OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Brittany, 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 Marissa Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks. It can be found on our Investor Relations website, on the homepage 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 risk and uncertainties outlined in the Risk Factor 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. Fernandez.

Good morning and thank you for joining us. We are pleased to report our third quarter results. This was our stronger quarter to date this year, driven by total core revenue growth of more than 7% quarter over quarter. As a result, All our key performance metrics improved. Thanks to the resilience of our dedicated staff and our digital first banking model, we performed well. We were able to fully support the needs of our customers in a very challenging environment following Hurricane Fiona on September 18th. Our hearts go out to all those affected. Thankfully, business activity has begun to return to pre-hurricane levels. Let's now turn to page three of our conference call presentation. Looking at our third quarter income statement, earnings per share diluted was 87 cents. Core revenue totaled $157 million. Net interest margin increased to 5.23%. Provision was $7 million. Non-interest expense was $87 million, and pre-provision net revenues totaled $70 million. Looking at our balance sheet, total assets were stable at $10.1 billion. Customer deposits decreased to $8.8 billion. Loans totaled $6.7 billion, and new loan origination remained strong at $511 million. Our liquid balance sheet enabled us to continue to deploy cash into higher yielding investment securities, improving our asset mix. As a result, Investment totaled $2 billion, and cash was $815 million. Capital levels remained strong. We increased our cash dividend 33%. Overall, we had another excellent quarter, despite a brief disruption to business on the island due to Fiona. This reflects our three key drivers, consistently increasing recurring net income driven by loan growth, OUR LARGER SCALE AND INVESTMENT IN OUR PEOPLE AND OUR FOCUS ON INCREASING DIGITAL UTILIZATION AND CUSTOMER DIFFERENTIATION TO ACHIEVE INCREMENTAL EFFICIENCIES AND IMPROVE OUR CUSTOMER EXPERIENCE. FOR EXAMPLE, WE RECENTLY LAUNCHED OUR DIGITAL WALLET FOR ORIENTAL MASTERCARD. IT IMPROVES THE EXPERIENCE ALLOWING CUSTOMERS TO PAY WITH THEIR CELL PHONE OR SMART WATCH IN A SECURE WAY. We now have 22 interactive teller machines and four self-service kiosks expanding our sales, expanding our 24-7 capabilities of sales and service network in the year. On a macro level, we're seeing solid consumer and business liquidity and credit trends continue to be stable. In turn, this has positioned us well to further benefit from additional rate increases by the Federal Reserve. We look forward to seeing Puerto Rico's economy continue its economic growth path. Now, here is Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page four to review our financial highlights. Let me start with total core revenues. They increased $11 million quarter over quarter and $22 million year over year. Looking at key components of that, interest income was $12 million higher than the second quarter. That reflects the benefit of higher average balances and yields on loans and investment securities. It also reflects improved yields on lower balances of cash. During the quarter, we effectively redeployed $410 million of cash to purchase short-term U.S. Treasury notes. This was part of our strategy of taking advantage of the higher yield environment. Net interest income for the quarter was higher by $11.4 million, or 9.9% from the second quarter, and $23.8 million, or 23%, compared to the same quarter a year ago. Looking at banking and wealth management revenues, They declined by about $1 million from the second quarter. This reflected a decline in banking service revenues due to Fiona's temporary effect on economic activity and relief to our clients by waiving late charges and other fees. Wealth management revenues were up 7% year over year. This partially reflected the shift of some core deposits to investment accounts. Other non-interest income declined about $5 million from the second quarter. That was when we had a large gain on the sale of a legacy branch building. Looking at the efficiency ratio, it was 55.8% in the third quarter. That's another substantial improvement from both the previous and year-ago quarters. Similar to last period, it reflects positive operating leverage. Actual non-interest expense total $87 million. That's $2 million higher than the second quarter. The increase reflects $1.4 million related to Fiona. Non-interest expense also increased due to $600,000 for real estate owned. This compares to $1.4 million of real estate income in the previous quarter. So far, we have profited from most of our REO disposition process. Going forward, we are more likely to see modest expenses versus large gains. Expenses also reflect the impact of our investment in people to align salaries to current market conditions and facilitate our more flexible, employee-friendly hybrid model. As we mentioned before, we will continue investing in our people and technology. Looking at our performance metrics, they improved nicely quarter over quarter and year over year. They also continue to exceed our target ranges. Return on average assets was 1.65%, that is up seven basis points from the previous quarter. Return on average tangible common equity was 18.5%, that is up 35 basis points from the second quarter. Looking at tangible book value per share, that was $18.46, a small decline from the second quarter. This reflects the reduction in the other comprehensive income on government and government-backed securities. In turn, this was mostly offset by the increase in retained earnings. Please turn to page 5 to review our operational highlights. Looking at average loan balances, they increased $57 million from the second quarter. However, end of period Loans held for investment decreased $19 million. That reflected paydowns of residential mortgages and seasonal commercial lines of trade, as well as PPP loan forgiveness. This was offset shiftly by increases in auto and consumer loans. Overall, we are pleased with our performance today, this year. Loans at September 30th increased more than 4%, year over year. Looking at loan yield, it was 6.89%. That is 16 basis point increase from the second quarter. That's largely the effect of Fed rate increases on new and variable rate loans in our portfolio. It is also due to a higher proportion of auto and consumer loans versus residential mortgages. Looking at average core deposits, they decreased $22 million from the second quarter. However, end-of-period deposits declined $174 million. That reflected customers shifting some of their excess funds to oriental wealth management operations and commercial clients using deposits to pay down lines of credit. It also reflected some effect of local retail competition. Looking at core deposit costs, it was 28 basis points. That is an increase of four points from the second quarter. That was mainly due to municipal accounts with specific yield parameters. Deposit costs increased slightly during the quarter. We expect deposit costs to increase in the coming quarter, given the magnitude and speed of Fed Fund recent and expected increases. Given the current competitive landscape in Puerto Rico, the deposit beta should be lower than past experience locally and seen on the U.S. Looking at new loan origination, it totaled $511 million compared to $587 million in the second quarter. Auto lending hit a record high of 20%. $220 million, and we saw a lower production in consumer. Puerto Rico, our U.S. commercial loan production was also lower. Residential mortgage production declined due to higher rates. This has affected home sales and the refugee business. Looking at net interest margin, that was 5.23%, an increase of 43 basis points from last quarter. It is also an increase of 111 basis points year over year. The higher net interest margin reflected four factors. One, growth of the loan portfolio at higher yield. This accounted for 43% of the increase in net interest income. Two, the increase in higher yielding investment securities. This accounted for another 43%. And three, higher yield on lower volume of cash. This accounted for 23%. In turn, all this was slightly offset by the small increase in the cost of interest vision liabilities. Please turn to page six to review our credit quality and capital strength. Looking at net charge-off, they total $11.3 million in the third quarter. About half of that came from two commercial loans we provisioned from in the second quarter. The remaining balance came from auto and consumer loans. In part, that was due to higher loan volumes. Also, late payments as a result of FIONA were a factor. Looking at provision for credit losses, total provision was $7.1 million. Two main factors affected the non-PCD portfolio. One was higher auto and consumer loan balances. This added $8 million. The other was an increase in the qualitative component of the allowance to account for potential funeral-related losses. This added $1.3 million. The PCD portfolio benefited from reduced balances and an improved performance of residential mortgage loans. This led to a recapture of $2.8 million. Third quarter allowance coverage ex-PPP was 2.33%. That's down five basis points from the second quarter. Looking at non-performing loans, the total NPL rate was 1.55%. That's down six basis points from the second quarter and 53 basis points from a year ago. Overall, Crate was stable with a little glitch at the end of the quarter due to the effects of Fiona. Capital remained strong. The CET1 ratio was 13.34%. That's up 12.8% in the second quarter. Total stockholder equity dipped a little below $1 billion. This reflects reduced other comprehensive income partially offset by increase in return earnings. The TCE ratio held fairly steady at 8.83% compared to the second quarter. Now, here's Jose.