OFG Bancorp

Good morning, everyone. Thank you for joining OFG Bancorp's conference call. My name is Beau and I will be your operator today. Our speakers today are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website 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 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. Fernández. Please go ahead, sir.

Good morning and thank you for joining us. We are pleased to report our second quarter results. We had another all-around outstanding quarter with good momentum in all areas. Let's go to phase three of our presentation. We continue to show strong financial performance. Earnings per share increased 21% year-over-year on 4% growth in total core revenues. This was driven by consistent loan growth, core deposit strength, stable credit quality, and effective balance sheet management. We saw continued solid and steady momentum across all our businesses, supported by disciplined execution, excellent customer engagement, and our differentiated operating model. During the quarter, we launched a new branding campaign highlighting our strategic and financial evolution into a digital bank with a human touch, one that combines innovative technology and our customer-focused culture. With healthy consumer and business liquidity, wage growth, and historically low unemployment, Puerto Rico's economy continues to be resilient. Please turn to page four. Our core digital strategy is focused on three key areas of execution. The first area is offering value to customers through innovative account products that meet their specific needs. Libre for the mass market, Elite for the mass affluent, and MyBiz for small businesses. The second focus is technology. Our Omnichannel platform allows customers to interact with us seamlessly across all our digital channels. This is driving digital adoption, generating efficiencies and savings. In turn, this enables us to reinvest in new ways to serve our customers and transform our branches into places for relationship building as opposed to transaction processing. The third focus is intelligent banking. We're leveraging data to provide real-time, personalized insights with unique value. helping customers better manage their finances. Overall, this approach differentiates OFG in the marketplace, drives higher digital adoption levels, and most importantly, deepens customer relationships. All this translates into consistent, steady growth of the business. Please turn to page five. The results continue to show up in our key performance indicators. Most retail customers are doing almost all routine and deposit transactions and loan payments through our digital and self-service channels. During the second quarter, we saw year-over-year growth of 4% in net new retail and commercial customers, 11% in active digital users, 6% in digital loan payments, and 3% in virtual teller users. Combined with our increased level of service, our products and people are delivering added value to our customers every day. Year to date as of June, 28% of Libra accounts were opened digitally. We're the only bank in Puerto Rico with this full digital capabilities. More than 1.1 million personalized smart banking insights have been delivered monthly with more than 90% positive feedback from customers. and more than 68,000 customers have accessed our live remote tellers during times when the rest of the banks in Puerto Rico are closed. Now, I'd like to pass the call to Maritza to go over the financials in more detail.

Thank you, José. All comparisons are to the first quarter, unless otherwise noted. Now, let's turn to page six. Our financial performance was very strong this quarter. EPS climbed to $1.39 efficiency ratio was 54% return on average assets rose to 1.93% and return on average tangible common equity increased to almost 18% loss to deposit ratio was 85% and the payout ratio was 25% which reflects the higher income in this quarter versus the first quarter Let's turn to page 7 to review our income statement highlights. Core revenues increased $4.5 million to $190 million. Total interest income was $197 million, an increase of $3 million. This reflected higher average balances of loans at higher average rates. which more than offset slightly lower income from cash and securities. The quarter included $4.1 million from three paid in full commercial loans. This compares to $3.3 million from a similar loan paid in full in the first quarter. There was one additional day in the quarter. This increased interest income by about $1.6 million. Total interest expense was $40 million, a decrease of $0.5 million. This reflected lower average balances of broker CDs and borrowings, which more than offset the cost of higher average balances of core deposits. The added date increased interest expense by about $0.4 million. So that banking and financial service revenues increased $1 million to $33 million, reflecting higher banking service and wealth management revenues, which included $1 million in annual insurance and annuity fees. Non-interest expense increased $8.1 million to $103 million. These included $5.8 million in business operational charges, while the first quarter included $1 million in capital market readiness and registration costs, and the benefit of $3.6 million in a business-related volume incentive. Income tax was $15.7 million. reflecting an anticipated ETR of 22.64% for the year and the benefit of some discrete items. Now let's turn to page eight to review our balance sheet highlights. Average loan balances grew $78 million to $8.2 billion and end of period balances grew $62 billion or 0.8% Due to increases in Puerto Rico commercial and consumer loans, new loan production was $750 million, an increase of $146 million, or almost 24%, reflecting increases in Puerto Rico commercial, residential mortgage, and consumer lending. Production in the year-ago period was slightly higher due to the spike in the auto sales from the trade of studies in the second quarter of 2025. Average core deposit balances grew $145 million to $9.7 billion, with end-of-period balances of $85 million, or 0.9%, deflecting government commercial and regional deposit growth. Here in our large government deposit, $400 million into three and six month time deposit, with approximately $175 million remaining in the demand deposit category. Average cash balances fell $45 million, but increased $109 million end of period as a result of deposit growth and repayment from the investment portfolio. Average investment fell $84 million and $92 million end of period due to principal pay downs in the mortgage-backed securities. And average balance and brokerage deposits fell $133 million and increased $49 million end of period reflecting our liquidity management. Now let's turn to page nine to review net interest margin. Loan yield increased three basis points to 7.90%. Excluding the three loan repayments in the second quarter and the one in the first quarter, loan yield was 7.70% compared to 7.71%. Core deposit cost was leveled at 1.29% Reflecting growth of $92 million in non-interest-bearing deposits to $2.7 billion. Excluding public funds, cost of deposit was 98 basis points compared to 1%. Net interest margin increased 9 basis points to 5.45%. Now, let's turn to page 10. Capital continued to build. TET-1 ratio increased to 14.07%. Total stockholders' equity rose to $1.4 billion. TCE ratio continued to climb to 10.90%. Untangible book value continued to expand to $31.12 per share. Looking at share buyback, if you recall, we bought a large number of shares in the first quarter. Cesar will provide more detail about credit in a moment, but let me summarize a little bit where we are at midpoint this year. We continue to expect low single-digit loan growth for the year, with commercial more than offsetting the unanticipated decline in auto, though auto has been slightly stronger than expected. We continue to anticipate deposit growth, excluding the large government deposits. benefiting from our Libre, Elip, and MyBiz accounts, as well as growth of commercial and government clients. On our last poll, we expected net interest margins to range from 5.10 to 5.20% this year. Now, we expect NIMH to range from 5.25 to 5.35% in the second half of 2026. This is in line with the 5.30% mean we had in the second quarter and 5.25% in the first quarter, excluding the loan pay down. Our second half outlook incorporated deposit growth and the relocation of the large government deposits. We continue to anticipate no rate cuts this year with the Fed cutting rates once next year. We remain on track to keep expenses in a range of 380 to $385 million this year. Our estimated tax rate for the year continues to be 22.6%, not including discrete items. And while we are not active buying back shares in the second quarter, our strategy has not changed. We have $194 million in remaining authorization. and we will continue to be selective and opportunistic balancing shareholder returns and discipline growth. Now, here is the first.