for wholesale funding. The date factor reduced interest expenses by $300,000 Total Banking and Financial Service revenues were $30,000,000 compared to $32,000,000 in the 4th quarter, which included annual insurance commission recognition of 2,500,000 dollars 1st quarter mortgage banking revenues increased $400,000 due to higher MSR valuation. Year over year, total fee revenue was up $1,500,000 reflecting increased wealth management and mortgage banking revenues. There was a minor amount of other non interest income compared to the 4th quarter, which included $6,000,000 in gains on sale of non performing Puerto Rico Small Business loans. Looking at non interest expenses, they totaled $91,000,000 down $3,000,000 from the 4th quarter, which included $3,200,000 due to the cost of workforce, early retirements and facilities rightsizing.

Speaker 2

We continue to expect to average about $90,000,000 to $92,000,000 of non interest expenses per quarter over the rest of 2024. The first quarter efficiency ratio was 52.49 percent, a 10 basis point improvement from the 4th quarter. The efficiency ratio should continue in the low to mid-fifty percentage range this year. Other performance metrics remain high. Return on average assets was 1.77%.

Speaker 2

Return on average tangible common equity was 70.92 percent and tangible book value per share was 23.50

Speaker 1

dollars 0 $0.42

Speaker 2

from the 4th quarter, mainly due to the increased pretense ending. Please turn to Page 6 to review our operational highlights. Average loan balances were $7,500,000,000 End of period balances were approximately level. March 31 balances reflected sequential growth in auto and consumer loans, offset by decreases in commercial and residential mortgages. Commercial reflected seasonal pay downs of lines of credit, residential mortgage reflected regular pay downs and securitization and sale of conforming loans.

Speaker 2

Loan yield was 7.98 percent, up 2 basis points from the Q1. This reflected variable rate commercial loans, higher entry yields on new loans and a smaller proportion of residential mortgages in the loan book. Average for deposits were $9,500,000,000 up 10% from the 4th quarter due to the large deposit of public funds in December. End of period balances declined 1% from December 31. This reflected a $48,000,000 decline in commercial deposits generated to the loan of deposits.

Speaker 2

Core deposit cost was 147 basis points compared to 107 in the 4th quarter. This increase reflects the full impact of the new government deposits. Non government deposits cost was 82 basis points. As of the Q1, our cumulative deposit beta and deposits and 23.24 percent for total deposits including interest bearing deposits. Excluding government deposits, it was about 16%.

Speaker 2

Average borrowings and brokerage deposits were $280,000,000 compared to $602,000,000 in the 4th quarter. The March 31 balance was $203,000,000 The rate paid on wholesale funding decreased 41 basis points to 4.80% in the 1st quarter. Looking at non interest expenses, they totaled $91,000,000 Excuse me. Net interest margin was 5.30 percent as anticipated. With the prospect of higher for longer, we now anticipate 3 trade costs versus 5.

Speaker 2

As a result, for this year, we are guiding a net interest margin range of 5.45 to 5.55. Please turn to page 7 to review our credit quality and capital strength. Net charge offs totaled $20,000,000 up $4,000,000 from the 4th quarter. The reinsurance rate was 105 basis points, up 17 basis points. We also included 2 factors.

Speaker 2

1 was $3,500,000 from previously and fully reserved non performing PPP loans. The second was $1,700,000 as a result of the strategic sale of a performing U. S. Commercial loan. The auto net charge off rate declined sequentially, while the consumer rate increased.

Speaker 2

Looking at provision for credit losses. It totaled $15,000,000 related to volume factor including net charge offs. The Q1 included $1,700,000 related to the U. S. Loan sales, which was offset by a separate $1,700,000 reduction in a specific reserve for payments received on substantially reserved U.

Speaker 2

S. Commercial loans. Looking at other credit metrics, 1st quarter early and total delinquency rates were lower than the 4th quarter at 2.41% and 3.30 percent, respectively. The non performing loan rate of 1.10% was the lowest over the last 5 quarters. However, credit continues to be good.

Speaker 2

With COVID cash demonstrating away, we we expect increases net charge off in auto and consumer, but lower than prepayment. However, net charge offs and delinquencies performed fairly well in the Q1 due to strong employment and Puerto Rico's economy as well as the federal tax charge credit. Looking at some of our other capital metrics. Total stockholders' equity remained level at $1,200,000,000 and tangible common equity ratio increased to 10 point our Q1 tax rate of 26.8 percent decreased from 31.9% in the 4th quarter. The Q1 reflected 2 factors.

Speaker 2

1 was an expected full year effective tax rate of 29% in 2024 due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code. The second item was a $1,100,000 discrete benefit for the stock vested in the Q1. To sum up, during the Q1, net interest income continued to grow despite the slight decline in net interest margin. This reflected higher average balances and yields of securities, cash and loans and lower wholesale funding costs, partially offset by higher cost of government deposits. Excluding government deposits, core deposits declined slightly due to commercial withdrawals, reflecting seasonal line of credit pay downs.

Speaker 2

While loans remain level quarter over quarter, we anticipate growth over the balance of the year based on the strength of our pipeline. As I mentioned, net interest margin should gradually improve, credit continues to continue to look like expenses were in line with our expected range and our expected tax rate should be lower. Now here's Jose.

Speaker 1

Thank you, Maritza. Please turn to Page 8. Our outlook is positive for both Puerto Rico and OFG. The flow of federal funds to rebuild the island's infrastructure continues at a solid pace. Local businesses are expanding.

Speaker 1

Overall business activity is good. We continue to be vigilant for the big macro uncertainties, interest rate changes, inflation trends, a possible mainland recession and ongoing global conflicts. Of course, we're always keeping an eye on the competition. We are optimistic about Puerto Rico and the future. We look forward to continuing overall economic and business growth as well as strong levels of employment.

Speaker 1

Turning to OFG, we're well positioned to continue to benefit from a higher for longer interest rate environment as well as loan and client growth. Consumer credit trends should remain below pre pandemic levels and digital adoption and customer acquisition should continue to expand. Clearly, our strategy is working. So we will continue to invest in and deploying more customer friendly technology, adapt to customer needs and tirelessly work to improve customer experience. Overall, we look forward to another strong year in 2024.

Speaker 1

In closing, I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and we're excited for what's to come. This year marks our 60th anniversary in business and our 30th on the New York Stock Exchange. With this, we end our formal presentation. Operator, let's start the Q and A.

Speaker 1

Thank

Operator

We'll go first to Brett Rabatin with Hovde Group.

Speaker 3

Hey, good morning, everyone. Wanted to start with the margin and my call is breaking up a little bit intermittently. But if I heard correctly, the guidance for the full year margin is 5.35% to 5.55%. And if I think about the low end of that guidance, that would suggest that the margin only has a few basis points of downside from here. And I wanted to kind of think about that versus the cost interest bearing funds increase.

Speaker 3

And if I think about the past 3 quarters that's gone from 30 to 32 to 43 basis points. And so it seems like the higher for longer, more normal for longer is having somewhat of an impact on the lower funding costs in Puerto Rico in the past quarter or 2. Just want to make sure I understood that guidance from here and if you it sounds like Marci, you think the margin despite the funding cost increase is bottomed out here. Is that a fair assessment?

Speaker 1

So Brett, just to correct, the guidance that you pointed out is not what Maritza said. She said $545,000,000 to $555,000,000

Speaker 3

Okay.

Speaker 1

So it's actually north of 540, which is what we had this quarter. So just to clarify that. And I'm sorry that you got that permitting.

Speaker 3

Okay. Well, that again, that would kind of

Speaker 1

adjust the Yes. And the fact that I just changed the premise of your question. So I don't know if you want to ask the question again.

Speaker 3

Well, maybe to rephrase it, given that the margin is expected to be slightly higher from here, I just wanted to make sure I understood. Obviously, we've had margin pressure with the rise in funding costs the past 3 quarters. The margin moving higher from here, what would that be a function of? And can you talk maybe about what you expect positive betas to do from here?

Speaker 1

Yes. So let me see if I can give you a high level and if Marisa needs to chime in here on more specifics, she will do so. But remember, when we spoke last time, we were assuming 5 rate cuts in the second half of the year as part of our guidance on the margin. After what's going on in the Q1 and a little bit afterwards, we are now modeling 3 cuts the second half of the year. So since we're asset sensitive and we have been for a while, we're going to be benefiting from that.

Speaker 1

That's number 1. And then number 2, we have a large government deposit, as you alluded and we mentioned in the call. The our expectation for that deposit is to flow out of the balance sheet, not in its entirety, but in a significant amount at the end of the second quarter or the beginning of the third quarter. So that in itself also has implications on how we're guiding a range on the margin. Is that am I answering your question?

Speaker 1

Is that giving you enough color?

Speaker 3

Yes, that's helpful. And then wanted to talk about credit quality for a second just around the Mainland net charge offs were higher, auto performed better than I would have expected. And I don't know if you would attribute that to tax returns or anything specifically, but was just hoping for some color on both of those. If I heard you correctly, it sounds like you do expect the auto to have a little bit of softening from the 1Q levels from here.

Speaker 1

Yes. So on the commercial U. S. Commercial loan, remember, we have a seasoned portfolio, and we make decisions based on risk management. And that's kind of what was a risk management decision.

Speaker 1

The sale of that performing loan, we just felt that it was the right thing to do from a risk management perspective, and that's what you saw. And we certainly look at the auto portfolio as a key component of our balance sheet. As you know, it's around 30% of our loan book. And we're very encouraged with the 1st quarter levels of delinquency and lower charges. So from our perspective, we're still seeing good trends.

Speaker 1

It has a lot to do with how we manage that loan book. And I'll let Cesar give you a little bit more specifics on the auto portfolio because we have we mentioned it somewhat last quarter, but we have made some changes throughout the last couple of years on the credit profile. Okay.

Speaker 4

I want to highlight that the Q1 is always seasonal in terms of tax benefits. As I mentioned, tax credits, tax refunds, but also the end of the holidays, that benefits the quarter, especially Q1 of the year. So you'll see those benefits in the retail portfolios. But in Alto also, we strategically improved the credit profile of our 16%. We're seeing the benefits of that shift in credit profile since we eliminated the tranches that yielded the higher losses during those years.

Speaker 4

So I think that's what's being noted in the trade that they're facing out right now.

Speaker 3

Okay. That's helpful. Then if I could sneak in one last one. Jose, any high level comments on we've seen stronger flows of funds to the island for projects. Anything in particular that you would highlight is maybe more impactful things that you see happening this year in Puerto Rico.

Speaker 3

Obviously, the economy is a lot stronger than it's ever been or has been in a long time?

Speaker 1

Yes. I mean, let's step back a second here. When you look at the macro and when you look at Puerto Rico, what we're seeing today is not only federal funds coming in and flowing in at a steady pace and at a higher pace than right after the hurricanes and the earthquakes and certainly the pandemic kind of accelerated all. But if we also think about it, Puerto Rico came out of bankruptcy a couple of years ago. So what you're seeing now is private capital at work from abroad as well as internally.

Speaker 1

So you're seeing businesses expanding, commercial business investments in their own businesses, and you're seeing U. S. Capital coming to Puerto Rico and expanding businesses and buying businesses. So that has a lot to do with that bankruptcy getting out, getting off bankruptcy. I think going forward, there's one more bankruptcy that needs to be eliminated, and this is the Electric Power Authority.

Speaker 1

Hopefully, 2024 will be the year where it's out of bankruptcy and that there are $11,000,000,000 of federal funds that are on the sideline right now to continue to strengthen the electric grid and the transformation that is being done there for resiliency as well as for diversified sources. So I think if you look forward, there's still quite a bit of a backwind for Puerto Rico's economy because the engines are at work, federal funds, private capital coming in and businesses putting capital to work too. So we're optimistic about Puerto Rico and that's why banks exist and that's why we're here. We're here to support small and midsized commercial clients. We're here to support our consumers and our clients and trying to help them achieve their goals.

Speaker 1

So I just think that we have a pretty strong pipeline on the commercial side, on the larger kind of middle and higher kind of commercial clients, but we also have a pretty strong quarter. We had a pretty strong quarter in the small business commercial, and we have a pretty good pipeline there too. So we're seeing good momentum overall, Brett.

Speaker 3

Okay, great. Appreciate all the color.

Speaker 1

Yes. Thank

Operator

you. We'll go next to Alex Twerdahl with Piper Sandler.

Speaker 3

Hey, good morning all.

Speaker 5

Hi Alex. I'm well, thanks. I wanted to start on just kind of sort of longer term strategy and sort of growth outlook. And when I look at your capital levels, they continue to rise, TCE now above 10% and that common equity Tier 1 continues to rise. And kind of coupled with all the money you guys are making, it just seems like there's it's hard to envision you being able to deploy all that capital just through organic growth.

Speaker 5

So I'm just I'm wondering if you have any updated sort of longer term thoughts on utilization of capital and kind of how you're thinking about deploying the excesses in the next couple of quarters or years?

Speaker 1

Yes. So the game plan for us remains relatively the same. We still see opportunities for us to grow here in Puerto Rico and we still see opportunities for us to deploy capital here in Puerto Rico. I agree with you. We have a lot of capital and we're generating a lot of capital.

Speaker 1

So we also have shareholder capital return strategies. We increased the dividend. We continue to look at that. We announced the Board announced a $50,000,000 repurchase program that is also available to us, and we will be opportunistically executing on all three fronts. We operate with higher levels of capital than our peers in the States.

Speaker 1

But in general, agree with your premise in terms of our capital generation, and we expect to deploy it accordingly.

Speaker 5

Okay. I mean, I guess, as you sort of look over the next couple of years and balancing the outlook that you see in Puerto Rico, which continues to be favorable, do you see the chances of expanding a little bit more, deploying a little bit more towards the U. S. Is something that's likely? Or I mean, I guess, when you talk about the growth opportunities in Puerto Rico, would those be sufficient to sort of absorb all that excess?

Speaker 1

Yes. Good point. As you know, we have the U. S. Business that we have been growing for the last 5, 6 years.

Speaker 1

We will continue to invest in that business. It's been a very good profitable business for us, so we see opportunities. We also recognize that Puerto Rico is decoupling our economy is decoupling steadily from the U. S, although the U. S.

Speaker 1

Is being more resilient these days and it's showing some growth. And that is also good for Puerto Rico, by the way. But so we expect Puerto Rico's economy to continue trending upwards, and we see somewhat a little bit choppiness in the U. S. Economy.

Speaker 1

So we will be more cautious there. But in general, we will be investing also and deploying some capital for the U. S. Business.

Speaker 5

Okay, thanks. And then I was hoping you could give us a little bit more commentary on the consumer in Puerto Rico. And just I recognize that there's still some normalization going on. And maybe just kind of frame sort of where you expect net charge off levels on the consumer and then also on the auto to level out and just kind of help us square the continued deterioration if you can call it that with the strength in the consumer that we're seeing and all the jobs numbers and the unemployment numbers and the wage salary numbers and all that kind of stuff that all seem to suggest that credit on the consumer side should be significantly better than it even has been in the last couple of years?

Speaker 1

Yes. So I'll give you some thoughts and I'll let Cesar then add some of the details. But when you look at consumer and auto, our own auto portfolio, you need to start by recognizing that both have different loss content. In itself, inherently, there are different types of loans. 1 is secure and the other one is unsecured.

Speaker 1

That's number 1. Number 2, when you look at auto loans, it's also the it's a necessity in Puerto Rico to own a car. As you know, we don't have a massive mass transportation in the island, all that stuff. So consumers prioritize the auto loan payment, and that is why you're seeing a divergence. And you see a natural divergence historically between consumer and auto.

Speaker 1

And but again, we come back to the same kind of land in the same place. Puerto Rico's economy is doing well, unemployment levels are low. So we are not seeing neither portfolio to go back to pre pandemic or worse. We are seeing them trending, inching upwards because certainly some of the stimulus is being taken away and it's kind of flowing out. But in general, we're not seeing those portfolios performing worse than pre pandemic levels.

Speaker 1

But that's kind of my 30,000 feet kind of view. I'll let Cesar give you a little bit more details on the consumer side because you already gave on the auto side.

Speaker 4

Yes. The consumer portfolio was before the IPO. So that with that coupled with the macroeconomic strong outlook that we have, we as I also mentioned, we don't expect it to deteriorate worse than the pandemic, and we expect it to be actually better than the pre pandemic level. So in Alto, as we mentioned, we did shift that portfolio, as I mentioned before, from the 64% priming to 82% priming. So the outlook for Alto is going to be better than pre pandemic levels because of that shift.

Speaker 4

So Yes.

Speaker 1

And again, you're going to see right now what we have, 4.4% in terms of net charges for consumer. That is lower than what we had in the past before the pandemic. In auto, we're around 1% or so, significantly lower also. High yielding portfolios. Yes.

Speaker 1

And these are both very high yielding portfolios. So we're very happy with the performance and the profitability of both portfolios.

Speaker 5

Would you mind just going through I don't know if anyone else on the call is again the same issues with it kind of breaking up every so often, but the percentage prime before the pandemic to today, I think you said 64% to 82%. And I wasn't sure if that was just for the auto or if that was for consumer as well.

Speaker 4

No, this is auto. Auto portfolio. The auto portfolio shifted from 64% and now it's 82%, prime. The consumer portfolio has always been an 80%, 89% prime portfolio. So that's why I'm mentioning that the consumer portfolio has and still is a prime, super prime portfolio.

Speaker 5

Okay. Thank you. And then just one final question just also on credit. I'm just curious if you can give us a little commentary on commercial real estate in Puerto Rico and just kind of how that market has fared up recently. And then also just remind us, I think one of the big concerns here is just the refinancing risk of loans going from 3.5% yields up to 7.5% or 8% yields as they kind of roll over in the next couple of years.

Speaker 5

If we look back to 2020 2021, were there loans commercial real estate loans being put on with yields as low as 3 with a 3 handle or were they a little bit structurally higher in terms of the yield back then?

Speaker 1

I'll take the last part first. We did not dabble much on the 3%, 3.5%, 4% type of commercial real estate loans. We don't have that type of yield on our CRE book. So it's not something that we have to contend with. And then in general, we have a very diversified well diversified CRE book.

Speaker 1

Most of the I would say the diversification comes from several industries. 1 is hospitality, hotels. Another one is retail space and shopping centers. And then we have around $90,000,000 in office space. This is non owner occupied, and these are 40%, 45% loan to value.

Speaker 1

We have 90 some percent occupancy. We have good coverage. We're not seeing any stress on the commercial real estate in our book and for that matter in the Puerto Rico market. So it's a different story here in Puerto Rico versus what you're seeing in the States from what I can gather.

Speaker 5

Thank you very much for taking all my questions.

Speaker 1

Yes. Sorry for the intermittency. I know Brett also brought her up.

Speaker 5

Yes. Nothing I'm sure there's nothing you can do about it. So no worries.

Operator

We'll go next to Kelly Motta with KBW.

Speaker 6

Hey, good morning. Thanks for the question.

Speaker 1

Hi, Kelly.

Speaker 6

The tax rate was lower this quarter and I know you had a discrete benefit in there, but it also, as you mentioned, was related to the mix of tax advantage activities that you partook in or business mix. So just wondering how we should be thinking about the overall tax rate as we look ahead if prior year is still a good run rate or if given a shift in mix it might be a bit lower?

Speaker 2

Well, hi, Kelly. Thanks for the questions. And as I shared in my prepared remarks, we are now expecting 29% effective tax rate for the full year. So that is a decrease from what we saw last year. So yes, we see a lower tax rate for the full year at 29.

Speaker 6

All right. Appreciate the color. And I believed in your prepared remarks, you discussed, you expect kind of loan growth continuing from here throughout the year. Previously, you had said about 3% to 4% growth, assuming the economy grows 2% to 2.5%. Just wondering where you see the drivers of growth ahead and if there's any kind of shift in the outlook as to what growth you can sustain?

Speaker 1

No. No shift in the outlook. We're seeing the 3% to 4% growth for the year. And we are seeing mostly from the commercial business. We see opportunities there, and we have a pretty good pipeline there.

Speaker 1

And we're also seeing, as you saw this quarter, we're seeing some growth on the consumer and auto. We're expecting commercial to have a higher contribution to the origination than in the Q1.

Speaker 6

Got it. That's really helpful. I guess final question for me. I mean, it seems like the margin outlook is somewhat better than what we had been expecting before with growth from here. As we look ahead, I know you had said the efficiency ratio low to mid-50s.

Speaker 6

It seems net net given your expense outlook hasn't changed that we may be in the lower part of that range versus the higher end. Just wondering kind of how you're thinking about as we look ahead kind of where we could fall out and how you're managing what could get us to the higher or lower end of that range? Thanks.

Speaker 2

Yes. Well, I think I understand very well your question. At the end, we're having expected higher NIM. But when we think about expenses, we think also about timing and when the investments are being are going to be deployed. I think we will continue to be in that range and probably most of the time would be in the lower of that range.

Speaker 2

But in other instances, other high end of that range. So I think we continue to see the expenses, as I mentioned, dollars 90,000,000 to $92,000,000 We need to continue investing in our strategy, And I think that the range and I don't see any way of cost being lower than that.

Speaker 6

Got it. That's helpful. Maybe one last for me and then I'll step back. Just wondering if there's any rule of thumb as to I know you had said you're still asset sensitive a bit, how each kind of rate cuts impacts margin at least on the near term? Do you have any kind of heuristic on that?

Speaker 1

We update that on the 10 Q, and you'll see it when we file the 10 Q. But as you will see, we have been gradually being opportunistic investing longer on the duration side of the investment portfolio, locking in rates at a higher level. And that has helped us in reducing our asset sensitivity, but we're still asset sensitive. And you'll get the details in the 10 Q when we file it because I think that's kind of the timing that we share that with the market.

Speaker 6

Fair enough. Thank you so much. I'll step back.

Speaker 1

Thank

Operator

you. We'll return to Alex Twerdahl with Piper Sandler.

Speaker 5

Hey, just one follow-up on the NIM. Just when you think about that the large government deposit that I think you mentioned is going to flow out or a good chunk of it's going to flow out in the end of the second, early third quarter, Does that get funded with sales and securities portfolio? Or does it get replaced with borrowings? How are you thinking about managing that outflow?

Speaker 1

Yes. I'll let Marita give you details.

Speaker 2

Yes. When we think about this, we as we experienced this quarter, we did have some we didn't have increase in the deposit side. We're expecting deposits to grow. That would be part of that replacing that funding. We will use wholesale funding.

Speaker 2

And if you think about the maturities that we have in the investment portfolio, we do have about $200,000,000 in treasury notes that will mature in May And about $160,000,000 already matured now in April. So we do have plenty of resources to replenish that exit. And there could be some effectiveness in the cost of funds through that process.

Speaker 1

Yes. And we're not taking that into consideration completely in our margin guidance. Okay, perfect.

Speaker 5

Thanks for taking my follow-up.

Speaker 1

Yes, thank you.

Operator

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

Speaker 1

Thank you, operator. Thanks again to all our team members and thanks to everyone for listening. Have a great day.

Operator

Thank you. Ladies and gentlemen, we apologize for the audio issues experienced on today's event. We thank you for your

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Earnings Conference Call
OFG Bancorp Q1 2024
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