OFG - OFG Bancorp (OFG) Q2 2023 Earnings Call Transcript

2023-07-20 15:54:02 ET

OFG Bancorp (OFG)

Q2 2023 Earnings Conference Call

July 20, 2023, 10:00 AM ET

Company Participants

Jose Rafael Fernandez - President and CEO

Maritza Arizmendi - CFO

Conference Call Participants

Timur Braziler - Wells Fargo Securities

Brett Rabatin - Hovde Group

Alex Twerdahl - Piper Sandler

Kelly Motta - KBW

Bernard Horn - Polaris Capital Management

Presentation

Operator

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

A presentation accompanies today's remarks. It can be found in 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. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All line have been placed on mute to prevent background noise. 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.

Jose Rafael Fernandez

Good morning, and thank you for joining us. We are pleased to report our second quarter results. All our businesses performed well and contributed to another strong quarterly performance.

Highlights included excellent loan production, stable core deposits with low cumulative beta, increased operating leverage and capital continues to build. Our digital-first strategy continues to show excellent progress with higher sales service actions and lower branch visits. The result has been an overall increase in customer transaction activity. Key performance metrics continue at strong levels.

On the people front, we announced several executive leadership promotions and recruited a new executive to lead our retail channel business development efforts. For Puerto Rico, consumer liquidity is good and the economy continues to do well. Thanks to our team for their commitment to helping customers and the communities we serve to achieve their financial goals.

Please let's turn to Page 3 of our conference call presentation. Looking at the income statement, earnings per share diluted was $0.93, up 11% year-over-year. Core revenues increased 17% to $170.5 million. Net interest margin was 5.9%. Provision was $15 million. Non-interest expenses were $89 million and pre-provision net revenues totaled $80.8 million, up 22% year-over-year.

Looking at our balance sheet. Total assets remained steady at approximately $10 billion. Customer deposits were approximately $8.5 billion. Loans held for investment totaled $7.1 billion, up 3.8% from the first quarter. New loan production increased 23% from the first quarter to approximately $692 million. Investments totaled $1.7 billion and cash was $799 million.

Looking at capital, the CET1 ratio was 14.0%. During the second quarter, we bought back about 565,000 OFG shares. This leaves us with a remaining authorization of about $19 million.

Please turn to Page 4 to look at our progress so far on our digital first strategy. Looking at data from June this year compared to last year, digital enrollment is up 10%. Self-service transactions increased 6%. That includes 14% growth in kiosk usage and 17% growth in digital loan payments. Overall, transactions increased 5%.

And to provide additional detail on our customer adoption levels, 78% of our customers are registered on our retail digital banking platform. 80% of total customer transactions are now being made using digital and self-service channels, and 90% of our customer deposit transactions are through digital and self-service channels. All this continues to validate that our investments in technology are key to our operating businesses, ultimately providing more value-added quality service to our customers, increased opportunities for business development and higher efficiency.

As part of our continued improvement to our retail digital banking platform, in April, we launched the Oriental servicing portal. This portal allows customers to easily manage all their deposits and loan accounts in one place, including full digital deposit account opening capabilities. So far, the early adoption levels are well above our initial expectations. Looking ahead, we will continue to enhance this portal with additional products and services to drive higher customer engagement and adoption while producing operating leverage.

Now I would like to pass the call to Maritza to go over the financials in more detail.

Maritza Arizmendi

Thank you, Jose. Please turn to Page 5 to review our financial highlights. Let me start with total core revenues. Net interest income was $140 million. That is a 2.8% increase over the first quarter. This mainly reflected the full effect of the first 50 basis point increase in the first quarter, partial effect of the 25 basis point increase in the second quarter, higher yields on higher average balances of auto, commercial and consumer loans, higher yields on higher average balances of cash and one additional day. This increased net interest income by $1.1 million.

Banking and wealth management revenues were $31 million. That's up $2 million from the first quarter. This mainly reflected higher wealth management and mortgage servicing revenues. Looking at non-interest income that included a loss of $1.1 million from the sale of a $205 million treasury note.

Looking at the efficiency ratio, it was 52.13%. That's an improvement of 274 basis points from the first quarter and more than 600 basis points from a year ago. This reflects increased operating leverage. Non-interest expenses totaled $89 million. This compares to $90 million in the first quarter. Operating expenses increased $1.8 million. These were more than offset by $3 million from lower credit expenses and higher gain on the sales of foreclosed real estate.

Non-interest expenses should continue to average about $90 million to $92 million per quarter for the rest of the year. Our efficiency ratio should continue in the low to mid-50 percentage range.

Looking at our other performance metrics. Return on average asset was 1.76%, and return on average tangible common equity was 17.67%. We continue to raise capital. Tangible book value per share was $21.06. That's up 2.4% from the first quarter and up 12% year-over-year. Total tangible common equity was $991 million. That's up 1.2% from the first quarter and 10.5% year-over-year.

Please turn to Page 6 to review our operational highlights. Looking at average loan balances, they increased $136 million from the first quarter. End-of-period loans were up $263 million. Sequential growth reflected increased balances of commercial, auto and consumer loans.

Looking at loan yields, it was 7.76%, up 18 basis points from the first quarter. That reflects increases from variable rate commercial loans and a larger proportion of higher yielding auto, consumer and commercial loans.

Looking at new loan originations, they were up 23% from the first quarter with increases in all lending categories in Puerto Rico. This was partially offset by a small decline in commercial U.S. loan production.

Looking at core deposits. Average balances declined $63 million from the first quarter. End-of-period deposits declined $27 million. Retail deposits declined $136 million, commercial declined $21 million and government deposits increased $130 million. We continue to see a shift to time deposits and wealth management.

Looking at core deposit costs, that was 69 basis points, up 16 basis points from the first quarter. As of the second quarter, our cumulative deposit beta has been 16%. Excluding government deposits, it was 12%. Through this cycle, we continue to expect cumulative deposit beta of about 25%.

Looking at borrowings. Average balances were $226 million compared to $64 million in the first quarter. The rate increased to 4.30% from 3.74%. This quarter reflects the full effect of the March advance from the Federal Home Loan Bank.

Looking at cash, average balance was $693 million, up $140 million from the first quarter. Yield was 5.22% compared to 4.73%. End-of-period cash declined $49 million.

Looking at net interest margin that was 5.90% flat from the first quarter and up 110 basis points year-over-year. We now expect NIM to remain level with the second quarter for the rest of the year. Looking at our effective tax rate, it was 33% for the quarter. We anticipate it to be that level for the year.

Please turn to Page 7 to review our credit quality and capital strength. Looking at net charge-offs, they totaled $6.6 million. That compares to $10.1 million in the first quarter. The second quarter included a recovery of $3.7 million. Delinquency rates rose slightly from reduced level in the first quarter.

Looking at provision for credit losses that totaled $15 million. That reflects two major items, $9.1 million from a specific reserve for 3 U.S. commercial loans with aggregate balance of $18 million and $6.3 million due to increased loan volume.

Looking at non-performing loans, the rate was 1.45%, up 13 basis points from the first quarter and down 36 basis points year-over-year. We anticipate delinquency and NPL rates to generally continue to around the second quarter level for the rest of the year.

Overall, credit continued to be strong. Looking at some of our other capital metrics. Total stockholders' equity was $1.1 billion, up slightly from the first quarter and TCE ratio increased to 10%.

Now here is Jose.

Jose Rafael Fernandez

Thank you, Maritza. Please turn to Page 8 for our outlook. Turning first to Puerto Rico, the economy continues to demonstrate resiliency and growth and the private sector continues to expand. The economic activity index in May increased 1.8% year-over-year. Retail sales in April increased 2.6% compared to last year. Wages are rising, labor participation is increasing and the flow of federal funds to rebuild infrastructure continues.

Having said that, we're keeping our eye on the potential impact of interest rate changes, inflation and a possible mainland recession. Nonetheless, we remain optimistic about Puerto Rico's strength and its continued decoupling from mainland economic uncertainties.

As to OFG, as I mentioned earlier, loan production was excellent, core deposit balances are stable with a low cumulative beta, operating leverage increased and capital continues to build. Retail customers are spending down some of their excess liquidity for home improvement, auto purchases, seasonal tax payments and higher-yielding products. Commercial customers are investing in expanding their businesses.

High levels of liquidity and capital provide OFG with a strong position in today's banking environment. We're encouraged by the increasing adoption levels of our self-service channels as it validates our investments in technology. And I want to thank all our dedicated team members for their commitment to the customers and the communities we serve.

With this, we end our formal presentation. Operator, please start the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Tim Braziler with Wells Fargo. Your line is open.

Timur Braziler

Hi, good morning.

Jose Rafael Fernandez

Good morning.

Timur Braziler

Maybe starting off on the loan outlook. Pretty phenomenal quarter kind of across the board. Maybe looking specifically at commercial loan growth, any color around the pipeline, the heightened growth this quarter. Was some of that kind of timing from first quarter that got pulled into the second quarter? And then yeah, any kind of outlook you can provide on just general loan growth for the remainder of the year?

Jose Rafael Fernandez

Sure, sure. Thank you for your question. As you mentioned, it was a pretty strong loan originating quarter for us, particularly on the commercial side. Here in Puerto Rico, we still have a pretty strong pipeline. And we think that the second half of the year will be -- we're going to try to replicate the first half, but we feel very confident that we have a pretty good strong pipeline. And we continue to see commercial customers investing in expanding their businesses and looking for ways to grow their businesses. So what we're seeing is a good constructive commercial market for us, and again, focusing on the small and midsized commercial businesses in particular.

Timur Braziler

Okay. And then if we look at the loan-to-deposit ratio, it's been picking up a little bit, still well below the mid-90s of pre-pandemic levels. What are your renewed thoughts around the funding base and where we can ultimately see that loan-to-deposit ratio migrate?

Jose Rafael Fernandez

Yeah. So we still have some space there on the loan-to-deposit ratio. And as you point out, we have moved the needle from the mid-70s to the 80s in terms of the ratio. So, I think the environment we're operating in right now where we are seeing good loan growth will require us to continue to look at our deposits and our clients. And the way we've managed it so far, it's -- we're very happy with the performance.

On the commercial side, we look at it from a primary relationship perspective. And we talk to our customers, our clients very recurrently and repetitively to make sure that we serve them well, and we kind of capture as much of their deposits as possible.

On the retail side, most of what's going on is really, as I mentioned on the call, investor -- retail customers deploying their excess liquidity. I'm not sure if all of you are aware, but Puerto Rico's excess liquidity as a percentage of GDP still stands around 10%, versus the U.S., which is around 6%. So there's still a lot of liquidity in the system. And the individuals and consumers are using it to kind of improve their life. And that's the right way of looking at this, because their wages have increased also.

So within that landscape and within that backdrop, I think we need to make sure that we grow our consumer deposits into the future just to make sure that we manage that loan-to-deposit ratio around the mid-80s.

Timur Braziler

Okay, great. And then one for Maritza. The deposit beta guidance hasn't changed. That's still at 25%, still seems quite conservative seeing as they were kind of half that level at the moment. But the guide on margin seems to have gotten a little bit better with a flat expectation versus kind of moderation lower. Is this your way of saying that, that beta guidance, is this probably a conservative one? I'm just wondering what would be needed if there's only one rate hike kind of assumption left, what's going to -- what's that lag look like after that last rate hike that's going to get us to a 25% beta?

Maritza Arizmendi

Yeah. Well, what we're seeing is as you have seen in the first two quarters, we have moved the beta from 11% to almost 15% during the quarter. As we see the mix and the change in the funding that we have, we continue to see cost of funds increasing. But we will continue to have this yield on the loan book growing as well as the mix in the balance sheet will improve in the earning asset side. So that's why we continue to see cost of fund increasing, but the yield on the loan book also increases our NIM being stable for the next 2 quarters.

Timur Braziler

Okay, great. And then just last for me on the credit front. Maritza, I missed the aggregate amount of the 3 mainland credits. And then just more broadly, as you look at your credit portfolio, any color you can provide on if there's any similarities on the borrower on those three credits? And then just in the mainland, kind of the areas that you're putting more attention and focus on.

Maritza Arizmendi

No. These were really very specific situations to these three loans that are related or not contaminate the rest of the portfolio as we have a very well-diversified portfolio. We have -- we don't have any concentration in any industries in that portfolio and it's very well diversified through U.S. So these are really very specific situations related to supply chains, and we don't see anything that relates to the whole portfolio. That's the way we see in these cases. And as I mentioned, they were really, really specific. And we're optimistic on those three cases also because management has continued to make the restructuring in a very efficient way and the perspective on those three loans continue to be good.

Jose Rafael Fernandez

And just to add, the aggregate amount is $18 million on the three loans.

Timur Braziler

Okay. Great. Thanks for the questions. Nice quarter.

Jose Rafael Fernandez

Thank you.

Operator

Thank you. Our next question will come from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin

Hey, good morning. Thanks for taking the questions. Wanted to start with -- good morning. Wanted to start with the efficiency ratio guidance, and Maritza, it had been in the mid-50s and sounds like you've tweaked that down to low-50s to mid-50s. And so I know there was a recapture of ORE or there was a gain in the quarter that minimized the expenses this quarter. But would it be fair to assume the expense trajectory is still higher from here? Can you give us some additional color on your expectations for the back half in terms of spending and what might impact the expense levels? Thanks.

Maritza Arizmendi

Thanks for the question. And if we take out that gain in repossessed, the expenses increased $1.8 million during the quarter, mostly because of technology. As we have been disclosing in prior calls and we're disclosing in this call, particularly how this technology is playing for us. That will continue to be an element going forward. And that's why we continue to, as I mentioned in my prepared remarks, talking about $90 million to $92 million as an ongoing expense for the next quarter.

We know that in the long term, this technology will bring some efficiency, but the timing, it will evolve. So I cannot tell you when it will happen. But we know that in the long-term, this will bring some efficiency to us. And we will continue to invest, and that's why we are giving you this guidance of $90 million to $92 million as we continue executing on our digital first strategy.

Brett Rabatin

Okay. And then wanted to talk about auto for a second. I was a little surprised. I thought we would see a little bit of normalization this year as it relates to gross auto charge-offs, and you obviously had a recovery that made the net really light this quarter. But was just curious what you were seeing with the consumer, their ability to absorb inflation. And just any thoughts on where auto from a credit perspective might go from here.

Jose Rafael Fernandez

So Brett, first, we are equally surprised with the strength of the auto loan growth. We're also equally surprised with the continuing strong auto purchase demand, new sales. Auto sales are still at very high levels. We're seeing dealers with higher levels of inventory, so maybe that's the starting point of a slowdown in terms of new auto sales.

But in general, I think it's a couple of things. One is we are coming from an environment, where clients or customers who are not changing their cars too often. And they kind of push that decision for a later time. And as their economic situation has improved and we've seen definitely their liquidity levels and their FICO scores have all increased and improved. So they feel more confident and they're going out there and doing -- making those big ticket purchases.

So we're really focusing on our auto portfolio. It's really high FICO score, 720-plus. We continue to increase the loan yields. Now we're booking loans or loans that are being booked in this quarter average, I think, around 9.5%.

So again, that Maritza mentioned it earlier, it's helping us on our net interest margin. It also is giving us the ability to get a higher FICO customer for us to do business in other areas with the bank. So actually, I call it a good problem to have.

Brett Rabatin

Okay, that's helpful. And then if you mentioned it, I missed it, but I know you bought back over 0.5 million shares this quarter. Obviously, you still have a high level of capital. Any thought on the buyback activity in the back half of the year?

Jose Rafael Fernandez

So with these loan growth levels that we're having, that's what we -- that's our main priority, how do we deploy our capital for our customers and for the communities we serve. And now with higher yields, we certainly have a higher return on our capital. But we look at the dividends also and we look at the repurchase program.

We still have $19 million left. So we'll kind of continue to be in the market. And as we've done this quarter and in the first quarter, we feel that the levels of capital that we have of around 14% CET1 and the way we're generating earnings, we're retaining earnings at a pretty good clip, it gives us confidence. So we're looking at the three areas, loan growth, dividends and repurchase program as well.

Brett Rabatin

Okay. Great, thanks. Appreciate the color.

Jose Rafael Fernandez

Thank you for your questions. Yeah, thank you for your questions, Brett.

Operator

Thank you. Our next question will come from Alex Twerdahl with Piper Sandler. Your line is open.

Alex Twerdahl

Hey, good morning.

Maritza Arizmendi

Good morning.

Jose Rafael Fernandez

Good morning, Alex.

Alex Twerdahl

First off, Jose, I was hoping you can just give us an update on what you're seeing in terms of deposit pressure trends in the island. I know you still have some inflows of public fund deposits that offset some outflow in retail, and presumably, there's a lot of seasonality around that. But maybe you can just give us a little bit more color on sort of the competitive environment and if there's been any change in customer mentality over the last couple of months with respect to what they need on their deposits.

Jose Rafael Fernandez

Yeah. So let's split the answer in two. Let's start with the retail side, on the consumer side. What we're seeing is lower non-interest-bearing deposit balances on the retail side. And that's a direct relation to what I mentioned in my prepared remarks in terms of customers using their money to improvements at home, buying furniture and et cetera.

So they're deploying that liquidity, and that's item number one, right? And also, what we're also seeing is moving some funds to higher-yielding vehicles. And some of it is coming through to our wealth management unit. This quarter, we had close to $30 million that were customer deposits that were moving their monies to our broker-dealer, and so that's good. But we're really not seeing much from the competitive side. We definitely see a competitive environment but we don't see any rational environment. And given the Puerto Rico market, right, it might be called that way because Puerto Rico has a different dynamic in terms of the banking competitive landscape versus the mainland.

So given who we are in Puerto Rico and the banking industry in the island, I think the competitive forces are really competitive, but at the same time, not irrational. So that's kind of how it's playing out on the consumer side.

On the commercial side where we have a higher beta, it's really driven by relationships, and we have very strong relationship with a segment of our commercial clients, and our team is working very closely with them. And we just make sure that we take care of them. And I think we're well positioned to not only take care of our customers but also be able to attract new customers on the commercial side, small and midsized companies, that is kind of the areas where we are most focused on the commercial side. So that's a little bit of an overall on our deposit landscape and how we're seeing it.

Into the next second half of the year, I think we're starting to see a slowdown on the outflows on the retail side. And we see the same kind of behavior on the commercial side, pretty steady and managing our primary relationships.

Alex Twerdahl

Great. That's good color. And then just as you kind of think about level of deposits and overall balance sheet management and obviously, the strong loan growth you've had this quarter and that you sort of alluded to hoping to have in the second half of this year. Is it fair to assume that maybe we see stable deposits but that most of the balance sheet growth -- the loan growth actually will be funded with the securities portfolio like you did in the second quarter? How should we think about the overall balance sheet management?

Jose Rafael Fernandez

There are a couple of levers there, right? Yeah, the securities portfolio, we have some short-term maturities early next year, and that's one way. We also do have excess wiggle room with the loan-to-deposit ratio as I alluded earlier. So we can still kind of grow our loan book and fund it with our deposits. So those are the two main drivers. But if we need to go and if growth is -- it's really hard to sustain the level of loan growth that we had this quarter. So our expectation is that we will be able to manage it with our current deposit balances. And if need be, we can use some of the securities side to fund that.

Alex Twerdahl

Okay. And then I wanted to ask, on the new loan production, you gave us the average new production yield for the auto during the quarter. I was wondering if you had that for the commercial as well.

Jose Rafael Fernandez

On the origination side?

Alex Twerdahl

Yeah.

Jose Rafael Fernandez

Yeah. On the commercial Puerto Rico is, I would say, 7 ---

Maritza Arizmendi

Almost 8.

Jose Rafael Fernandez

Almost 8%, between 7.5% and 8%. I don't have the exact number but Maritza can provide it to you later.

Alex Twerdahl

Okay, very good. And then just a final question. You talked about the avenues of capital management. And it seems like given the earnings generation, you can grow loans and continue to buy back stock and then the dividend. You guys have been on a nice track record of increasing the dividend at a fairly regular pace and the payout ratio. Can you just talk maybe about sort of the long-term goal for the dividend payout ratio for earnings and what your expectations for the dividend are over the next, I guess, over the next couple of quarters?

Jose Rafael Fernandez

Yeah. So we look at a payout ratio in total, not only dividends. So we look at dividend plus buybacks. So right now, we're at 41% kind of payout ratio halfway through the year. So we -- net income of $90 million and we've deployed out there $21 million in dividends and $16 million in repurchase, so $37 million.

So our goal is to continue to inch up our common dividend to get closer to a payout ratio that it's north of the 25% and then complemented with our buyback, and that's kind of the approach, Alex.

Alex Twerdahl

Okay. And if I remember correctly, you guys look at that generally around this time each year and then again in the January time frame. Is that correct?

Jose Rafael Fernandez

Can you repeat the question again?

Alex Twerdahl

In terms of the time frame for the capital -- changes to the capital management outlook, it's generally around July, right around this time of year and then January. Am I remembering that correctly?

Jose Rafael Fernandez

Yes, that's correct. We take a look at it twice a year, July and January.

Alex Twerdahl

Okay, great. Thank you for taking my questions.

Jose Rafael Fernandez

Yeah, Alex. Have a great day.

Operator

Thank you. Our next question will come from Kelly Motta with KBW. Your line is open.

Kelly Motta

Hi, good morning. Thanks for the questions. I guess starting out, going back to the margin, I appreciate the color you just gave about new origination yields and also the color around your expectation for deposits. Just wondering, it looks like a lot of the growth this quarter came from CDs. Can you provide what you're pricing new CDs at currently and how that compares to the roll-off rates right now?

Jose Rafael Fernandez

You're talking about time deposits?

Kelly Motta

Correct, yes.

Maritza Arizmendi

The entry price right now is around 2.9% in the new CDs, while the ones maturing is about 60 to 65 basis points. So that's one of the drivers on the beta that we're showing you these last two quarters.

Jose Rafael Fernandez

Yeah. And I think the additional 1 is on the commercial side.

Maritza Arizmendi

Yeah, and it's the commercial side, yes.

Jose Rafael Fernandez

Where we manage relationships and we want to make sure that we're constructive with that.

Kelly Motta

Got it. And then in terms of the balance sheet management, just kind of closing the loop there, the past two years, you kind of skirted by below the $10 billion in asset mark. It seems like loan growth has been really strong and deposits may be stabilizing. Do you have any updated commentary on crossing $10 billion and the timing of that and the implementation of Durbin?

Jose Rafael Fernandez

Yeah. So you pointed out the reality, right? So if we have the opportunity to continue to grow our loan book and also stabilizing deposits, I think 2023 will probably be a safe year not to pass the $10 billion mark, but I can't guarantee that. But it's starting to look now with higher-yielding loans and higher-yielding cash, it makes less -- it's less -- it's easier to manage the Durbin in terms of loan assets or asset levels.

So from our side, we're probably going to not cross the $10 billion before the end of the year. But we're not going to be as concerned about breaking the $10 billion barrier in 2024, given the higher yields on our loans as well as on other assets like cash and securities. So Kelly, I think on the $10 billion mark, we're coming to a close on that one.

Kelly Motta

I appreciate the color. Just kind of zooming out and taking a more high-level view, it does look like the macro backdrop in Puerto Rico is holding up quite nicely. Can you give us an update on the pace of federal funds and how those have been flowing and kind of what you've been seeing on the ground on the island?

Jose Rafael Fernandez

Sure. Specific dollar numbers, I really try to stay away from that because it flows all over the place. But I can tell you my view from the ground in terms of the federal funds. And that is we're seeing significant amount of construction going on in the island on the public side from the roads and bridges and all the broadband that is being kind of redone here in the island.

We're also seeing a lot of construction on the private sector. We're seeing, as I mentioned in my comments earlier, commercial businesses are really investing in their own businesses. So all that is kind of adding to the equation.

I also want to point out that the recently passed federal laws on infrastructure, that's going to represent, I think, $1 billion to Puerto Rico in terms of federal funds, additional federal funds coming down. So I think what's going to happen, Kelly, is that the federal funds flowing into the island probably will continue to flow in for a longer period of time than anticipated. And that is also good for really getting Puerto Rico's economy to be resilient and be able to build the competitiveness for our small and midsized businesses and be able to have recurring economic growth not so dependent on several funds. So in general, that's my outlook on the federal funds and how are things playing out down in the island.

Kelly Motta

Thank you so much. Maybe last question for me. I really appreciate all the detail you provided on your digital first strategy and what you're, kind of seeing there versus a year ago. Can you kind of expand upon what you're doing with your digital strategy, maybe next steps with that? I also know you've added to your executive team. So any color around that as well as kind of outlook for what you're doing on the digital side would be really interesting. Thank you.

Jose Rafael Fernandez

Yeah, sure. Thank you for your question. So on our digital first strategy, it's all about the customer, so let's start there. Everything that we do, every investment that we make, every technology that we deploy has got one and one single focus, and that is the customer. And how can we improve the customer experience?

How can we have an edge from a customer experience perspective so that we can then do business development and grow our business and grow our loan book and grow our deposits and make it easier for our customers? So that's kind of what -- how it all begins, right? So that's number one.

Number two is we're really encouraged with the investments we've made in the last couple of years. And as I shared with you today, the adoption levels are pretty good. And we have been able to kind of educate the consumer to utilize the kiosk and the self-service tellers and the chatbot, and we're seeing 35% increase on the chatbot utilization. We're really encouraged with how our customers are embracing the tools that we're providing them above and beyond the brick-and-mortar. So as we look at the midyear and kind of reflect on how our investments in technology playing out, I think we're in good shape.

Now going to the future, we can't stop. We live in a competitive market and we need to keep on making sure, again, from a customer perspective, what is the next thing, what is the next improvement and what is the next addition that we need to make.

And we are working on a couple of those. I don't want to get into the specifics for competitive reasons. But in general, we have been working at this for the last two or three years. You guys have heard us say efficiency ratio is going to be in the mid-50s because we got to invest in technology. And we're feeling today that not only it's starting to pay out but it's also the right path, it's a confirmation. So that's kind of how I feel about all this and encouraged with the prospects of us continuing to lead in terms of digital and leading in terms of innovation in banking in Puerto Rico.

Kelly Motta

Great. I really appreciate all the color. Congrats on a great quarter. I'll step back.

Jose Rafael Fernandez

Thank you, Kelly. Thank you.

Operator

Thank you. [Operator Instructions] And we do have another question from Timur Braziler with Wells Fargo. Your line is open.

Jose Rafael Fernandez

Timur?

Timur Braziler

Good morning. Had you on mute, sorry about that.

Jose Rafael Fernandez

Hi, Timur. How are you doing?

Timur Braziler

Good. Thanks for the follow up. Just one last one on this last kind of thought process around the technology. Can you just maybe give us an update on where OFG is from a technology perspective relative to the other island banks? Is this kind of extending the lead that you already have? Is this playing catch-up in certain areas? Maybe you can sort-rank what you guys do best and then maybe some areas where the other banks might have a lead but you're working to catch up.

Jose Rafael Fernandez

Yeah. I mean, I agree. We're not in the lead in everything but we have, certainly throughout the last 10 years, not only positioned ourselves but invested in bringing new services and tools to our customers from a technology side.

So how are we positioned in terms of technology? I think we're well -- very well positioned in terms of trying to execute on our business strategy, which is differentiation. We're trying to differentiate from our competitors from the traditional brick-and-mortar strategy to more of a challenger approach. And we use technology and people as a way to differentiate.

So that's kind of how we're positioned. And in that sense, this portal that we came up with and we deployed and launched in April, what it really does, it provides one place in our online banking platform to kind of achieve solving all your issues that you might have with -- in one kind of place without having to call somebody or without having to go to a branch.

And it goes from basic stuff like asking for the balance of a loan to cancel it to -- and you can get that digitally and as also opening a deposit account digitally. And those are things that help us to kind of show some differentiation. And we keep on working on that. We have formidable competitors and they are -- they have deeper pockets than us.

And at the end of the day, each one continues to focus on their own strategies. But we're really happy with the way we're working ours, and for the size of our bank, we're very happy with the results that we've come up with.

Timur Braziler

Great. Thanks for that update.

Jose Rafael Fernandez

Yeah. No problem. Thank you for your questions.

Operator

Thank you. Our next question will come from Bernard Horn with Polaris Capital Management. Your line is open.

Bernard Horn

Yes. Good morning. Actually, my first question was just asked and answered, so thank you. But the second question is on the auto market. The U.S. has seen lower used car prices. I'm wondering if you could give us any color on what's happening in Puerto Rico and whether you see that as a potential risk on residual values for any part of your auto loan book.

Jose Rafael Fernandez

Yeah. We have yet to see that reduction on the used cars values, but it's certainly a risk into the future, right, in terms of the losses. One thing that we are focused on is on the models and we're focused on what type of cars we kind of lend to. And it's really more on the middle-size type of kind of the middle market, the Japanese and the Korean cars, most of it. We really don't play on the higher-end autos.

So that serves a little bit as a hedge to your point, so that's kind of what we're seeing. We're seeing better resale values on some car manufacturing, like I don't want to give an advertisement some of those guys, but we're seeing better values on the Toyotas than in others, and we kind of work it that way.

Bernard Horn

Thanks very much. I'm clear.

Jose Rafael Fernandez

Yeah. Thank you.

Operator

Thank you. We have no further questions in the queue, so I would like to turn the call back over to Jose for any additional or closing remarks.

Jose Rafael Fernandez

Thank you, operator, and thanks again to all for joining us in this call. And thanks to all our team members for a great job. Looking forward to the next call. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. We appreciate your participation. You may disconnect at any time.

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OFG Bancorp (OFG) Q2 2023 Earnings Call Transcript