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 José Rafael Fernández, 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 filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.
Instructions will be given at that time. I would now like to turn the call over to Mr. Fernández. Please go ahead.
Good morning, and thank you for joining us. We are pleased to report our fourth quarter and year-end results. 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. 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.
Please turn to page three for a summary of our fourth quarter results. Looking at the income statement, earnings per share diluted was $0.98. 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. Quarterly performance included two items of note. First was closing 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 rightsizing. This resulted in a $3.2 million non-interest expense for severance and lease cancellations.
This stemmed from increased productivity in certain areas, in part as a result of our technology investments. Turning to the balance sheet, total assets increased to $11.3 billion from $10.3 billion last quarter. 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 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. Investment increased to $2.7 billion from $2.1 billion in the third quarter.
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 longer-term mortgage-backed securities. These moves position OFG 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. Total core revenues were $683 million, up 12% year-over-year. Net interest margin was 5.8%.
Provision was $60 million. Non-interest expense at $363 million, and pre-provision net revenues total $326 million. Our capital actions in 2023 included increasing the quarterly dividend by 10% to $0.22 and completing $18.7 million of share buyback. We have approximately $17 million of remaining authorization. Please turn to page five 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 mid-2023.
For new listeners, the portal is a cornerstone of our self-service strategy. Customers can manage all loans and deposit accounts. It enables them to originate and 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. Our 2023 performance continued to validate our strategy and investments 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. Now, I'd like to welcome Maritza to the call to go over the financials in more detail.
Thank you, José. Please turn to page six 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. Loans 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. 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, up $2 million from the third quarter. Wealth management revenues reflected annual insurance commission recognition of $2.5 million. Bank service revenues increased due to higher levels of economic activity, and mortgage banking revenues declined due to lower MSR valuations, reflecting 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 third quarter. 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. 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 rightsizing. We plan to use the resultant savings to continue to invest in technology. This should enable us to continue to average about $90 million-$92 million of non-interest expense per quarter in 2024, with efficiency ratios continuing in the low-to-mid 50s% range. Other performance metrics remained high. Return on average assets was 1.76%, the same as in the third quarter.
Return on average tangible common equity was 18.22%, a nice increase from the third quarter. Tangible book 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. Please turn to page seven to review our operational highlights. Average loan balances were $7.4 billion, an increase of 3% from the third quarter. End of period balances were about the same. December 31st balances reflected sequential growth of 9% in Puerto Rico commercial loans, 7% in US commercial loans, 3% in auto loans, and 1% in consumer loans. Residential mortgage loans declined 3%, reflected 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. This reflected increases from variable rate commercial loans, higher entry deals 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. 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.
As of the fourth quarter, our converted beta was 27% for interest-bearing deposits and only 19% for total deposits. Excluding government deposits, it was 15%. Average borrowings and brokered deposits were $602 million, compared to $266 million in the third quarter. 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. 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%. 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 it include easy about 20 basis points over the course of 2024. Please turn to page eight to review our credit quality and capital strength. Net charge-offs totaled $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.
Included in the fourth quarter net charge-off rates were increases in auto and consumer loans, mainly due to the higher level of delinquencies. 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. 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-off and delinquency should be lower than pre-pandemic levels.
Looking at some of our capital metrics, total stockholders' equity was $1.2 billion, and tangible common equity ratio was 9.68%. To sum up, during the fourth quarter, we saw revenue growth continue to benefit from higher yields and higher balances of both loans and securities. Good loan origination, driven by commercial, retail, auto, and consumer lending. Increased core deposit costs mainly higher, but betas continue to remain well below peers. 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 José.
Thank you, Maritza. Please turn to page nine. 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. Turning to OFG, 2023 results were driven by loan growth, good credit quality, a higher interest rate environment, and low deposit beta. We saw strong traction with digital adoption and client acquisition, as Oriental Servicing 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. Looking ahead, we're 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.
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. 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 one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. Once again, that's star one to ask a question. Our first question will come from Alex Twerdahl with Piper Sandler. Please go ahead.
Good morning.
Good morning, Alex.
First off, José, 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 gonna stick around on your balance sheet for a prolonged period of time.
Yep. 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. We will definitely update you guys as we get more color from the customer, but it's gonna take a couple of more weeks for us to figure it out.
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?
Well, it's just on the basis scenario that José was mentioning that it will be in 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 non-interest-bearing now, or is it something that's gonna impact interest expenses in the first quarter?
It's a government deposit that is index-based, as all government deposits are these days. It's earning interest right now based on the formula that the government has established.
Understood. 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. Now, 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?
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 wanna 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 a extraordinary event on the agenda for us.
We just simply need to keep on going forward. Just to go back to the question on the deposit, on the government deposit, I just want to mention to you that really it's providing us gives us a 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 gonna help us to be more flexible and nimble with our balance sheet.
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?
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 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 on our digital-first strategy, as we've talked about. So we've seen some workforce reduction in some of the areas that have been invested 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 do 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. And that's why we can keep the expenses at the $90 million-$92 million kind of quarterly level, as Maritza mentioned.
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?
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.
Thanks for taking my questions.
Yeah. Thank you for your call.
Thank you. Our next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning.
Good morning.
Wanted to start with credit, and you know, we, we've seen the 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 4 Q trend versus going forward and that normalization. Was the comment-
Mm-hmm.
That net charge-offs would be lower going forward relative to 4 Q? Or can you maybe just give us some color on your expectations for charge-offs in the consumer and auto book? Thanks.
So when you're referring to the charges, you're obviously alluding to the consumer and auto charge-offs 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 on specifically on the auto loan book, I'll ask our Chief Risk Officer, César Ortiz, to give you you know, a little bit of color on the auto book so you guys understand how we see this.
Thank you, José. One of the things that I wanna highlight in terms of context, taking the opportunity during 2022 and 2023 of the increased demand in 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 as of December 2023, we have an 82% prime composition compared to 60.4, so 64%, prime composition during, 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.
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 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.
Okay, that's helpful. And then on loan growth, obviously strong production on the commercial side. Can you talk maybe a little bit about how you expect loan 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 2023.
Yeah.
You know, what do you think about the commercial production going forward, José, 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, 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 loan opportunities here in Puerto Rico. We see a good, strong pipeline. 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 2.5%, 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.
Okay. And if I could sneak in one-
Yeah, and as we sell some of those conforming loans, I'm sorry.
Okay, sorry. If I could sneak in one last one just around fee income. You know, obviously, the wealth management/insurance bucket benefited from, I guess you'd call it unusual numbers in 4Q. Is it fair to assume that those line items go back a little lower, maybe even out, like, on fee income relative to the fourth quarter?
Yeah. Remember, fourth quarter is impacted by the insurance, contingent commissions that we get every year. So, so yeah, I think it will trend back down to the more normal level-
Normal, $30 million.
Around $30 million, as Maritza mentioned. Yep, a quarter.
Okay. Great. Thanks for all the color.
Yep. Thank you, Brett. Have a great day.
As a reminder, that's star one to ask a question. Our next question comes from Kelly Motta with KBW. Please go ahead.
Great. Hi, good morning. Thanks so much for the question.
Hi.
I'm just hoping maybe piggybacking off the loan growth question in Q4. I know the Metropistas deal closed. I was hoping you could share about how much that contributed to your loan growth this quarter, as well as if you could offer any additional color on how the pricing of that compares to, you know, normal commercial origination, if perhaps lower.
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 Metropistas privatization, the highway privatization, with a $75 million participation. So excluding that, we grew our commercial book by approximately $121 million. So ex Metropistas, you still are seeing a 5.6% growth from third to fourth quarter. So again, most of that origination, ex Metropistas, is coming from construction services. It's coming from hospitality. It's coming from small and mid-sized 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 the 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 approach that we have is paying off. In terms of the Metropistas 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 not nothing too dissimilar from other large loans.
But that, again, as we've said in the past, 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 teams, the small business team and the large commercial team, are doing a great job.
That's really, really helpful. Thank you for that. And maybe just getting some clarification around the margin guidance. I appreciate the outlook for about 20 basis compression. Just wondering, what your assumptions embedded in there are for rates this year? And can you just remind us, any indexed or floating rate on either side of the balance sheet, how we should be kind of thinking about that when the Fed starts to cut?
So I'll give you my high level, and I'll let Maritza give you more of the specifics. But 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 three-four 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-
Yeah.
of the margin.
Thank you, Kelly, for your question. You know, 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-
... is a variable rate, so we have exposure when rates start to go down. 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 will mature in May 2024, is $200 million in and $200 million in Treasury notes. That will reprice at current levels. That's the variability on the asset side. What we have been doing during the last two quarters is adding extension in the asset side at higher yielding, with the acquisition of $700 million in MBS.
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 to the liability side to position ourselves to a lower rate environment when it starts coming.
Awesome. Thanks so much for the help. Maybe, kind of a last multi-part question for me is on just the $10 billion in asset size. Can you, one, remind us the timing and impact of the Durbin? I know you've covered it on previous calls, just wanted to-
Yeah.
- confirm and get an update. Maybe we'll start there.
It should be in July that we start triggering the Durbin effect, so it's gonna have a half of a year impact, and the full impact will be seen on 2025.
I think I recall it's maybe roughly about
Yeah, $5 million.
Bucks annually?
Yeah, $10 million annually, $5 million 2024, and then the $10 million dollar 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 it elsewhere. Just, it seems like the large government deposit is idiosyncratic to that customer and not have anything to do with kind of previous managing under $ 10 billion. Just wanted to confirm that, and also wondering if there's, you know, potential, you know, inflows of deposits just re-related to, customers who have OFG as their lead bank, who may, you know, you may recruit to bring more of that excess funds back now that you're clearly crossed over that.
Yeah. So the first part of your question, no, 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 in, I think, on the third quarter call. 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 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.
That should play 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, for your questions.
Thank you. 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. Fernández for closing remarks.
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.