OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Shelby. 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 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 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. We are pleased to report our fourth quarter and fiscal year 2022 results. We are extremely proud of the work we did last year and our performance reflects that. We achieved great progress executing our strategies for the benefit of our customers, deploying technology, expanding and improving our network, and investing in people and talent. We took major steps forward in our digital first business transformation. solidifying our position as a challenger bank, differentiating us from our competitors. In addition to ATMs, we now have seven self-service banking kiosks and 23 interactive telemachines as part of our enhanced sales and service banking network. All this has contributed to our strong financial results. Our performance metrics are at the highest they've ever been to date. The Puerto Rico economy is also doing well. Businesses and consumers remain in good financial shape. We look forward to another good year with a cautious eye, as always, on economic and financial uncertainties. Now, please turn to page three of our conference call presentation. This was our strongest quarter this year. It was driven by total core revenue growth of more than 7% quarter over quarter. and more than 19% year over year. Looking at the income statement, earnings per share diluted was 97 cents. Core revenues totaled $168.3 million. Net interest margin was 5.69%. Provision was $8.8 million. Non-interest expenses was $91.6 million. and pre-provisioned net revenues totaled $76.9 million. When we look at our balance sheet, customer deposits were $8.6 billion, loans held for investment totaled $6.8 billion, and new loan origination remained strong at $616.4 million. Investments totaled $2 billion, and cash was $550 million. Capital remained strong with CET1 ratio at 13.64%. Please turn to page four. When we look at our results for the year, earnings per share was $3.44, up 22%. This was driven primarily by total core revenue of $607.8 million. net interest margin of 5.05%, provision of $24.1 million, and interest expenses of $345.1 million. We ended the year with total assets of $9.8 billion. As a result, we remain under the Durbin threshold. As part of our ongoing strategic reviews, at the end of the year, we decided to take advantage of an opportunity to sell our retirement plan administration business. The rationale behind this decision is to focus our efforts on 401 business development while leveraging the service and scale of a larger U.S. player in this segment. There was minimal financial impact from this transaction. And as we previously reported, Other capital actions in 2022 included completing $64.1 million of our $100 million buyback authorization plan and increasing our common stock dividend to 20 cents per share from 12 cents, an increase of 66.7%. Then yesterday, we increased the quarterly dividend 10% to 22 cents per share. Now, here is Maritza to go over the financials in more detail.

Jose, please turn to page five to review our financial highlights. Let me start with total core revenues. They increased $11 million quarter over quarter and $27 million year over year. Looking at the key components of that, interest income was $11 million higher than the third quarter. That reflects the benefit of higher yields on increased average balances of loans and of investment securities. Net interest income for the quarter was $9 million higher compared to the third quarter, and $31 million higher compared to the year-ago quarter. Of the $9 million, about $11 million came from higher rates on interest-earning assets, partially offset by $2.5 million in higher cost of funds. Looking at banking and wealth management revenues, they increased $3 million from the third quarter. This reflected higher electronic banking activity and gain on sale of mortgages compared to the third quarter when Hurricane Fiona interrupted business. The annual recognition of insurance commission was $1 million. This was $1.2 million lower than a year ago due to Fiona-related claims. Year over year, banking and wealth management revenues declined $4 million. This reflected lower wealth management revenues due to lower equity market valuation. It also reflected the lower annual insurance commissions. Looking at the efficiency ratio, it was 54.45% in the fourth quarter. That's another nice improvement from the third and year-ago quarters. Similar to the last few periods, it reflects our positive operating leverage. Actual not interest expenses total $92 million. That's $4 million higher than in the third quarter. That reflects higher compensation expenses due to hourly salary increases implemented in the third quarter, increases in year-end performance bonuses, and added technology staffing. It also reflects increased amortizations related to new digital projects and reduced hurricane funeral-related expenses. Non-interest expense should average about $90 to $92 million per quarter in 2023. As we previously mentioned, our efficiency ratio target range is in the mid-50s. As Rosa mentioned, we sold our retirement and plan administration business during the fourth quarter. This will reduce wealth management revenues by about $2 million, which would be fully upset by an equal amount of savings in non-interest expenses. Looking at other performance metrics, they improved nicely quarter over quarter and year over year. They also continue to exceed our target ranges. Return on average asset was 1.86%. That is up 21 basis points from the third quarter. Return on tangible common equity was 20.36%. This is up 231 basis points from the third quarter. Looking at tangible book value per share. That was $19.56, an increase of $1.10 compared to the third quarter. This reflects increased retained earnings and other comprehensive income. Please turn to page six to review our operational highlights. Looking at average loan balances, they increased $72 million from the third quarter. End-of-period loans held for investment increased $150 million. Compared to the third quarter 2022, loan growth reflected increased balances of commercial, auto, and consumer loans. End-of-period loans increased 2.3% from the previous quarter and 6.8% year-over-year. We are extremely pleased with our performance this year. Looking at loan yield, it was 7.32%. That is a 43 basis point increase from the third quarter. That's largely the effect of Fed rate increases on new and variable rate loans in our commercial loan portfolio. It is also due to a higher proportion of auto consumer and commercial loans versus residential mortgages. Looking at average core deposits, they decreased $165 million from the third quarter. End-of-period deposits declined $287 million. That reflects commercial withdrawals of $172 million, which included $59 million in government funds. It also reflects retail withdrawals of $150 million, which included $37 million transferred to Oriental Wealth Management Operations. Looking at core deposit costs. It was 39 basis points. That is an increase of 11 basis points from the third quarter. That was mainly due to government accounts with specified yield parameters and migration from savings accounts into time deposits. Of the 11 basis points increased, six basis points came from government deposits. So far in this rate cycle, our deposit beta has been 7%. We expect deposit costs to increase, given the magnitude and speed of Fed fund recent and expected increases. But we believe that through this interest cycle, they will continue to be below mainland levels. Looking at new loan origination, they total $660 million compared to $511 million in the third quarter. This reflected the strong production of commercial loans in Puerto Rico and the mainline. It also reflected continued high levels of auto loans at a record of $221 million. Looking at net interest margins, that was 5.69%, an increase of 46 basis points from the last quarter and 151 basis points year over year. This higher net interest margin affected growth of the loan portfolio at a higher yield, growth of the investment portfolio also at a higher yield, and higher yield on cash. This was partially offset by the increase in cost of funds. Please turn to page 7 to review our credit quality and capital strength. Looking at net charge-offs, they total $11 million in the fourth quarter, That reflected $5 million for auto loans, $4 million for consumer loans, and $3 million for a commercial loan previously reserved. Looking at provision for credit losses. Total provision was $8.8 million. That reflected $9.2 million in higher provision due to the increased loan volume. It also includes a net release of $400,000 mainly related to reduction in the qualitative adjustment due to the improved macroeconomic environment in Puerto Rico as well as a stable delinquency trend. Fourth quarter allowance coverage ex-PPP was 2.24%. That's down 9 basis points from the third quarter. Looking at non-performing loans. The total non-performing loan rate was 1.61%. That's down 10 basis points from the third quarter and 37 basis points from a year ago. Overall, credit was stable with a rebound from the last quarter effects of Fiona. Looking at some of our other metrics, the CET1 ratio was 13.64%. That's up 13 points 38% in the third quarter. Total stockholders' equity was $1 billion, up $49 million from the third quarter. The tangible common equity ratio increased to 9.59%. Now here is Jose. Thank you, Maritza.