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spk07: 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.
spk01: 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.
spk02: 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.
spk01: Please turn to page eight for our outlook. When we entered 2023, We entered 2023 with strong momentum in loan growth, customer acquisition, and market penetration, all of which are helping to transform our company. While we need to keep a watchful eye toward uncertainties from Fed rate hikes, inflation, and a possible mainland recession, we should benefit from a full year of higher loan balances and rates combined with a relatively low deposit data as compared to our mainland peers. We should also start to benefit from a full year of investments in technology and people that we made in 2022. On a macro basis, the Puerto Rico economy should continue to grow, perhaps at a slower pace, but better than the mainland, given the level of continued federal spending here. All this should enable us to continue to invest in people technology as part of our digital first strategy. Thanks again to our dedicated team members for their commitment to the customers and the communities we serve. This ends our formal presentation. Operator, we can start the Q&A.
spk07: If you have a question at this time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2.
spk06: We'll take our first question from Alex Twardall with Piper Sandler.
spk03: Good morning. This is Bader. I'm filling in for Alex Twardall today. How are you guys doing?
spk01: Good. How are you doing?
spk03: Good. Thanks. I just wanted to start off. I know you guys mentioned that you expect deposit basis to be lower than the last race cycle. But given the rising deposit costs,
spk01: you see increased pressure in any specific segment of deposits in the island so um when we look at betas we kind of look at the past to use it as a reference and and when we look at our org's deposit betas in the last cycle it was somewhat around 16 percent so we expect given the speed and the size of the increases that we've seen in 2022, we see our betas to be higher than that 16% that we had in the last rate cycle hikes. Now, where do we see that? We definitely have an adjustment with a lag from the Puerto Rico government. We have very little, but whatever it is, it's going to have some impact on that. And then when we look at the core, I think the ones that will have a higher beta would be the commercial deposits across the board, but in particularly the higher balances accounts.
spk03: Got it. Thanks. And I know you guys had another great quarter of asset yield growth. I'm just curious to know what rates are coming on the books from new loan production right now or, you know, moving forward.
spk01: So on the commercial book, we're seeing rates on the 6% handle, more or less, north of 6.5%. I'm talking about larger type of loans. And then on the small commercial, closer more to the 7%, 7.25%. Okay.
spk03: And lastly, I know you've hit your efficiency ratio target around 54%. Also curious to know where you see it going moving forward throughout the year.
spk01: So in terms of the efficiency ratio?
spk03: Yes.
spk01: Yeah, we are targeting mid-50s. So you should expect our efficiency ratio around those levels. And this is the way we think about this and take this opportunity to give you a little bit of our thought process here for 2023. We see long growth. around three to 4% for the year as interest rates start to slow down loan growth in the island. I mentioned the beta slightly higher than what we had in the last cycle of 16%. So given the current yield curve, our net interest margin should start to stabilize at these levels with a slight positive trend during 2023. Remember that in 2023, we will realize the full effect of higher loan balances and interest rates, as Marisa mentioned. So net interest expenses are on 90, $92 million per quarter. We keep on investing on our network optimization, self-service and process improvement technology and people and talent and recruitment of additional team members. So that puts it around the mid-50s range for the efficiency ratio.
spk03: Got it. Okay. That's all for me. Thanks for answering my questions.
spk06: Yeah. Thank you for your questions. We'll take our next question from Tim Ur-Brazilier.
spk04: Hi. Good morning.
spk01: Hi. Good morning.
spk04: Maybe circling up on the loan commentary and the expectation for three to four percent growth next year, I mean, you've been calling for slowing loan growth here now for a couple of quarters, especially on the auto side, and trends seem to be going in the opposite direction. How much of that three to four percent is more wishful thinking versus what you're currently seeing, and then specifically on auto, are we close to an equilibrium there, or is there still a big delta between supply and the increased demand.
spk01: So you bring a very good point, and you're correct also. We've been kind of guiding towards a slowdown in loan originations, particularly on the auto side, and it hasn't played out. But we continue to feel that The level of cars, inventories in the island, the level of new auto sales are starting to stabilize. And I think the fact that interest rates are going up and the effects that that might have on slowing down the economy during 2023, we should see a slowdown. We've been wrong for a couple of quarters, but we want to not be wrong on the wrong side of the equation here. also prudent on the auto lending side. On the other buckets on the commercial side, interest rates also play a game here in terms of the demand for commercial loans. So we're also seeing good pipelines, but not as strong as they were last year. So we were confident that we will continue to have good, strong generation of origination of loans on the commercial and auto, but not at the same levels of 2022.
spk04: Okay. And your competitor that reported yesterday, their auto balance actually, I think, shrunk a little bit. I'm just wondering, is there kind of a changing of the guard in the auto market on the island? Or I guess, what are you seeing from a competitive standpoint in that asset class?
spk01: I can't speak for our competitors, but I can tell you that this is a very competitive market, and I do not see any change of guard. happening in the near term. We see very strong competition and certainly the largest competitor is a formidable competitor.
spk04: Got it. And then as you think about funding that loan growth, is the expectation that we should continue to see the bond book being used as a source of funds um for both loan growth and then i guess maybe looking at the deposit base would love to hear your thoughts on what you think deposit balances do uh if we're in a higher for longer type fed environment yeah yeah i i could not hear well the first part of your question but the second part of your question in terms of deposit balances uh
spk01: First, I think we will see a transition of some of those deposits either to wealth management, which we have seen so far. I think for 2022, the full year deposits transferred to our wealth management unit was around $100 million. So that's one thing that we're seeing already, clients with high deposit balances putting money in the investment treasuries or whatnot. That's one shift that we saw. I think we're also seeing a shift from savings to CDs, to longer term CDs, to 12, 18, 24 months. So we will continue to see that. And as I mentioned, I think someone asked me earlier about the deposits. I think commercial deposits, large balance commercial deposits will also... look at different ways to optimize their returns. So that's kind of what I see in terms of balances. I think internally we will have a little shift there, and we will then have to retain our customers and deal with them on a customer relationship perspective as we look into higher cost of deposits.
spk04: Got it. And then the first part of my question, you know, tying this all together, should we expect the bond book to continue funding the loan growth, meaning assets stay flat even though loans grow the 3% to 4%? Or are you envisioning an environment where you actually grow the asset base over and above that $10 billion in 2023?
spk01: So we're not seeing the bond investment portfolio to – grow from these levels. We see our deposit balances optimized with investment in our loan origination efforts. So at this point, I think we were very patient throughout the last part of the 0% interest rate environment and kind of kept everything excess liquidity in cash. And we've been very, opportunistic in the last 12 to 15 months, slowly but surely investing in higher yields. We're very comfortable with the current position, and we have some repayments that will probably be best as they come in, but we are not expecting to grow the investment book.
spk04: Okay. And then last for me on credit quality, net charge-offs are in the mid-60 basis point range for the second consecutive quarter, and You guys are one of the few banks to actually release reserves in the fourth quarter. Maybe just some color on where you see net charge-offs normalizing. How close are we to that point? And then how should we be thinking about the allowance ratio going forward?
spk01: Net charges for us are driven by the consumer book and the order book. And we saw the fourth quarter starting to show more normal rate post-pandemic. significantly below pre-pandemic, but still more of a more realistic way going forward. So depending on loan growth and depending on the macro scenarios, our provision should be driven mostly by replenishing the charges from the consumer and the auto book. It's a good guiding post to utilize the charges of the fourth quarter going forward, and we'll be updating given the different kind of variables of CECL throughout the year.
spk04: Great. Thanks for the caller, and nice quarter.
spk01: You're welcome.
spk07: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll take our next question from Kelly Mata with KBW.
spk05: Hi, Jose Rafael and Marisa. Good morning. Good morning, Kelly. I noticed you guys ended up exiting the year at under $10 billion in assets again. Can you remind us what that implies in terms of the implementation of Durban, the timing of that, and also what sort of impact of fees that will have once it does go into effect.
spk01: Yeah. So again, we did not cross the $10 billion by the end of the year. So Durbin, the effect of Durbin does not apply for 2023, as you pointed out. And the annual cost for us estimated for Durbin is $10 million. So we are, and we usually, It starts six months after crossing the $10 billion on December 31st. So for this year, it would have been around $5 million. For yearly, it would be $10 million. Great. That's super helpful.
spk05: And I know we've talked at length about the kind of deposits and the balances going down as customers use their funds and search for higher rates. But wondering if there was any kind of decline around year end to, if Durbin was a factor at all in some of that decline that we should perhaps anticipate coming back as we look into 1Q and build into sort of the size of the balance sheet with that.
spk01: Yeah, so that's a good point. That was more the case at the end of 2021. 2022, we started the fourth quarter at a, lower asset level than 2021. So it was more natural end of the year clients utilizing mostly commercial clients utilizing their funds at the end of the year. And we did not have to press at all to be below $10 billion. So it's part of the natural attrition that we're seeing from higher interest rates and clients reallocating their cash to higher yielding investments.
spk05: Got it. That's really helpful. And I think, and please correct me if I'm wrong, but I think you had mentioned that client accounts are still like that overall balance of each account is on average running higher than where they were pre-COVID. Do you have any sense of, you know, obviously there's been a search and runoff of for rates, but has most of that occurred so far in the pace of that pressure on the overall level of deposits should start to wane a bit, or is there any way we can kind of ballpark the deposits that could still, I don't want to say at risk of running off, but more likely to run off?
spk01: Kelly, I am sorry, but I could not understand your question. Can you repeat it again?
spk05: I'm sorry. I just I think in your presentation, please correct me if I'm wrong, but client account balances are still generally higher than where they had been pre-COVID. Obviously, as rates have risen, there's been pressure on excess deposits as they look for a higher rate. Just wondering, in terms of maybe core checking accounts, if you have a sense of whether or not the bulk of the pressure is for search for yield and higher rate has occurred or if there's any way to ballpark how much could still be at risk of potentially being at yield.
spk01: Understood. So the way we look at this is after or during the pandemic, we build up around a billion dollars of additional customer deposits And that's kind of how the balance sheet was impacted. So far, I think we're at the early stages. I cannot say here in the market in Puerto Rico that we've had the same kind of behavior as I've seen on our peers in the state. So the premise of the Puerto Rico market having a slower beta is playing out. And I think it will continue to play out. But having said that, I think commercial accounts and I think also the move towards CDs from savings is going to still play out at least the first half of this year as the Fed ends its rate cycle hikes or as everyone expects. But it's still a hope, I think.
spk05: Got it. That's helpful. Appreciate the caller. all the color there. Next, turning to capital, it's nice to see the dividend announcement. Just wondering on kind of how you guys are viewing the buyback and what's keeping you out of the market and what would be the circumstances that would get you back in buying your stock again?
spk01: So I think throughout the last couple of years, you have seen us move more towards increasing our dividend than doing the buyback. We feel that longer-term investors are better served by us increasing the dividend and having a higher payout from a dividend perspective and certainly a higher yield. So that's one reason. The other reason is also that we want to be opportunistic and be cognizant of the environment we operate in, where the macros are somewhat uncertain and interest rates are going up. And we want to make sure that we don't deploy our cash into buybacks too soon and just being prudent, Kelly. Having said that, if there's an opportunity for us to go in and buy back shares, we have the authorization and we will execute accordingly.
spk05: Got it. Understood. Thinking through your expenses, I appreciate the range you gave. I think it was, I still look back at my notes, maybe 90 to 93. What sort of bills does that incorporate in terms of I know there's some technology initiatives that you're working on. How confident do you feel that... I know you've raised the minimum wage. How confident do you feel that inflationary pressures are hereby captured?
spk01: A couple of factors here that I want you to consider that are, I think, different than in the U.S. market. Number one, the Puerto Rico market comes from a... significantly lower rate per hour in terms of the employee compensation on the hourly versus the U.S. So as you've seen from us, we've been gradually increasing the the hourly rate for our hourly employees simply because we need to make sure that we serve our customers well and that we reduce the attrition or the turnover that we were seeing. I think that goes across the entire market in Puerto Rico. So the level of hourly pay in Puerto Rico starts in this cycle at a significantly lower level than in the US and it's catching up. So that's one component of why you're seeing higher non-interest expenses on the compensation side. We've also realized that we need to recruit a talent that has skills that we need to compete and that we need to help us continue our transformation and our investments in our digital first edition. So we need people with analytical skills. We need more talent with technology backgrounds so that we can leverage the technology and the investments that we're making. So that is another component of... increases in non-interest expenses. And lastly, we're making investments in technology. We've been doing this. And if you look back for the last five years, we are being very methodical on how we look at the branch network, how do we look at transactionality in those branch networks, and how do we leverage technology to provide self-service, digital, solutions for our customers. And we certainly come in a Puerto Rico market that is significantly behind the curve as opposed to the US market. So that's kind of the reason why you've seen us making these investments and making sure that we are thoughtful about them vis-a-vis our strategy. And that's the rationale behind us making these investments. Having said that, we're very cognizant about mid-range 50s efficiency ratio, and we would like to leverage the higher interest rates and the higher, better economy in Puerto Rico to maintain a positive operating leverage as we've had for the last several years.
spk05: Thank you so much for all the color there. I'll step back.
spk01: Thank you, Kelly. I hope that was helpful.
spk07: Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad.
spk06: And again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll take our next question from Alex Twirdall with Piper Sandler.
spk03: Hi, guys. I just have a follow-up. I know you guys mentioned the technology investments and efforts you have in 2023. Just wondering, you know, if you could reveal, like, what direction, like, of the technology efforts it is and specifically what the technology initiatives and investments you're making for the year are.
spk01: So we're making investments, as we've mentioned, in interactive telemachines. We're making investments in digital solutions and upgrading our digital platforms for our customers. We should be launching some of those in 2023. We've been looking at process improvement and how do we leverage technology to simplified processes so we should see also efficiencies there. We look at underwriting and we're looking at how do we become more efficient in terms of our consumer underwriting processes. So all those things are being looked at and investing in for the last couple of years and we continue to look at them. And again, we feel that all this is done for two main reasons. One is to deepen the relationships with our customers and also by improving the customer experience. And number two, by also growing our market share in the products or services that we offer. And that is something that how we measure ourselves, right? So far, we are very optimistic and encouraged with the progress we've made and look forward to 2023 that continues to confirm that progress.
spk03: Got it. Thank you.
spk06: You're welcome. Again, if you would like to ask a question, press star then the number one on your telephone keypad. At this time, there are no further questions.
spk07: I will now turn the call back over to Jose Fernandez for closing remarks.
spk01: Thank you, operator. And thanks again to all our team members for their hard work and dedication. We're extremely proud of what we have accomplished, and we have more to deliver. Thanks to all our stakeholders who have listened in today. Looking forward to our next call.
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