Q4 2023 OFG Bancorp Earnings Call

January 24, 2024

Unnamed Host: dedication of all our team members. We are thankful to them, and we're excited for what's to come in 2024 as we mark our 60th year in business and our 30th year trading on the New York Stock Exchange. With this, we end our formal presentation. Operator, please open up the call for the Q&A. Thank you. 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.

Unnamed Host: Once again, that's star number one to ask a question. Our first question will come from Alex Twerdahl with Piper Sandler. Please go ahead. Good morning. Good morning, Alex.

Jose: First off, Jose, I was hoping you could give us a little bit more color on the $1.2 billion government deposit, where it came from, and whether or not it's something that's going to stick around on your balance sheet for a prolonged period of time. So, it's a long-standing client of ours, and they had a one-time inflow of liquidity, and certainly, we're honored to be their bank. So again, at this point, we don't have full disability on the users of the funds. So for now, we're modeling it within our balance sheet as a short-term deposit, but in the meantime, we are again servicing a long-standing customer with whom we have a full banking relationship. We will definitely update you guys as we get more color from the customer, but it's going to take a couple more weeks for us to figure it out.

Jose: Okay, so I mean, when you're thinking about the NIM guidance, the I think the 20 basis points of NIM compression throughout the year, should we just assume that on the balance sheet, excluding that $1.2 billion? Well, it's just on the basis, and I also was mentioning that it will be for a short-term period, yeah. Yep, so it excludes that one time deposit. Our modeling excludes that deposit for the better part of 2024. Okay, and is that government deposit just sitting in a non-interest bearing account now, or is it something that's going to impact interest expenses in the first quarter? So it's a government deposit that is index-based, as all government deposits are these days. And it's earning interest right now based on a formula that the government has established. understood.

Jose: And then I guess as I think about the size of the balance sheet, you guys are obviously over 10 billion now. It's something you projected, something we expected, you know, and your capital levels are building to a level where, you know, it suggests that you could have a much larger balance sheet than where you are today. How are you thinking about just overall managing the balance sheet over the next, I guess, year, or coming years? And, you know, does the strategy shift at all now that you're, you know, firmly above the 10 billion mark? So, our game plan remains pretty much the same.

Jose: We see great opportunities for us to continue to grow our loan book here in Puerto Rico and in the States, too, but mostly here in Puerto Rico. We are seeing a good economic environment that supports us in that effort, and that's the game plan that we have. We're basically now with good liquidity levels, and excess deposits, and we want to deploy them first and foremost into the jurisdictions, you know, in the locations that we operate primarily here in Puerto Rico. So, that's kind of how we're seeing it, Alex. We're not really planning or having any extraordinary event on the agenda for us.

Jose: We just simply need to keep going forward. And just to go back to the question on the deposit, on the dormant deposit, I just want to.., mentioned to you that really it's providing us with, gives us flexibility on our balance sheet because, as Maritza mentioned in her remarks, we have kind of cancelled or let mature some of the wholesale funding that we took in the November-December months. So the cost of that, there's a differential that also benefits us, a slight differential, but it benefits us, so it's also short-term, something that is going to help us to be more flexible and nimble with our balance sheet.

Jose: And then just a final question for me, just on the workforce rightsizing and some of the actions, can you just tell us what you did, you know, and I guess what the impact is? Yeah, so first, we've been investing in our digital first strategy for several years, you've seen the investments, and part of the, The thesis and hypothesis for us is that we're investing in technology to improve the customer experience and also to generate and incrementally start generating some efficiency. So some of what you're seeing in the fourth quarter is our pointed effort towards starting to extract some efficiencies with the intention of using those efficiencies as the way we invest forward in technology and in our digital first strategy, as we've talked about.

Jose: So we've seen some workforce reduction in some of the areas that have been invested in mostly, and some of it is on branches but mostly on the operational side, and we're also seeing how we can be more nimble in terms of our facilities, and we were able to cancel and terminate one of the leases that we had. So again, it's all about how we take advantage of the investments that we made to get the second part of the thesis that we presented to you guys several years ago, which is starting to get some efficiencies out of the investments too. So we're being very intentional with that.

Jose: And that's why we can keep the expenses at the 90-92 kind of quarterly level, as Maritza mentioned. But is it the presumption, then, going forward, that as the digital strategy continues to play out through the next year, maybe there'd be further right sizing or, you know, further efficiencies found, I guess, towards the end of next year? It's too early to tell, Alex, but this is something that we look at very closely, and we look at it on a quarter-to-quarter basis to see what opportunities surface, but we are certainly looking at it. I can't promise anything though.

Brett D. Rabatin: Thanks for taking my questions. Yeah. Thank you. Our next question comes from Brett Rabatin with Hufty Group. Please go ahead. Hey, good morning. Good morning.

Brett D. Rabatin: I wanted to just start with credit and, you know, obviously, credit continues to be pretty good, but we are seeing this, as I guess everyone kind of expected, a normalization on consumer and auto. And I missed Maritza's comment on the 4Q trend versus going forward and that normalization. Was the comment that net charge-offs would be lower going forward relative to 4Q? Or can you maybe just give us some color on your expectations for charge-offs in the consumer and auto book? So, when you're referring to the charges, you're obviously alluding to the consumer and auto charges that Maritza mentioned in her remarks. And this is the way I look at it from a macro perspective, Brett. The economy in Puerto Rico is solid; it's doing well.

Jose: The consumer has much more liquidity than they had pre-pandemic. The economy is also much better than it was pre-pandemic. So, that's kind of the underlying environment that we're operating in. To give you a little bit more color, specifically on the auto loan book, I'll ask our Chief Risk Officer, Cesar Ortiz, to give you a little bit of color on the auto book so you guys understand how we see this. Thank you, Jose.

Cesar Ortiz: One of the things that I want to highlight in terms of contact, taking the opportunity during 2022 and 2023 of the increased demand for loans, in auto loans, we took the opportunity to improve and tighten our underwriting standards. So, if you look at the portfolio composition in terms of prime composition after December 2023, we have an 82% prime composition compared to 64% prime composition back in the fourth quarter of 2019. So, that basically is giving us comfort that our levels of returning to normalcy will be better than pre-pandemic levels.

Jose: And, Brett, to your point about the charges, we expect them to increase slightly or level off around sometime mid-year as we continue to see the tighter credit standards that we put in in 2022 and 2023 potentially generating lower levels of charges. But for the next several quarters, we expect charges on the order book to be similar to the fourth quarter as we start to normalize, but still better than pre-pandemic levels. Okay, that's helpful.

Jose: And then on loan growth, obviously strong, production on the commercial side, can you could talk maybe a little bit about how you expect long growth to play out this year? It was obviously, you know, I don't expect double-digit growth in Puerto Rico every year, but you obviously hit that 10% mark in 23. What do you think about commercial production going forward, Jose, and then maybe just long growth for the year? First, thank you for highlighting the fact that it's hard to replicate 10% loan growth every year, so I appreciate that bone that you're throwing at us. But the way we see this is we see auto loan originations normalizing and trending slightly lower, consumer credit probably relatively flat in terms of loan originations, and we see a good opportunity on the commercial side.

Jose: Small, mid-size, and a little bit larger types of loan opportunities here in Puerto Rico. We see good, strong pipelines, we still see strong, good demand, we see private capital being deployed in the economy in Puerto Rico, and that's kind of an area of opportunity for us as it was in 2023. So that's kind of how we're looking at this in terms of loan growth. If the economy grows two, two and a half percent, as it's been predicted, we expect it to grow between three and four percent.

Jose: Our loan book, note that we expect the residential mortgage book to go down still during the year as we're seeing less and less demand for us in that line of business. And as we sell some of those conforming loans, I'm sorry. Okay, sorry.

Brett D. Rabatin: I can sneak in one last one just around fee income. You know, obviously, the wealth management slash insurance bucket benefited from, I guess you call it, unusual numbers in 4Q. Is it fair to assume that those one items go back a little lower? Maybe any outlook on fee income relative to the fourth quarter? Yeah, remember, the fourth quarter is impacted by the insurance contingent commissions that we get every year. So, yeah, I think it will trend back down to the more normal levels, around $30 million, as Maritza mentioned, a quarter. Great. Thanks for all the color.

Brett D. Rabatin: Yep. Thank you, Brett. Have a great day. As a reminder, that's star number one to ask a question. Our next question comes from Kelly Mata with KBW. Please go ahead.

Kelly Mata: Great, hi, good morning. Hi, backing off. I know about how much as well as if you could offer any... and Paul Laron.

Unnamed Host: Thank you for joining us. Thank you, how the price of that? Proud to be a proud Plower.

Jose: So thank you for your question, Kelly. So we grew from the third quarter to the fourth quarter. We grew commercial, Puerto Rico commercial loans by around $196 million. We did participate in the Metropistas privatization, the highway privatization, with a $75 million participation. So excluding that, we grew our commercial book by approximately $121 million.

Jose: So ex-Metropistas, you still are seeing a 5.6% growth from the third to fourth quarter. So again, most of that origination, ex-Metropistas, is coming from construction services. It's coming from hospitality.

Jose: It's coming from small and midsize manufacturing companies that we do business with. And I think we also are looking into the small business side of the business is doing a great job at generating good professional kind of offices, medical and D-like type of offices, financing, and equipment. So we are doing a pretty good job on the Puerto Rico commercial book, and we think that the pipelines that we have and the approach that we have are paying off. In terms of the Metropistas loan rate and how it compares to other larger loans, it's pretty similar, you know, maybe slightly lower by 25, 30 basis points, but it's nothing too dissimilar from other large loans.

Jose: But again, as we've said in the past, we do not rely on those types of transactions. We really are focused on our bread and butter, which is small and midsize commercial loans. And both teams, the small business team and the large commercial team, are doing a great job; really, really helpful. Thank you for that. And maybe just getting some clarification around the margin guidance. The Outlook for about, wondering what you're embedded in there are for race this year, and can you just remind us of any indexed or floating rate on either side of the balance sheet, how we should be kind of thinking about that when the Fed. So, I'll give you my high level, and I'll let Maritza give you more of the specifics.

The way we look at the interest rate environment, Kelly, for 2024 is for the second half of the year where we will start seeing some Fed take some action and reducing rates, 3 to 4, 25 basis point cuts. So that's how we're modeling our net interest margin from a macro interest rate perspective. I'll let Maritza talk to you about the underpinnings of the margin. Thank you, Kelly, for your question. You know, the balance sheet composition right now on the asset side, and this is something we have shared with you before, is the fact that in the commercial book, about half of our commercial loan book is at variable rates, so we have exposure when rates start to go down. And the other volatility that we have is the maturity of the short-term treasuries that we took in the fourth quarter, about $300 million in short-term treasuries. And a longer position that we had that matured in May 2024 is $200 million in treasury notes. So that will reprice at the current level. So that's the variability on the asset side.

But what we have been doing during the last two quarters is adding extension on the asset side at higher yields with the acquisition of $700 million in MBS. And the idea is to continue to finance that at variable rate deposits, and the structure of the government deposit that we recently added to the balance sheet has that structure. So we are adding variability into the liability side to position ourselves for a lower rate environment when it starts coming. Awesome. Thanks so much for the help.

Kelly Mata: Maybe kind of a last multi-part question, on billions in asset size, um, Can you, one, remind us the timing and impact of Durban? I know you covered it on previous calls, just wanted to confirm and get it up. It should be in July that we start triggering the Durbin effect, so it's going to have a half of a year impact, and the full impact will be seen in 2025. I think I recall it's maybe roughly about $5 million annually.

Jose: Yeah, $10 million annually, $5 million in 2024, and then $10 million in 2025. Got it, got it. And then I believe in, you know, prior year ends, you've talked about maybe strategically managing under that $10 billion in assets, maybe customers took excess funds and put them elsewhere. But it seems like the large government deposit to that customer does not have anything to do with the previous managing under $10 billion? Just wanted to confirm that and also wondering if there's potential inflows of deposit just related to customers who have OFT as their lead bank who may... You may, bring more of that excess funds back now that you have it, clearly cropped over that. The first part of your question, no, we did not try to manage below $10 billion XT government deposits and did not engage this year as we had kind of commented, I think, on this third quarter of So we were managing, and we were managing conscientiously towards breaking the $10 billion mark because it really made total sense for us as we could reinvest those deposits into a higher yield than in previous years.

Jose: So that's the first part. On the second part, yeah, we are very active, and we are actually working very diligently on customer deposit strategies that will be deployed during the year, and that should work for us as we continue to grow our customer base and take advantage of our good strategic positioning that we have in the Puerto Rico market. Got it. I appreciate the color. Thanks so much. You're welcome. Thank you for your call or your questions. As a final reminder, if you have a question at this time, please press star one. And we have no further questions at this time. I'll now turn the call back to Mr. Fernandez for his closing remarks.

Jose: Thank you, operator. Thank you again to all our team members and thanks to all our stakeholders who have listened in. Have a great day. This does conclude today's call. We thank you for your participation. You may disconnect at any time.

Unnamed Host: Thank you for watching and make sure to subscribe! and Ibah N. Unity, Floyd Davis, Mark H. Schumacher INAAC, and Tempus Orympus, and And enjoy the rest! Cedric Pei, John Atkinson, Shinta Huttingson, shop members, Google Images.

Unnamed: BF-WATCH TV 2021, Mozart Trombone Solo. Thanks for watching! If you enjoy it, please like, comment, and subscribe. Stay Stark, Follow me on Instagram and and and and and and and and Subs by www.zeoranger.co.uk and Steven Martin. Ooh, ooh, ooh- If you find the video useful, please Like, Comment, and Subscribe, and as always, Thanks for watching it!

Unnamed: and, uh... Acting President Bill Clinton.

Thanks for watching!

Thank you for watching!

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Todd and 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 the homepage of the OFG website under the fourth quarter 2023 section.

This call may feature certain forward-looking statements about management's goals, plans, and an expectation.

These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFG's SEC filing.

actual results may differ materially from those concurrent currently anticipated.

We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterward.

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. Please go ahead.

Fernandez: Good morning and thank you for joining us. We are pleased to report our fourth quarter and year-end results.

Fernandez: 2023 was an outstanding year with record levels of loans, customer deposits, assets, and stockholders' equity.

Fernandez: For the first time, commercial loan balances exceeded $3 billion and tangible common equity was more than $1 billion.

Fernandez: Our digital first strategy continues to empower existing customers and attract new ones.

Fernandez: 93% of all routine retail transactions and more for deposits now take place through self-service channels, enabling our teams to focus more on business development opportunities.

Fernandez: While consumer credit has begun to normalize post-pandemic,

Fernandez: Consumer liquidity and employment levels continue to be solid.

Fernandez: Our commercial clients are doing very well in a strong economy.

Fernandez: We are very proud of our accomplishments and thank the entire Oriental team for making this record year possible.

Fernandez: Please turn to page three for a summary of our fourth quarter results.

Fernandez: Looking at the income statement, earnings per share diluted was 98 cents, total core revenues were $175.6 million, and net interest margin was 5.62%.

Fernandez: Provision was $19.7 million, primarily due to increased loan volume. Non-interest expenses were $94.1 million, and pre-provision net revenues totaled $88.2 million.

Fernandez: Quarterly performance included two items of note. First was closing on the sale of non-performing Puerto Rico small business loans.

Fernandez: We mentioned the planned sale last quarter. This resulted in a $6.3 million pre-tax gain.

Fernandez: Second was workforce early retirement and right sizing.

Fernandez: This resulted in a $3.2 million non-interest expense for severance and lease cancellations.

Fernandez: These stem from increased productivity in certain areas, in part as a result of our technology investment.

Fernandez: Turning to the balance sheet, total assets increased to $11.3 billion from $10.3 billion last quarter.

Fernandez: Customer deposits increased to $9.6 billion from $8.5 billion.

Fernandez: This was due primarily to a $1.2 billion deposit of public funds in mid-December, giving us a total of $1.6 billion of government deposits.

Fernandez: Loans held for investment total $7.5 billion, up 4% from the third quarter.

Fernandez: with new loan production or loan origination of $664 million, up 17% from the third quarter.

Fernandez: Investments increased to $2.7 billion from $2.1 billion in the third quarter.

Fernandez: This was due to purchases of short-term treasury bills and long-term government mortgage-backed securities. Cash increased to $748 million from $533 million.

Fernandez: During the second half of 2023, we redeploy our higher than normal cash levels and maturing treasury positions into longer-term mortgage-backed securities.

Fernandez: These moves position OFG balance sheet well for the expected lower interest rate environment in the second half of 2024.

Fernandez: Looking at capital, the CET1 ratio was 14.12% up from 14.06% in the third quarter.

Fernandez: Please turn to page four for a summary of our 2023 results.

Fernandez: Earnings per share diluted for the year was $3.83, up 11% year over year.

Fernandez: Total core revenues were $683 million of 12% year-over-year. Net interest margin was 5.8%, provision was $60 million, non-interest expense $363 million, and pre-provision net revenues total $326 million.

Fernandez: Our capital actions in 2023 included increasing the quarterly dividend by 10% to 22 cents and completing $18.7 million of share buyback. We have approximately $17 million of remaining authorization.

Fernandez: Please turn to page 5 for an update on our digital first strategy.

Fernandez: As of December, 93% of all retail customer transactions and 96% of retail deposit transactions are now being made through digital and self-service channels.

Fernandez: That is being driven by year-over-year growth in December of 11% in digital enrollment, 54% in digital loan payments, and 21% in virtual teller utilization, as well as the continued success of our Oriental Servicing Portal, which was introduced mid-2023.

Fernandez: For new listeners, the portal is a corner store of our self-service strategy. Customers can manage all loans and deposit accounts. It enables them to originate an open checking savings and CD, applying for and accessing loans, managing automatic loan payments, and downloading bank letters and tax documents. We will continue to add new features on a regular basis.

Fernandez: Our 2023 performance continues to validate our strategy and investment in technology. As I mentioned, they help us provide more value-added service, increase our efficiency, and assign more staff for new business development activities.

Fernandez: Now I'd like to welcome Maritza to the call to go over the financials in more detail.

Maritza Arizmendi Diaz: Thank you, Jose. Please turn to page 6 to review our financial highlights.

Maritza Arizmendi Diaz: Starting with revenues, total interest income was $176 million, up $10 million from the third quarter.

Maritza Arizmendi Diaz: Key factors were a $7 million increase from loans, a $6 million increase from investment securities, and a $2 million decline from cash.

Maritza Arizmendi Diaz: Lungs benefited from higher average volumes and yields. The same factors affected investment securities, mainly due to fixed rates, higher yielding securities purchased late in both the third and fourth quarters.

Maritza Arizmendi Diaz: Average cash balances declined as we put more funds to work in loans and investment securities.

Maritza Arizmendi Diaz: Total interest expense was $33 million, an increase of $9 million from the third quarter. Key drivers were a $5 million increase due to a higher level of short-term wholesale funding and a $4 million increase due to higher average balances of core deposits at a higher rate.

Maritza Arizmendi Diaz: Total banking and financial service revenues were $32 million, or $2 million from the third quarter.

Maritza Arizmendi Diaz: Cost management revenues reflected annual insurance commission recognition of $2.5 million.

Maritza Arizmendi Diaz: Bank service revenues increased due to higher levels of economic activity and mortgage banking revenues declined due to lower MSR valuations, deflecting the fall in long-term interest rates during the quarter.

Maritza Arizmendi Diaz: As a result of all these factors, total core revenues were $176 million, up $3 million from the first quarter.

Maritza Arizmendi Diaz: Other non-interest income totaled $7 million, up $6 million from the third quarter. This was due to the gain from the sale of non-performing Puerto Rico small business loans.

Maritza Arizmendi Diaz: Looking at non-interest expenses, they total $94 million, up $4 million from the third quarter.

Maritza Arizmendi Diaz: The efficiency ratio was 53.59%, up slightly from the third quarter.

Maritza Arizmendi Diaz: Most of the difference between the third and the fourth quarter was the cost of workforce early retirement and facilities rights sizes.

Maritza Arizmendi Diaz: We plan to use the results and savings to continue to invest in technology.

Maritza Arizmendi Diaz: This should enable us to continue to average about $90 to $92 million of non-interest expense per quarter in 2024 with efficiency ratios continuing in the low to mid 50% range.

Maritza Arizmendi Diaz: All the recommended metrics remained high. Return on average asset was 1.76%.

Maritza Arizmendi Diaz: The same as in the third quarter. Return on average tangible common equity was 18.22% and ice increased from the third quarter. Tangible value per share was $23.13 up more than $2 from the third quarter. Tangible equity benefited from the increase in both retained earnings and AOCI.

Speaker Change: Thank you.

Speaker Change: Please turn to page 7 to review our operational highlights. Average loan balances worth $7.4 billion, an increase of 3% from the third quarter.

Speaker Change: and Osprey Advances were about the same.

Speaker Change: December 31st balances reflected sequential growth of 9% in Puerto Rico commercial loans, 7% in U.S. commercial loans, 3% in auto loans, and 1% in consumer loans.

Speaker Change: presidential mortgage loans declined 3%, reflected continued

Speaker Change: Regular pay downs and the securitization and sale of conforming loans.

Speaker Change: Loan yield was 7.96%, up 12 basis points from the third quarter. This reflected increases from variable rate commercial loans, higher entry yields on new loans, and a smaller proportion of residential mortgages in the loan book. Average core deposits were $8.7 billion, an increase of 1% from the third quarter. End of period balances were $9.6 billion, an increase of 12% from September 30th. This reflected the $1.2 billion deposit of public funds in mid-December.

Speaker Change: Core Deposit Cost was 107 basis points compared to 90 basis points in the third quarter. This increase mainly relates to 30 basis points due to higher rates on government deposits and 20 basis points in time deposits.

Speaker Change: As of the fourth quarter, our cumulative beta was 27% for interest-bearing deposits and only 19% for total deposits.

Speaker Change: Excluding government deposits, it was 15%.

Speaker Change: Average balance and brokerage deposits were $602 million compared to $266 million in the

Speaker Change: The December 31st balance fell to $363 million. The rate paid on this wholesale funding increased 54 basis points to 5.21% in the fourth quarter.

Speaker Change: The interim quarterly increase in wholesale funding balances reflected asset and liability management strategies that involve a short-term need for increased liquidity.

Speaker Change: Most of the December 31st broker deposit balance of $162 million will mature early in the current first quarter. We expect to use excess deposits to reduce wholesale funding.

Speaker Change: Net Interest Margin was 5.62% that compares to 5.80% in the third quarter. Assuming some catch up in the deposit cost as well as a potential rate cut, we believe NIMC will easy about 20 basis points over the course of 2024.

Speaker Change: Please turn to page A to review our credit quality and capital strength.

Speaker Change: Net charge-off total $16 million, down $3 million from the third quarter. The net charge-off rate was 88 basis points, down 70 basis points from the third quarter.

Speaker Change: The first quarter reflected net charge-off rate declines in residential mortgages due to recovery and an improvement in commercial loans due to the absence of a $7 million charge-off in the third quarter related to two U.S. loans.

Speaker Change: included in the fourth quarter net charge of rates.

Speaker Change: were increases in auto and consumer loans mainly due to the higher level of delinquency.

Speaker Change: Looking at other metrics, provision for credit losses totaled $20 million, most of which relate to increased volume. Fourth quarter early and total delinquency rates were in line with the third quarter at 2.76% and 3.76% respectively. The non-performing loan rate of 1.22% was the lowest of the last five quarters.

Speaker Change: Overall, credit continues to be good. With COVID cash stimulus fading away, we expect increased net charge-offs in auto and consumer. But with increased employment and a growing Puerto Rico economy, net charge-offs and delinquency should be lower than pre-pandemic level.

Speaker Change: Looking at some of other capital metrics, total stockholders' equity was $1.2 billion and tangible common equity ratio was 9.68%.

Speaker Change: To sum up, during the fourth quarter we saw

Speaker Change: Revenue growth continues to benefit from higher yields and higher balances of both loans and securities.

Speaker Change: Good loan origination driven by commercial, retail, auto, and consumer lending.

Speaker Change: Increase for deposit costs mainly higher.

Speaker Change: but vigorous continue to remain well below pierce.

Speaker Change: Significantly higher end-of-period core deposits

Speaker Change: Higher short-term wholesale funding, credit condition normalization, and core non-interest expense in line with our expected range that includes continuing investment in our digital first strategy.

Speaker Change: Now, here's a poster.

Poster: Thank you, Maritza. Please turn to page nine.

Poster: Our outlook remains positive for both Puerto Rico and OFG. The flow of federal funds to rebuild the island's infrastructure continues. Local businesses are expanding. The consumer is doing well. Private capital continues to make investments in the island. We still have to watch out for all the big uncertainties, interest rate changes, inflation, possible mainland recession, as well as the ongoing global conflicts. But we remain optimistic about Puerto Rico and look forward to continued economic and business growth. As well as strong levels of employment.

Poster: Turning to OFG, 2023 results were driven by loan growth, good credit quality, a higher interest rate environment, and low deposit data.

Poster: We saw strong traction with digital adoption and client acquisition as Oriental Self Service Portal and other innovations are helping to build our businesses.

Poster: as a result, we had a record year in earnings. As I mentioned earlier, assets, loans, customer deposits, and stockholders' equity ended the year at new highs. Overall, our strategies have proven highly effective.

Poster: Looking ahead.

Poster: We are starting 2024 with strong momentum, excellent strategic positioning, and a significantly larger balance sheet for both loans and investments. With this as a starting point, we anticipate continued loan and client growth. This will be partially offset by net interest margin easing over the course of the year due to expected lower interest rates by the Fed and by higher provision as consumer credit continues to normalize. As Maritza mentioned, we plan to continue to invest in and deploy more customer-friendly technology. All in all, we look forward to a strong year in 2024.

Poster: In closing, I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and we're excited for what's to come in 2024 as we mark our 60th year in business and our 30th year trading on the New York Stock Exchange.

Host: Thanks for watching! Thank you for watching!

Operator: Good morning. Thank you for joining OFG Bancorp's conference call. My name is Todd, and I will be your operator today.

Poster: With this, we end our formal presentation. Operator, please open up the call for the Q&A.

Operator: 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 the homepage of the OFG website under the fourth quarter 2023 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 filing; 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 afterward. All lines have been placed on mute to prevent any background noise.

Speaker Change: Thank you.

Speaker Change: If you have a question at this time, please press star 1 on your telephone keypad.

Speaker Change: If you wish to remove yourself from the queue, please press star 2.

Speaker Change: Once again, that's star one to ask a question.

Speaker Change: Our first question will come from Alex Twerdahl with Piper Sandler. Please go ahead.

Alexander Roberts Huxley Twerdahl: Good morning.

Alexander Roberts Huxley Twerdahl: Good morning Alex.

Jose: So, it's a long-standing client of ours, and they had a one-time inflow of liquidity, and certainly we're honored to be their bank. So, again, at this point, we don't have full visibility on the uses of the funds, so for now, we're modeling it within our balance sheet as a short-term deposit, but in the meantime, we are, again, servicing a long-standing customer that we have a full banking relationship with them.

Operator: 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. Please do so.

Good morning, and thank you for joining us. 2023 was an outstanding year with record levels of loans, customer deposits, assets, and stockholders' equity. For the first time, commercial loan balances exceeded $3 billion, and tangible common equity was more than $1 billion. Our digital first strategy continues to empower existing customers and attract new ones.

Jose: We will definitely update you guys as we get more color from the customer, but it's going to take a couple of more weeks for us to figure it out.

93% of all routine retail transactions and more for deposits now take place through self-service channels, enabling our teams to focus more on business development opportunities. While consumer credit has begun to normalize post-pandemic, consumer liquidity and employment levels continue to be solid. Our commercial clients are doing very well in a strong economy. We are very proud of our accomplishments and thank the entire Oriental team for making this record year possible.

Jose: So, I mean, I guess when you're thinking about the NIM guidance, I think the 20 basis points of NIM compression throughout the year, should we just assume that on the balance sheet, excluding that $1.2 billion?

Speaker Change: Well, it's just from the basic scenario that Jose was mentioning that it will be for a short term period, yeah. Yep, so it excludes that one time, that deposit, our modeling excludes that deposit for the better part of 2024.

Please turn to page three for a summary of our fourth quarter results. Looking at the income statement, earnings per share diluted was 98 cents, total core revenues were $175.6 million, and net interest margin was 5.62%. Provision was $19.7 million, primarily due to increased loan volume. Non-interest expenses were $94.1 million, and pre-provision net revenues totaled $88.2 million.

Speaker Change: Okay. And is that government deposit just sitting in non-interest bearing now or is it something that's going to impact interest expenses in the first quarter?

Speaker Change: So it's a government deposit that is index-based, as all government deposits are these days. So it's earning interest right now based on the formula that the government has established.

Speaker Change: Understood. And then I guess as I think about the size of the balance sheet, you guys are obviously over $10 billion now. It's something you projected, something we expected, you know, and your capital levels are building to a level where, you know, it suggests that you could have a much larger balance sheet than where you are today. How are you thinking about just overall managing the balance sheet over the next, I guess, year, coming years? And, you know, does the strategy shift at all now that you're, you know, firmly above the $10 billion mark?

Quarterly performance included two items of note. First, we closed on the sale of non-performing Puerto Rico small business loans. We mentioned the planned sale last quarter. This resulted in a $6.3 million pre-tax gain. Second, was workforce early retirement and right sizing.

This resulted in a $3.2 million non-interest expense for severance and lease cancellations. These stem from increased productivity in certain areas, in part as a result of our technology investment. Turning to the balance sheet, total assets increased to $11.3 billion from $10.3 billion last quarter, and customer deposits increased to $9.6 billion from $8.5 billion. This was due primarily to a $1.2 billion deposit of public funds in mid-December, giving us a total of $1.6 billion of government deposits. Loans held for investment total $7.5 billion, up 4% from the third quarter, with new loan production or loan origination of $664 million, up 17% from the third quarter. Investments increased to $2.7 billion from $2.1 billion in the third quarter.

Speaker Change: So our game plan remains pretty much the same. We see great opportunities for us to continue to grow our loan book here in Puerto Rico and somewhat in the States too, but mostly here in Puerto Rico. We are seeing a good economic environment that supports us in that effort, and that's the game plan that we have. We're basically now with good liquidity levels, excess deposits, and we want to deploy them first and foremost into the jurisdictions, in the locations that we operate primarily here in Puerto Rico. So that's kind of how we're seeing it, Alex. We're not really planning or having any extraordinary event on the agenda for us. We just simply need to keep on going forward. And just to go back to the question on the deposit, on the government deposit, I just want to...

This was due to purchases of short-term treasury bills and long-term government mortgage-backed securities. Cash increased to $748 million from $533 million. During the second half of 2023, we redeploy our higher than normal cash levels and maturing treasury positions into longer-term mortgage-backed securities. These moves position OFG's balance sheet well for the expected lower interest rate environment in the second half of 2024. Looking at capital, the CET1 ratio was 14.12%, up from 14.06% in the third quarter. Please turn to page four for a summary of our 2023 results. Earnings per share diluted for the year was $3.83, up 11% year over year.

Speaker Change: I want to mention to you that really it's providing us, gives us flexibility on our balance sheet because as Maritza mentioned in her remarks, we have kind of canceled or let mature some of the wholesale funding that we took in the November-December months. So the cost of that, there's a differential that also benefits us, slight differential, but it benefits us. So it's also short-term something that is going to help us to be more flexible and nimble with our balance sheet.

Speaker Change: Got it. And then just final question for me, just on the workforce right sizing and some of the actions. Can you just tell us what you did, you know, and I guess what the impact is?

Total core revenues were $683 million, 12% year-over-year. Net interest margin was 5.8%, provision was $60 million, non-interest expense $363 million, and pre-provision net revenues totaled $326 million. Our capital actions in 2023 included increasing the quarterly dividend by 10% to 22 cents and completing $18.7 million of share buyback. We have approximately $17 million of remaining authorization. Please turn to page 5 for an update on our digital first strategy. As of December, 93% of all retail customer transactions and 96% of retail deposit transactions are now being made through digital and self-service channels. That is being driven by year-over-year growth in December of 11% in digital enrollment, 54% in digital loan payments, and 21% in virtual teller utilization, as well as the continued success of our Oriental Servicing Portal, which was introduced in mid-2023. For new listeners, the portal is a cornerstone of our self-service strategy. Customers can manage all loans and deposit accounts.

Speaker Change: Yep, so first it starts with we've been investing in our digital first strategy for several years. You've seen the investments and part of the...

Speaker Change: Thank you very much. Thank you very much. Thank you very much.

It enables them to open an open checking savings and CD, apply for and access loans, manage automatic loan payments, and download bank letters and tax documents. We will continue to add new features on a regular basis. Our 2023 performance continues to validate our strategy and investment in technology. As I mentioned, they help us provide more value-added services, increase our efficiency, and allocate more staff for new business development activities. Now, I'd like to welcome Maritza to the call to go over the financials in more detail. Thank you, Jose.

Speaker Change: and that's why we can keep the expenses at the 90-92 kind of quarterly level as Maritza mentioned.

Speaker Change: I mean, is the presumption then, you know, going forward that as the digital, you know, strategy continues to play out through the next year that, you know, maybe there'd be further right sizing or, you know, further efficiencies found, I guess, towards the end of next year?

Speaker Change: It's for me too early to tell, Alex. This is something really that we look very closely and we look at it on a quarter-to-quarter basis to see what opportunities surface. But we are certainly looking at it. Can't promise anything, though.

Please turn to page 6 to review our financial highlights. Starting with revenues, total interest income was $176 million, up $10 million from the third quarter. Key factors were a $7 million increase from loans, a $6 million increase from investment securities, and a $2 million decline from cash. Lungs benefited from higher average volumes and yields.

Speaker Change: Thanks for taking my questions. Yeah, thank you for your call.

Speaker Change: Thank you. Our next question comes from Brett Rabatin with Hufty Group. Please go ahead.

Brett D. Rabatin: Hey, good morning.

Brett D. Rabatin: Good morning wanted to just wanted to start with credit and you know we've seen obviously credit continues to be pretty good but we are seeing this as I guess everyone kind of expected a normalization on consumer and auto and I missed Maritza's comment on the 4Q trend versus going forward and that normalization was the comment that net charge offs would be lower going forward relative to 4Q or can you maybe just give us some color on that. Your expectations for charge offs in the consumer and auto book.

The same factors affected investment securities, mainly due to fixed rates, higher yielding securities purchased late in both the third and fourth quarters. Average cash balances declined as we put more funds to work in loans and investment securities. Total interest expense was $33 million, an increase of $9 million from the third quarter. Key drivers were a $5 million increase due to a higher level of short-term wholesale funding and a $4 million increase due to higher average balances of core deposits at a higher rate. Total banking and financial service revenues were $32 million, or $2 million from the third quarter. Cost management revenues reflected annual insurance commission recognition of $2.5 million.

Speaker Change: So, when you're referring to the charges, you're obviously alluding to the consumer and auto charges that Maritza mentioned in her remarks. And this is the way I look at it from a macro perspective. Brett, the economy in Puerto Rico is solid. It's doing well. The consumer has much more liquidity than they had pre-pandemic. The economy is much better than it was pre-pandemic also. So, that's kind of the underlying environment that we're operating in. To give you a little bit more color, specifically on the auto loan book, I'll ask our Chief Risk Officer, Cesar Ortiz, to give you a little bit of color on the auto book so you guys understand how we see this. Thank you, Jose. One of the things that I want to highlight in terms of contact, taking the opportunity during 2022 and 2023 of the increased demanding loans, we took the opportunity to improve and tighten our undergrading standards. So, if you look at the portfolio composition in terms of prime composition as of December 2023, we have an 82% prime composition compared to 64% prime composition back in fourth quarter of 2019. So, that basically is giving us comfort that our levels of returning to normalcy will be better than pre-pandemic levels.

Bank service revenues increased due to higher levels of economic activity, and mortgage banking revenues declined due to lower MSR valuations, deflecting the fall in long-term interest rates during the quarter. As a result of all these factors, total core revenues were $176 million, up $3 million from the first quarter. Other non-interest income totaled $7 million, up $6 million from the third quarter.

Cesar Ortiz: And Brett, to your point about the charges, we expect them to increase slightly or level off around sometime mid-year as we continue to see the tighter credit standards that we put in in 2022 and 2023, potentially generating lower levels of charges. But for the next several quarters, we expect charges on the auto book similar to the fourth quarter as we start to normalize, but still better than pre-pandemic levels.

This was due to the gain from the sale of non-performing Puerto Rico small business loans. Looking at non-interest expenses, they totaled $94 million, up $4 million from the third quarter. The efficiency ratio was 53.59%, up slightly from the third quarter. Most of the difference between the third and the fourth quarter was the cost of workforce early retirement and facilities rights sizes.

Speaker Change: Okay, that's helpful. And then on loan growth, obviously strong.

Speaker Change: production on the commercial side can you can you talk maybe a little bit about how you expect lung growth to play out this year it was obviously

We plan to use the results and savings to continue to invest in technology. This should enable us to continue to average about $90 to $92 million of non-interest expense per quarter in 2024 with efficiency ratios continuing in the low to mid 50% range. All the recommended metrics remained high.

Speaker Change: I don't expect double-digit growth in Puerto Rico every year, but you obviously hit that 10% mark in 2023.

Speaker Change: What do you think about the commercial production going forward, Jose, and then maybe just loan growth for the year?

Jose: First, thank you for highlighting the fact that it's hard to replicate 10% loan growth every year. So I appreciate that bone that you're throwing at us. But, you know, the way we see this is we see auto loan originations normalizing and trending slightly lower, consumer probably relatively flat in terms of loan originations, and we see a good opportunity on the commercial side. Small, mid-sized, and a little bit larger type of loan opportunities here in Puerto Rico. We see good, strong pipelines. We still see strong, good demand. We see private capital being deployed in the economy in Puerto Rico, and that's kind of an area of opportunity for us as it was in 2023. So that's kind of how we're looking at this in terms of loan growth. If the economy grows 2%, 2.5%, as it's been, predicted, we expect to grow between 3% and 4%, our loan book. Note that we expect residential mortgage book to go down still during the year as we're seeing less and less demand for us in that line of business.

Return on average asset was 1.76%, the same as in the third quarter. Return on average tangible common equity was 18.22%, and ice increased from the third quarter. Tangible value per share was $23.13, up more than $2 from the third quarter. Tangible equity benefited from the increase in both retained earnings and AOCI. Thank you. Please turn to page 7 to review our operational highlights. Average loan balances were $7.4 billion, an increase of 3% from the third quarter, and Osprey Advances were about the same. December 31st balances reflected sequential growth of 9% in Puerto Rico commercial loans, 7% in U.S. commercial loans, 3% in auto loans, and 1% in consumer loans. Presidential mortgage loans declined 3%, reflecting continued, regular pay downs and the securitization and sale of conforming loans. Loan yield was 7.96%, up 12 basis points from the third quarter.

Jose: and as we sell some of those conforming loans, I'm sorry.

Jose: Okay, sorry. I can sneak in one last one just around fee income. You know, obviously, the wealth management plus insurance bucket benefited from, I guess you'd call it unusual numbers in 4Q.

Jose: Is it fair to assume that those line items go back a little lower, maybe you need to look on fee income relative to the fourth quarter?

This reflected increases from variable-rate commercial loans, higher entry yields on new loans, and a smaller proportion of residential mortgages in the loan book. Average core deposits were $8.7 billion, an increase of 1% from the third quarter. End-of-period balances were $9.6 billion, an increase of 12% from September 30th, and this reflected the $1.2 billion deposit of public funds in mid-December. The core Deposit Cost was 107 basis points compared to 90 basis points in the third quarter.

Speaker Change: Yeah, remember, fourth quarter is impacted by the insurance contingent commissions that we get every year. So, yeah, I think it will trend back down to the more normal levels. Around $30 million. Around $30 million, as Maritza mentioned. A quarter. Okay.

Speaker Change: Great. Thanks for all the color.

Speaker Change: Thank you, Brett. Have a great day.

Speaker Change: As a reminder, that's star one to ask a question. Our next question comes from Kelly Mata with KBW. Please go ahead.

Kelly Mata: Great, hi, good morning.

Kelly Mata: Hi.

Kelly Mata: Backing all

Kelly Mata: I know them

This increase mainly relates to 30 basis points due to higher rates on government deposits and 20 basis points on time deposits. As of the fourth quarter, our cumulative beta was 27% for interest-bearing deposits and only 19% for total deposits. Excluding government deposits, it was 15%. Average balance and brokerage deposits were $602 million compared to $266 million in the fourth quarter. The December 31st balance fell to $363 million.

Kelly Mata: about how much

Kelly Mata: as well as if you could offer any

Kelly Mata: and Lauren

Kelly Mata: how the pricing of that

Kelly Mata: Press, press, press, slower.

Lauren: So, thank you for your question, Kelly. So, we grew from the third quarter to the fourth quarter, we grew commercial, Puerto Rico commercial loans by around $196 million. We did participate on the Metro Pistas privatization, the highway privatization, with a $75 million participation. So, excluding that, we grew our commercial book by approximately $121 million. So, ex-Metro Pistas, you still are seeing a 5.6% growth from third to fourth quarter. So, again, most of that origination, ex-Metro Pistas, is coming from construction services, it's coming from hospitality, it's coming from small and mid-sized manufacturing companies that we... we do business with, and I think we also are looking into the small business side of the business is doing a great job at generating good professional kind of offices, medical and D-like type of office financing and equipment. So, we are doing a pretty good job on the Puerto Rico commercial book, and we think that the pipelines that we have and the applications... and the approach that we have is paying off. In terms of the Metro Pistas loan rate and how does it compare to other larger loans, it's pretty similar, you know, maybe slightly lower by 25, 30 basis points, but it's nothing too dissimilar from other large loans. But that, again, as we've said in the past, we do not rely on... we do not rely on those type of transactions. We really are focused on our bread and butter, which is small and mid-sized commercial loans, and both things, the small business team and the large commercial team are doing a great job.

The rate paid on this wholesale funding increased 54 basis points to 5.21% in the fourth quarter. The interim quarterly increase in wholesale funding balances reflected asset and liability management strategies that involve a short-term need for increased liquidity. Most of the December 31st broker deposit balance of $162 million will mature early in the current first quarter.

We expect to use excess deposits to reduce wholesale funding. Net Interest Margin was 5.62%, which compares to 5.80% in the third quarter. Assuming some catch-up in the deposit cost as well as a potential rate cut, we believe NIMC will ease by about 20 basis points over the course of 2024. Please turn to page A to review our credit quality and capital strength. Net charge-off total $16 million, down $3 million from the third quarter.

The net charge-off rate was 88 basis points, down 70 basis points from the third quarter. The first quarter reflected net charge-off rate declines in residential mortgages due to recovery and an improvement in commercial loans due to the absence of a $7 million charge-off in the third quarter related to two U.S. loans. Also included in the fourth quarter net charge-off rates were increases in auto and consumer loans mainly due to a higher level of delinquency. Looking at other metrics, provision for credit losses totaled $20 million, most of which related to increased volume. The fourth quarter early and total delinquency rates were in line with the third quarter, at 2.76% and 3.76%, respectively. The non-performing loan rate of 1.22% was the lowest in the last five quarters.

Speaker Change: really really helpful thank you for that and maybe just getting some clarification around the margin guide

Speaker Change: The Outlook for about 20 minutes.

Speaker Change: Wondering what your...

Speaker Change: embedded in there are for race this year and can you just remind us any any indexed

Speaker Change: or floating rate on either side of the balance sheet, how we should be kind of thinking about that when the Fed.

Overall, credit continues to be good. With COVID cash stimulus fading away, we expect increased net charge-offs in auto and consumer. But with increased employment and a growing Puerto Rico economy, net charge-offs and delinquency should be lower than pre-pandemic levels. Looking at some of the other capital metrics, total stockholders' equity was $1.2 billion, and the tangible common equity ratio was 9.68%.

Speaker Change: So I'll give you my high level and let Maritza give you more of the specifics.

Speaker Change: The way we look at the interest rate environment, Kelly, for 2024 is for the second half of the year where we will start seeing the Fed taking some action and reducing rates, 3 to 4, 25 basis point cuts. So that's how we're modeling our net interest margin from a macro interest rate perspective. I'll let Maritza talk to you about the underpinnings of the margin. Thank you, Kelly, for your question.

To sum up, during the fourth quarter, revenue growth continues to benefit from higher yields and higher balances of both loans and securities, and good loan origination driven by commercial, retail, auto, and consumer lending. Increase for deposit costs mainly higher, but vigorous continue to remain well below pierce. Significantly higher end-of-period core deposits, higher short-term wholesale funding, credit condition normalization, and core non-interest expense in line with our expected range that includes continuing investment in our digital first strategy. Now, here's a poster. Thank you, Maritza. Please turn to page 9. Our outlook remains positive for both Puerto Rico and OFG. The flow of federal funds to rebuild the island's infrastructure continues.

Maritza Arizmendi Diaz: The balance sheet composition right now in the asset side, and this is something we have shared with you before, is the fact that in the commercial book we have about half of our commercial loan book is at variable rate, so we have exposure when rates start to go down.

Maritza Arizmendi Diaz: and the other variability that we have is the maturity of the short-term treasuries that we took in the first quarter, about $300 million in short-term treasuries and a longer position that we had that we matured in May 2024 is $200 million in treasury notes.

Maritza Arizmendi Diaz: So that will be priced at current level. So that's the variability on the asset side, but what we have been doing during the last two quarters is adding an extension in the asset side at higher yielding with the acquisition of $700 million in MBS.

Maritza Arizmendi Diaz: and the idea is to continue finance that at variable rate deposits and the structure of the government deposits that we recently add into the balance sheet have that structure. So we are adding variability into the liability side to position ourselves to a lower rate environment when it starts coming.

Local businesses are expanding. The consumer is doing well. Private capital continues to make investments in the island.

We still have to watch out for all the big uncertainties, interest rate changes, inflation, possible mainland recession, as well as the ongoing global conflicts. But we remain optimistic about Puerto Rico and look forward to continued economic and business growth, as well as strong levels of employment.

Speaker Change: Awesome. Thanks so much for the help. Maybe kind of a last multi-part question.

Speaker Change: and so on.

Speaker Change: Billion in Asset Size.

Speaker Change: um

Speaker Change: One, remind us the timing and impact of the Durban. I know you covered it on previous calls. Just wanted to confirm and get it up.

Turning to OFG, 2023 results were driven by loan growth, good credit quality, a higher interest rate environment, and low deposit data. We saw strong traction with digital adoption and client acquisition as the Oriental Self Service Portal and other innovations are helping to build our businesses. As a result, we had a record year in earnings. As I mentioned earlier, assets, loans, customer deposits, and stockholders' equity ended the year at new highs. Overall, our strategies have proven highly effective.

Speaker Change: It should be in July that we start triggering the Durbin effect, so it's going to have a half of a year impact and the full impact will be seen on 2025.

Speaker Change: I think I recall it's maybe roughly about $10,000 annually.

Speaker Change: Yeah, $10 million annually, $5 million 2024, and then the $10 million in 2025.

Speaker Change: Got it.

Speaker Change: Got it. And then I believe in, you know, prior year ends, you talked about maybe strategically managing under that $10 billion in assets, maybe customers took excess funds and put it elsewhere. It seems like the large government deposit...

Speaker Change: Thank you so much for joining us.

Looking ahead, we are starting 2024 with strong momentum, excellent strategic positioning, and a significantly larger balance sheet for both loans and investments. With this as a starting point, we anticipate continued loan and client growth. This will be partially offset by the net interest margin easing over the course of the year due to expected lower interest rates by the Fed and by higher provision as consumer credit continues to normalize.

Speaker Change: inflows of deposits just related to customers who have OFG as their lead bank who may

Speaker Change: you may

Speaker Change: more of that excess funds back now that

Speaker Change: We crossed over that.

Speaker Change: So the first part of your question, no, we did not try to manage below $10 billion XT government deposits and did not engage this year as we had kind of commented, I think, on this third quarter of the call. So we were managing conscientiously towards breaking the $10 billion mark because it really made total sense for us as we can reinvest those deposits into a higher yield than in previous years. So that's the first part. On the second part, yeah, we are very active and we are actually working very diligently in customer deposit strategies that will be deployed during the year. And that should play for us as we continue to grow our customer base and, again...

As Maritza mentioned, we plan to continue to invest in and deploy more customer-friendly technology. All in all, we look forward to a strong year in 2024. In closing, I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members.

Operator: We are thankful for them, and we're excited for what's to come in 2024 as we mark our 60th year in business and our 30th year trading on the New York Stock Exchange. With that, we end our formal presentation. Operator, please open up the call for the Q&A. Thank you. 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.

Speaker Change: take advantage of our good strategic positioning that we have in the Puerto Rico market.

Speaker Change: Got it. Appreciate the color. Thanks so much.

Speaker Change: You're welcome. Thank you for your call or your question.

Speaker Change: Thank you. As a final reminder, if you have a question at this time, please press star 1.

Operator: Once again, that's star number one to ask a question. Our first question will come from Alex Twerdahl with Piper Sandler. Please go ahead. Good morning. Good morning, Alex.

Speaker Change: And we have no further questions at this time. I'll now turn the call back to Mr. Fernandez for closing remarks.

Jos Rafael Fernndez: Thank you, operator. Thank you again to all our team members and thanks to all our stakeholders who have listened. Have a great day.

Alexander Roberts Huxley Twerdahl: First off, Jose, I was hoping you could give us a little bit more color on the $1.2 billion government deposit, where it came from, and whether or not it's something that's going to stick around on your balance sheet for a long period of time. So, it's a long-standing client of ours, and they had a one-time inflow of liquidity, and certainly, we're honored to be their bank. So, again, at this point, we don't have full visibility on the uses of the funds, so for now, we're modeling it within our balance sheet as a short-term deposit, but in the meantime, we are again servicing a long-standing customer with whom we have a full banking relationship. We will definitely update you guys as we get more color from the customer, but it's going to take a couple of more weeks for us to figure it out.

Jos Rafael Fernndez: This does conclude today's call. We thank you for your participation. You may disconnect at any time.

Speaker Change: © transcript Emily Beynon

So, I mean, when you're thinking about the NIM guidance, I think the 20 basis points of NIM compression throughout the year, should we just assume that on the balance sheet, excluding that $1.2 billion? Well, it's just from the basic scenario that Jose was mentioning that it will be for a short-term period, yeah. Yep, so it excludes that one time deposit. Our modeling excludes that deposit for the better part of 2024. Okay. And is that government deposit just sitting in a non-interest bearing account now, or is it something that's going to impact interest expenses in the first quarter? So it's a government deposit that is index-based, as all government deposits are these days.

Speaker Change: Thank you for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: Thank you for watching!

Speaker Change: Thanks for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: ¶¶

Alexander Roberts Huxley Twerdahl: So it's earning interest right now based on the formula that the government has established. And then I guess as I think about the size of the balance sheet, you guys are obviously over $10 billion now. It's something you projected, something we expected, you know, and your capital levels are building to a level where, you know, it suggests that you could have a much larger balance sheet than where you are today. How are you thinking about just overall managing the balance sheet over the next, I guess, year or so? And, you know, does the strategy shift at all now that you're, you know, firmly above the $10 billion mark? So our game plan remains pretty much the same.

Speaker Change: Thanks for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: Thanks for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: Thanks for watching!

Speaker Change: Subtitles by the Amara.org community

Speaker Change: Thanks for watching!

Speaker Change: ¶¶

Speaker Change: © transcript Emily Beynon

We see great opportunities for us to continue to grow our loan book here in Puerto Rico and in the States, too, but mostly here in Puerto Rico. We are seeing a good economic environment that supports us in that effort, and that's the game plan that we have. We're basically now with good liquidity levels, and excess deposits, and we want to deploy them first and foremost into jurisdictions, in the locations that we operate primarily here in Puerto Rico. So that's kind of how we're seeing it, Alex. We're not really planning or having any extraordinary event on the agenda for us.

Speaker Change: © transcript Emily Beynon

Speaker Change: Thank you for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: Thank you for watching!

Speaker Change: © transcript Emily Beynon

Speaker Change: Thank you for watching!

Speaker Change: © transcript Emily Beynon

Alexander Roberts Huxley Twerdahl: We just simply need to keep going forward. And just to go back to the question on the deposit, on the government deposit, I just want to... I want to mention to you that it really provides us with, gives us flexibility on our balance sheet because, as Maritza mentioned in her remarks, we have kind of canceled or let mature some of the wholesale funding that we took in the November-December months. So the cost of that, there's a differential that also benefits us. A slight differential, but it benefits us. So it's also something that is going to help us to be more flexible and nimble with our balance sheet. Got it. And then just a final question for me, just on the workforce right sizing and some of the actions. Can you just tell us what you did, you know, and I guess what the impact is?

Yep, so first, it starts with we've been investing in our digital first strategy for several years. You've seen the investments and part of the... Thank you very much. Thank you very much.

Alexander Roberts Huxley Twerdahl: Thank you very much, and that's why we can keep the expenses at the 90-92 kind of quarterly level, as Maritza mentioned. I mean, is the presumption then, you know, going forward that, you know, maybe there'd be further right sizing or, you know, further efficiencies found, I guess, towards the end of next year? It's too early to tell, Alex.

This is something that we look at very closely, and we look at it on a quarter-to-quarter basis to see what opportunities arise. But we are certainly looking at it. I can't promise anything, though.

Alexander Roberts Huxley Twerdahl: Thanks for taking my questions. Yeah, thank you for your call. Thank you. Our next question comes from Brett Rabatin with Hufty Group. Please go ahead. Hey, good morning.

Brett D. Rabatin: Good morning, I wanted to just start with credit and we've seen, obviously, credit continues to be pretty good, but we are seeing this as I guess everyone kind of expected a normalization on consumer and auto credit, and I missed Maritza's comment on the 4Q trend versus going forward and that normalization was the comment that net charge-offs would be lower going forward relative to 4Q, or can you maybe just give us some color on that? Your expectations for charge-offs in the consumer and auto book. So, when you're referring to the charges, you're obviously alluding to the consumer and auto charges that Maritza mentioned in her remarks. And this is the way I look at it from a macro perspective.

Brett, the economy in Puerto Rico is solid. It's doing well. The consumer has much more liquidity than they had pre-pandemic. The economy is much better than it was pre-pandemic also.

So, that's kind of the underlying environment that we're operating in. To give you a little bit more color, specifically on the auto loan book, I'll ask our Chief Risk Officer, Cesar Ortiz, to give you a little bit of color on the auto book so you guys understand how we see this. Thank you, Jose. One of the things that I want to highlight in terms of contact, taking the opportunity during 2022 and 2023 of the increased demand for loans, we took the opportunity to improve and tighten our undergrading standards. So, if you look at the portfolio composition in terms of prime composition as of December 2023, we have an 82% prime composition compared to 64% prime composition back in the fourth quarter of 2019.

So, that basically is giving us comfort that our levels of returning to normalcy will be better than pre-pandemic levels. And Brett, to your point about the charges, we expect them to increase slightly or level off around sometime mid-year as we continue to see the tighter credit standards that we put in in 2022 and 2023, potentially generating lower levels of charges. But for the next several quarters, we expect charges on the auto book to be similar to the fourth quarter as we start to normalize, but still better than pre-pandemic levels. Okay, that's helpful.

Brett D. Rabatin: And then on loan growth, obviously strong, production on the commercial side, can you could talk maybe a little bit about how you expect inflation to play out this year? It was obviously, I don't expect double-digit growth in Puerto Rico every year, but you obviously hit that 10% mark in 2023. What do you think about commercial production going forward, Jose, and then maybe just loan growth for the year? First, thank you for highlighting the fact that it's hard to replicate 10% loan growth every year. So I appreciate that bone that you're throwing at us.

But, you know, the way we see this is we see auto loan originations normalizing and trending slightly lower, consumer credit probably relatively flat in terms of loan originations, and we see a good opportunity on the commercial side. Small, mid-sized, and a little bit larger types of loan opportunities here in Puerto Rico. We see good, strong pipelines. We still see strong, good demand. We see private capital being deployed in the economy in Puerto Rico, and that's kind of an area of opportunity for us as it was in 2023. So that's kind of how we're looking at this in terms of loan growth. If the economy grows 2%, 2.5%, as it's predicted, we expect to grow between 3% and 4% our loan book. Note that we expect the residential mortgage book to go down still during the year as we're seeing less and less demand for us in that line of business, and as we sell some of those conforming loans, I'm sorry. Okay, sorry.

Brett D. Rabatin: I can sneak in one last one just around fee income. You know, obviously, the wealth management plus insurance bucket benefited from what I guess you'd call unusual numbers in 4Q. Is it fair to assume that those line items go back a little lower; maybe you need to look at fee income relative to the fourth quarter? Yeah, remember, the fourth quarter is impacted by the insurance contingent commissions that we get every year. So, yeah, I think it will trend back down to more normal levels, around $30 million. Around $30 million, as Maritza mentioned. A quarter.

Okay. Great. Thanks for all the color.

Brett D. Rabatin: Thank you, Brett. Have a great day. As a reminder, that's star number one to ask a question. Our next question comes from Kelly Mata with KBW. Please go ahead. Great, hi, good morning. Hi. Backing all, I know them about how much as well as if you could offer any and Lauren how the pricing of that, Press, press, press, slower.

So, thank you for your question, Kelly. So, from the third quarter to the fourth quarter, we grew our commercial, Puerto Rico commercial loans by around $196 million. We did participate in the Metro Pistas privatization, the highway privatization, with a $75 million participation. So, excluding that, we grew our commercial book by approximately $121 million.

So, ex-Metro Pistas, you are still seeing 5.6% growth from the third to fourth quarter. So, again, most of that origination, ex-Metro Pistas, is coming from construction services, it's coming from hospitality, it's coming from small and mid-sized manufacturing companies that we... we do business with, and I think we also are looking into the small business side of the business, which is doing a great job at generating good professional kind of offices, medical and D-like types of office financing and equipment. So, we are doing a pretty good job on the Puerto Rico commercial book, and we think that the pipelines that we have and the applications... and the approach that we have are paying off. In terms of the Metro Pistas loan rate and how it compares to other larger loans, it's pretty similar, you know, maybe slightly lower by 25, 30 basis points, but it's nothing too dissimilar from other large loans.

But that, again, as we've said in the past, we do not rely on... we do not rely on those types of transactions. We really are focused on our bread and butter, which is small and mid-sized commercial loans, and both things, the small business team and the large commercial team, are doing a great job, really, really helpful. Thank you for that, and maybe just getting some clarification around the margin guide, The Outlook, for about 20 minutes. Wondering what your... embedded in there are for the race this year, and can you just remind us of any indexed or floating rate on either side of the balance sheet, how we should be kind of thinking about that when the Fed. So I'll give you my high level and let Maritza give you more of the specifics. The way we look at the interest rate environment, Kelly, for 2024 is for the second half of the year, when we will start seeing the Fed taking some action and reducing rates, 3 to 4, 25 basis point cuts.

So that's how we're modeling our net interest margin from a macro interest rate perspective. I'll let Maritza talk to you about the underpinnings of the margin. Thank you, Kelly, for your question. The balance sheet composition right now on the asset side, and this is something we have shared with you before, is the fact that in the commercial book, about half of our commercial loan book is at a variable rate, so we have exposure when rates start to go down, and the other volatility that we have is the maturity of the short-term treasuries that we took in the first quarter, about $300 million in short-term So that will be priced at the current level.

So that's the variability on the asset side, but what we have been doing during the last two quarters is adding an extension on the asset side at higher yields with the acquisition of $700 million in MBS, and the idea is to continue to finance that at variable rate deposits, and the structure of the government deposits that we recently added to the balance sheet have that structure. So we are adding variability into the liability side to position ourselves for a lower rate environment when it starts coming. It was awesome. Thanks so much for the help. Maybe it's kind of a last multi-part question, and so on. Billion in Asset Size, um, One, please remind us of the timing and impact of Durban.

I know you covered it on previous calls. Just wanted to confirm and get it up. It should be in July that we start triggering the Durbin effect, so it's going to have a half of a year impact, and the full impact will be seen in 2025. I think I recall it's maybe roughly about $10,000 annually.

Yeah, $10 million annually, $5 million in 2024, and then the $10 million in 2025. Got it. Got it. And then I believe at prior year ends, you talked about maybe strategically managing under that $10 billion in assets. Maybe customers took excess funds and put them elsewhere. It seems like the large government deposit...

Thank you so much for joining us; inflows of deposits just related to customers who have OFG as their lead bank, who may you may get more of that excess funds back now that we have crossed over that. So the first part of your question, no, we did not try to manage below $10 billion in XT government deposits and did not engage this year as we had kind of commented on this third quarter of the call. So we were managing conscientiously towards breaking the $10 billion mark because it really made total sense for us as we could reinvest those deposits into a higher yield than in previous years. So that's the first part. On the second part, yeah, we are very active, and we are actually working very diligently on customer deposit strategies that will be deployed during the year. And that should work for us as we continue to grow our customer base and, again..., take advantage of our good strategic positioning that we have in the Puerto Rico market.

Got it. I appreciate the color. Thanks so much. You're welcome. Thank you for your call or your question. Thank you. As a final reminder, if you have a question at this time, please press star 1. And we have no further questions at this time. I'll now turn the call back to Mr. Fernandez for closing remarks.

Thank you, operator. Thank you again to all our team members and thanks to all our stakeholders who have listened. Have a great day.

Operator: This does conclude today's call. We thank you for your participation. You may disconnect at any time.

Operator: transcript Emily Beynon, Thank you for watching! transcript Emily Beynon, Thank you for watching! Thanks for watching!

Host: transcript Emily Beynon, Thanks for watching! transcript Emily Beynon, Thanks for watching! Subtitles by the Amara.org community, Thanks for watching!

Host: transcript Emily Beynon, Thank you for watching! transcript Emily Beynon, Thank you for watching! transcript Emily Beynon, Thank you for watching!

Good morning, Thank you for joining O S. T. Bancorp's Conference call. My name is Todd and I will be your operator today.

Speaker Change: Our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of directors and Maritza areas Mindy Chief Financial Officer.

Speaker Change: A presentation accompanies today's remarks it.

Speaker Change: It can be found on the homepage of the O F. G web site under the fourth quarter 2023 section.

Speaker Change: This call May feature certain forward looking statements about managements goals plans and expectations.

Speaker Change: These statements are subject to risks and uncertainties outlined in the risk factors section of <unk>.

O S T SEC filings.

Speaker Change: Actual results may differ materially from those concurrent currently anticipated.

Speaker Change: We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

Speaker Change: All lines have been placed on mute to prevent any background noise.

Speaker Change: After the Speakers' remarks, there will be a question and answer session.

Speaker Change: Instructions will be given at that time.

Speaker Change: I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Fernandez: Good morning, and thank you for joining us.

Fernandez: We are pleased to report our fourth quarter and year end results.

Fernandez: 23 was an outstanding year with record levels of loans customer deposits assets and stockholders equity.

Fernandez: For the first time commercial loan balances exceeded $3 billion in tangible common equity was more than $1 billion.

Fernandez: Our digital first strategy continues to empower existing customers and attract new ones.

Fernandez: 93% of all routine retail transactions and more for deposits Nowadays places to self service channels.

Fernandez: I believe our teams to focus more on business development opportunities.

Fernandez: While consumer credit has begun to normalize post pandemic.

Fernandez: Consumer liquidity unemployment levels continue to be solid.

Fernandez: Our commercial clients are doing very well in a strong economy.

Fernandez: We are very proud of our accomplishments and thank the entire Oriental team for making this record year possible.

Fernandez: Please turn to phase III for a summary of our fourth quarter results.

Fernandez: Looking at the income statement earnings per share diluted was <unk> 98.

Fernandez: Total core revenues were $175 $6 million and net interest margin was 562%.

Fernandez: Provision was $19 $7 million, primarily due to increased loan volume.

Fernandez: Noninterest expenses were $94 $1 million in pre provision net revenue totaled $88 $2 million.

Fernandez: Quarterly performance included two items of note first was closing on the sale of nonperforming, Puerto Rico small business loans, we mentioned the planned sale last quarter.

Fernandez: This resulted in a $6 $3 million pre tax gain.

Fernandez: With workforce early retirement and right sizing.

Fernandez: This resulted in a $3 $2 million noninterest expense for severance and lease cancellations.

Fernandez: This stemmed from increased productivity in certain areas.

Fernandez: In part as a result.

Fernandez: Our technology investments.

Fernandez: Turning to the balance sheet.

Fernandez: Total assets increased to $11 $3 billion from $10 $3 billion last quarter customer.

Fernandez: Customer deposits increased to $9 $6 billion from $8 $5 billion.

This was due primarily to a $1 2 billion dollar deposit of public funds in mid December.

Fernandez: A total of $1 $6 billion in government deposits.

Fernandez: Loans held for investments totaled $7 5 billion up 4% from the third quarter with new loan production or loan origination of $664 million up 17% from the third quarter.

Fernandez: Investments increased to $2 $7 billion from $2 $1 billion in the third quarter.

Fernandez: This was due to purchases of short term treasury bills and long term government mortgage backed securities cash increased to $748 million from $533 million. During the second half of 2023, we redeployed our higher than normal cash levels and maturing treasury positions into.

Fernandez: Longer term mortgage backed securities. These moves position <unk> balance sheet, well for the expected lower interest rate environment in the second half of 'twenty 'twenty four.

Fernandez: Looking at capital the CET, one ratio was $14, 12% up from 14, 6% in the third quarter.

Fernandez: Please turn to page four for a summary of our 2023 results.

Fernandez: Earnings per share diluted for the year was $3 83.

Fernandez: 11% year over year.

Fernandez: Total core revenues were $683 million up 12% year over year net interest margin was five 8% provision was $60 million.

Fernandez: Noninterest expense X six $363 million.

Fernandez: Provision net revenues totaled $326 million.

Fernandez: Capital actions in 2023 included increasing the quarterly dividend by 10% to 22 cents.

Fernandez: Completing $18 $7 million of share buybacks, we have approximately $70 million of the remaining authorization.

Fernandez: Please turn to page five for an update on our digital first strategy.

Fernandez: As of December 93% of all retail customer transactions and 96% of retail deposit transactions are now being made through digital.

Fernandez: And self service channels.

Fernandez: That is being driven by year over year growth in December of 11%, Indeed on enrollment, 54% in digital payments and 21% in virtual teller utilization as well as the continued success of our Oriental servicing portal, which was introduced.

2023.

Fernandez: For new listeners to support all of these are cornerstone of our self service strategy customers can manage all loans and deposit accounts it enables them to.

Fernandez: So originate on open checking savings and CD applying for and accessing loan managing automatic loan payments and downloading bank lenders and tax documents. We will continue to add new features on a regular basis.

Fernandez: I played 23 performance continues to validate our strategy and investments in technology as I mentioned, they help us provide more value added service increased our efficiency and assigning more staff for new business development activities.

Speaker Change: Now I'd like to welcome reset to the call to go over the financials in more detail.

Reset: Thank you Jose.

Turning to page six to review our financial highlights.

Reset: Let's start then with revenues stood that embedded income was $176 million.

Reset: $10 million from the third quarter.

Reset: Key factors split off $7 million increase from lung a $6 million increase from investment securities and that to me.

Reset: Decline from cash.

Reset: <unk> benefited from a higher average volumes and yields.

Reset: The same factors affected investment securities, mainly due to fixed rate higher <unk> securities purchased late.

Reset: The third and fourth quarters.

Reset: I would add to cash balances decline as we put more funds to work in lung.

Reset: Investment Securities.

Reset: So that means that our <unk> expense.

Reset: $33 million.

Reset: Increase of $9 million from the same four key drivers were a $5 million.

Reset: <unk> increased due to a higher level of short term wholesale funding.

Reset: Million dollar increase due to higher.

Reset: Is this a core deposits at a higher rate.

Reset: Does that banking and financial services revenues were 33 $34 million.

Reset: $2 million from the third quarter.

Reset: Management revenues reflected on insurance Commission, the recognition of 2.5 million.

Reset: Bank service revenues increased due to a higher level of economic activity and mortgage banking revenues declined due to lower MSR valuation.

Reset: Reflecting the fall in long term interest rates during the quarter.

Reset: As a result of all these factors so in Mexico revenues were one.

Reset: <unk> hundred $76 million.

Reset: $3 million from the third floor.

Reset: All of that non interest income totaled $79.

Reset: $6 million I'll ask some of the third quarter.

Reset: Due to the gain from the sale of nonperforming, Puerto Rico, it's more leases.

Reset: Looking at non interest expenses, they still got a $94 million.

Reset: $4 million from the third floor.

Reset: The efficiency ratio was 50, 359% up slightly from the third player most.

Reset: Most of the difference between the third and the fourth quarter was the cluster of workforce.

Reset: I mean I'm facilities right sizing.

Reset: We plan to use the resultant savings to continue to invest in technology.

Reset: Nishu will enable us to continue to average about $90 million to $92 million of noninterest expense third quarter in 2024 with efficiency ratios continue in the low to mid 50% range.

Reset: Alright.

Reset: <unk> remains high peak download this asset was one 7% the same as in the third quarter, Chris Dan I understand you will come on equity was 18 point, 22%, a nice increase from the third well.

Chris Dan: Thank you on book value per share was $123 and.

Chris Dan: More than two hours from the third quarter. Thank you equity ran a theater some increase in both preferred and then eight OCI.

Chris Dan: Please turn to slide seven to review our operational highlights.

Chris Dan: Alrighty excellent balances were seven $4 billion, an increase of 3% from the third floor.

Speaker Change: Fair enough Peter bonuses to worry about this thing.

December 31st balances reflects sequential growth of 9% in Puerto Rico commercial loans, 7% in U S commercial loans, 3% in auto loans, and a one person and consumer.

Speaker Change: Saturday's from mortgage loans declined 3% reflected continued very well.

Speaker Change: A lot of Paydowns, and the securitization and sale of confirming that.

No.

Speaker Change: 796%.

Speaker Change: <unk> basis.

Speaker Change: From the third quarter.

Speaker Change: This reflected increases from variable rate commercial loans.

Speaker Change: Higher yields on new loans, and a smaller proportion of Christy I said why do they just in the loan book.

Speaker Change: Our next core deposits were $8 7 billion, an increase of 1% from the third quarter and you'll see the balances were $9 $6 billion.

Speaker Change: An increase of 12% from September 30, and this reflected the $1 2 billion dollar deposit.

Speaker Change: Paul.

Speaker Change: In mid December.

Speaker Change: For the quarter was 107 basis points compared to 90 basis points in the third quarter. These.

This increase mainly relates to the 80 basis points due to higher rates on government policies and 20 basis points in time deposits.

Speaker Change: The fourth quarter, our combat this beta was 27% for instead of speed Lindsay policies and only 19% for total deposits.

Speaker Change: Excluding government deposit it was.

Speaker Change: <unk>.

Speaker Change: Oh it is about airlines.

Speaker Change: Borrowings and broker deposits.

Congress $2 million compared to $266 million so far.

Speaker Change: The December.

Speaker Change: 31st balance fell to $363 million the rate based on these wholesale funding increased 54 basis points to five points to any one person in the fourth quarter.

Speaker Change: Is there any quarterly increase in wholesale funding balances reflect the assets and liabilities.

Speaker Change: Management has put out there is.

Speaker Change: That involved a short term need for increased liquidity.

Speaker Change: Most of the December 31st broker deposit balance of $162 million with mature early in the current first quarter.

Speaker Change: We expect to use those deposits to reduce wholesale funding.

Speaker Change: Net interest margin was 562% that's conferred to 580 <unk> in the third quarter. So maybe some catch up in the deposit cost as well as a potential rate cuts. We believe NIM will see about 20 basis points I've worked with cars of 'twenty 'twenty four.

Speaker Change: Sure.

Speaker Change: Please turn to page eight to review, our credit quality and copies of this change.

Speaker Change: Net charge offs totaled $16 million down $3 million from the third quarter. The net charge off rate was 88 basis points down 17 basis points from the third floor.

Speaker Change: The first quarter reflects the net charge off rate declines, especially in shallow yes, due to recoveries and an improvement in commercial loans due to the absence of a $7 million charge off in the third quarter related to two U S land.

Included in the fourth quarter net charge off rate.

Speaker Change: These were increases in auto and consumer loans, mainly due to the higher level of delinquencies.

Speaker Change: Looking at provision for credit losses totaled $20 million or.

Speaker Change: Most of which relates to increased millennium first quarter early and total delinquency rates were in line with the third quarter at $2 76 per cent and 376%, respectively. Then I'm very familiar with rates of 122% was the lowest of the last five quarters.

Speaker Change: Hello, everyone.

Speaker Change: <unk> continues to be good with carbon seamless fading away, we expect increased net charge offs in auto and consumer, but with increased employment and a growing Puerto Rico net charge off and delinquency should be lower than pre pandemic levels.

Speaker Change: Looking at some of our capital metrics total stockholders' equity was $1 $2 billion and tangible equity ratio was 968%.

Speaker Change: To sum up during the fourth quarter, we saw.

Speaker Change: Revenue growth continued to benefit from higher yields and higher balances of both loans and securities.

In Asia, driven by commercial retail auto and consumer lending.

Speaker Change: Increased core deposits cost mainly higher.

Speaker Change: But the big guys continue to remain well below peers.

Speaker Change: Significantly higher end of period core deposits higher.

Speaker Change: Higher short term wholesale funding Great Foundation normalization and for noninterest expense in line with our expected range that includes continued investment in our digital first study.

Speaker Change: Now here's pulses.

Pulses: Thank you Marika, please turn to page nine.

Pulses: <unk> remains positive for both Puerto Rico, and Oh Gee the flow of federal funds to rebuild the islands infrastructure continues local businesses are expanding the consumer is doing well private capital continues to make investments in the island, we still have to watch out for all the big uncertainties interest rate changes in inflation.

Pulses: Seaborne mainland recession as well as the ongoing global conflicts, but we remain optimistic about Puerto Rico and look forward to continued economic and business growth as well as strong levels of unemployment.

Pulses: Turning to <unk> 2023 results were driven by loan growth, good credit quality and higher interest rate environment and low deposit beta.

We saw strong traction with these our adoption on client acquisition is Oriental self service portal and other innovations are helping to build our businesses. As a result, we had a record year in earnings as I mentioned earlier assets loans customer deposit and stockholders' equity ended the year, a new high overall, our strategies have proven highly.

Speaker Change: Got it.

Speaker Change: Looking ahead.

Speaker Change: We're starting 2024 with strong momentum excellent strategic positioning and a significantly larger balance sheets for both loans and investments with this as a starting point, we anticipate continued loan and client growth. This will be partially offset by net interest margin easing over the course of the year due to expected low.

Speaker Change: Our interest rates by the fed and by higher provisions as consumer credit continues to normalize as Marissa mentioned, we plan to continue to invest in and deploy more customer friendly technology. All in all we look forward to a strong year in 2024.

Speaker Change: In closing I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and we're excited for what's to come in 2024, as we Mark our sixth year in business and our serious year trading on the New York Stock exchange with this we end our formal.

Speaker Change: The presentation operator, please open up the call for Q&A.

Speaker Change: Yes.

Speaker Change: If you have a question at this time, please press star one on your telephone keypad.

Speaker Change: If you wish to remove yourself from the queue. Please press star two.

Speaker Change: Once again Thats star one to ask a question.

Speaker Change: Our first question will come from Alex <unk> with Piper Sandler. Please go ahead.

Alex: Good morning.

Alex: Good morning, Alex.

Alex: First off I was hoping you could give us a little bit more color on the $1 $2 billion covered government deposit where it came from and whether or not it's something that's going to stick around on your balance sheet for a prolonged period of time.

Speaker Change: Yeah, So it's a long standing client of ours.

Speaker Change: They they had a.

Speaker Change: One time inflow of liquidity and uncertainty.

Speaker Change: We were honored to be their banks so again.

Speaker Change: At this point, we don't have full visibility on the youth.

Speaker Change: Users of the the funds so for four now we're modeling them within our balance sheet us.

Short term deposit.

Speaker Change: But in the meantime, we are again servicing and long standing customer and then we have a full.

Speaker Change: A full banking relationship with them.

We will definitely update you guys as we get.

Speaker Change: More color from the customer, but I see.

Speaker Change: Yeah.

Speaker Change: Take a couple of more weeks for us to figure it out.

Speaker Change: Okay. So I mean, I guess, when you're thinking about the NIM guidance. The I think the 20 basis points of NIM compression throughout the year should we just assume that on the balance sheet, excluding that $1 $2 billion.

Speaker Change: Well, what it does from the basis an idea that's also worth mentioning that it will be.

Speaker Change: <unk> seen that for a short time theater Yep Yep, so it excludes that.

One time that would be positive.

Speaker Change: Our modeling excludes that'd.

Speaker Change: That would be positive for the better part of 2024.

Speaker Change: Okay and is that.

Speaker Change: Is that government deposits sitting in noninterest.

Speaker Change: And noninterest bearing now or is it is it something that's going to impact our interest expenses in the first quarter.

Speaker Change: So it's a government deposits that is index based on his own government deposits are these days. So so it's it's earning interest right now on based on the Formula that the government has established.

Speaker Change: Understood.

Speaker Change: And then I guess as I'm thinking about the size of the balance sheet. You guys are obviously over 10 billion now it's something you projected something we expected.

Speaker Change: You know and your capital levels are building to a level, where it suggests that you could have a much larger balance sheet and where you are today. How are you thinking about just overall managing the balance sheet over the next I guess year coming years, and you know just a strategy shift at all now that you're you know firmly above the $10 billion Mark.

So our game plan remains pretty much the same we see great opportunities for us to continue to grow our loan book here in Puerto Rico and somewhat into stage, two but mostly here in Puerto Rico, we arent seeing in good and economic environment that supports us.

Speaker Change: And in that effort and that's the <unk>.

Speaker Change: The game plan that we have where we're basically now with good liquidity levels, a excess deposits and we want to deploy them first and foremost into.

Speaker Change: Into the.

Speaker Change: Jurisdictions, you know in the locations that we that we operate in primarily here in Puerto Rico. So that's kind of how we're seeing it Alex.

Speaker Change: We're not really planning or having any.

Speaker Change: The extraordinary event on the on the agenda for US, we just simply need to keep on going forward and just just to go back to the question on the deposit on the government deposit I just want to.

Speaker Change:

Speaker Change: I mentioned to you that that really is providing us I haven't got gives us flexibility on our balance sheet because last night as I mentioned in her.

Speaker Change: Remarks, she will and we have kind of canceled or less mature some of the wholesale funding that we that we took in the November December months. So the cost of that there's a differential that also benefits our slight differential bodies, but it benefits us.

Speaker Change: And it's also short term.

Speaker Change: Something that is.

Speaker Change: Going to help us to be more flexible and nimble with our balance sheet.

Speaker Change: Got it and then just final question for me just on the workforce a right sizing and some of the actions could you just tell us what you did.

Speaker Change: No.

Speaker Change: I guess, what the impact is.

Speaker Change: So first it starts with we've been investing in our digital first strategy for several years, you have seen the investments and part of the.

Speaker Change: Hey.

Speaker Change: Theses and hypotheses for US is that we're investing in technology to improve the customer experience and also to generate an incrementally start generating some efficiencies. So some of some of what youre seeing in the fourth quarter is our point.

Speaker Change: That effort towards starting to extract some efficiencies with the intention of using those efficiencies as the way, we invest forward in technology and and our and on.

Speaker Change: On our digital first strategy as we've talked about so we have seen some of them some.

Speaker Change: It workforce reduction in some of the areas that have.

Speaker Change: He has been.

Speaker Change: <unk> invested mostly and some of it is on branches, but mostly on the operational side and we're also seeing how we can be.

Speaker Change: More nimble in terms of our facilities and we were able to.

Speaker Change: Cancel and terminate one of the leases that we had so so again, it's all it's all about how do we take advantage of the investments that we've made is to get the second part of the on the well the species that we presented to you guys several years ago, which is starting to.

Speaker Change: Get some efficiencies out of the investments too so we're being very intentional over that.

And that's why we can keep the expenses at the 90% 92 kind of quarterly level as Melisa mentioned.

Speaker Change: I mean is the presumption then going forward that as the digital strategy.

Speaker Change: Our strategy continues to play out through the next year that maybe there'd be further.

Speaker Change: Right sizing or further.

Speaker Change: Efficiencies found I guess towards the end of next year.

Speaker Change: It's for me too early to tell Alex.

Speaker Change: This is something really that we look very closely and we we look at it on a quarterly quarter to quarter basis to see what opportunities.

Speaker Change: In surface.

Speaker Change: But we are certainly looking at it cant promise anything though.

Speaker Change: Thanks for taking my questions.

Speaker Change: Thank you for your call.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question comes from Brett Robinson with Hep D Group. Please go ahead.

Brett Robinson: Hey, good morning.

Good morning, I wanted to just wanted to start with credit and we've seen obviously credit continues to be pretty good but we are seeing I guess, everyone kind of expected normalization on consumer and auto and I Miss Morris just comment on the <unk> trend versus going for.

Brett Robinson: Forward and that normalization was the comment that net charge offs would be.

Brett Robinson: Lower going forward relative to <unk> can you, maybe just give us some color on your expectations for charge offs in the consumer and auto book. Thanks.

Speaker Change: So when you're referring to the charges, you're obviously alluding to the.

Speaker Change: Consumer and auto.

Speaker Change: Yes.

Speaker Change: Charge offs moderate as I mentioned in the remarks.

Speaker Change: And this is the way I look at it from a micro perspective Bret.

The economy in Puerto Rico is solid it's doing well, but the consumer has much more liquidity than they had pre pandemic.

Speaker Change: Economies are much better than it was pre pandemic also so that's kind of the underlying environment that we're operating in to give you a little bit more color on specifically on the auto.

Speaker Change: Loan book I'll ask our chief risk officer of SaaS or piece too to give you a little bit of color on the order book. So you guys understand how we see this thank you.

Speaker Change: One of the things I wanted to highlight in terms of contact are taking the opportunity during 2022 and 23 of the increase in the money loans and auto loans.

Speaker Change: We took the opportunity to improve on.

Speaker Change: On site in our underwriting standards. So if you look at the portfolio composition in terms of Brian from position as of December 2023, we have an 82% Brian composition compared to $60.

Speaker Change: 64%.

Speaker Change: Non compensation during backing fourth quarter of 2019, so that basically is giving us comfort.

Speaker Change: Our levels of returning to normalcy will be better than pre pandemic levels.

Speaker Change: And Brent.

Speaker Change: To your point of all of the charge offs, we expect them to increase slightly or level off around sometime mid year as we continue to see.

Speaker Change: The.

Speaker Change: Tighter credit standards that we've put in in 2022 and 2023.

Speaker Change: Potentially generating lower levels of charge offs for the for the next several quarters, we expect our charge offs on the auto book similar to the fourth quarter.

Speaker Change: As we start to normalize.

Speaker Change: But still better than pre pandemic levels.

Okay. That's helpful and then on loan growth obviously strong.

Speaker Change: Production on the commercial side can you can you talk maybe a little bit about how you expect loan growth to play out this year. It was obviously.

Speaker Change: I don't expect double digit growth in Puerto Rico every year, but you obviously hit that 10% Mark in 'twenty three.

Speaker Change: What do you what do you think about the commercial production going forward Jose and then maybe just loan growth for the year.

Jose: First thank you for for.

Jose: Highlighting the fact that it's hard to replicate 10% loan growth every year. So I appreciate I appreciate that bond or youre throwing at us but.

Jose: The way we see this is we see auto loan originations normalizing and trending slightly lower consumer probably relatively flat in terms of loan originations and we see a good opportunity on the commercial side small mid size and a little bit larger type of a loan opportunities here in Puerto Rico.

Jose: We see good strong pipelines, we still see strong good demand, we see private capital B.

Jose: Being deployed in the economy in Puerto Rico, and that's kind of.

Jose: An area of opportunity for us as it was in 2023, so that's kind of how how we're looking at this in terms of loan growth. If the economy grows to two 5% as it has been.

Jose: We expect to grow between three and 4% our loan book No note that we.

Jose: We expect residential mortgage book go down still during the year.

Jose: We're seeing less and less.

Jose: Demand for us in that in that line of business.

Okay and asked if I could sneak in one elephant, yes, and as we sell some of those conforming loans I'm sorry.

Jose: Okay sorry.

Jose: If I could sneak in one last one just around fee income obviously, the wealth management philosophy insurance bucket benefited from.

Jose: I guess you call it unusual numbers in <unk>.

Is it fair to assume that.

Jose: That was one items go back a little lower and maybe any outlook on fee income relative to the fourth quarter.

Jose: Remember fourth quarter is impacted by reinsurance.

Jose: Finjan commissions that we get every year. So so yes, I think it will trend back down to more normal levels 30 meters around $30 million outstanding at.

Jose: At quarter Okay.

Speaker Change: Great. Thanks for all the color.

Speaker Change: Yes, Thank you Brett and have a great day.

Speaker Change: Yeah.

Speaker Change: As a reminder, that star one to ask a question. Our next question comes from Kelly Motta with <unk>. Please go ahead.

Speaker Change: Great.

Kelly Motta: Thanks, so much for the question.

Kelly Motta: Hi.

Kelly Motta: Maybe peggy.

Kelly Motta: Backing off.

Kelly Motta: Loan growth question.

Kelly Motta: Hi, Yeah.

Q4, I know the Metro place. This deal closed I was hoping you could share.

Kelly Motta: About how much that contributed to your loan growth this quarter as well.

Kelly Motta: If you could offer any any additional color on <unk>.

Kelly Motta: How the pricing of that comparison to.

Kelly Motta: Normal commercial origination.

Kelly Motta: Flower.

Kelly Motta: So thank.

Kelly Motta: Thank you for your question Kelly.

Kelly Motta: So we grew from the third quarter to the fourth quarter, we grew commercial Puerto Rico commercial.

Kelly Motta: Loans by around $196 million.

Kelly Motta: We did participate on the Metro <unk> privatization, the highway prioritization with a $75 million or.

Kelly Motta: Participation. So excluding that we grew our commercial book by approximately $121 million. So ex Metro. Please don't you still are seeing a five 6%.

Kelly Motta: Growth from third to fourth quarter.

Kelly Motta: So again most of that origination expand therapy stuff is coming.

Kelly Motta: Coming from construction services is coming from hospitality, it's coming from small and mid size manufacturing companies that we do business with and.

Kelly Motta: And I think.

Kelly Motta: We also are looking into.

Kelly Motta: The small business side of the business is doing a great job at.

Kelly Motta: Generating good.

Kelly Motta: Professional kind of offices medical and and the like type of office financing and equipment. So.

Kelly Motta: We are doing a pretty good job on the Puerto Rico commercial book.

Kelly Motta: We think that the pipelines that we have and the approach that we have is paying off in terms of the metro based us a loan rate and.

Kelly Motta: And how does it compare to two other.

Kelly Motta: Larger loans is pretty similar maybe slightly lower by 20.

Kelly Motta: 25, 30 basis points, but it's not nothing too dissimilar.

Kelly Motta: From other from other large loans, but again as we've said in the past.

Kelly Motta: We do not rely on those type of transactions, we really are focused on the our bread and butter, which is small and midsized commercial loans and in both themes is small.

Kelly Motta: Business team in the large commercial team are doing a great job.

Kelly Motta: That's really really helpful.

Speaker Change: Thank you for that and maybe just getting some clarification around the margin guidance I appreciate it.

Speaker Change: The outlook for about 20 days.

Speaker Change: Okay.

Speaker Change: Wondering.

Speaker Change: What what your assumption.

Speaker Change: Embedded in there are four.

Speaker Change: And can you just remind us.

Speaker Change: Any any index.

Speaker Change: Or or floating rate.

Speaker Change: Either side of the balance sheet, how we should be.

Thank you about that when when the fed starts.

Speaker Change: So I'll give you my high level high level and I'll, let Matt give you more of the specifics but.

Speaker Change: The way, we look at the interest rate environment Kelly for 'twenty 'twenty four is for the second half of the year, where we will start seeing some.

Speaker Change: Okay.

Speaker Change: We start seeing the fed taking some action in reducing rates three to 425 basis point cuts. So so that's how we're modeling our net interest margin from a macro.

Speaker Change: Interest rate perspective.

Speaker Change: I'll, let maritza talk to you about the.

The underpinnings of that.

Maritza Arizmendi Diaz: On the margin and thank you for your question.

The balance sheet purposes are right now in the asset side and this is something that we have shared with you before is the fact that in the formation. We have about half of our commercial loan book is is it a viable rate. So we have exposure.

Maritza Arizmendi Diaz: When when when rates start to go down.

Maritza Arizmendi Diaz: And the other everybody our ability that we have is the maturity of the short term treasuries that we took in the first quarter about $300 million in short term treasuries.

Maritza Arizmendi Diaz: And along their position that we had with mature.

Maritza Arizmendi Diaz: May 'twenty 'twenty four is $200 million going in.

Maritza Arizmendi Diaz: And so 100 millions on ethane Treasury notes.

Maritza Arizmendi Diaz: That will that will reprice as karan level. So that's your liability on the on the asset side, but.

Maritza Arizmendi Diaz: Well, we have been doing during the last two quarters is adding an extension in the asset side at higher dealing with the acquisition of $700 million MBS.

Maritza Arizmendi Diaz: And the idea is to continue finance that body of work.

Maritza Arizmendi Diaz: <unk> rate deposits.

Maritza Arizmendi Diaz: The structure of the government deposits that were recently added to the <unk>.

Maritza Arizmendi Diaz: She has that structure so we.

Maritza Arizmendi Diaz: We are adding <unk> into the <unk>.

Maritza Arizmendi Diaz: Let me cite two to position ourself to.

Maritza Arizmendi Diaz: The lower rate environment when it when it starts coming.

Speaker Change: Awesome. Thanks, so much for the help and maybe kind of a lot of multi part question for me is on the 10 billion in asset size.

Speaker Change: Can you one remind us the timing and impact of the Durbin I know you've covered it.

Speaker Change: Previous call just wanted to clarify.

Speaker Change: Farm and get an update.

Speaker Change: Maybe I'm sorry.

Speaker Change: It should be in July and we start triggering the.

Speaker Change: The Durbin effect. So it's gonna have a half of a year impact and the full impact will be seen on the 2025.

Speaker Change: Okay.

Speaker Change: I I I think I recall, it's maybe roughly about yeah.

Speaker Change: Yeah, Hi million Bucks box annually.

Speaker Change: Yes, $10 million annually by 2024, and then the $10 million in 2025.

Speaker Change: Got it.

Speaker Change: Got it and then.

Speaker Change: Believe in.

Speaker Change: Prior year ends you've talked about maybe strategically managing under that $10 billion in assets.

Speaker Change: At this time and put it elsewhere.

Speaker Change: It seems like the large government deposit is.

Speaker Change: Idiosyncratic to that customer and not.

Speaker Change: Have anything to do with kind of previous managing under 10 billion just wanted to confirm that and also wondering if there was.

Speaker Change: Potential.

Speaker Change: Inflows of deposits.

Speaker Change: <unk> two <unk>.

Speaker Change: Customers, who at OFC as their lead bank, who may.

B you may recruits to bring more of that excess back now.

Speaker Change: Clearly cross sell.

Speaker Change: Yeah. So the first part of your question.

Speaker Change: No we are.

Speaker Change: We did not try to manage below 10 billion ex the government deposits and did not engage this year as we had kind of commented.

Speaker Change: I think on this third quarter of call.

Speaker Change: So we are managing and we were managing Constantius leap towards breaking the $10 billion Mark because he's really made total sense for us as we.

Speaker Change: Can reinvest those deposits into.

Speaker Change: Are you then than in previous years. So that's the first part.

Speaker Change: On the second part you Yeah, we are very active and we are actually working very diligently in customer deposit strategies.

Speaker Change: That will be deployed during the year and.

Speaker Change: That should play for us as we continue to grow our customer base.

Speaker Change: And again.

Speaker Change: Take advantage of our good strategic positioning that we have in the Puerto Rico market.

Speaker Change: Got it I appreciate the color. Thanks, so much.

Thank you for your call for your questions.

Speaker Change: Thank you. That's a final reminder, if you have a question at this time, Please press star one.

Speaker Change: Okay.

Speaker Change: And we have no further questions at this time I will now turn the call back to Mr. Fernandez for closing remarks.

Jos Rafael Fernndez: Thank you operator, thank you again to all our team members and thanks to all our stakeholders, who have listened and have a great day.

Jos Rafael Fernndez: This does conclude today's call. We thank you for your participation you may disconnect at any time.

Jos Rafael Fernndez:

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Sure.

Jos Rafael Fernndez: Uh-huh.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Okay.

Jos Rafael Fernndez: [music].

Okay.

Jos Rafael Fernndez: [music].

Okay.

Jos Rafael Fernndez: Hum.

Jos Rafael Fernndez: Uh-huh.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez:

Jos Rafael Fernndez: Uh-huh.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Okay.

[music].

Jos Rafael Fernndez: Hum.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Yes.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Hum.

Jos Rafael Fernndez:

Jos Rafael Fernndez: Yeah.

Jos Rafael Fernndez: Okay.

Jos Rafael Fernndez: Yeah.

Jos Rafael Fernndez: Yes.

[music].

Jos Rafael Fernndez: Yeah.

Jos Rafael Fernndez: Okay.

Jos Rafael Fernndez: Yeah.

Jos Rafael Fernndez: Hum.

Jos Rafael Fernndez: Okay.

Uh-huh.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Hum.

Jos Rafael Fernndez: Mhm.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Uh-huh.

Jos Rafael Fernndez: Okay.

Jos Rafael Fernndez: [music].

Jos Rafael Fernndez: Okay.

Uh-huh.

Jos Rafael Fernndez: Okay.

Okay.

Jos Rafael Fernndez: [music].

Q4 2023 OFG Bancorp Earnings Call

Request a DemoDemo

OFG

Earnings