Jose Rafael Fernandez - President, CEO, and Vice Chairman Ganesh Kumar - EVP and CFO

Alex Twerdahl - Sandler O'Neill Brett Rabatin - Piper Jaffray Joe Gladue - Merion Capital Group Brian Klock - Keefe Bruyette & Woods

Good morning. My name is Paula, and I will be your conference operator today. Thank you for joining us for this conference call for OFG Bancorp. Our speakers are Jose Rafael Fernandez, President, Chief Executive Officer and Vice Chairman; and Ganesh Kumar, Executive Vice President and Chief Financial Officer. There is a presentation that accompanies today's remarks. It can be found on the Investor Relations Web site on the homepage in the What's New Box or on the webcast, presentations, and other files page. Please note this call may feature forward-looking statements about management's goals, plans and expectations, which are subject to various risks and uncertainties outlined in the risks factor section of OFG's Securities and Exchange Commission 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, which occur afterwards. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference call over to Mr. Fernández.

Good morning. And thank you for being here today. Please to turn to Slide 3. Before the market open today we reported another strong, steady quarterly performance. An earnings per share of $0.27 was better than the prior three quarters and significantly better than a year ago. The Oriental Bank franchise continued to deliver. Loan originations were at the highest quarterly level for 2016, customer deposit was up close to 4% year-over-year and we increased our customer base on a net basis by 5% for the year. Credit quality remains high. Early and total delinquencies were below the third quarter and year ago levels. The nonperforming loan rate was the lowest it has been in five quarters. And OREO and REPO balances were down more than 20% year-over-year. Major performance ratios improved. Net interest margin excluding cost recoveries increased 19 basis points. Deficiency ratio at 55% was its best point in more than a year and return on average assets at 0.96% increased to its highest level in five quarters. Capital continued to grow. The leverage ratio and the tangible common equity ratios grew to the highest mark in five quarters. And at $15.08 tangible value per share was up close to 4% year-over-year. None of these happens on its own. It takes a lot of hard work, dedication and effort. And so I like to take a moment to thank our Board, our management team and our associates, every one of you for a job well done. Please turn to Slide 4. At the beginning of 2016, there was considerable uncertainty here in Puerto Rico and we promised that we will increase our focus on the business in order to deliver consistent quarterly results. We are very pleased that we've been able to deliver on that promise. From a financial point of view, key elements to making that happen were expanding net interest margin, maintaining strong credit and pricing discipline in the face of intense competition. Reducing credit costs and optimizing noninterest expenses. The result has been improved return on assets and return on equity. While we continue strengthening our capital position. Please turn to Slide 5. From a business point of view, we achieved significant progress in 2016 executing on our strategy of differentiating Oriental to high level of service and speed of execution. Oriental is positioned as an innovator and challenger brand. Our goal is to become the premier retail bank and the best performing bank on the island on a consistent basis. In 2016, we led the market with new mobile application such as Oriental Biz with mobile check capture for small business clients and card less cash for retail customers. This was on top a long list of innovations we've already introduced in previous years. These along with our effective cross selling efforts have enabled us to consistently attract new customers. As you can see on this slide, we grew our customers every quarter in 2016 through our high levels of service and product quality, we successfully converted this relationships enabling us to end the year by maintaining or expanding our market share to the number two, three or four in key areas. Now here is Ganesh to review the quarter in more detail after which I'll make some closing remarks.

Thank you, Jose. Good morning to all of you. I'll continue from Slide 6. You can see our key business trends in our slide. Jose mentioned some of them. Let me point our a few others. Originator loan balances continue to grow as you've seen before. The dip in the third quarter is due to the exit of the PREPA line. Associated yield increases are primarily due to the growing proportion of the higher yielding retail loans. Customer deposits declined a bit due to cyclical fluctuations in our large commercial account balances. When you compared to the last year, the customer deposits are up $153 million, highlighting the growth in our customer segment, with the bulk of this coming from retail channel and business line. Banking and wealth management revenues increased sharply from last quarter and up year-over-year as well. As usual we continue to optimize our expenses balancing the reductions to the investments and new capability. The efficiency ratio is now at the best level for the last five quarters. This is within our target range and we are comfortable with this. Please turn to Slide 7 to see our new loan and fee generation for the quarter. We closed on $258 million in new loans excluding the renewal. We had an excellent quarter in commercial with some new loans. A new credit hospitality sector accounts for the increased in this category. Auto loan production was also up close to 12%, industry sales of new cars in 2016 was up but our success primarily comes from our strategies to maximize on our exiting dealer relationship. Residential mortgage production was in line with our average of about $52 million a quarter in 2016. Consumer lending was down slightly from a strong third quarter but up about 12% year-over-year reflecting our emphasis in this category. I mentioned the fee revenues earlier. This quarter we generated more than $20 million with increases across the board. Banking services revenue was up more than 6% due to higher seasonal electronic banking transaction volume. Wealth management was up sharply due to annual insurance revenues. Mortgage banking increased more than 20% due to higher mortgage servicing asset valuation. Now please turn to Slide 8.Trends in this quarter to income statement again are in line with the last few quarters. We've emphasized consistency right from the beginning of this year. Interest income from originated loans continued to grow as the portfolio grows and from the mix I mentioned earlier. While the income from the acquired loans continued to decline due to run-off and lower cost recovery opportunity. Investment securities were up a little due to lower premium amortization but also from purchases during this quarter. Interest expense declined from a full quarter benefit of the third quarter reductions in Federal Home Loan Bank advances and the subordinated capital notes. Provision for loan losses fell more than $10 million. If you recall in the third quarter we had provisions for two Puerto Rico governments' related loans and one commercial loan. The FDIC loss share expense declined reflecting level from earlier quarter in 2016. Total noninterest expenses fell $2.5 million, most of the operating expenses categories were lower due to tight controls we exercised during the quarter. Credit expenses were low by $1.6 million as last quarter included annual property tax payment. Lastly, the income tax expense was $7 million higher due to yearend adjustments. For the year, the effective tax rate was 30.5%. Turning to Slide 9, you can see our loan book transition and the NIM evolution. The main point I'd like to highlight in this quarter is the increase in core NIM to 4.89% excluding recovery due to variety of reasons including the loan mix I mentioned earlier and as well as the reduction in our borrowing. Eliminating the non-accruing PREPA line also help to widen the margin a bit. On Slide 10, you can see the credit performance continues to hold steady considering the prevailing market conditions. Net charge-offs in commercial loan category is due to one loan we had provision for in third quarter. Mortgage NCOs were higher due to yearend assessment. The NPL rate fell due to improvement all around. Early and total delinquencies are also below third quarter and year ago level. Let me point out that much of these improvements over the last quarter have been due to our efforts in refining our loan servicing capability. Turning to Slide 11. Our capital ratios continued to exceed requirements for a well capitalized institution. We continue to improve sequentially for most part in every category since 2012, putting us in a very strong position today. Similarly, on slide 12, you can see positive trajectory in tangible common equity and tangible book values over the year. The average tangible common equity of $661 million was up 2.4% from the year ago and the tangible book value grew 3.8% from the last year. Please note that slight dip in tangible book value this quarter is due to lower OCI valuation. Turning on to Slide 13. You can see some trends over the last five quarters as we have mentioned several times previously, one of our main goals in 2016 was to achieve stability in our core financial performance. We are happy to conclude the year in a similar fashion and turn ourselves towards the New Year challenges. With these remarks I conclude my portion and turn the call back to Jose.

Thank you, Ganesh. Please turn to Slide 14 for our outlook. We view Puerto Rico's macroeconomic situation as similar to last quarter. We are encouraged that the Fiscal Oversight Board created by PROMESA has commenced to function in earnest. We look forward to seeing the board gaining momentum in the exercise of their legal mandate of instilling fiscal discipline while providing a path towards a consensual resolution of Puerto Rico's economic and fiscal challenges. Puerto Rico's economy remains under pressure due to significant levels of political and fiscal uncertainty. The reality is that a clear path towards sustainable economic growth is imperative and cannot be further delayed. For that to occur, we need strong leadership. We are confident that such leadership will be provided by the new administration with the firm guidance of the board. Regarding OFG, we promised consistency in 2016 and we delivered. Our underlying businesses, credit metrics and capital position are solid. Looking forward, we believe that our quarterly performance should continue through the first half of 2017 in the range we demonstrated the last four quarters. In closing, we are at OFG have for more than 10 years successfully navigated through an extremely challenging economic environment. Who we are today is clear evidence of a job well done. Our focus remains the same as in the past, be excellence towards of capital, proactively managed evolving risks and most importantly continue to provide service leadership, innovation and continuous improvement with only one goal in mind, our customers' increased loyalty and satisfaction. Whatever lies ahead we fully expect to continue to adopt and prosper. With this we end our formal presentation. Operator, please open up the call to questions.

[Operator Instructions] Your first question comes from Alex Twerdahl of Sandler O'Neill.

Hey, good morning, guys. Just to clarify, Jose you said you expect EPS for the next couple of quarters to be in the range of the last four quarters. You are talking $0.24 to $0.27 on a reported basis. Is that correct?

Yes. I mean our quarterly performance during the first half of 2017 should remain level with what we provided in 2016, the results we shown in 2016. We are very confident on our franchise, how it has developed and how it continues to grow. We are encouraged with the momentum we have in all our businesses and customer retention, attraction and expansion strategies. We are also very cognizant of the environment we operate in. So we remain cautious on our outlook for the second half of 2017. Rest assured guys that as things continue to progress in Puerto Rico. We will update you accordingly.

Great. And I just wanted to ask a little bit more on the margin here. I guess the loan yield jump from 6.35% in the third quarter to 6.82%, I imagine there is a little bit noise in there from interest recoveries et cetera but how much of that was due to higher consumer balances versus how much of it was due to the rate hike that we saw in December? And should we see some additional lift from that rate hike in the first quarter?

Alex, good morning. I wouldn't factor in this quarter's performance any impact due to the rate hike. It's too early to see any impact over there. It's as I mentioned during my remarks, it's because of the higher proportion of the higher yield in consumer and auto loans in the mix, in the originated loans and as well as the elimination of the PREPA which was a non-accruing loan that affected the NIM in the prior quarters.

Great. And then just one final question on mortgage production and balances. It seems like origination activity really in all the categories has been somewhat within a range for the last several quarters and we've seen most of the categories kind of at least for the non acquired loans kind of trend a little bit higher but mortgage continues to trend lower. Is that -- is there a point that you can see in the near future where we see some crossover where the origination activity is enough to kind of sustain mortgages at their level?

Keep in mind that we still continue to say a hybrid originate to sale model or originate to securitized at least. And a part of Ginnie Mae we retained so that part goes into the securities balance, so you would not see that in the loan balance. But rest of them we securitized themselves so this is a model that is not going to result in a net increase of the mortgage loans on our loan book. So therefore you would see continuing decrease as long as we hold that model.

I also think that the mortgage business here in Puerto Rico is a little complicated simply because of home values and loan to value levels and we don't do much of a nonperforming. So I mean a nonconforming so our origination levels will remain around the levels we have right now because the market is what it is. Right now we don't have a legacy kind of commercial, residential projects that we finance permanently and that also is part of the reason for our volumes to --

And primarily we see the mortgage business as a fee generation activity at this point and time origination side.

Your next question will come from Brett Rabatin of Piper Jaffray.

Hi, good morning. I wanted just to first ask about the expense fund rate going forward. I mean obviously really strong management of expenses, other line especially in the fourth quarter. Can you just maybe give us some thoughts on obviously 1Q has FICO but just kind of a core run rate, whether anything else that might affect the expense run rate going forward?

The core run -- I mean you need to start take a look at the whole year and see what's in store for 2017 because the quarter has got some variation. We might have like for instance second half of the year there might not be some social security taxes and everything in the employment related expenses. Therefore I can only answer to you as a whole for the year. And what we project internally for there is going to be at least 2% to 3% increase year-over-year for 2017.

Okay. And then it was nice to see delinquencies continue to be worked down and I know charge-offs included one $3 million commercial loan but can you give us any other color on the charge-offs in the quarter and if you have any visibility there, maybe that run rate might be kind of little better? Thoughts there.

In the commercial side, as Ganesh mentioned in his remarks earlier, it's a loan that we had provision for in the prior quarter. You look at our early delinquency and commercial loan is negligible basically so we right now are not seeing any reason to believe that we are going to have significant level of charge-offs in the commercial side. You saw the mortgage numbers and in terms of charge-offs, December is always -- or the first quarter is always kind of a year where the assessments on all the properties come due and then there is usually a spike given the market that we operate in. But in general we feel that we have a pretty grip on how the losses are coming in, certainly it's going to be very much depended on how the second half the year 2017 in terms of the economy and the issues that need to be addressed play out. But that's why we kind of are focusing this year in a two tier way. First, let's look at first half and then let's see how everything develops afterwards.

And if you look at our total delinquency and nonperforming rate in the commercial category it has been reducing. Obviously with PREPA rolling off it is big drop but even with our post PREPA phase, we have been reducing the delinquencies over there.

Yes.

Okay. And then just lastly, your capital ratios continued to climb, if we get any kind of positive momentum with PROMESA or the budget comes out and looks like things are going to be stable, would there be any possibility for some capital actions this year. How do you guys think about that?

Yes. As you know, we look at our capital levels not only that we are way ahead of or way above the requirements. We are also way above our peers in the US. So we understand that. We also have a different landscape to operate in as we've continuously mentioned. So we are being prudent here. I think when you look at the macro, things are moving in the right direction but there are still some high levels of uncertainty and we need to do just be cautious. So we'll certainly update things progress, we'll certainly update everyone on that side.

[Operator Instructions] Your next question comes from Joe Gladue of Merion Capital Group.

Good morning. I guess first off just let me on I guess since the Fed rate hike and anything, have you seen any pressure on deposit rates? Jose Rafael Fernandez : No. No. We have not. We typically having sort of [Technical Difficulty] higher level of the funds for deposits in Puerto Rico. And we are not seeing that. We hope that the local banks, friendly competitors also address the issue constructively because certainly it's going to have an impact if one of the competitors in the island decide to increase deposit cost for customers but we are in relatively course and we'll not be forced to raise interest rates on our deposits in the near future given the fact that we have a spread versus the US rates right now and been carrying that for several now years now so --

Okay. All right. Also just guess in light of the potential for austerity measures to be necessary as part of the government debt situation, how would you expect that to impact I guess the consumer lending side since I guess that's been increased emphasis lately. Ganesh Kumar : Yes. It's too early to tell Joe but the numbers that they are showing and the timeline and the time span that they are kind of -- when I say they meaning the fiscal board that they are looking at are relatively large number and relatively short period. So we expect to have some pressure on the consumer definitely. The consumer should feel the threat given the magnitude of the reductions that they are talking about. Having said that, when you look at ourselves, we really don't have that big of an exposure to the consumer when you look at our consumer portfolio. It is only $200 million or $300 million in a portfolio of $4.2 billion in loan. So we look at this very closely as you can imagine. And that's why also you look at our yields in both of those, both of consumer and auto portfolios and certainly are higher than our peers and that's because we are very sensitive to risk pricing too.

Okay, all right. And I guess lastly on income tax expense, looking forward expected to be positively a full year effective tax rate or closer to the fourth quarter?

So we are shooting for 35% as they are shown and there might be some changes over the quarters but 35% would be our target ETR for the year.

[Operator Instructions] Your next question will come from Brian Klock of Keefe Bruyette & Woods.

Good morning, guys. So I apologize I dialed in late so not sure if you've already addressed this but I guess maybe two prong question. One, the commercial quarterly loan production was up significantly, it's up 14% over a year ago fourth quarter. So not sure if you talked about already but are that anything that you are seeing that is maybe a sign of confidence on the commercial side or maybe you can talk about that? And then I guess the second part Jose is with everything you guys have done this year with derisking the balance sheet and bringing expenses down and seems like the margin is a little cleaner more straightforward from the accretively your part, and you can talk about the other things you are doing that we don't see in a numbers that are helping to grow new consumer accounts and some of the other sort of digital and other things you guys have invested in that are actually starting to pay some dividend this year.

Yes, sure. Let me address the commercial question first. Ganesh mentioned in his remarks, our commercial production in the quarter was higher. We had a particularly larger loan, a commercial loan in the hospitality business that we originated in the quarter. And that's kind of what brought it higher the origination levels versus other quarters. We are not seeing that as a trend. We think that the business sector in Puerto Rico, they are somewhat more confident, I don't think they are still confident but they are recognizing the challenges that the economy presents today and that there are still some execution risks from a political perspective as well as from a fiscal perspective. So I think everyone in this holding kind of a holding pattern from a commercial business perspective. We are not seeing the same levels of pipeline that we used to have at the beginning of last year. So we look at that and we'll also some other pipeline that we have is a little bit less attractive from a credit perspective than it used to be. So we are seeing a little bit of deterioration there, nothing big. It's just simply how we are looking at potential commercial originations. I think there are several industries that are showing some interesting opportunities. Food and beverage franchises and distribution, distribution companies are ones that are pretty solid and they are looking to consolidation. Hospitality and entertainment I mentioned and I also highlighted non-hospital healthcare businesses. And we see that in the small and mid sized type of commercial loan where we see those opportunities too but Brian still a little bit of holding pattern from a commercial perspective. Although, unless you look at the $100 million plus type of loans where we really don't go there. So that's on the commercial side. Really the exciting part of what we are doing and we accomplished and continue to move forward in 2016 and now 2017 is our consumer business and our retail business. And you saw on our presentation I think it's on chart 5 or slide 5, we continued to build our consumers and our clients. We have grown net 5% in 2016 that comes from another 5% net from 2015. Deposits continue to go up and we have done this, two ways. One is the easy part which is providing the technology and market leading innovation that we talked about. But the other part is the harder one and that is training our people and making sure that we deliver a differentiating -- a different proposal to our customers at the branch level and at every touch point. And as technology continues to evolve we are converting and trying to make sure that our branches are less transactional and more value added for all our customers. And lastly, I think our brand has a good momentum. I think we are a challenger brand and that has its positives and we feel that we should continue to benefit from that in 2017. So that part is really exciting for us. We have a great team and our training on making sure that they have the skills and all the -- they live our values is very important for us. And we'll plan -- we plan to continue to invest in that because that's the only way you can attain leadership in our business.

Yes. I mean that's a great point. I couldn't agree with you more. And then I add into thanks for the color and thanks for your time.

Your next question comes from Brett Rabatin of Piper Jaffray.

Hey, I just want to follow up on deposits and I know you had some seasonality there with some commercial deposits. Can you talk about just your thoughts on this year and you had obviously been growing your overall client base but just what are you planning this year to grow deposits and does 1Q already look like it's got commercial side back up?

Yes. I think from a deposit side I think it's a reflection of the retention strategy that we are putting in place on our client, with our clients and our expansion strategy of businesses cross selling. I think our team is doing an incrementally better job that and we want to continue to move that further. And we are bringing in new client still so that's kind of from the retail side. On the commercial side I think on the middle market business we have done a better job by bringing clients with deposits. And that is looking positively, I hope you understand to that or noticed to that our noninterest bearing deposits continue to grow and that we are encouraged by that. And that is because of the small and mid-size type of clients that are coming in that continue to help us out on building our deposits. So I think it all comes in a whole package. It's not just one single specific strategy that we have on the deposit side, Brett. It's more of a complete package where we are focusing on the customers and we are trying to establish strategies that penetrate the services that we offer to them and they become a deeper in their relationship with Oriental than in the past. And that's very exciting for us.

Okay. And then the other thing I just wanted to cover whether the securities portfolio the yield was up 5 basis points same quarter. What are you guys doing in the securities book this quarter and maybe an outlook on just where that yield might go kind of given premium and what you are investing in?

We didn't do anything, the market did it for us but to recap Brett the premium amortization was lower this quarter so basically because of the CPR space and underlying factors but also we did increase the securities book. We purchased about $125 million - $130 million more this quarter mainly treasury securities and as well as the NBS paper.

[Operator Instructions] At this time, there are no further questions. I'll now turn the floor back over to Mr. Jose Rafael Fernandez for any additional or closing remarks.

Thank you, operator. And thank you all for listening in today. Looking ahead, we'll be hosting a visit from Merion Capital and investors on February 16, here at our corporate headquarters. Week later we will be hosting a visit from Sandler O'Neill and investors also here in our headquarters and we preliminarily scheduled our first quarter conference call for April 21. So we look forward to talk to you throughout the quarter and looking forward to our results at the end of April. Have a great day to all. Thank you.

Thank you. This concludes today's conference call. You may now disconnect. And have a wonderful day.