Q3 2024 OFG Bancorp Earnings Call

Speaker Change: i

Operator: Thank you for joining the OFG Bancorp's conference call.

Speaker Change: Good morning!

Connie: Thank you for joining the OFG Bank Corpse Conference Call. My name is Connie and I will be your operator today.

Operator: My name is Connie, and I will be your operator today.

Operator: Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arismendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer, a presentation and companies today's remarks.

Speaker Change: Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors.

Speaker Change: Maritza, Arizona, Chief Financial Officer, and Sezar Ortiz, Chief Risk Officer, a presentation and companies today's remarks. It can be found on the homepage of the OFG website under the third quarter 2024 section.

Operator: It can be found on the homepage of the OFG website under the 3rd quarter 2024 section. This call may feature certain forward-looking statements about management 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.

Speaker Change: This call may feature certain forward-looking statements about management schools, plans and expectations.

Speaker Change: These statements are subject to risks and uncertainties outlined in the risk factor section of OFG's SEC filings.

Speaker Change: Actual Results may differ materially from those currently anticipated.

Operator: We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

Speaker Change: We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. A line to have been placed on a mute to prevent any background noise. After this speaker's remarks, there will be a question and answer session. At that time, I will give instructions. I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Operator: 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. At that time, I will give instructions.

Jose Rafael Fernandez: I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Jose Rafael Fernandez: Good morning, and thank you for joining us. We are pleased to report our 3rd quarter 2024 results. It was another solid performance earnings per share, where 5.3% year over year, where up 5.3% year over year, on a 1.1 increase in total core revenues. We continue to produce consistent core operating results, and digital adoption of our new and upgraded product services and sales service tools keeps steadily growing. Puerto Rico's economy continues to do well, with high levels of business activity and employment.

Mr. Fernandez: Good morning and thank you for joining us.

Mr. Fernandez: We are pleased to report our third quarter 2024 results.

Speaker Change: It was another solid performance, earnings per share were 5.3% year over year, were up 5.3% year over year, when a 1.1 increase in total core revenues.

Mr. Fernandez: We continue to produce consistent core operating results and digital adoption of our new and upgraded products services and self service tools keeps steadily growing.

Mr. Fernandez: Puerto Rico's economy continues to do well with high levels of business activity and employment.

Jose Rafael Fernandez: In addition, today marks our 60th anniversary in business. While that is cause for celebration, it is a time to renew our commitment to bring progress to our customers, employees, shareholders, and the communities we serve. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow.

Mr. Fernandez: In addition, today marks our 60th anniversary in business.

Mr. Fernandez: While that is caused for celebration, it is a time to renew our commitment to bring progress to our customers, employees, shareholders and the communities we serve. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow.

Jose Rafael Fernandez: Before I go on, I would also like to comment on the recent hurricanes in the Southeast United States. As an island, where people have suffered through many of them, our prayers and heart go out to everybody who has been affected by Eline and Milton.

Mr. Fernandez: Before I go, I go on. I would like also to comment on the recent hurricanes in the South East United States. As an island, where people have suffered through many of them, our prayers and heart go out to everybody who has been affected by healing and Milton.

Jose Rafael Fernandez: Please turn to page 3 for a summary of our 2nd quarter results. Looking at the income statement, we reported earnings per share diluted of $1 on total core revenues of $174.1 million. Net interest margin was 5.43%. Provision was $21.4 million. Non-interest expenses were $91.6 million and pre-project vision net revenues total $83.1 million. Turning to the balance sheet, total assets were $11.5 billion, up 12% from a year ago and up 2% from last quarter. Customer deposits were $9.5 billion, loans held for investment total $7.8 billion, and new loan production was $572 million. Investments were $2.6 billion, of 26% from a year ago and of 5% from last quarter.

Mr. Fernandez: no

Speaker Change: Please turn to page 3 for a summary of our second quarter results.

Speaker Change: Looking at the income statement, we reported earnings per share diluted of $1 on total core revenues of $174.1 million. Net interest margin was 5.43%. Provision was $21.4 million. Non-interest expenses were $91.6 million and pre-project vision net revenues total $83.1 million.

Speaker Change: Turning to the balance sheet, total assets were $11.5 billion of 12% from a year ago and up 2% from last quarter.

Speaker Change: Customer deposits were $9.5 billion, loans held for investment total $7.8 billion, and new loan production was $572 million. Investments were $2.6 billion of 26% from a year ago, and of 5% from last quarter.

Jose Rafael Fernandez: Cash at $681 million was up 28% from a year ago and down 8% from last quarter. Looking at capital, the CET-1 ratio was 14.37%.

Speaker Change: Cash at $681 million was up 28% from a year ago and down 8% from last quarter.

Speaker Change: Looking at capital, the CET-1 ratio was 14.37%.

Jose Rafael Fernandez: There were two corporate developments of note during the third quarter; Durbin took effect, which reduced debit card interchange fees by $2.7 million, and we acquired service in rights in late August to a $1.7 billion Puerto Rico residential mortgage loan portfolio.

Speaker Change: There were two corporate developments of note during the third quarter, Derving took effect, which reduced debit card interchange fees by $2.7 million. And we acquired service in rights in late August to a $1.7 billion Puerto Rico residential mortgage loan portfolio.

Jose Rafael Fernandez: Please turn to page 4 for an update on our Digital First strategy. As of the third quarter, 95% of all routine retail customer transactions, 97% of retail deposit transactions, and 67% of retail loan payments were made through our digital and sales service channels. This has been driven by year-over-year growth of 13% in digital enrollment, 53% in digital loan payments, 40% in virtual teleutilization, and 4.6% in customer growth. In addition, customer reception to the Oriental Servicing Portal continues to expand. By the end of September, 30% of all retail clients were using it to transact business with the bank, up from 24% at the end of June.

Speaker Change: Please turn to page 4 for an update on our...

Speaker Change: Digital First Driving.

Speaker Change: As of the third quarter, 95% of all routine retail customer transactions, 97% of retail deposit transactions, and 67% of retail loan payments were made through our detail and sales service channels.

Speaker Change: This has been driven by year over year growth of 13% in data enrollment, 53% in digital loan payments, 40% in virtual teleutilization and 4.6% in customer growth.

Speaker Change: In addition, customer reception to the oriental servicing portal continues to expand. By the end of September , 30% of all retail clients were using it to transact business with the bank, up from 24% at the end of June . All this frees up our branch bankers to grow business and provide value added advice to our customers.

Jose Rafael Fernandez: All this frees up our branch bankers to grow business and provide value-added advice to our customers.

Jose Rafael Fernandez: As I mentioned on our last call, 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. Since then, we have further enhanced the account with the launch of the first-of-its-kind debit card in the Puerto Rico market, offering world elite benefits exclusively for elite account holders. In addition, we offer fully digital account opening with funding for all our retail checking and savings accounts.

Speaker Change: As I mentioned on our last call, we launched the Elite Deposit Account for retail customers, a combined checking and savings account that rewards customers for expanding their relationship with Oriental.

Speaker Change: This represents a unique value proposition in our market. Since then, we have further enhanced the account with the launch of the first of its kind debit card in the Puerto Rico market, offering world elite benefits exclusively for elite account holders.

Speaker Change: In addition, we offer full digital account opening with funding for all our retail checking and savings accounts. Now here's Maritza to go over the financials in more detail.

Maritza Arismendi: Now, here's Marisa to go over the financials in more detail.

Maritza Arismendi: Thank you, Jose.

Maritza Arismendi: Please turn to page 5 to review our financial highlights. Starting with components of core revenues, so that interest income was $189 million, up 1% or $1.4 million from the second quarter. This mainly reflects higher balances of investment securities and yields, higher balances of loans, and the absence of a $2 million loan recovery in the second quarter. If you recall, since late last year, we have been growing the investment portfolio to manage the anticipated lower rate environment going forward.

Maritza Arizona: Thank you for saying, please turn to page 5 to review our financial highlights. Starting with the components of core revenues, so that interest income was $189 million. Up, 1% or 1.4 million dollars from the second quarter.

Maritza Arizona: This mainly reflects higher balances of investment securities and yields, higher balances of loans and the absence of a 2 million dollar loan recovery in the second quarter.

Maritza Arizona: If you recall, since late last year we have been growing the investment portfolio to manage the anticipated lower rate environment going forward Add in higher yielding US guaranteed longer duration securities

Maritza Arismendi: Adding higher yielding you and go and see it longer duration security. Twerdahl Interest Expans was $41 million, an increase of less than $1 million from the 2nd quarter. This mainly reflects higher finances, higher average finances of higher cost borrowings and brokerage deposits, as well as slightly reduced average cost deposits for deposit balances and costs. Twerdahl Bancin and Financial Service revenue were $26 million, a decrease of $5.8 million from the 2nd quarter. This mainly reflects the $2.7 million in reduced interchange fees that host a mention. $2.1 million in reduced MSR valuation due to lower loan term rates.

Maritza Arizona: Toda Interest Experience was 41 million dollars, an increase of less than 1 million dollars from the second quarter.

Maritza Arizona: This mainly reflects higher balances, higher average balances of higher costs, borrowers and brokerate deposit, as well as slightly reduced average cost deposit for deposit balances and costs.

Maritza Arizona: Total banking and financial service revenues were 26 million dollars, a decrease of 5.8 million dollars from the second quarter. This mainly reflects the 2.7 million dollars in reduced interchange fees that holds a mention.

Maritza Arizona: 2.1 million dollars in reduced MSR valuation due to lower loan term rates.

Maritza Arismendi: $300,000 in 1 month revenue from the new mortgage service in portfolio and the absence of $1.1 million from the 2nd quarter's loan repayment fees and annual recognition of certain issue-less commissions. If you exclude the reduced MSR valuation, total banking and financial service revenues were in line with our original expectations.

Maritza Arizona: $300,000 in one month revenue from the new mortgage service in portfolio.

Maritza Arizona: and the absence of $1.1 million from the second quarter, long repayment fees and annual recognition of certain issuers commissions.

Maritza Arizona: If you exclude the reduced MSR evaluation, total banking and financial service revenues were in line with our original expectations.

Maritza Arismendi: Please turn to page 4, please turn to page 4. Excuse me. Looking at non-interest expenses, they totaled $91.6 million, down $1.4 million from the 2nd quarter. This mainly reflects a $2.3 million, one-time credit and debit card processing business contract in lower rebates in general and administrative expenses. And $1.3 million in expenses related to lower gain on real estate on sales. The 2nd quarter efficiency ratio was 52.6% or 79 basis points higher than the 2nd quarter. This was generally in line with trends we have seen over the last five quarters. Other performance settings remained high. Retail, on average, was 1.66%.

Speaker Change: Please, thanks to page 4, please, thanks, turn to page 4 for looking at not interested expenses, they sold out 91.6 million dollars.

Speaker Change: down $1.4 million from the second quarter. This mainly reflects a $2.3 million one-time credit and debit card processing business contract will worry about in general and I'm in a 30-thence session.

Speaker Change: and $1.3 million in expenses related to lower gain on real estate on sales.

Speaker Change: The second quarter efficiency ratio was 52.6%, or 79 basis points higher than the second quarter. This was generally in line with trends we have seen over the last five quarters.

Speaker Change: All their performance settings remain high, we dare on our excess, was 1.66%.

Maritza Arismendi: Retail on average was 15.94%, and annual book value per share was $26.15. That's of 8% from the 2nd quarter due to our earnings performance and increased value of our investment securities portfolio.

Speaker Change: We thank you all for coming today with us 15.94% and thank you all for your support. Thank you very much for your support. That's 8% from the second quarter due to our any performance and increase value of our investments and to create this portfolio.

Maritza Arismendi: Please turn to page 6 to review our operational highlights. Outage loan balances were $7.6 billion or slightly from the 2nd quarter. End of period balances of loans held for investment increased 1.5% or $111 million from the 2nd quarter. This mainly reflects growth in Puerto Rico and U.S. commercial and Puerto Rico oro and consumer loans. Also, the regular pay-downs and securities stations of residential mortgage. Year over year, the quarter loans held for investment increased almost 7%. Loneel was 8.05% down 10 basis points from the second quarter. Third quarter, Newerty, New Loneel Nation mainly reflects a higher amount of U.S.

Speaker Change: Please turn to page 6 to review our operational highlights.

Speaker Change: Ourif's long balances were $7.6 billion, or slightly from the second quarter.

Speaker Change: Aino period balances of long health or investment increase 1.5% for 111 million dollars from the second quarter.

Speaker Change: This mainly reflects wealth in Puerto Rico and US commercial and Puerto Rico or an consumer loan.

Speaker Change: Also, the regular faith-downs and security stations of the presidential mobiers.

Speaker Change: Year of the Year, therefore a long time for investments increased almost 7%.

Speaker Change: No year was 8.05% down 10 basis points from the table floor.

Speaker Change: Third for New Year, New London, the National Mainly Reflects, a higher amount of US commercial loans and Puerto Rico consumer loans. And I'll owe it a little for Puerto Rico commercial and overall loans.

Maritza Arismendi: commercial loans and Puerto Rico consumer loans and a lower level of Puerto Rico commercial and Orolox. In Puerto Rico, we continue to have a strong commercial pipeline, and as we have said, we had anticipated Oro Landings will moderate at some points from record levels. Now that interest rates are falling down and inflation has come down in the U.S. We expect our U.S. landing pipeline to strengthen it. Average core deposits were 9.6 billion dollars. Downside, slightly from the second quarter. A number of period balances decreased 72 million dollars, or 0.7%. This mainly reflects increases in time and savings deposits and reduces demand deposits.

Speaker Change: In Puerto Rico, we continue to have a strong commercial tap length, and as we have said, we had anticipated oral ending with moderate at some points from record levels.

Speaker Change: Now that interstracial falling down and interstracial has come down in the U.S., we expect our U.S. landing pipeline to strengthen it.

Speaker Change: Average for deposit were $9.6 billion, downside slightly from the second quarter. Aino period balances decreased $72.000 or 0.10%.

Speaker Change: This mainly reflects increases in time and saving the process and reviews demand the process.

Maritza Arismendi: Core deposit cost was 153 basis points, down 1 basis point from the second quarter. Excluding public funds, the cost of deposits was 91 basis points compared to 87 basis points last quarter. Average borrowings and broker deposits were 262 million dollars compared to 211 million dollars in the second quarter. The average rate rate was 4.6% down to 2 basis points, and of period balances were 346 million dollars compared to 201 million dollars in the second quarter. Net interest margin was 5.43%. Excluding the previously mentioned long recovery in the second quarter, Ning was basically flat from the previous quarter.

Speaker Change: Corri Pasi Coss was 153 Vs points down, one Vs points from the second corner.

Speaker Change: and including public funds, because of the cost, it was 91 basis funds compared to 87 basis funds last week.

Speaker Change: Average barones and broker deposits were 262 million dollars, compared to 211 million dollars in the second quarter.

Speaker Change: The aggregate rate rate was 4.6% down to basic ones, and of period balances were $346 million compared to $201 million in the second quarter.

Speaker Change: Next Interest Martin was 5.43%.

Speaker Change: Excluding the previously mentioned long recovery in the second quarter, Ning was basically flat from the previous quarter.

Maritza Arismendi: Please turn to page 7 to review our query quality and capital strength. Credit quality continues to be stable. Net charge of total $17 million, up to $1 million from the second quarter. Sequentially, borrow net charge of were higher at 1.64%, but lower than the high points last year. Consumers' net charge of now at 4.70% appeared to be resuming the traditional level for this business, which typically runs in the high 4% range. At the same time, there were continued recoveries in mortgage and in both Puerto Rico and U.S. commercial loans. As a result, the net charge of rate was 98 basis points, up 11 basis points sequentially, but below 1.05% in the year of oak water.

Speaker Change: Please turn to pay seven to review our credit quality and capital strength.

Speaker Change: Credit quality continues to be a stable.

Speaker Change: Net charts of total 17 million dollars up to million dollars from the second quarter.

Speaker Change: Second Italy, Orone Church of We're higher at 1.64% but lower than the high point last year.

Speaker Change: Consumant net search of now a 4.70% appear to be resuming the traditional level for this business, which typically runs in the high 4% range.

Speaker Change: At the same time, there were continued recoveries in mortgage and in both Puerto Rico and US commercial loans.

Speaker Change: As a result, the NNH chart of rate was 98 points of 11 basis points sequentially, but below 1.05% in the year of OPPORT.

Maritza Arismendi: Provision for grade losses was at $21.4 million, of $5.8 million from the second quarter. This mainly reflects $11.7 million from increased loan volume, $5.2 million related to the annual update of auto risk drivers, consumer loan loss factors, and the extension of cash flows of a Puerto Rico commercial loan up for renewal in the fourth quarter. And at $2.7 million, it is mainly due to an improved U.S. macroeconomic perspective. Looking at other metrics, the early and total delinquency rates were 2.78% and 4.10%, respectively. The number from a loan rate was 1.11%; the total delinquency rate increased from the second quarter.

Speaker Change: provision for credit losses, so that's $21.4 million of 5.8 million dollars from the second quarter. This mainly reflects

Speaker Change: 11.7 million dollars from increased lung volume, 5.2 million dollars related to the annual update of oral with drivers, consumer-long loss factors, and the extension of cash flows of a Puerto Rico commercial loan for renewal in the fourth quarter.

Speaker Change: [inaudible]

Speaker Change: Look at all of the metrics, the early and total delicacy rates were 2.78% and 4.10% respectively.

Speaker Change: The number for me to know already was 1.11%.

Maritza Arismendi: This was due to booking of the journey made by the options programs related to the mortgage service in portfolio acquisition.

Speaker Change: The Dodal is the inequality rate increased from the second quarter, which was due to looking, to looking of the Uni-May buy-back options programs related to the mortgage service in portfolio acquisition.

Maritza Arismendi: To sum up, during the third quarter, net interest income grew, driven by the investment portfolio and loans. The poor deposit balances have helped create a steady since the beginning of the year. We achieved from demand into savings and time deposits, as we continue to grow and deepen in cost to my relationship with recent value added products and services. Long growth continues to be strong, credit quality is well maintained, and the trends are mostly positive, reflecting the good economic and macroeconomic Puerto Rico. Our fourth quarter, name outlook, is now between 5.3% and 5.4%. Given the size of the first Fed rate cost.

Speaker Change: to come.

Speaker Change: To sum up, during the third quarter, net interest income grew, driven by the investment portfolio and loans.

Speaker Change: The court-deposit balances have helped create a steady since the beginning of the year, with a shift from demand into savings and time deposits, as we continue to grow and deepen in cost to my relationships with recent value-out-a-trols and services.

Speaker Change: Long growth continues to be strong, credit, quality is one and same, and the trends are mostly positive, reflecting the good economic and migraining Puerto Rico.

Speaker Change: Our fourth quarter, name our look is now between 5.5.3% and 5.4%. Given the size of the first set rate vote.

Maritza Arismendi: We continue to expect to add additional Fed rate cost by the end of the year. Non-interest expense should range from $91 to $93 million going forward, with an efficiency rate in line with the trends we have seen during the last several quarters.

Speaker Change: We don't think it's going to expect to audition at the end of the year.

Speaker Change: Learning that assistance should range from 91 to 93 million dollars going forward with an efficiency rate from in line with the trends we have seen during the last several hours.

Maritza Arismendi: We will update you more precision on the fourth quarter call about our interest rate, net interest margin, and credit outlook for 2025. Figured in capital allocation, we continue to remain opportunistic, focusing on Puerto Rico and U.S. Non-grow, and always looking at dividends and share by-bugs.

Speaker Change: We would update you more precision on the 4th quarter call about our interest rate, net interest margin and grades I will look for 2025.

Speaker Change: Figured in Cabby Town, a location we continue to remain opportunistic, focusing on Puerto Rico and you let's not grow and always looking at the events and sharing by-back.

Speaker Change: Now, here's the project.

Jose Rafael Fernandez: Thank you, Marisa. Please turn to page 8. Our outlook for both Puerto Rico and ORG continues to be positive. The island's economy is steadily growing, wages and employment are at high levels in Puerto Rico, and the start of a lower interest rate cycle by the Federal Reserve supports the continued strong financial condition for both businesses and consumers. Altogether, the business environment here remains optimistic.

Speaker Change: Thank you, Maritza. Please turn to page 8.

Speaker Change: Our outlook for both Puerto Rico and OG continues to be positive.

Speaker Change: The island's economy is steadily growing, wages and employment are at high levels in Puerto Rico and the start of a lower interest rate cycle by the Federal Reserve supports the continued strong financial condition for both businesses and consumers.

Speaker Change: All together, the business environment here remains optimistic.

Jose Rafael Fernandez: As always, we remain vigilant regarding the big macro uncertainties, changes in interest rates and inflation, the impact of unfortunate weather events, and ongoing geopolitical conflicts. Turning to ORG, we continue to be well positioned for growth of loans, deposits, and our customer base. Consumer credit trends should remain at current level. Our digital first strategy will continue to evolve. Now that we have established a strong platform for fast, easy-to-use, convenient customer self-service, we plan to further enhance experience through increased personalization. And that means we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model while at the same time increasing efficiencies.

Speaker Change: As always, we remain vigilant regarding the big macro uncertainties, changes in interest rates and inflation, the impact of unfortunate weather events and ongoing geopolitical conflicts.

Speaker Change: Turning to ORG, we continue to be well-positioned for growth of loans, deposits, and our customer base. Consumer credit trends should remain at current levels.

Speaker Change: Our digital first strategy will continue to evolve. Now that we have established a strong platform for fast, easy-to-use, convenient customer self-service, we plan to further enhance experience through increased personalization.

Speaker Change: And that means we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model while at the same time increasing efficiencies. All together we look forward to a strong finish to our 60th year more than ready to make progress possible for customers, employees, shareholders and then communities we serve.

Jose Rafael Fernandez: All together we look forward to a strong finish to our 60th year, more than ready to make progress possible for our customers, employees, shareholders, and then communities we serve. Our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and excited for what's to come.

Speaker Change: Our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and excited for what's to come. With this, we end our formal presentations operator. Please start the Q&A.

Operator: With this, we end our formal presentation. Operator, please start the Q&A.

Operator: Thank you. If you have any questions at this time, please press star one on your telephone keypad. If you wish to remove yourself from the Q, please press star two.

Kelly Motta: And we'll take our first question from Kelly Motta from KBW. Hi. Good morning. Thanks for the question. I thought I would kick it off with the loan growth that you've had. It's been very strong in the past two quarters, you know, kind of broad-based, but continue to train in auto. And on the commercial side, you mentioned who they prepared remarks about the US pipeline.

Speaker Change: and we'll take our first question from Kelly Mada from KBW.

Kelly Mada: Hi, good morning, thanks for the question. I thought I would kick it off with the lone growth that you've had. It's been very strong in the past two quarters, you know, kind of broad-based, but

Kelly Mada: Continue training auto and on the commercial side you mentioned Jose and your prepare remarks about the US pipelines. So there's hoping to get a sense of...

Jose Rafael Fernandez: So I was hoping to get a sense of what you're seeing on the island as well, what pipelines look like there, and how we should be thinking about the loan growth that you're, sounds like you're continuing to expect that we look ahead here. So, Kelly, thank you for your question. It hasn't changed. I mean, we feel that there's quite a bit of economic activity here in Puerto Rico that supports a strong growth in terms of our commercial as well as our auto and consumer. So we feel that the forecast hasn't changed. So what we have seen this quarter is kind of steady origination, steady loan production.

Kelly Mada: What you're seeing on the island as well, what pipelines look like there and how we should be thinking about, you know, the lone growth that you're, sounds like you're continuing to expect this week. We look ahead here.

Speaker Change: So, Kelly, thank you for your question. It hasn't changed. I mean, we feel there's quite a bit of economic activity here in Puerto Rico that supports

Speaker Change: a strong growth in terms of our commercial, as well as our auto and consumer.

Speaker Change: So we feel that...

Speaker Change: and the...

Speaker Change: the forecast hasn't changed. So what we have seen this water is kind of steady origination, steady loan production.

Jose Rafael Fernandez: We had some delays on the commercial in Puerto Rico, the loan origination that are going to be pushing to the fourth quarter, but all in all, we have a pretty strong pipeline on the commercial side. And then I asked you your question on the US. We have been quite cautious in the last, let's say, four to six quarters with regards to our US business simply because we felt that the US economy was still kind of figuring out if it was a soft landing, a hard landing, or a no landing. Frankly, I don't have the crystal ball.

Speaker Change: We had some delays on the commercial in Puerto Rico and the loan originations that are going to be pushed into the fourth quarter, but all in all, we have a pretty strong pipeline on the commercial side. And then after your question on the U.S., we have been...

Speaker Change: White cautious in the last let's say 4 to 6 quarters with regards to our U.S. business. It's simply because we felt that the U.S. economy was still kind of figuring out if it was a soft landing or a hard landing or a no landing.

Jose Rafael Fernandez: I don't think anybody does, but we feel more encouraged with what's going on in the US economy in terms of inflation coming down and economic growth remaining steady with low unemployment. It's similar to what we have seen in Puerto Rico for the last couple of years, where we kind of called it out and said, look, Puerto Rico is going to do well and we're going to have a good economy. And what we're seeing now going for here in Puerto Rico, and I'm trying to compare here, we continue to see Puerto Rico having a pretty steady growth in the economy.

Speaker Change: Frankly, I don't have the crystal ball, I don't think anybody knows, but we feel more encouraged with what's going on in the US economy, in terms of inflation coming down, and an economic growth remaining steady with low unemployment. It's similar to what we have seen in Puerto Rico for the last couple of years where we kind of...

Speaker Change: Called it out and said, look, Puerto Rico is going to do well and we're going to have a good...

Speaker Change: Economy and what we're seeing now going forward here in Puerto Rico and I'm trying to compare here. We continue to see Puerto Rico having a pretty steady growth in the economy. It's a different...

Jose Rafael Fernandez: It's a different paradigm that we have been living in the last couple of years. And I think it will continue for the next several years given the low employment levels, higher wages that we have, as well as the support from the reconstruction funds continued to flow down to Puerto Rico.

Speaker Change: A paradigm that we have been living in the last couple of years, and I think it will continue for the next several years given the low employment levels, higher wages that we have as well as the support from the reconstruction funds continued to flow down to Puerto Rico. So, you know, really, really optimistic about Puerto Rico, more constructive on the U.S. side. All in all, we were excited to finish the year, record year this year. And looking forward to start 2025 with strong momentum.

Jose Rafael Fernandez: So really optimistic about Puerto Rico, more constructive on the U.S. side. All in all, we're excited to finish the year, record year this year, and looking forward to start 2025 with strong momentum.

Kelly Motta: Okay, that's super helpful. And then on the other side of the balance sheet, on the deposit side, your demand deposits fell. It looks like that wasn't government deposits; it was more retail and commercial, but it looks like there was some migration among accounts. And in your slides, you highlight the optimism about the ability to grow deposits.

Speaker Change: Okay, that's super helpful and then on the other side of the balance sheet on the deposit side, your demand deposit cell, it looks like that, wasn't government deposits.

Speaker Change: More retail and commercial, but it looks like there was some migration among the accounts and in your slides you.

Jose Rafael Fernandez: I was hoping we could spend a moment talking about with rates cut, do you see the leveling off of migration, or is there a continuation of that as well as with the growth you're expecting, how much of that is market share gains versus continued growth and deposits on the island? Yeah, so there's some variables that we can control as you clearly point out in terms of how interest rate move and how demand and flow of liquidity into the island flows. But we can control some things that internally, and that is our business model. And I think the way we're seeing our business model evolve and how we have invested in technology and bringing in the new products and services with digital account opening and funding, something that's unique in the Puerto Rico market.

Speaker Change: You highlight the optimism about the ability to grow deposits, I was hoping we could spend...

Speaker Change: I'm a moment talking about, you know, with rates cut, do you see the leveling off of migration or is there a continuation of that, as well as, you know, with the growth you're expecting, how much of that is market share gains versus...

Speaker Change: you know continued growth in deposits on the island.

Speaker Change: So, there are some variables that we can't control as you clearly point out in terms of how interest rate move and how demand and flow of liquidity into the island flows, right? But we can control some things that internally and that is our business model.

Speaker Change: and I think the way we're seeing our business model evolve and how we have invested in technology and bringing in new products and services with digital account opening and funding, something that is unique in the Puerto Rico market.

Jose Rafael Fernandez: It's giving us a competitive advantage in a slight way so that we feel into 2025, as we see interest rates starting to critical down, we see deposits starting to level off, and we potentially see core deposits growing into 2025. What we have seen so far in this quarter, you have seen ups and downs on the government deposit balances. If you look at it from average balances or as end of the period, because we do have a pretty big deposit from the government that is still on the books. But all we know what we're seeing is a transition from checking towards slightly savings and mostly time deposits.

Speaker Change: It's giving us a competitive advantage in a, in a, in a, like way so that we feel into, into, to 25, as we see interest rates starting to trickle down, we see,

Speaker Change: The posit starting to level off and we potentially see core deposits growing into 2025. What we have seen so far in this quarter.

Speaker Change: You have seen ups and downs on the government deposit balances, if you look at it from average balances, or as end of the period, because we do have a pretty big deposit from the government that is still on the books.

Speaker Change: But all we know what we're seeing is a transition from checking towards slightly savings and mostly time deposits.

Jose Rafael Fernandez: We think that that is going to start shifting into 2025, and we continue to build our core franchise on the retail side. On the commercial side, we're very excited, given what we're seeing in terms of liquidity levels in Puerto Rico, in terms of the businesses. And we see our small business accounts, which is a small and mid-sized type of checking accounts, getting good momentum in the market.

Speaker Change: We think that that is going to start shifting into 2025 and we continue to build a core franchise on the retail side. On the commercial side, we're very excited, given what we're seeing in terms of the liquidity levels in Puerto Rico in terms of the businesses. And we see that our...

Speaker Change: A small base accounts, which is a small on mid-sized top of checking accounts, getting good momentum on the market. Again, we look at 2025 as a year where we see the positive stabilizing and starting to grow back.

Kelly Motta: Again, we look at 2025 as a year where we see deposits stabilizing and starting to grow back steadily. That's super helpful.

Speaker Change: and the state.

Kelly Motta: Can you remind us, my notes on the government deposits, I think you were projecting at least step the last quarter that they would be saying through September. Any updated thoughts about those on those? Yeah, so, you know, we have a large deposit that was supposed to exit the balance sheet in September. It did not, and it extended until November. So right now, what we're seeing is a tentative exit in November of this year, reminding everyone in the call that this is an index government deposit fund. In their index government deposit, which is indexed to the three-month treasury bill, added discounts to that rate.

Speaker Change: That's super helpful and can you remind us I've my notes on the government of positive I think you were projecting at least step the last quarter that they would be saying through September any updated thoughts about flows on those.

Speaker Change: So, you know, we have a largely positive, that was supposed to exit the balance sheet in September, it did not, and it extended until November.

Speaker Change: So right now, what we're seeing is a tentative exit in November of this year, reminding everyone in the call that this is an index government deposit fund in the index government deposit, which is index to the three-month pressure bill at a discount to that rate.

Kelly Motta: So, as interest rates have gone down, that is helping us also on the cost of funds as the deposit remains in the books. So, again, it's going to stay until November, and we will update the market accordingly.

Speaker Change: So, as interest rates have gone down, that is helping us also on the cost of funds as the deposit we made in the books. So, again, it's gonna stay on to November and we will update the market accordingly.

Maritza Arismendi: Okay, that's helpful. And then turning to your margin guidance, the 5.3 to 5.4 margin, it seems like it's trending lower than what we expected, you know, this time last quarter, but your balance sheet is also bigger. It looks like you purchased more MBS securities. Just wondering how much of that kind of reduction in the outlook is a function of rates versus potentially, you know, if you could discuss the rates of perhaps the securities purchases and kind of the outlook for an appetite for additional ones for the size of the balance sheet. Yeah, Maritza, give you the answer.

Speaker Change: Okay. That's helpful. And then, turning to your margin guidance, the Phi 3 to Phi 4 margin, it seems like it's trending lower than what we expected.

Speaker Change: you know this time last quarter but your balance sheet is also bigger. It looks like you purchased more MBS security. Just wondering how much of that?

Speaker Change: kind of reduction in the outlook is a function of rates versus potentially, you know, if you could discuss the rates of perhaps the securities purchases and kind of the outlook for an appetite for additional ones for the size of the balance sheet.

Maritza Arismendi: Yeah, Kelly, it's mostly related to rates. When we share with you last quarter, the estimate, the expectation was based on a 3.25 basis point cost, and the actual one September was 50 basis point. So, given the size of that cost, we adjust the estimate for the fourth quarter, okay? Okay, and then again, the securities, it looks like EOP was about 2.6 billion; it was higher than what I was modeling. Just any appetite around securities purchases from here and kind of managing the size of the balance sheet. Yes, yeah, and that's the, that's powerful, but I mentioned also in the paper remarks about we have been in last year, extending the duration of the assets, prepared the balance sheet for the new low rate environment in the long term.

Speaker Change: Yeah, I learned how to review the answers. Yeah, Kelly, it's not really related to race. When we shared with you, last quarter, the estimate, the expectation was based on a 3-25 basis point.

Speaker Change: Setscore.

Speaker Change: and the actual one in September was 50 basis, so given the size of that cut, we adjusted the estimate for the fourth quarter, okay?

Kelly Mada: Okay, and then again the security looks like.

Kelly Mada: EOP was about 2.6 billion. It was the higher than, but I was modeling just any apathy around security through purchase.

Speaker Change: I'm a part of this project.

Speaker Change: is from here and kind of managing the size of balance sheets.

Speaker Change: Yes, and that's powerful, but I mentioned also in the prepare remarks about, we have been since last year extending the duration of the assets prepared the balance sheet for the new low rate environment in the long term. So that's why we did this quarter also. And again, adding to that, we will continue to look into the investment portfolio as we use it as a way to reduce our asset sensitivity. We used to be 5% asset sensitive, we're now in the two-handle asset sensitive, and extending the duration at 5% on mortgage-back security from the

Maritza Arismendi: So that's why we did this quarter also. And again, you know, adding to that, we will continue to look into the investment portfolio as we use it as a way to reduce our assets' sensitivity. We used to be 5% asset sensitive; we are now in the two handle asset sensitive, and extended the duration at 5% of mortgage-backed security from the US government kind of makes sense for us. So we are going to be constructive about the investment portfolio going forward as we manage the lower interest rate environment, as many as I mentioned.

Speaker Change: U.S. Government kind of makes sense for us, so we are going to be constructive about the investment portfolio going forward as we manage the lower interest rate environment as many dimensions.

Maritza Arismendi: Got it. I guess kind of tying into that is capital return. You guys, even with Durbin kicking in, you make your super profitable and even growing the loan book from here and kind of the low mid single digit range, you're going to create capital. Any updated thoughts on dividends, buybacks, and higher minimums? So we will review dividends and buybacks with the board in our off-site strategy session coming up, and we will also look at it in the January board. But if you ask me, Kelly, if we kind of were a little behind the ball in the third quarter, from our management perspective, is that we could have been a little bit more intentional about the buyback, and we did some repurchases, but not significant.

Speaker Change: Got it. I guess kind of tying into that is capital return. You guys, even with Derben kicking in, you make your super profitable and even growing the loan book from here and kind of the low mid-singer vision range, you're going to create capital. Any updated thoughts on dividends bybacks?

Speaker Change: We will review dividends and buy vaccine with the board in our off-site, but the vaccination coming up and we will also look at it in the January board.

Speaker Change: If you ask me, Kelly, if we were a little behind the ball in the third quarter, from our management perspective, is that we could have been a little bit more intentional about the buyback. We did some repurchases, but not significant. With the level of capital that we're accumulating and the earnings that we're generating and the long growth prospects that we're seeing, we look at long growth, we look at dividends, we look at buybacks, but if you put a fault into us, it's probably that we are a little bit slow on the capital return.

Kelly Motta: And with the level of capital that we're accumulating and the earnings that we're generating, and the long growth prospects that we're seeing, we again look at long growth, we look at dividends, we look at buybacks. But if you put a fault into us, it's probably that we are kind of a little bit slow on the capital return. Great, thanks for the color.

Kelly Motta: Maybe the last one for me is on the servicing portfolio. You purchased this quarter, hoping you can provide some insight as to the strategic, you know, the decision around that and any thoughts on how that contributes to the servicing income from there. So, you know, first, we, it's a portfolio that we had a soft servicing agreement with. So, in the end, it's just us owning the whole servicing rights and having the ability to own the customer relationship from a servicing perspective. And it's part of us building our servicing book, which, as you know, requires a critical mass.

Kelly Mada: Great, thanks for the color, maybe the last one for me is on the servicing portfolio, you purchase this quarter, hoping you can provide some insight as to the strategic, you know, the decision around that and any thoughts on.

Kelly Mada: How that country.

Kelly Mada: and we'd be to the service saying income from there.

Speaker Change: So, you know, first we, it's a portfolio that we had a sub-services agreement with. So, in the end, it's just us owning the whole service rights and having the ability to...

Speaker Change: to all the customer relationship from a servicing perspective. And it's part of us building our servicing book, which, as you know, requires a critical mass. And here in Puerto Rico, it has its opportunities, but it also has its limitations. So that's kind of the logic behind it. I think it was just complementary to what we have been doing. It was part of our operating model already, except that now we own it versus subservicing it. And we're going to be generating approximately $900,000. If you use the balance today, a quarter in terms of mortgage banking fees. And you know, we felt that it was the right thing to do.

Jose Rafael Fernandez: And here in Puerto Rico, it has its opportunities, but it also has its limitations. So, that's kind of the logic behind it. I think it was just complimentary to what we have been doing. It was part of our operating model already, except that now we own it versus subservicing it. And we're going to be generating approximately $900,000 if you use the balance today, a quarter in terms of mortgage banking fees. And you know, we felt that it was the right thing to do.

Kelly Motta: Great. Thank you so much for the time and all the color. I will step back. Thank you, Kelly. Have a great day. And once again, it is star one for questions.

Speaker Change: Great, thank you so much for the time and all the color, I will step back.

Jose Rafael Fernandez: And at this time, with no questions in the queue, I'll turn the call back over to Jose.

Speaker Change: and at this time with no questions in the queue, I'll turn the call back over to Jose.

Jose Rafael Fernandez: Thank you, operator. Thanks again to all our team members and thanks to all our stakeholders that have listened. Have a great day.

Operator: And this concludes today's conference. We appreciate you joining us. Have a great day.

Operator: The OSG Bank for 3224 earnings call has been ended. Thank you.