OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is James. 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 on the homepage of the OFG website under the third 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 background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. I'd now like to turn the call over to Mr. Fernandez.

Good morning, and thank you for joining us. We are very pleased to report our third quarter results. All our businesses perform well, and we continue to generate steady year-over-year revenue and earnings growth. Highlights include increased loan balances, stable core deposits with low cumulative data, increased operating leverage, and strong credit and performance metrics. Our Digital First strategy continues to attract customers and speed the transition of routine transactions from in-branch to digital platforms. This makes it easier for customers to do their banking and for us to increase efficiency and engage in more business development activities. In Puerto Rico, consumer liquidity is sound and the economy is doing well. As always, thanks to our team for helping our customers and the communities we serve achieve their financial goals. Please turn to page three for a summary of our third quarter results. First, looking at the income statement, earnings per share diluted was 95 cents, an increase of 9% year over year. Total core revenues were $172.2 million, up 10% compared to last year. Net interest margin was 5.8%, provision was $16.4 million, and non-interest expenses were $90.2 million. Pre-provision net revenues totaled $82.3 million, up 18% year-over-year. Now turning to the balance sheet, total assets increased to $10.3 billion from last quarter. Based on our growth and outlook for next year, we will remain above $10 billion. Customer deposits were stable at approximately $8.5 billion. Loans held for investment totaled $7.3 billion, up 2% from the second quarter. New loan production was approximately $563 million in line with the last five quarters. Investments increased to $2.1 billion and cash declined to $533 million. Moving to capital, the CET1 ratio was 14.03%, level with the second quarter. We bought back about 74,000 OFG shares in the third quarter. Please turn to page four for an update on our digital first strategy. Looking at data year to date, September, compared to the same period a year ago, 87% of all routine retail customer transactions and 92% of all retail deposit transactions are now being made through digital and self-service channels. This is being driven by 11% growth in digital enrollment, 14% growth in digital loan payments, 5% growth in kiosk usage, and the success of our recently deployed Oriental servicing portal. The portal is a cornerstone of our self-service strategy. Customers can manage all loan and deposit accounts in one place. The portal now enables digital account opening for checking, savings, and CDs, applying for and accessing loans, managing automatic loan payments, and downloading a wide variety of bank letters and tax documents that customers in Puerto Rico frequently request in our branches, or by phone. New features to the portal will continue to be added on a regular basis. All this continues to validate our strategy and investment in technology. As I have mentioned before, they help us provide more value added service, increase our efficiency, and assign more staff for new business development activities. Having said that, branches continue to be an important component of our island-wide sales and service network. During the third quarter, we opened a new branch in Dorado, an area with good commercial and retail opportunities. As you probably already know, Dorado is a growing high net worth suburb of San Juan that has attracted many new residents from the mainland. We already have a 9% market share there, and we think we can grow further. These developments, both digital and physical, continue to better position us to serve our customers and communities and grow our businesses. Now, here is 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 total core revenues. Net interest income total $142 million, an increase of 1.5% from the second quarter. This reflected the full effect of the Fed's 25 basis points increase in the second quarter, the partial effect of the 25 basis points increase in the third quarter, higher yield on higher loan balances, in particular variable rates and new loans, higher balances and yield on investment securities, and one extra day, which added around $1 million. Banking and wealth management revenues were $30.4 million, approximately level with the second and year-ago quarters. Other non-interest income totaled about $300,000. This compared to a loss of about $800,000 in the second quarter due to the early sales of a $200 million treasury note. The efficiency ratio was 52.36%, reflected continuous growth, strong operating leverage. Nottingham Interest Expense totaled $90 million, $1 million higher than the second quarter. This reflected lower gain on the sale of a close real estate partially upset by lower G&A expenses. We expect non-interest expenses to continue to average about $90 to $92 million next quarter and next year. Deficiency ventures should continue in the low to mid 50% range. Other performance metrics remain high. Return on average assets was 1.76%. return on average tangible common equity was 70.59%, and tangible book value per share was $21.01. Please turn to page five to review our operational highlights. Average loan balances increased $188 million from the second quarter. The end of period balance increased $144 million. Growth continued to reflect increases in Puerto Rico and U.S. commercial loans and retail auto and consumer loans. This was partially offset by the continued regular paydowns on the residential mortgages. Loan yield was 7.84%, up eight basis points from the second quarter. This reflected increases from variable rate commercial loans and higher yields on new order, consumer, and commercial loans. Average core deposits increased $90 million from the second quarter, while the end of period balance was approximately level with the June 30th. Detail deposits declined $102 million, commercial increased $73 million, and government increased $30 million. We continue to see a shift to time deposit and wealth management. Poor deposit cost was 90 basis points compared to 69 in the second quarter. This increase of 21 basis points mainly relates to six basis points due to higher rates on government deposits, six basis points in time deposits, four basis points in commercial now and savings accounts, and four basis points in retail now and savings accounts. As of the third quarter, our cumulative deposit data has been 19%. Excluding government deposit, it was 14%. Through this cycle, we continue to expect a cumulative deposit data of about 25% by the end of this year. Average borrowings were $264 million, while the end of period balance was $452 million. The increase reflected our asset liability management strategies during the quarter. Net interest margin was 5.80%. That compares to 5.90% in the second quarter. Our effective start rate was 32%, which will be our rate for the year. Please turn to page 7 to review our credit quality and capital strengths. Net charge-off totaled $18.8 million. That compares to $6.6 million in the second quarter. The third quarter included about $7 million for two US loans previously and substantially reserved. This compares to the second quarter, which included a $4 million recovery from the sale of older, fully charged-off auto and consumer loans. Provision for credit losses totaled $16.4 million. This included more than $11 million due to increased loan volume, $4 million in quantitative adjustment mainly related to the auto loan portfolio, and $700,000 for specific for the sale of a small portfolio of non-performing Puerto Rico small business commercial loans. Overall, credit continued to be strong. Early and total delinquency rates were 2.75% and 30.78% respectively. The non-performing rate at 1.33% was in the lower ranges seen over the last five quarters. Looking at some of our other capital metrics, total stockholder equity was $1.1 billion. and the TCE ratio was 9.74%. To sum up, during the third quarter, we saw a steady revenue growth from higher yields on higher loans and security balances. Good loan origination driven by auto, commercial, and consumer lending. Deposit costs increased from higher average balances during the quarter and higher rates but betas remained well below peers. End of period core deposit balances were approximately level with the second quarter. Trade conditions remained benign. Next-charge shocks were higher due to two U.S. commercial loans. And expenses were in line with our expected range. Now here is Jose.