OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Savannah. I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of Board of Directors, Marisa Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks, and it can be found on the homepage of the OFG website under the second quarter 2024 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 the OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update the information disclosed in this call as a result of developments that occur afterward. 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 2024 results, which demonstrate the strength of our strategies and franchise, both in line with our short-term and long-term plans. Performance for the quarter was exceptional. We generated consistent growth through increased loans, deposits, and non-interest income, and stable credit quality. Our Digital First strategy continues to help us expand our retail and business relationships, and we deployed close to half of our $50 million share buyback program, purchasing $24.3 million of OFG shares in the open market. At the same time, Puerto Rico's economy continues to grow and steadily decouple from mainland economic uncertainties. I want to thank the entire OFG team for their commitment to our mission and purpose, which is to make progress possible for our customers, employees, shareholders, and the communities we serve. Please turn to page three for a summary of our second quarter results. Looking at the income statement, earnings per share diluted increased more than 16% year-over-year to $1.08 on a more than 5% increase in total core revenues to $179.4 million. Net interest margin was 5.51%. Provision was $15.6 million. Non-interest expenses were $93 million and pre-provision net revenues total close to $87 million. Turning to the balance sheet, total assets were $11.3 billion, up 12% from a year ago, and 1% less than last quarter. Customer deposits were $9.6 billion, including strong commercial deposit growth. Loans held for investment totaled $7.6 billion, and new loan production was a solid $589 million. Investments were level with the first quarter at $2.5 billion, and cash at $740 million. It was down slightly from last quarter. Looking at capital, the CET-1 ratio was 14.29%. Let's turn to page four for an update on our Digital First strategy. As of the second quarter, 94% of all routine retail customer transactions 96% of retail deposit transactions and 66% of retail loan payments were made through our digital and self-service channels. This has been driven by year-over-year growth of 13% in digital enrollment, 69% in digital loan payments, 26% in virtual teller utilization, and 4% in customer growth. During the second quarter, we launched the Elite Deposit Account for retail customers a combined checking and savings account that rewards customers for expanding their relationship with Oriental. This represents a unique value proposition in our market. Elite offers an exclusive combination of benefits, in particular cash back on loan payments and full digital account opening and funding. For small business commercial clients, we upgraded Oriental Biz, a complete cash management platform easily accessible through mobile devices with access to remote check deposit. Small businesses now have a complete set of tools to manage their finances anywhere, anytime. We are very excited with the customer reception so far of both products. Our strategy is to continue to take advantage of our unique positioning in the Puerto Rico market. This includes leveraging our technology investments, our entrepreneurial culture, and our client-centric challenger approach. All this to provide customers with products and services that incentivizes them to deepen their relationship with us. We focus on doing it in a way that is fast, easy, agile, and that delivers added value. Now, here's Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page five to review our financial highlights. Starting with the components of core revenues, total interest income was $188 million, up more than 2% or more than $4 million from the first quarter. That mainly reflected higher income from loans due to higher average balances and yields, and $2.1 million from recovery of a non-accrual U.S. commercial loan paid in full. Total interest expense was $40 million, an increase of $1 million from the first quarter. This reflected higher average core deposits and a seven basis point increase in rate, partially offset by lower average wholesale funding and rate. Total banking and financial service revenues were $32 million, an increase of $2 million from the first quarter. with higher banking service, wealth management, and mortgage banking revenues. Banking service revenues included $600,000 in prepayment fees on U.S. loans. Wealth management included $500,000 in annual recognition of certain commercial insurance fees. Looking at non-interest expenses, they total $93 million. of $1.6 million from the first quarter. Expenses included $1.3 million in higher electronic banking fees due to increased business activity. $1.1 million in different categories of professional services to improve business processes. and $400,000 in higher FDIC insurance, now that Oriental is more than $10 billion in assets. This was partially offset by $1.4 million due to higher gain on sale of prepossessed properties and lower compensation expenses related to reduced FICA payroll expenses. The second quarter efficiency ratio was 51.81%, a 68 basis points improvement from the first quarter. As revenues continues to expand, we are incrementally investing in our digital first strategy by adding new technology and investing in people. We expect to average $90 to $92 million of non-interest expense per quarter the rest of this year, with the efficiency ratio remaining level with the second quarter. Other performance metrics remain high. Return on average assets was 1.82%. Return on average tangible common equity was 18.24%. And tangible good value per share continued to climb to $24.18, up 63 cents from the first quarter. Please turn to page six to review our operational highlights. Average loan balances were $7.6 billion, increasing 1% from the first quarter. end-of-period balances of loans held for investment increased 1.3% or $100 million. This reflected sequential growth in Puerto Rico commercial, auto, and consumer loans, partially offset by regular pay downs of residential mortgages and prepayment of approximately $66 million of U.S. commercial loans. Year over year, Second quarter loans held for investment increased more than 7%. Loan yield was 80.15%, up 70 basis points from the first quarter. This included the previously mentioned U.S. loan recovery, represented 11 basis points. New loan origination increased $52 million from the first quarter. Production increased sequentially across all categories led by a strong quarter for auto. We have a strong line in commercial and continue to anticipate auto production will moderate. Average core deposits were $9.6 billion, up $67 million from the first quarter. End of period balances increased $59 million or 0.6%. This reflected a $125 million increase in commercial deposits, partially upset by a decline of $53 million in retail deposits and a $12 million decline in government deposits. Core deposits were 154 basis points, up seven basis points from the first quarter. That's the smallest sequential increase over the last five quarters. Excluding public funds, cost of deposits was 87 basis points compared to 82 basis points. Average borrowings and brokerage deposits were $221 million compared to $280 million in the first quarter. The Juneteenth balances was $201 million. The rate paid on wholesale funding decreased 18 basis points to 4.62% in the second quarter. Investment securities held steady from the first quarter at $2.5 billion. During the second quarter, a $200 million Treasury note yielding 3.3% that maturity made was replaced with $200 million of government-insured mortgage-backed securities yielding 5.6%. With this, we extended asset duration at a higher year to lower our asset sensitivity. Net interest margin was 5.51%. Excluding the U.S. loan recovery, net interest margin was 5.44%. Please turn to page five to review our credit quality and capital strengths. Credit quality continues to be stable. Net charge-off total $15 million, down $5 million from the first quarter. The net charge-off rate was 79 basis points, down 26 basis points. Auto and consumer net charge-off rates were both down sequentially. The auto net charge-off rate is now below the last two quarters. While there are sometimes delays in payments, the business is well managed. Provision for credit losses totaled $15.6 million, up $500,000 for the first quarter. Second quarter provision mainly reflected loan volume. Looking at other credit metrics, early and total delinquency rates were up from the first quarter at 2.81%, and 3.71% respectively. In line with trends we have seen over the last five quarters. The non-performing loan rate of 1.08% was the lowest over the last five quarters. Looking at some other capital metrics, total stockholders equity increased about $12 million from the end of last quarter. and the tangible common equity ratio increased to 10.09%. Our second quarter effective tax rate was 28.2% compared to 26.8% in the first quarter. We continue to expect a full year EDR of 29% in 2024. The second quarter included a $800,000 benefit from a tax credit, and the first quarter included a $1.1 million discrete benefit from the stock vested. To sum up, during the second quarter, net interest income continued to grow based on increased volume of interest-earning assets, partially offset by lower net interest margins year over year. This mainly reflected higher balances and yields of loans partially upset by higher but moderating core deposit costs. The core deposit trends continue to be positive, benefiting from commercial deposit growth. Loans remain strong. We continue to be on track for 3 to 4 percent growth this year. Credit quality remains stable and is expected to continue that way. Our net interest margin outlook continues to be a range of 5.45% to 5.55%. We expect the full benefit from the most recent change in our investment portfolio in the third quarter. We continue to expect three Federal Reserve Federal Reserve Bank rate cuts of 25 basis points each. Our anticipated range of non-interest expense continues to be $90 to $92 million as we invest in technology. While we bought back shares during the second quarter, we remain opportunistic regarding capital allocations, ranging from Puerto Rico and U.S. loan growth to dividends and continue share buyback. Now, here are his thoughts.