OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Maria, and I will be your operator today. Our speakers are José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman, and Maritza Aramis-Mendi, Executive Vice President and Chief Financial Officer. A presentation accompanying today's remarks can be found on our Redesign Investor Relations website, on the homepage, and in the What's New box or on the quarterly results page. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties outlined in the risk factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Mr. Fernández.

Good morning to all and thank you for joining us. Before I begin, I want to thank all our team members for their dedication and commitment during these very challenging times. You have done an excellent job and our results show it. I'd like to spend an hour on the big picture. Once we got through the last crisis in January, the economy and OSG performed well. We had only started to see the benefits of the Scotiabank acquisition. Then, the COVID-19 pandemic hit, and by mid-March, the Puerto Rico government had shut down the island. These tough measures, however, enabled Puerto Rico To begin to relax restrictions on economic activity by the end of the second quarter and beginning of the third, with a noticeable rebound in the economy. At the same time, we began to see an increased flow of federal funds for stimulus and reconstruction related to Hurricane Maria, the earthquakes, and the COVID-19 pandemic, in addition to the benefits provided by the bank loan deferrals. All this added to the third quarter's economic rebound and resulted in increased liquidity on the part of businesses and consumers. Altogether, the impact has been much more beneficial on a relative basis than what's happened on the mainland. As it relates to the local banking industry, consolidation, the natural rebound in economic activity, and the growing amount of stimulus combined with the Federal Reserve Bank's significant rate cuts in March created a number of banking crosscurrents in the third quarter. By acting with agility and speed, OFG has been able to take advantage of them to the benefit of our customers, communities, and people. The increased liquidity resulted in continued growth in deposits and cash. This cost virtually all our net interest margin dilution compared to the second quarter. It also encouraged consumers and business customers to step up their loan repayments. Taking advantage of this situation, we continued to expand our customer base and digital migration. There was a large increase in new auto sales, which we translated into a noticeable increase in our own auto loan generation. Mortgage production quadrupled, fee income grew across the board, and deferrals dropped to 2% of loans from 30% Our commitment and preparation enable us to manage these changes fácil, rápido, hecho, as we say at OFG. Branches continue to operate safely, enhanced by our technology. Full-service ATMs and ITMs, our mobile app, and online bill-paying tools continue to facilitate routine transactions in a contactless manner. Online and mobile appointment scheduling continue to make COVID-safe customer meetings possible at branches. In addition, the Scotiabank integration continues on track and we're starting to see improved operating leverage. In the end, we generated strong momentum in our core businesses as we continue to help our customers, communities, and people build better and stronger financial futures for themselves. Let's turn to page 4. We have continued to see strong digital migration trends among both our retail and business customers. More customers are becoming online and mobile users, but they are also using an increasing number of digital features. Here are some new highlights comparing September to January of this year. P2P volume is up 40%. Digital money transfers have increased 55%. Online loan payments are up 87%. Retail and commercial photo deposits have doubled. And we scheduled more than 34,000 COVID-safe appointments with customers through our online mobile tool, almost all of them in the second and third quarters. Clearly, customers are using these features to avoid contact during COVID. But as they experience the ease and convenience of banking like this, The habits will surely stick. More and more customers in Puerto Rico are asking themselves, why would you drive to the branch to deposit a check when you can take a photograph? Why would you even write a paycheck these days? These are positive trends that have accelerated due to the pandemic and play nicely to our retail banking strategy. We continue to look for new and innovative ways to help our customers interact with us in an agile and easy way. Earlier this week, we became the first financial institution in Puerto Rico and the U.S. Virgin Islands to launch a digital portal to make it fast and easy for our commercial clients to apply for PPP loan forgiveness. Let's start on page five to talk about our financial results. Earnings increased significantly. We reported earnings per share of 50 cents, a 28% increase from the second quarter, and more than four times the year-ago quarter. The effective tax rate was 19% compared to 25% in the second quarter. Total core revenues were $127 million. Excluding one-time interest recoveries from acquired Scotiabank loans, net interest income of $99 million was level with the second quarter, while fee income rose 19% to $27 million. Net interest margin was 4.3%. When you exclude interest recoveries in both quarters, net interest margin was 4.28 versus 4.5% in the second quarter. Virtually all the difference was attributable to the increase in cash balances. Non-interest expenses of $83 million fell more than $2 million compared to the second quarter, and that number includes merger and COVID-related costs. Excluding those in both periods, the efficiency ratio improved 369 basis points compared to the second quarter as increased operating leverage from the Scotiabank acquisition began to peak in. Customers' deposits grew more than $212 million from June 30 to $8.5 billion. Due to the increased deposits as well as repayments of loans and securities, cash increased $383 million As a result, total assets grew $84 million to $10 billion. We do not anticipate exceeding this total asset level come December 31, 2020. Loan production was strong, totaling $458 million. Excluding Paycheck Protection Program loans in the second quarter and third quarter, production increased $228 million. The allowance coverage increased to 3.64%, excluding PPP loans. Capital continued to build. Shareholders' equity increased to $1.06 billion. All regulatory capital ratios remained significantly above requirements for a well-capitalized institution. The CET-1 ratio was 12.55% on September 30, 2020. Please turn to page 6. The effects of all this is that we are building tangible book value per share. This increased 50 cents in the third quarter to $16.51. In addition, all three of the key performance ratios we tracked improved sequentially. The efficiency ratio improved to 65.69% on a reported basis. On an adjusted basis, it was 62.17%. Return on average assets was 1.11% and return on average tangible common stockholder equity was 12.23% and 12.10% on an adjusted basis. Return on average tangible common equity is now exceeding our performance as compared to the year-ago second quarter before all the transactions related to the Scotiabank acquisition and increased provisioning affected the business. Please turn to page 7 for our operational highlights. Average loan balances declined $54 million from the second quarter, reflecting net loan repayment in mortgage, commercial, and consumer. Auto increased. Average core deposits, excluding brokered, grew $524 million from the second quarter. End-of-period core deposits are now up more than $1 billion from the end of last year. That is, on top of the $2.8 billion that came with the Scotiabank acquisition. Loan generation, excluding PPP loans by order of magnitude, was driven by $174 million in commercial lending, $156 million in auto, $94 million in residential mortgage, and $24 million in consumer. Loan yield at 657 declined 40 basis points from the second quarter, This was mainly driven by PCD loans due to lower interest recoveries. Non-PCD loan yield declined only 16 basis points. The cost of core deposits declined 5 basis points to 56 basis points. Please turn to page 8 to review credit quality. Credit quality continues to be under control. The net charge of rate declined 30 basis points from the second quarter, mainly due to declines in auto. Provision declined $4 million, largely due to the decline in COVID-related provisioning. Otherwise, provision was approximately level. The non-performing loan rate increased 52 basis points quarter over quarter, mainly in mortgage and auto. We believe this is more about getting customers back in the payment cycle now that most deferrals are over. But we surely are keeping a close watch on it. As for our customer relief program, if you recall, as of June 30th, we had process relief for more than 44,000 retail customers for $1.4 billion, or 32% of our retail loans. For our commercial customers, we had process relief on $685 million in loans, or about 27% of our commercial portfolio. As I mentioned earlier, Our deferrals are now down to 2% of total loans. Most of that relates to about $112 million of commercial loans, mostly long-standing, solid customer relationships in the hospitality industry. Please turn to page 9. The allowance for loan and lease losses increased $2.6 million from the second quarter and is now equal to 3.48% of total loans, excluding SBA guarantee PPP loans. The allowance was 16 basis points higher than in the second quarter. Please turn to page 10. We're in a very strong capital position. Our CET capital ratio is now up 164 basis points since last year after the Scotiabank acquisition. Please turn to page 11. To conclude, We believe our history, culture, team, and approach to business, as well as our most recent results, demonstrate our ability to quickly respond and adapt to changing economic environments. During the second and third quarters, we have built momentum in our core businesses and developed a strong pipeline of new loans. Looking at our liquidity, capital, and balance sheets, we are well positioned financially and strategically. We have $8.5 billion of sticky core deposits with an excess of more than $1 billion, giving us significant amount of dry powder. Our agenda remains the same. Finish integrating the former Scotiabank operations by year-end. Achieve the full benefits of the acquisition by the end of next year. Continue to invest for the future to further simplify our operations and enhance our ability to serve customers. and continue to play a significant role in the economic rebound of Puerto Rico and the U.S. Virgin Islands. From a macro perspective, the increased liquidity from ongoing stimulus should continue to benefit the economy. This favorable environment should be further enhanced by the fiscal board finally working towards a resolution with Puerto Rico creditors and by pharmaceutical companies as they ensure more production back to Puerto Rico. We are now incrementally more confident that the economy will improve further. Let's be clear, we still face tremendous challenges from COVID-19, the elections in Puerto Rico and the USA, and completing our Scotiabank conversion and integration. But we believe the economy is starting to move in the right direction and the future is beginning to look brighter. By staying close to our customers and communities, we should be able to continue to deepen our relationships and all the financial services we provide to them as we enter what appears to be a nascent and potentially expanding recovery. Again, I want to thank all our team members for our excellent results and for their dedication and commitment this year. Crises bring out the best in people to help others. Our team demonstrates that every single day. With this, we end our formal presentation. Thank you all for listening. Operator, let's start the Q&A.

Thank you. The floor is now open for questions. To ask a question at this time, simply press star, then the number 1 on your telephone keypad. Again, that is star 1. If at any point you wish to withdraw your question, press the pound key. Our first question comes from one of Alex Tordal of Piper Sandler.