OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Madison. I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the fourth quarter 2024 section. 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 by-links. 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 2024 results. It was another outstanding quarter and year of performance. Looking at the quarter, earnings per share were up 11.2% year over year on a 3.6% increase in total core revenues. We showed consistent operational growth on our plans, including our digital first strategy. We steadily grew our banking market share. Digital adoption of our new and upgraded products, services, and self-service tools keeps expanding. Results also benefited from lower taxes. And we bought back about $46 million of common shares in the fourth quarter. Please turn to page three for a summary of our fourth quarter results. Looking at the income statement, we reported earnings per share diluted of $1.09 on total core revenues of $182 million. Net interest margin was 5.4%. Provision was $30.2 million. Non-interest expenses were $99.7 million. This resulted in slightly lower pre-tax income, which was more than offset by reduced year-end taxes. Pre-provision net revenues total $83 million. Turning to the balance sheet, total assets were $11.5 billion, up 1.4% from a year ago. Customer deposits were $9.4 billion. Loans held for investment total $7.8 billion. New loan production was a solid $609 million. Investments were $2.7 billion of 1% from a year ago and 4% from the last quarter, and cash at $591.1 million was down 13% from last quarter. Looking at capital, the CET-1 ratio was 14.26%, and we bought back $46 million in stock. That leaves $29.7 million remaining on our buyback authorization as of December 31st, 2024. Please turn to page four for a summary of our full year results. Earnings per share of $4.23 increased 10.4% year over year on a 3.9% increase in total core revenues for a total of $710 million. Net interest margin was 5.43%, provision was $82 million, non-interest expense total $376 million, and pre-provision net revenues was $336 million. Capital management played a big role. Even with Durbin taking effect mid-year, we were able to increase average interest earning assets by 11.8% year-over-year. In addition, we acquired the servicing rights to a $1.7 billion Puerto Rico residential mortgage loan portfolio. We bought back a total of 1.8 million shares, and we increased the quarterly dividend 14% to 25 cents per quarter or one buck per share annually. Puerto Rico's economy continues to do well with high levels of business activity and employment. We concluded our 60th year in business in excellent position, fulfilling our purpose of bringing progress to all our stakeholders. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow. Please turn to page five. We're really building some real muscle with our digital first strategy. As of fourth quarter, 96% of all routine retail customer transactions, 97% of retail deposit transactions, and 68% of retail loan payments were all made through our digital and or self-service channels. This is being driven by year-over-year growth of 12% in digital enrollment, 54% in digital loan payments, 34% in virtual teller utilization, and close to 5% customer growth. Over the last year and a half, we have introduced or relaunched four major new products and services. Oriental Servicing Portal was introduced mid-2023, By the end of December of last year, a third of all retail clients were using it. The My Small Business account was relaunched March 2024. As part of our overall offering, this helped to achieve 14% growth in loans to local businesses last year. The Retail Mass Market Libre account was relaunched in April 2024, and the Mass Affluent Elite account with its unique cashback program, was launched June 2024. Both are doing extremely well, bringing in new customers and deposits. There are more digital firsts on the pipeline coming in this year. Now, here's Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page six to review our financial highlights. Starting with the components of core revenues, total interest income was $190 million, up $1.1 million from the third quarter. This increase mainly reflects higher balances and higher yields on investment securities, higher loan balances, $700,000 from repayment of two commercial loans, and reduced interest income from cash. If you recall, Since late last year, we have been growing the investment portfolio to help manage the anticipated lower rate environment going forward, adding higher yielding U.S.-guaranteed longer-duration securities. Total net interest expense was $41 million, slightly down from the third quarter. The decrease reflects slightly lower average balances and cost of core deposits. and higher average balances of borrowings and brokerage deposits total banking and financial service revenues were 33 million dollars an increase of 6.5 million dollars from the third quarter the increase mainly reflects 2.1 million dollars animal insurance commission recognition in wealth management revenues $4.8 million in favorable MSR valuations due to higher long-term rates, and $800,000 from the previously mentioned acquisition of Puerto Rico's residential mortgage servicing portfolio in August. Looking at North Interest expenses, they total $99.7 million, up $8.1 million from the third quarter. The increase mainly reflects $3.4 million in early retirement and business resizing, $1.4 million in annual performance incentives, and the absence of the third quarter $2.3 million card processing rebates. We expect 2025 non-interest expense to average $95 to $96 million a quarter. This mainly reflects a combination of increased technology spending and amortization and higher electronic banking fees and transaction costs as we grow larger. The fourth quarter efficiency ratio was 54.82% compared to 52.60% in the third quarter. Please note, this includes the early retirement and performance incentive expenses that I just mentioned. Without those, the efficiency ratio would have been 52.18%. Other performance metrics remain high. Return on average assets was 1.75%. Return on average tangible common equity was 16.71%. And tangible book value per share was $25.43. That's down 3% from the third quarter, mainly due to capital use in share buyback and lower other comprehensive income. Please turn to page seven to review our operational highlights. Average loan balances were $7.7 billion, up slightly from the third quarter. End of period balances of loans held for investment increased 0.5%, or $41 million. The increase mainly reflects growth in auto, U.S. commercial, and Puerto Rico consumer loans, more than upsetting repayment of Puerto Rico commercial and residential mortgages. Year over year, fourth quarter loans held for investment increased 3.3%. Loan yield was 8.01%, down four basis points from the third quarter. Fourth quarter new loan originations of $609 million increased 5.5% from the third quarter. This reflects increases in Puerto Rico commercial, auto, and residential mortgage lending, partially offset by a decrease in U.S. commercial and Puerto Rico consumer lending. We continue to have a strong commercial top line in Puerto Rico. In particular, small commercial had a very good fourth quarter and year. Precedential mortgage lending improved. Average core deposits were $9.6 billion, down slightly from the third quarter. End of period balances decreased $84 million, or 0.9%. This reflects decline in government deposits, partially offset by a small increase in commercial and retail. Excluding government deposits, savings and time increased, more than upsetting the declining demand. Year over year, ex-government deposits, retail, and commercial also increased. Core deposit cost was 146 basis points, down 7 basis points from the third quarter. Excluding public funds, cost of deposit was 96 basis points compared to 91 last quarter. Average borrowings and broker deposits were $426 million compared to $262 million in the third quarter. The aggregate rate paid was 4.40%, down 20 basis points. End of period balance was $557 million compared to $346 million. Net interest margin was 5.40% compared to 5.43% in the third quarter. Fourth quarter needs benefited slightly from the commercial loan prepayment I mentioned before. Please turn to page eight to review our credit quality and capital strength. Credit quality continues to be stable. Net charge of total $16 million down $1.2 million from the third quarter. Net charge-offs benefited from a $2.6 million recovery from the sale of a portfolio of fully charged-off auto and consumer loans. Auto net charge-off rate fell one basis point to 1.63%. Consumers net charge-off rate fell 98 basis points to 3.72%. At the same time, there were continued recoveries in mortgage and Puerto Rico commercial loans. As a result, the total net charge-on rate was 82 basis points, down 8 basis points sequentially, and down from 88 basis points in the year-ago quarter. Provision for credit losses totaled $30.2 million. $8.8 million from the third quarter. The increase mainly reflects $18.1 million from increased loan volume, $7.6 million for a specific result related to four U.S. commercial loans, and the previously mentioned $2.6 million recovery from the sale of auto and consumer loans. The fourth quarter also included a $5.7 million qualitative adjustment related to recent increasing auto delinquency trends, which the model doesn't fully capture yet. Looking at other credit metrics, the early and total delinquency rates were 2.95% and 4.38% respectively. The non-performing loan rate was 1.06%. Looking at other capital metrics, total stockholders' equity decreased about $64 million from the end of last quarter. And the tangible common equity ratio decreased 59 basis points to 10.13%. That mainly reflects share buybacks and lower other comprehensive income. Income tax expense was $2.4 million compared to $14.8 million in the third quarter. The decrease mainly reflects a reduction in the 2024 ETR for higher than previously forecasted business activities with preferential tax treatment and $2.3 million of discrete benefits. Excluding discrete items, ETR was $24.4 million 0.03% for 2024, compared to 32.08% for 2023. For 2025, we anticipate the full year would be about 26%. To summarize the first quarter, net interest income grew, driven by the investment portfolio and loans, partially offset by lower interest income from lower cash balances. Loan growth continues to do well, particularly in the small business area. Ex-public funds, retail, and commercial deposit balances increased, with savings and time deposits higher, as we continue to grow and deepen customer relationships with the recent added value products and services. net interest margin held fairly steady, as the yield from investment securities and reduced cost of core deposits helped offset some of the declining interest rates. Credit quality continues to be well managed. The trends are mostly stable, reflecting the solid economic environment in Puerto Rico. Non-interest expenses were higher, mainly due to early retirement, business rate sizing, and increased annual performance incentives. as well as higher electronic banking fees and technology spending and amortization. Regarding capital allocation, we increased our buyback during the fourth quarter. Now, here's Jose.