OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Christy, and I will be your operator today. Our speakers for today are Jose Rafael Fernandez, President, Chief Executive Officer, and Vice Chairman, and Maritza Arizmendi, Executive Vice President and Chief Financial Officer. A presentation accompanies today's remarks. It can be found on the redesigned Investor Relations website on the home page 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 lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Good morning and thank you for joining us. First, I want to wish all a happy new year and that you all remain safe and healthy. If there was ever a year where we fulfill our purpose to our customers, our people, and our communities, it was 2020. We were more than ready. Más que listo. You know, our job as managers is to lead through good and bad times. When we look back at 2020, we're so proud of our people who have been so dedicated, so resilient, and who have persevered through all the challenges of 2020. while maintaining our high levels of service to our customers, giving back to the communities we serve, and delivering excellent results for our investors. To our teams in Puerto Rico, the U.S. Virgin Islands, and on the mainland, once again, thank you. We are extremely pleased with our results. For our customers, despite everything, we swiftly processed their service requests, applications for loan deferrals, and the rapid influx of stimulus checks. For commercial customers, we implemented an easy-to-use, 100% digital service for applying, processing, disbursing, and for giving PPP loans. Both retail and commercial customers took full advantage of the digital technology we have been providing. As we say at OFG, fácil, rápido, hecho. Our people adapted quickly to working remotely. We stepped up spending for COVID-related items such as testing, healthcare, and worksite safety. We made significant investments to ensure our teams had robust remote work capabilities. We also worked to do our part for our communities. At the beginning of 2020, we supported the earthquake-affected towns in the southern part of Puerto Rico. After that, it was COVID-related donations and securing more than $100,000 in grants for nonprofits in Puerto Rico and the US Virgin Islands. In addition, we converted our internship, scholarship, and financial seminar program to virtual formats to maintain a sense of continuity during these challenging times. We will continue in 2021 to help our customers, people, and communities to adapt to the challenging and changing COVID conditions. Please turn to page four. As you can see in this slide, we continue to see higher percentage adoption in all banking technologies. I'm particularly pleased with the 50,000 online appointments made through our digital platforms and our online bill and loan payment solution. All of this made life easier for our customers during the pandemic. It also helped further our strategic and operational goals. In all likelihood, digital migration should build on the progress we achieved in 2020. Please turn to page five to review our fourth quarter results. We reported earnings per share of 42 cents. It is important to note that this included three major items, $6.4 million in merger and restructuring charges for final Scotiabank systems conversion and integration, $3.7 million in merger and restructuring charges for branch consolidation in 2021, and $1.5 million in COVID related spending. All of these amounts are pre-tax. Also keep in mind, our tax rate was 22%. That's higher than the third quarter because of a greater proportion of higher tax income, but it is also lower than our estimated tax rate in 2021, which we currently anticipate being in the 30 to 32% range. Total core revenues were a record $133 million. Net interest income was $99 million, similar to the third quarter. Banking and wealth management revenues were a record $34 million. Wealth management included $4 million in annual insurance commissions. Approximately $3 million of that was from additional insurance business that came with the Scotia acquisition. Mortgage banking included $2 million in revenues from secondary market sales of mortgages that were held back from the third quarter due to our system's conversion. Non-interest expenses were $89 million. Excluding the merger restructuring charge and COVID-related costs, non-interest expenses amounted to $77 million. This reflects significant cost savings, which Maritza will discuss in a few minutes. Regarding the balance sheet, total assets were under $10 billion as we had anticipated, loan production continued to be solid at $485 million, and capital continued to build with the CET1 ratio increasing to 13.08%. Looking at our numbers, we continue to see signs of recovery with solid loan production, regular payment activity, stable credit trends, and a sequential orderly increase in banking service fees, which reflect improved day-to-day economic activity. Now here's Marisa to go over the financials in more detail.

Thank you, Jose. Please turn to page six for our financial highlights. Let me start with tangible book value per share, one of our key areas of focus. At close to $17, it increased more than $1 year over year and by 46 cents from the third quarter. Deficiency ratio increased sequentially to 67%. When you adjust for merger and COVID expenses, it improved about 400 basis points to 58%. Return on average assets and tangible common equity was close to 1% and 10% respectively on a reported basis. Excluding the merger charge and the COVID expenses, These two metrics will have been more in line with our general performance objectives. Please turn to page 7 for our operational highlights. As Jose mentioned, loan generation was a solid $485 million. That included commercial lending of $224 million, auto lending of $138 million, and mortgage lending of $98 million. Average loan balances declined slightly from prior quarter due to pay downs. And loan yields stood at 6.55%. Average core deposits increased. But end-of-period balances declined $170 million on a linked quarter basis. This was primarily due to our decision not to renew certain institutional higher-cost deposits. As a result, the cost of core deposits continued to fall to 53 basis points. Average cash balances increased $162 million during the quarter. The result was a six basis point sequential decline in net interest margin to 4.24%. Please turn to page eight to review credit quality. The net charge-off rate increased to 2.67%. That reflects our decision to charge-off to acquire Scotiabank loans that were substantially and previously reserved at the time of the acquisition. Provision was $14.2 million. This includes $4.7 million to cover the two charges of commercial loans acquired from Scotiabank that I just mentioned. First quarter 2020 loan deferrals fell to 1.4% of total loans, from 2% in prior quarter and 30% in the second quarter of 2020. The non-performing loan rate for non-PCD loans remained fairly steady at 2.35%, while non-performing loan rates for PCD loans decreased from 4.26% to 2.11%. Turning to capital, stockholders' equity increased 2% sequentially and 4% year-over-year. The tangible common equity ratio increased to 9% ahead of both the prior quarter and the year-ago period when we made the acquisition of Scotiabank. Please turn to page 8. After holding off for most of the first half of 2020 due to the pandemic, We completed the Scotiabank cost savings program in the fourth quarter. With the completion of the system conversion, we realized $32 million in annualized savings, exceeding our original estimate of $35 million by about 9%. Looking ahead, we expect to benefit from about two-thirds of this savings in 2021 as we plan to step up investment in the continuing transformation of our business model. Long-term, we are committed to reducing expenses and increasing operating leverage. Our objective is to return to an efficiency ratio in the mid-50 range. Now here is Jose for his outlook for 2021.