Operator: Good morning. Thank you for joining OFG Bancorp's conference call. My name is Chloe and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and César Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the Q3 2026 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations.
Operator: 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 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.
José Rafael Fernández: Good morning, and thank you for joining us. We are very pleased to report our results today. We had an outstanding Q3 with excellent performance across the board. Let's turn to page 3 of our presentation. EPS increased 15% year-over-year and on 1% growth in total core revenues. This was driven by strong commercial loan growth, stable credit and core deposit balances, disciplined expense management, and strong profitability metrics. We continue advancing our digital at the core strategy. Customers are embracing Oriental's digital tools and value-added services. Our Libre, Elite, and MyBiz accounts are attracting new clients and helping our bankers deepen existing relationships. We resumed stock repurchases, buying back $13.5 million of common shares, reflecting our continued focus on creating long-term shareholder value.
José Rafael Fernández: As to Puerto Rico's economy, it remains stable, supported by a healthy labor market and ongoing expansion by local and mainland businesses. Thank you to all our team members for their hard work and continued focus on making progress possible for our customers, employees, shareholders, and the communities we serve. Please turn to page 4. Our core digital strategy is focused on 3 main areas. The first area centers on delivering value through innovative account products tailored to the needs of our customers, Libre for the mass market, Elite for the mass affluent, and MyBiz for small businesses. The second area of focus is technology. Our omni-channel platform enables customers to engage with us seamlessly across our digital channels. This creates a convenient and efficient banking experience, helps drive digital adoption, generating efficiencies and savings.
José Rafael Fernández: As a result, we continue to invest in the customer experience and shift branch interactions away from routine transactions and toward meaningful relationship building. The third area of focus is AI-powered intelligent banking. Our data-driven, real-time personalized insights provide compelling value, giving customers the ability to manage their finances in an easy and intuitive way. Together, these capabilities distinguish us from competitors and accelerate digital adoption. They also expand our client base, create more opportunities to deepen customer relationship and engagement, and ultimately support growth in core deposits. Please turn to page 5. Our key digital performance indicators continue to show our strategy is delivering results. During the Q3, we saw year-over-year growth of 5% in net new retail customers and commercial customers, 24% in active digital users, 2% in digital loan payments, and 11% in virtual teller use.
José Rafael Fernández: Year-to-date as of September, more than 1.5 million customized AI-enabled smart banking insights have been delivered monthly to customers with more than 90% positive feedback. Libre accounts increased 7%, while digitally opened Libre accounts grew 18%. We are the only bank in Puerto Rico that provides customers the convenience and speed of digital account opening. MyBiz commercial accounts grew 6%, while accounts opened either digitally or by phone grew 16%. Now I would like to turn the call to Maritza to go over the financials in more detail.
Maritza Arizmendi: Thank you, José. All comparisons are to the Q2, unless otherwise noted. Now let's turn to page six. Our financial performance was strong this quarter. EPS was $1.33. Efficiency ratio was 52%. Return on average assets was 1.86%. Return on average tangible common equity was 17%. Loans to deposit ratio was 85%, and the payout ratio was 26%. Let's turn to page seven to review our income statement highlights. Core revenues decreased $4.5 million to $186 million. Total interest income was $196 million, a decrease of $1 million. This reflected the absence of $4.1 million from the prepay in full commercial loans in the Q2. This was partially offset by higher average balances of loans and cash, and higher yields in cash and investment portfolios. There was one additional day in the quarter, which increased interest income by $1.6 million.
Maritza Arizmendi: Total interest expense was $42 million, an increase of $2.3 million. This reflected higher average balances of deposits at a higher cost. The date factor increased interest expense by about $400,000. Total banking and financial service revenues decreased $1 million to $32 million. This reflected the absence of $1.1 million in annual insurance and annuity fees in the Q2 and lower mortgage banking revenues. This was partially offset by higher banking service revenues. Non-interest expenses decreased $6.6 million to $96 million. This reflected the absence of $5.8 million in business operational charges from the Q2. Income tax was $15.2 million, reflecting an anticipated ETR of 22.5% for the year. Now, let's turn to page eight to review our balance sheet highlights. Average loan balances grew $37 million to $8.3 billion, while end of period balances grew $151 million to 1.8%.
Maritza Arizmendi: End of period balances reflected an increase in Puerto Rico commercial and consumer loans, which more than offset a decline in auto, residential mortgage, and US commercial. Most of the commercial loan growth came towards the end of the quarter. year-over-year, loans are up 4.1%. New loan production was $694 million, a decrease of $61 million. This reflected decreases in auto, Puerto Rico commercial, and residential mortgage lending, partially offset by increases in US commercial and Puerto Rico consumer loans. Average core deposit balances grew $15 million to $9.7 billion. End of period balances declined $80 million or 0.8%. This reflected decreases in demand and savings deposits, partially offset by increases in time deposits. Excluding the $500 million government deposits that moved to wealth management in the Q1, deposits are up 3.5% year-over-year.
Maritza Arizmendi: Average cash balances grew $29 million and fell $179 million end of period. End of period balances reflected the funding of loan growth, as previously mentioned. Average investments were flat and increased $20 million end of period. End of period balances increased due to purchases of $260 million of mortgage-backed securities and $20 million in securitizations. This was partially offset by mark-to-market adjustment and MBS principal payments. Average borrowings and broker deposits increased $45 million and $131 million end of period, reflecting liquidity management. Now, let's turn to page 9 to review our net interest margin. The Fed's 25 basis point rate increase in September had a limited impact on this quarter's results. Loan yield declined 22 basis points to 7.68%. As a reminder, Q2 loan yield benefited from $4.1 million related to commercial loans that were paid in full.
Maritza Arizmendi: September's rate increase had only a small impact on variable rate commercial loans. About $550 million of the total $1.7 billion of variable rate commercial portfolio repriced late in the quarter. Core deposit cost increased 5 basis points to 1.34%. This reflected higher demand for time deposits and higher cost of government deposits tied to 3-month T-bill rates. Net interest margin was 5.23%. Now, let's turn to page 10. Capital remained strong despite an increase in mark-to-market adjustment in our securities portfolio. CET1 ratio was 14.10%. Total stockholders' equity was $1.3 billion. TCE ratio was 10.34%. Tangible book value was $29.66. As for share buyback, as José mentioned, we bought back $18.5 million in Q3. We have $180 million remaining in our authorization. César will provide more details about credit in a moment. Let me summarize where we're heading into the final quarter of 2026.
Maritza Arizmendi: We continue to have a strong commercial pipeline and expect low single-digit loan growth for the year, with commercial more than offsetting an anticipated decline in auto. We expect deposit growth, excluding government deposits, driven by our Libre, Elite, and MyBiz accounts. While our variable rate loans and cash position make us asset sensitive, higher asset yields should largely be offset by the increase in liability costs. We expect net interest margin to remain near 5.25% for the balance of the year. Our NIM outlook assumes that there will be one additional 25 basis points hike in December.
Maritza Arizmendi: Provision should move into $18 to $20 million range. This reflects increased loan volume and seasonally higher auto and consumer credit metrics. We remain on track to maintain non-interest expenses at about $385 million for the year, excluding the $5.8 million business operational charge in Q2. Our estimated tax rate for the year continues to be 22.5%, not including discrete items. We will deploy capital prudently across organic growth, dividends, and share repurchases, balancing attractive opportunities with long-term shareholder returns. Now, here's César.
César Ortiz: Thank you, Maritza. Please turn to page 11. All comparisons are to the Q2 unless otherwise noted. Credit reflected disciplined execution, proactive risk management, and typical seasonal trends. Provision for credit losses was $18.1 million, up $5.1 million from the Q2. This reflected $17.5 million for increased loan volume and $1.3 million due to seasonal adjustments for the auto delinquency. This compares to the Q2, which included $14.7 million for increased loan volume, partially offset by $1.9 million in commercial loan recoveries. Early and total delinquency rates of 2.65% and 3.91% increased from the Q2 due to seasonal trends but declined year-over-year. At the same time, net charge-offs and non-performing loan rates of 0.70% and 0.74% declined compared to Q2 2026 and Q3 2025.
César Ortiz: As a result, Q3 provision was slightly lower than originally anticipated due to better auto and consumer credit metrics. On the retail side, consumer and residential mortgage portfolios continue to perform well, with both reporting lower early and 90-plus day delinquency levels compared to a year ago. The auto portfolio experienced modest increases in both early and non-performing delinquency levels compared to the same period last year. Net charge-offs for auto improved year-over-year, and recovery performance remained strong. Collateral liquidation values have remained stable, resulting in consistent loss severities despite a modest increase in delinquency. This provides additional confidence that the observed seasonal increase in delinquency does not necessarily translate into increased loss content. We continue to closely monitor this trend. Mortgage performance remained particularly strong, with continued improvements across delinquency measures and recoveries continued to exceed charge-offs.
César Ortiz: As we discussed in prior quarters, H1 retail credit performance typically benefits from seasonal factors, including tax refunds and other liquidity events. Then we see a seasonal increase in the credit risks in the H2. Accordingly, part of the Q3 increase in all our delinquency metrics reflects seasonal normalization rather than a deterioration in the underlying credit profile of the portfolio. Our retail portfolio continued to benefit from discipline underwriting and a significantly improved credit profile. As we have previously reported, this reflects tighter underwriting standards, improved portfolio mix, and stronger vintage performance. Turning to commercial, our asset quality represents one of the strongest credit stories within the quarter. Commercial non-performing loan rates were 0.68% compared to 0.90% in the Q2. Delinquencies and non-performing levels are down. Criticized exposures have declined, and overall asset quality has improved materially.
César Ortiz: Looking ahead, we remain watchful of inflationary pressures, higher operating costs, elevated energy expenses, and the continued impact of higher borrowing costs on both commercial and consumer borrowers. The credit portfolio continues to demonstrate resilience. We believe we are well-positioned to navigate the current environment and any potential macroeconomic headwinds that may emerge. Now, here's José to wrap up.
José Rafael Fernández: Thank you, César. Let's turn to page 12. The Puerto Rico economy remains resilient. It is supported by healthy consumer and business liquidity, higher wages, and historically low unemployment. Infrastructure projects and private investment continue to support economic activity. Manufacturing expansion and new onshoring initiatives reinforce the long-term economic outlook. As César mentioned, we remain attentive to evolving macroeconomic conditions, including higher energy costs, interest rates, and inflation, while continuing to monitor broader geopolitical developments. OFG is well positioned for growth. Our digital at the core strategy is driving customer growth and engagement, simplifying operations, and expanding our market opportunity. We continue investing in people and technology to improve the customer experiences and operating efficiency. Our capital strength, methodical execution, and differentiated franchise positions us well to navigate evolving market conditions. With this, we end our formal presentation. Operator, please open the call for questions.
Operator: Certainly. If you have a question at any time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press the star two key. We will take our first question from Brett Rabatin with StoneX Group. Your line is open.
Brett Rabatin: Hey, good morning, everybody. Thanks for the questions. Wanted to start off, José Rafael, I have seen some of the data here in the past few months that has been modestly positive for some continued Puerto Rico growth. But if you look at the newspaper articles in Puerto Rico, they seem to be somewhat more dour and talking about downside risks and the cost of diesel, etc. Can you maybe just start off with just what you are seeing on the ground and what positives and negatives you would point to as it relates to the economy?
José Rafael Fernández: Sure. Thank you for your question, Brett. We need to separate a little bit the noise from the facts here, in the sense that we are not seeing any deterioration on the economy to speak of. We continue to see unemployment on the 5% handle. We see wages at a higher, historically highest levels. We are seeing the onshoring coming in, and we see actual private investment flowing through the economy. So the data does not support the noise that we might be reading or listening to locally. Again, most of it driven by political kind of discussions and one side kind of challenging the other. But from our perspective, and as César mentioned on the credit side, we continue to see a pretty steady consumer, and we are not seeing any indications of a slowdown in the economy.
José Rafael Fernández: What we are seeing is a steady economy that continues to chug along and benefiting from the inflows of investment from the US and locally too, as businesses continue to invest in their business, and they feel optimistic about their potential growth. That is as much as I can share with you given the data that we have.
Brett Rabatin: Okay. That is helpful. I wanted just, it seems like all the Puerto Rico banks have been lamenting that auto has been softer. When I look at the auto trends, I mean, the origination levels have not fallen off that much. It seems like auto is still hanging in there relative to what I seem to hear. Any thoughts on auto from here? Just the commercial pipeline, I heard the guidance around the low single-digit growth, but just any thoughts as you think about 2027, any early reads that growth might be better or worse than what you are seeing this year?
José Rafael Fernández: Yep. To your first point, we are equally happily surprised with the levels of auto lending originations during this year. We expected a softer market, and we are still seeing, yes, lower originations, but better than what we expected. We really are not ready to give you formal 2027 guidance, but I can give you a little bit of color on how we see the auto business into 2027. I think you will see the steady, maybe slightly lower new car sales, and therefore you will see also some trends across the market where you will see lower auto originations. We are actually into those analysis right now. We feel that given what we saw in 2026, we do not expect auto originations to decline additionally at a faster pace than 2026. We see it pretty stable. That is on the auto side.
José Rafael Fernández: On the commercial side, on the other hand, we are seeing very good growth opportunities. We are seeing good opportunities for us to establish new commercial relationships through the lending side as well as on the funding side. Maritza mentioned in her remarks the pipeline that we continue to have. We are having a banner year on the commercial side in Puerto Rico. A lot of our work has been put into this year's work, and the team has done a great job on the commercial middle market and small business. We do feel that we are going to end the year with strong numbers, strong originations, and this quarter is another example of what we have been able to achieve.
Brett Rabatin: Okay, great. Appreciate the color. Thanks, José Rafael.
José Rafael Fernández: Yep. Thank you, Brett. Thank you for your questions.
Operator: We will take our next question from Arren Cyganovich with Truist Securities. Your line is open.
Arren Cyganovich: Thanks. Good morning. On the deposit side, are you seeing competition increase? Demand deposits were down, savings deposits were down quarter-over-quarter. Anything in particular driving that? I am sorry if I missed something in the prepared remarks.
José Rafael Fernández: Yeah. Maritza covered it pretty well. I think big picture, the seasonality that we see in the H1 of the year with funds coming in reflects also on the deposit side. You will see a little bit of a softer H2 of the year on the funding side, just simply because the liquidity is put to work on the commercial side as well as on the individual sides, on the retail side. From a competition perspective, look, we are in a competitive market, and we compete, and our competitors compete against us. This is not a cakewalk, trying to gain market share on all the business units as well as growing the bank. Yes, for sure, there is deposit competition. We are also seeing a little bit more sensitivity with higher rates on some higher balance individual clients. They are more sensitive, and they are looking for alternatives.
José Rafael Fernández: We have the wealth management business that benefits from that, so it is fine with us. At the end, we are just trying to make sure that we service and cater to our customers on a relationship basis. We feel pretty confident on how we are growing our deposit balances and the deposit relationship with our commercial and retail customers, Arren.
Arren Cyganovich: Great. Thanks. As a follow-up in the slide deck discussing the AI insights that are personalized for your customers, maybe you could talk a little bit about how that works and maybe some examples of how that might be helping the customer experience.
José Rafael Fernández: Yep. So it is personalized. It is on the mobile, it is on online. You get your phone or your online, and the first thing you see is this is the expected expenses based on your several months before experience. These are your expected expenses that you are going to be funding. This is your expected income coming in. These are insights that are really unique for the Puerto Rico market. No ever has a bank provided those type of insights on such a simple and accessible way. So that is an example. There is another insight that you get, and these are personalized. This is not based on collective data.
José Rafael Fernández: This is on specific personalized ins and outs of the client's checking accounts and savings accounts, etc. Another example is we provide insight. You paid the same bill twice in the same month. Check it out because you might have paid it twice. Those are examples of what those insights provide, and the feedback that we are getting, as mentioned, it provides pretty positive insights. This is all translating, Arren, into us growing retail customers 5% year-over-year, and the same thing goes for the commercial side.
José Rafael Fernández: It is something that we have been working on and building on throughout several years, and it is starting to show the results. We are also seeing the opportunity for us to deepen those relationships. It is not only about bringing in new customers and clients to Oriental, it is also about our opportunity to deepen those relationships and be able to make them primary customers for us. So it is exciting times for us. We are really happy with the way our strategy is progressing and how we are unique in the market and being a different bank than the market is accustomed to see.
Arren Cyganovich: Thanks, José.
Operator: We will take our next question from Kelly Motta with KBW. Your line is open.
Kelly Motta: Hi, good morning. Thanks for the question.
José Rafael Fernández: Hi, Kelly.
Kelly Motta: I think I would like to start off on the margin. You guys undoubtedly have one of the best margins here of the group, but it seems like your expectations near term are a bit more tempered than where you were in July. I am wondering in terms of both loan pricing as well as the deposit competition, you have noted you are in a competitive environment, where the incremental headwinds have been coming from relative to those July expectations. Thanks.
José Rafael Fernández: Thank you for your question, Kelly. I appreciate you recognizing the margin levels that we have and how we have managed them pretty consistently. Kudos to the team and Maritza overlooking and overseeing all that effort. I will let her give you the more details about it.
Maritza Arizmendi: Thank you, Kelly. I think when you look at the range that we share with you, we were near the lower end of that range because we were managing several scenarios at the moment, particularly in the funding side, how it will behave in the second part of the year, given the liquidity that is moving and everything. When you look at what happened during the quarter, we did have some repricing in the government side that we were expecting because we repriced about $400 million of the government deposit at the end of Q2 that were moved into time deposits. We had the full impact on this Q3. Secondly, the mix in the now savings and time deposits, we saw more than expected movement to the time deposit side of the funding mix. That is what happened with the initial estimate that we have.
Maritza Arizmendi: It is particularly driven by the funding mix. I think that the level of market rates right now, we were expecting no rate hike during the second part of the year. Now we have one. Secondly, we have the Treasury notes at its highest level. We are starting to see more clients looking for high-yielding type of products. We are there for our customers. That is why time deposits were higher than expected during this Q3.
Kelly Motta: Great. Thanks so much for the color. That kind of ties into my next question, which is mostly a point of clarification as well as an outlook ahead. The government deposits, you had some go to wealth at the beginning of the year, and then you had what you had already disclosed as moving to being termed out to CDs in June. That has created some variability in those demand deposits. Just wanted to confirm that those balances are now, one, out of demand deposits. Then as we look ahead, it seems like clients are being driven by more rate-sensitive accounts. Do you think this is a place where we can stabilize, or would you anticipate some additional migration of excess funds to time here? Thanks.
Maritza Arizmendi: Yeah. Let me make sure. You are asking about the government deposits or as a-
Kelly Motta: Yes.
Maritza Arizmendi: Okay. That is a particular deposit that we have been managing from a long period. It was at $1.2 billion, about $500 million moved to the broker dealer at the beginning of the year. Then end of Q2, we made two time deposits. One actually matures end of Q3, and we reprice it, that will impact this Q4 coming. The answer is that we will see some repricing there because of the market condition. All these deposits are tied to 3-month Treasury bill, so they will have some reflection of what the market is experiencing.
José Rafael Fernández: Yep. It is a good point that Maritza makes because that is very much separate to the actual core client deposit funding that we have on the retail and commercial.
Maritza Arizmendi: The dynamics are different.
José Rafael Fernández: The dynamics are completely different.
Maritza Arizmendi: Not necessarily tied to market rates.
José Rafael Fernández: Correct. So it is good that you asked that question, Kelly, because there might be some confusion among the market.
Kelly Motta: Got it. Okay. That is helpful. Maybe last question for me, and then I will step back. I appreciate you guys reiterated the low single-digit growth outlook for the year. You are kind of already there in Q3. Obviously, commercial growth was super strong. Wondering about the pipeline ahead and what could potentially push you slightly above that if you are successful in growing loans again in Q4. Thank you.
José Rafael Fernández: Yep. So to answer your question, Kelly, is yes, we are very confident that we are going to have low single-digit loan growth for the full-year. And we work hard to do better. And the strong pipeline that we have gives us confidence that we have a chance to do better. So that is as much as I am going to share.
Kelly Motta: Great. Thank you so much. I will step back.
José Rafael Fernández: Thank you.
Operator: And we will take our next question from Manuel Navas with Piper Sandler. Your line is open.
Manuel Navas: Hey, good morning. I appreciate the commentary. Just kind of following up on the NIM here. How should we think about the December hike post you kind of get past some of these, seems more like unique public fund repricing moments that might be impacting the near-term NIM in Q4. How should we think about future hikes impact on the NIM into early next year?
Maritza Arizmendi: Yeah. We will update at the end of the year with how we see 2027, but I can answer on the matter of the December hike. It will be something similar to this quarter, that it happened at the end of September. As I shared with you in my prepared remarks, the more elastic asset is the cash and also the about $500 million, $550 million in the commercial portfolio, which is tied to prime rates and the other happens gradually through the next quarter. So that is how we see that. So it will not be much of an impact on the Q4 NIM.
José Rafael Fernández: Yep. The Q4 interest rate hike.
Maritza Arizmendi: Interest rate hike.
Maritza Arizmendi: Yeah.
Manuel Navas: Sure. I guess also, separately, you had a lot of loan growth come in at the end of the quarter. Do you have a sense for new loan yields, especially for that piece, maybe like September new loan yields?
José Rafael Fernández: Yeah, similar to the portfolio yields. It is a market at those levels that we are originating on the commercial Puerto Rico side. So you should use that as a guidance.
Manuel Navas: Okay. I like that the buyback restarted this quarter. Just kind of thoughts on its pace. I know you're doing shareholder capital return, but just kind of a current update on capital deployment and the pace of the buyback.
José Rafael Fernández: Yeah. So we look at loan growth and balance sheet growth first. We certainly are very proactive on the capital management, and we'll continue to do so. We'll mix it between dividend and the buyback. So you'll see us being pretty steady on the buyback and probably more active as there are fluctuations in the market. But overall, the capital management strategy remains the same. We want to deploy our capital for growth on the balance sheet and the excess capital that we have, we deploy it through dividends and buyback. We still have $180 million on the buyback, so that is ample space for us to go out and go into the market.
Manuel Navas: I appreciate that. My last question is a little bit on digging in deep on credit. Credit trends are really strong. The commercial trends are excellent. Just want to cover all my bases. Delinquencies ticked higher in auto, and a little bit higher, I think, year-over-year as well as linked quarter. Any extra color there, or is this still well within the normal seasonal increases, and you kind of expect a seasonal increase in Q4 and then an improvement in Q1 of next year as well? Is that the right trajectory to think about?
César Ortiz: Yeah, that's exactly right. You have it right. The seasonality works from Q1 improving and then picking up to Q4. So we still expect that trend to happen this year, too.
Manuel Navas: Anything specific in auto this year versus last year?
César Ortiz: No.
Manuel Navas: Okay.
César Ortiz: No, we continue seeing the resiliency on the customers as you see in the credit performance of the customers. So far the portfolio is behaving very well. The economy is well, too. So those two together give us comfort on the credit performance of our portfolios.
José Rafael Fernández: Yeah, as César mentioned, we are very cognizant about what is going on with higher interest rates and inflation and energy and all that stuff. But all those things are happening when Puerto Rico's economy is sitting in a much different position than in years past, and it makes a different behavior for consumers, simply. That is what is going on. So the performance that you are seeing on the consumer side, on the credit consumer side, it is a reflection of the economy and all the things that we talked about earlier in the call.
Manuel Navas: Thank you. I appreciate the comments.
José Rafael Fernández: Yeah. Thank you.
Operator: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. At this time, there are no further questions. I will now turn the call back over to management for closing remarks.
José Rafael Fernández: Thank you, operator. Thanks again to all our team members for a great job in the quarter. Thanks to all our stakeholders who are listening. Looking forward to see you next time.
Operator: Thank you. This does conclude today's program. We thank you for your participation. You may now disconnect.
