OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Chelsea, 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 in 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 risks 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 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 second quarter results. All our businesses performed well and contributed to another strong quarterly performance. Highlights included excellent loan production, stable core deposits with low cumulative data, increased operating leverage, and capital continues to build. Our digital first strategy continues to show excellent progress with higher sales service transactions and lower branch visits. The result has been an overall increase in customer transaction activity. Key performance metrics continue at strong levels. On the people front, We announced several executive leadership promotions and recruited a new executive to lead our retail channel business development efforts. As for Puerto Rico, consumer liquidity is good and the economy continues to do well. Thanks to our team for their commitment to helping customers and the communities we serve to achieve their financial goals. Please, let's turn to page three of our conference call presentation. Looking at the income statement, earnings per share diluted was 93 cents, up 11% year-over-year. Core revenues increased 17% to $170.5 million. Net interest margin was 5.9%. Provision was $15 million. Non-interest expenses were $89 million, and pre-provision net revenues totaled $80.8 million, up 22% year-over-year. Looking at our balance sheet, total assets remain steady at approximately $10 billion. Customer deposits were approximately $8.5 billion. Loan held for investment total $7.1 billion, up 3.8% from the first quarter. New loan production increased 23% from the first quarter to approximately $692 million. Investments total $1.7 billion and cash was $799 million. Looking at capital, the CET1 ratio was 14.0%. During the second quarter, we bought back about 565,000 OFG shares. This leaves us with a remaining authorization of about $19 million. Please turn to page four. to look at our progress so far on our digital first strategy. Looking at data from June this year compared to last year, digital enrollment is up 10%. Self-service transactions increased 6%. That includes 14% growth in kiosk usage and 17% growth in digital loan payments. Overall, transactions increased 5%. And to provide additional detail on our customer adoption levels, 78% of our customers are registered on our retail digital banking platform. 80% of total customer transactions are now being made using digital and self-service channels. And 90% of our customer deposit transactions are through digital and self-service channels. All this continues to validate that our investments in technology are key to our operating businesses, ultimately providing more value-added quality service to our customers, increased opportunities for business development, and higher efficiency. As part of our continued improvement to our retail digital banking platform, in April, we launched the Oriental Servicing Portal, This portal allows customers to easily manage all their deposits and loan accounts in one place, including full digital deposit account opening capabilities. So far, the early adoption levels are well above our initial expectations. Looking ahead, we will continue to enhance this portal with additional products and services to drive higher customer engagement and adoption while producing operating leverage. Now I'd like to pass the call to Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page five to review our financial highlights. Let me start with our revenues. Net interest income was $140 million. That is a 2.8% increase over the first quarter. This mainly reflected the full effect of the Fed's 50 basis point increase in the first quarter Partial effect of the 25 basic points increased in the second quarter. Higher yields on higher average balances of auto, commercial, and consumer loans. Higher yields on higher average balances of cash. And one additional date. This increased net interest income by $1.1 million. Banking and wealth management revenues were $31 million. That's up $2 million from the first quarter. This mainly reflected higher wealth management and mortgage servicing revenues. Looking at non-interest income, that included a loss of $1.1 million from the sale of a $205 million treasury note. Looking at the efficiency ratio, it was 62.13%. That's an improvement of 274 basis points from the first quarter and more than 600 basis points from a year ago. This reflects increased operating leverage. Non-interest expenses total $89 million. This compares to $90 million in the first quarter. Operating expenses increased $1.8 million. These were more than offset by $3 million from lower credit expenses and higher gain on the sales of foreclosed real estate. Non-interest expenses should continue to average about 90 to 92 million dollars per quarter for the rest of the year. Our efficiency ratio should continue in the low to mid 50 percentage range. Looking at our other performance metrics, return on average asset was 1.76% and return on average tangible common equity was 70.67%. We continue to raise capital. Tangible book value per share was $21.06. That's up 2.4% from the first quarter and up 12% year-over-year. Total tangible common equity was $991 million. That's up 1.2% from the first quarter and 10.5% year-over-year. Please turn to page six to review our operational highlights. Looking at average loan balances, they increased $136 million from the first quarter. End of period loans were up $263 million. Sequential growth reflected increased balances of commercial, auto, and consumer loans. Looking at loan yields, it was 7.76% of 18 basis points from the first quarter. That reflects increases from variable rate commercial loans and a larger proportion of higher yielding auto, consumer, and commercial loans. Looking at new loan origination, they were up 23% from the first quarter, with increases in all lending categories in Puerto Rico. This was partially offset by a small decline in commercial U.S. loan production. Looking at core deposits, average balances declined $63 million from the first quarter. End of period deposits declined $27 million. Retail deposits declined $136 million. Commercials declined $21 million. And government deposits increased $130 million. We continue to see a shift to time deposits and wealth management. Looking at core deposit costs, that was 69 basis points, up 16 basis points from the first quarter. As of the second quarter, our cumulative deposit beta has been 16%. Excluding government deposits, it was 12%. Through this cycle, we continue to expect cumulative deposit beta of about 25%. Looking at valuables, average balances were $226 million compared to $64 million in the first quarter. The rate increased to 4.30% from 3.74%. This quarter reflects the full effect of the March advance from the Federal Home Loan Bank. Looking at cash, average balance was $693 million, up $140 million from the first quarter. Yield was 5.22% compared to 4.73%. End of period cash decline, $49 million. Looking at net interest margin, that was 5.90% flat from the first quarter and up 110 basis points year-over-year. We now expect NIM to remain level with the second quarter for the rest of the year. Looking at our effective tax rate, it was 33% for the quarter. We anticipate it to be that level for the year. Please turn to page seven to review our credit quality and capital strengths. Looking at nature, they total $6.6 million. That compares to $10.1 million in the first quarter. The second quarter included a recovery of $3.7 million. Delinquency rates rose slightly from the reduced level in the first quarter. Looking at provision for credit losses, that totaled $15 million. That reflects two major items, $9.1 million from a specific reserve for three U.S. commercial loans with an aggregate balance of $18 million, and $6.3 million due to increased loan volume. Looking at non-performing loans, the rate was 1.45% up 13 basis points from the first quarter and down 36 basis points year over year. We anticipate delinquency and NPL rates to generally continue to around the second quarter levels for the rest of the year. Overall, credit continues to be strong. Looking at some of our other capital methods, Total stockholder equity was $1.1 billion, up slightly from the first quarter, and this year ratio increased to 10%. Now, here is Jose.