OFG Bancorp

Your program is about to begin. Should you need audio assistance during today's program, please press star zero. Good morning. Thank you for joining OFG Bancorp's conference call. My name is Brittany. 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 Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks. It can be found on our Investor Relations website, on our homepage, in the What's New box, or in the quarterly results page. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to certain risks and uncertainties outlined in the risk factor 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. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Good morning and thank you for joining us. I wanted to start our call today thanking all our team members for the excellent work they've done through 2021. We are extremely proud of our achievements, particularly our focus on helping our customers achieve progress and financial well-being. So let's start by turning to page three of our conference call presentation. Fourth quarter earnings per share diluted was 66 cents compared to 81 cents in the third quarter. and 42 cents in the year-ago period. Fourth quarter earnings were impacted by our strategic decision to sell $66 million of past due loans. These loans had already been partially reserved, but required $10 million in additional provision. As for our core business, we continue to demonstrate strong momentum as we end at 2021 and now enter 2022. Core revenues total $141 million. That's an increase of 5% quarter-over-quarter and 6% year-over-year. Asset quality continued to improve, resulting in a $3 million net reserve relief, which reduced our total provision to $7 million. Non-interest expenses increased $8 million, primarily due to increased investments in people and technology. Pre-provision net revenues total $56 million, similar to the third quarter, but 26% greater than last year. Looking at the December 30th balance sheet, we ended 2021 with $9.9 billion of assets, postponing the applicability of Durbin later in the summer. Compared to September 30th, customer deposits declined $641 million to $8.6 billion. that reflects withdrawals at year end by government-related and institutional commercial clients. This was partially upset by increased retail deposits. Even with the loans we decided to sell, we saw long growth in loans held for investments in all three of our priority areas. An increase of 5% in commercial loans, ex-PPP, an increase of 9% in consumer loans, and an increase of 1% in auto loans. And new loan origination remained very strong at $633 million for the quarter. We also successfully executed on our capital allocation strategies. We completed our $50 million share buyback and our capital levels remain robust. Please turn to page four. We are also pleased at all the progress we made for the year as a whole. Earnings per share of $2.81 was up 113%. This was driven by $17 million higher core revenues, $92 million lower provisioning, and $20 million lower non-interest expenses. And pre-provision net revenues increased 15% to $250 million. Looking at the balance sheet, total assets increased $74 million. Customer deposits grew $225 million. Loans declined $172 million. Excluding PPP forgiveness, they increased $24 million. New loan origination was a record $2.4 billion. If we exclude PPP from both years, it was also a record at $2.2 billion, up $798 million or 56%. compared to 2020. The CET1 ratio increased 69 basis points, leaving us in a very strong capital position. Other capital actions in 2021 included increasing our common stock dividend to $0.12 per share from $0.07 and completing the $92 million redemption of all our remaining preferred stock. Results for both the quarter and the year continue to reflect the four main drivers of our business. Consistently growing recurring net income driven by loan growth, and that includes continuing to build both our Puerto Rico and our U.S. loan businesses, our larger scale, our focus on increasing digital utilization and customer service differentiation, and Puerto Rico beginning to enter a growth economic cycle. All this continues to validate our optimism regarding the future of Puerto Rico and OFG. We continue to transform OFG with a focus on simplification and building a culture of excellence and customer service. We are developing and attracting top talent to deliver on this transformation and continue to invest in technology. As you know, some of our technology investments are table stakes and required to continuously upgrade our systems. Others require us to focus our technology on investments that drive our strategy, namely digital, data analytics, cloud migration, cybersecurity, and our sales and service capabilities. Two quick examples of this in 2021 were the deployment of our digital residential mortgage origination process and our commercial banking data-driven business model. Both are first for the Puerto Rico market. With OFG's unique strategic position and with Puerto Rico's growing economic outlook, we will accelerate these investments to improve the customer experience faster, improve efficiency longer term, and set the stage for OFG's long-term growth. We are extremely proud of our accomplishments and look forward to continuing to grow together with our clients and the communities we serve. Now, here is Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page five to review our financial highlights. Total score revenue were $141 million. That is an increase of about $6.2 million, or about 5% from the third quarter. This reflects a $1.5 million increase in net interest income. NII reflected level income from loans and cash, increased income from investment securities, and $1 million in lower cost of funds. The decline in total interest expense was mainly driven by a lower average rate. Growth in total core revenues also reflected a $4.7 million increase in total banking and wealth management revenues. That reflected the fourth quarter receipt of annual insurance commissions. This totaled $4.3 million this year compared to $4 million last year. Non-interest revenue growth also reflected modest increases in recurring banking services and mortgage banking activities. Non-interest expenses totaled $86 million. That is an increase of $7.6 million from the prior quarter. The fourth quarter included increased compensation, technology investment, and costs related to higher levels of business activity. The quarter also included $2.4 million for a legal reserve and to cover operational losses, and $1 million in lower gains on sales of real estate owned compared to the prior quarter. The higher non-interest expenses resulted in an efficiency ratio of 61.4% compared to 58.6% in the third quarter. As Jose mentioned, we will continue to invest in our people and in technology to further deploy our strategy. We now expect in 2022 our efficiency ratio to remain in the low 60% range. Return matrix continues to be in our target range. Return on average assets was 1.3%. Return on average tangible common equity was 14.1%. We continue to build capital. Tangible value per share was $19.08. That is an increase of 2.6% from the third quarter and 12.4% year over year. Please turn to page 6 to review our operational highlights. Average loan balances totaled $6.5 billion. That is a decline of $14 million from the third quarter. This reflected an increase of $54 million in non-PCD loans and a decrease of $60 million in PCD loans. The increase in PCD largely reflected new commercial, auto, and consumer loans. The decrease in PCD largely reflected repayment in the acquired Scotiabank mortgage portfolio. Loan yields held steady at 6.62% as it has for most of the year. The loan sales consisted of $60.7 million of mainly former Scotiabank residential mortgage PCD loans and one large former Scotiabank PCD commercial loan that were transferred to HEP for sale. And the $5 million balance mainly consisted of several small commercial loans where the sale was completed during the quarter. Total new loan origination was $633 million. This is up $76 million from the third quarter. It is also up $147 million year over year. We continue to see high levels of auto commercial and mortgage lending, and an increased demand for consumer loans. The commercial loan portfolio has now increased three consecutive quarters. Average core deposits total $9.1 million. That is a decline of $19 million from the third quarter. Most of the government-related and commercial withdrawals occur at the end of the year, End of period core deposit declined $641 million from September 10th. Core deposit costs continued to fall. There were 26 basis points in the fourth quarter. That is a reduction of four basis points from the third quarter. This reflected general rate reduction and the continued maturing of older, higher-priced cities. Early in the fourth quarter, we paid down $33.3 million of 2.98% federal and foreign bond advances. Average advances totaled $2.6 billion. That is a decline of 5% for $146 million from the third quarter. This mainly reflects an increase in the average investment portfolio by $177 million. Net interest margin was 4.18%, an increase of six basis points from the third quarter. The increase was mostly driven by the five basis point decrease in cost of interest and by the one basis point increase in any asset yield. Please turn to page seven to review our credit quality and capital strength. As quality metrics continue to trend positively, fourth quarter nurture shops totaled $32 million. This included $30 million related to the past due loans transferred to her for sale and sales previously mentioned. The NCO rate increased to 2%. The early and total delinquency rate were 2.34% and 3.71% respectively. The non-performing loan rate on the non-PCD loan portfolio was 198%. Total NPL rate including PCD was 175%. This compares to 2.08% in the third quarter and 2.28% in the year above quarter. These rates are some of the lowest levels we have seen in the last five quarters. As a result, we had $2.7 of net reserve relief With the added provision related to the loan sales, that provision was $7.2 million. Our allowance coverage was 2.44% on a reported basis and 2.47% excluding CPP loans. The CEG ratio increased to 13.77%. So far, the equity was $1.03 billion, an increase of $15 million from the third quarter. This reflected the increase in repayment partially upset by the common stock buyback. The tangible commodity growth was at 9.69%. Now here's its total.