Good morning. Thank you for joining OFG Bancorp's conference call. My name is Christie and I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors and Maritza Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks that can be found on our Investor Relations website on the homepage in the What's New box or on the Quarterly Results page. This call may feature certain forward-looking statements about management's goals, plans and expectations. These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speakers' 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. Please turn to page three of our conference call presentation. We had an outstanding performance in the second quarter, generating $0.78 per share. This reflects our larger scale and our focus on digitalization and customer service differentiation. From a big picture perspective, it also reflects several key factors that are coinciding at this time that puts OFG in an excellent strategic position. One, Puerto Rico's economy is clearly benefiting from the massive amount of federal reconstruction funds now starting to be received as well as COVID stimulus funds. It's important to note that these funds are more meaningful here as compared to Mainland state, given how reconstruction funds and the amount of stimulus payments compare to average income levels on the island as well as the size of our economy. Two, Puerto Rico has managed well the COVID pandemic and today vaccination levels are in the top quartile of U.S. states and territories with 55% of the population fully vaccinated and 63% with at least one dose. And three, OFG is operating in a much different competitive environment than years past with only three commercial banks serving the market. All this continues to validate the comments I made last quarter regarding our optimism on Puerto Rico's economy and OFG's future. Our second-quarter results confirm this across all businesses. Let's take a look at our income statement as compared to the first quarter. Total core revenues were $133 million, an increase of more than 4%. Results were enhanced by a 12% reduction in cost of funds. Interest income grew more than 2%. Banking and financial services revenues rose more than 5% due to increased economic activity. Asset quality trends continue to improve. As a result, provision for credit losses was a net benefit…

Thank you Jose. Please turn to page five to review our financial highlights. Total core revenues were $133 million. That's an increase of about 4% from both the first and year-ago quarters. Most of the increase from the first quarter was due to higher income from non-PCD loans. This reflects higher revenues from commercial and auto loans which more than offset lower interest income from paydowns in residential mortgages and forgiven PPP loans. Net interest income also benefited by approximately $7,000 due to one extra day compared to the first quarter. In addition, total core revenues also reflected growth in banking services and financial services. Revenues from banking services grew 11% from the first quarter and 34% year-over-year. This was due to expanding economic activity. Revenue from financial services increased 12% from the first quarter and 30% year-over-year. This was largely due to increased asset values and higher commercial insurance income. Non-interest expenses totaled $83 million. That is an increase of $5 million from the first quarter and a decline of $2.9 million year-over-year. Second quarter expenses reflected our previously announced cost savings, a $2.2 million technology write-down and a higher variable expenses related to increased savings. Adjusting for the write-down, our efficiency ratio would have been similar to the first quarter. We continue to see expenses in line with our previously announced plans for the year. Our goal by the end of 2022 is to continue to improve our efficiency ratio to the mid to lower 50% range. Return on average assets was 1.58%. They were significantly higher than the first year and the year-ago quarter. It also exceeded our baseline target of more than 1%. Return on our average tangible common equity was 17.8%. This was also up significantly from the first year for the first and year-ago…

Thank you, Maritza. Please turn to page eight for our conclusion. Our performance this quarter reflects what we had anticipated to see a year after the Scotia acquisition. Our larger scale, business approach ad improved efficiency [AUDIO GAP]

Ladies and gentlemen, please stand by.

Please turn to page eight for our conclusion. Our performance this quarter reflects what we had anticipated to see a year after the Scotia acquisition. Our larger scale, business approach and improved strategic positioning is coming to fruition, adding to our franchise value. Following the first quarter and now this quarter, we are seeing incremental optimism on the part of the business sector to invest for the future, slowly but surely giving us confirmation of Puerto Rico's economic revival. We, at OFG, are more than ready. We have a lot of dry powder in the form of cash to deploy for growth on the loan side but we will also continue to look closely at capital management strategies. Thanks to all our team members who have helped our customers achieve their goals. That ends our formal presentation. Thank you for listening. Operator, please open the call for question-and-answer.

[Operator Instructions]. And your first question is from Alex Twerdahl of Piper Sandler.

Hi. Good morning.

Good morning Alex. How are you?

I am well. And you guys?

Good.

First question for me. I just want to hone in on the commercial loan growth that you had this quarter. Based on some of your commentary, I think I know the answer. But do you think that we have now reached and are past the inflection point on commercial loan growth?

So when we look, definitely we are very happy with the commercial loan growth that we have seen in this quarter. I think when we look at our pipelines and the activity that we are seeing on both the small and the middle commercial businesses, we are encouraged with the activity that we are seeing. And as I said on my remarks, we are seeing incremental optimism from the business sector getting ready for what we are starting to expect, which is a more robust economic revival. So I think the business optimism, certainly supported by the reconstruction funds coming in and the economic revival and last but not least is our business model. I think the fact that we kind of focus on doing it fast, easy and well done and we have a business model that gets us a lot closer to our commercial clients is actually getting good traction and we are benefiting from that too. So if this is the inflection point, I wish I could give you the convincing answer that this is the moment. Who knows? We will probably see it with the rear view mirror. But it certainly starts to look incrementally a more positive and hopefully will continue for the years to come as the economy continues to move from rebuilding to expansion.

And then if I could just dig into the commercial growth a little bit more. Can you break out what was construction versus C&I or CRE?

I would say, most of it is C&I. When we look at our business model, there are some. Loans, commercial loans, that are construction mostly, business constructing new warehouses or building new stores as demand has grown and they need the capacity. Those are the larger kind of clients. The smaller clients are mostly C&I lines to operate their businesses and do some small or medium size acquisitions. So when we look at it, I would say 50% of our originations are for, what we call, new money, meaning new money by businesses to be deployed into their own businesses. The other 50% is more a refinancing and just going through their cycle, their business cycle. So again, that's how we break it down. And when we look at the large commercial, apart from what I just mentioned, construction, most of it is C&I lending businesses that are expanding their operations as the economy grows.

Got it. And then just switching gears to the NIM. Maritza, maybe you could just quickly breakout the contribution from PPP and NII this quarter?

Well, yes. The PPP loan program is going down as we continue to forgive loans. And for this quarter, there were only an incremental effect of two basis points as we have some forgiveness that increased our fees there. It was about $400,000 only. So it's not significant during this quarter, only two basis points. Did you get the answer, Alex? Are you there?

Operator, can you help us out?

One moment. And Alex, your line is open.

Can you hear me.

Yes, we can.

Yes, we can.

Okay. Yes. I did get the answer, Maritza. Thank you. And then, you guys are now sitting on 27%. Your balance sheet is just cash. Is there any update to the strategy with respect to activating some of that huge cash position?

Yes. I mean the update is, we are going to take a look at it now. At the end of the month of July, we were going to review our capital deployment options and we will certainly communicate any decision made to the street accordingly. So yes, we are clear, Alex. We have a significant cash position. We have strong earnings and strong earnings momentum. So we are building a lot of capital also. So we get it and we will convey the message to our board and we will come back with a decision on how to continue to move forward on our capital deployment strategies, in a more consequential way than probably earlier anticipated.

Okay. So when you talk about capital and just continuing on that theme, I think earlier this year you had sort of alluded to reassessing the dividend for a second time this year as well as I mean are you now saying there's maybe some other possibilities on the table, like a like a buyback for example?

Yes. We always have everything on the table when we look at this. So we will look at everything again. And as I said, we know how things are moving along in terms of our performance and in the terms of our capital growth. So we will be more focused, if you want to call it, to look at all options at this time.

Okay. Understood. And then back on to the margin. Just when I look at the cash position, sort of capital deployment aside, is there any update to the strategy of maybe activating some of that cash with additional securities purchases and loan growth, just kind of overall hoping for or repaying some, being more aggressive on reducing cost of funds with was some of that cash? Anything like that?

Yes. So the way we look at deploying cash to investment portfolio, we are going to be very patient given where levels of interest rates are today. We mentioned in the call that of the FHA loans that we originate, we are converting them to Ginnies and we keep them on our books on the investment portfolio. So we are just not going to just go out there and deploy cash into long duration low-yielding mortgage backed securities. So we will be patient there. We are definitely looking into deploying our cash into lending activities. We see momentum certainly on the commercial side, as I mentioned. We also see good momentum on the consumer and we have seen for a while now higher levels of origination the auto side. So we will continue to deploy there. And then we will look at the mortgage origination business also and see if we can, with home prices not only stabilizing but starting to increase in price across all areas, we might start looking more seriously into non-conforming lending strategies for us to keep in the books. So those are all in play from the lending side. And I mentioned the capital management strategies that we are going to take a look at it now. Cost of funds, yes, we will continue to look at it. You saw the effect this quarter. We will see additional effects in the next quarter. And it's something that we continue to look. I think you guys need to understand that we are also operating in a three-bank market. And that's new for us in Puerto Rico. It's new for everybody out there looking at the island banking market. And I think we have great opportunities here to generate both above average returns across the board.

Right. And then just as I think about cash on the balance sheet with the Child Tax Credit starting to hit people's bank accounts, I think in the last week, at least here. Is that the same in Puerto Rico? And would that suggest that cash balances should actually just continue to grow until at least early over the next couple of months?

So it has significant benefits for Puerto Rico but it's not necessarily immediate. The way it's going to be processed, remember, we don't pay federal taxes. So the way it's going to be processed is probably going to have an effect later in 2022. But it definitely has an impact in Puerto Rico because the limitations in terms of the caps in dollar amounts and the amount of kids that will qualify was eliminated for Puerto Rico and it was paired to the U.S. states. So from that perspective, the dollar amount that will benefit the island will be higher than in years past, because more kids qualify. And certainly the income levels in Puerto Rico make it pretty widespread in terms of the impact, in terms of the families. It's just that the process is not going to be equal in terms of the cash deposits. It's not going to be equal to the one in the States. So there's a little bit of a change there. But otherwise, it will have an eventual important impact.

Understood. And then, just switching gears to the --

[Indiscernible]. Alex, I think that we are also only looking for the consumer to start deploying the cash also. And I think we, this quarter, got benefits from the second, third or fourth wave of COVID stimulus, right, for the individuals. And we are also seeing on the commercial side how they are paying their lines of credit and bringing them down to zero balances because of the excess liquidity they have. Our expectation is, in the second half of the year, we will see some of that excess liquidity on the consumer and commercial to be deployed incrementally into consumers or into consumption or in the businesses that they operate in. So our expectation is not for continued deposit growth from the consumer and commercial as we have seen in the several quarters past.

Got it. And in terms of sort of the macro commentary, is the expectation for the expanded unemployment benefits to expire in September? Has there been any talk down there about that deadline changing, either bringing it forward or anything we should be thinking of?

I haven't heard anything. I suspect it's going to end now at the deadline and I have not heard anything specific on that. I really try to stay away from listening to too many positions.

Okay. And then, just switching gears to the ACL a little bit. You are still over 3%, excluding PPP. Charge offs look a lot like any other bank, quite frankly, very low, historical low for you guys. How are you thinking about the ACL right now? Are there still some quantitative or rather qualitative factors that you guys are incorporating? Still anything you are sort of waiting to see before releasing reserves? How do you think that is going to sort of gradually grind lower?

Let me give you my big picture. I will let Maritza give you the details. But I agree with you. And we have said it in the past. Now that Puerto Rico has kind of turned the corner from two decades of economic contraction and we are seeing the start of the revival, our bank's financial performance also, while the last two decades has been pretty, pretty good in spite of that economic contraction. Now that we have the revival, I think credit trends are going to trend toward the peers in the States. And I agree with your assessment that our numbers for this quarter certainly are equal or better than some of the States, the banks in the States. We look forward to continue to confirm that that's the trend in the quarters to come, given what we are seeing on the economy. Regarding the ACL, I will let Maritza give you the details.

Well, as we mentioned, Alex, I think the level of allowance that we have at this point are still elevated and as we continue to see credit trends at this level and the economic revival continue being tangible for everybody, we see our allowance coverage gravitated towards the level of day one and with a good probability that to be better than that, lower than that day one accounting. But we need to continue seeing consistent and this metric to be sustainable through the time to start releasing the company potential qualitative adjustment that we still have within the allowance.

[Indiscernible]. Okay. And then, when I look at fee income and I look especially at the level of the banking service revenues struck me as high this quarter, but then I also realized we have never really seen a clean quarter post Scotia. So, the $18.2 million, is that kind of the right run rate to start out? Is that a normalized level?

So again, right on point on your comment, Alex. The COVID pandemic kind of delayed the full momentum that we brought in with the Scotia acquisition. So this is the first quarter where we are seeing all systems go with the Scotia acquisition. When we look at banking service revenues, that is also the case and that's what encourages us, because it has a lot to do with business activity, but it also has to do with the larger scale. We also need to get accustomed to those levels. I don't want to go out on a limb and say this is the going rate but it certainly starts to look like it is.

Great. And then, just last question for me. When you think about the efficiency ratio target of kind of mid to low 50 as by the end of 2022, do we need to see some rate hikes to kind of help that out? Or is that something that can be sort of achieved in the current environment?

Yes. We certainly need the rate hikes. In a growing environment and growing business environment, it's very, very difficult to just reach the low 50s efficiency ratio by just bringing down expenses. And as I said in quarters past, we are making some investments in technology and digital and that will certainly have an impact there. So yes, we need some help from interest rates going up. And that's why I mentioned earlier on the question regarding deployment of liquidity, even though we have been wrong so far, we expect interest rates to inch up and be more compelling for us to invest in the investment portfolio and also get a little bit better returns on our variable rate commercial loans that we have in the books. And that should impact and help improve our efficiency ratio to the mid to low 50s. That's our expectation.

Perfect. Thank you for taking my questions.

Thank you Alex. Have a great day.

You too.

Thank you. [Operator Instructions]. And your next question is from Jon Krautmann of Rubric.

Buenos días.

Hi. Good morning.

You mentioned there's only three commercial banks on the island. How would you characterize the competition for deposits? And what does that mean, in your opinion, for interest rate sensitivities for us in the future?

Well, competition for deposits is strong, particularly on the commercial side. So when we look at the consumer side, the expected competitive landscape of making sure that we serve our customers on the individuals. But on the commercial side, it's keen and there is some, I would say, above level, aggressive levels of pricing on the commercial side. What does that mean for sensitivities into the future? I think we will have a lower for longer when interest rates go up. That's how I see it.

And switching to commercial loan growth. You had a good discussion there with Alex around some of the inputs there. But with respect to new construction, which has tended to be some of the biggest multipliers in terms of economic activity construction is, when do you think we see larger scale construction projects really start to take shape on the island?

Well, it's all dependent on how CDBG funds are deployed in the island. They are starting to be deployed. There are some federal contracts that are being approved in time. And so my expectation is, in the second half of the year we will start seeing those and incrementally growing going forward. But hard to be specific to your question.

Third question is on loan loss provisions. Obviously, we saw some progress there. Can you help us out in just understanding some of the macroeconomic changes if those were incorporated into the model that helped drive some of the release there in reserves? And do things continue where we are right now, should we expect that to continue with reversals in the back half?

There are no changes on macroeconomic assumptions. The changes that you are seeing on the provision is basically based on the credit performance of our loan portfolios. And since they improved, our model just spits out a release. We take care of the charge offs and then we run the model and it spits out the provision number which, in this case, was a negative provisioning because, as Alex mentioned, we are having a low level of credit losses and we see our delinquency levels at very low levels also historically as well as NPL. So that's how it works out. But we do not tinker with the economic assumptions. That is something that we do that when we have a shock to the system and that shock happened last year.

So is it fair to say then if third parties like Moody's economics were to upgrade the island, their economic forecasts, whether it's because of a debt deal resolution or other macroeconomic areas that are improving on the island that would as that's incorporated into our model that that would potentially accelerate loan loss provision reversal?

I think you are looking too much into it, honestly. I think the third parties, in this case, Moody's or whoever, they just run their macroeconomics for the island and we discuss it with them and we include those assumptions into our model and we run the allowance calculation. But don't make too much about all these modeling and all these economic assumptions and all that stuff because there has to be a complete shift in the economic reality for those assumptions to change dramatically one quarter to other. So at the end of the day, it's about primarily how your loan portfolio, from a credit perspective, is performing. And that's what moves the needle.

Got it. Okay. And then a bigger picture question. With some of the efforts around the G20 and the global minimum corporate tax rate, if that were to proceed and there seems to be some barriers within various countries within the G20 in blessing something like that. But if that were to proceed and we were to see a minimum corporate tax rate, how does that affect investment on the island? Does that impact prospective investment from, say, pharmaceuticals that talk about reinvesting in the island?

That's for a higher IQ. I am a normal level IQ guy. I don't have the answer for that. Sorry.

Got it. Okay. And then just last question, again, bigger picture on the island. What are you sort of seeing out of the local, the Puerto Rican legislature and the Governor's office in efforts to promote a climate that's conducive for Mainland and foreign investment in Puerto Rico?

Yes. I said earlier, I try to stay away from the political landscape as far away as possible. But the short answer to it is nothing.

Okay. Thank you.

Yes. Thank you for your questions.

Thank you. [Operator Instructions]. And your next question is from Anne Wickland of Easterly investment.

Good morning.

Hi. Good morning. How are you?

I am good. I wanted to circle back to the CET ratio. So last quarter you gave us a target of more like 11% to 12% and you are currently sitting at about 14%. So first, can you quantify how much excess capital we will have and sort of the timing on garnering that excess capital? And then, second and Alex kind of touched on this question, but I wanted to ask other possibilities. You talked about loan growth and non-performing loans. Is M&A on the table at all? Or maybe a small financial technology bolt-on to help buildout your customer service offering? And then another thing you haven't talked about in a while is your U.S. investments in the syndicated loan. So if you just can just kind of provide some color on that?

Yes. Sure. So you asked me three questions. I hope I can remember all three. If I don't, please remind me of the question. So I will start with the CET question first. As I said earlier, we know we are building capital quite fast, given our results so far in the first half of the year. So yes, we do recognize that we have excess capital. It's around 250 to 300 basis points of excess capital that we can manage on. So we know what we need to do. And in terms of deploying that capital, I don't want to go into the specifics here, but what I can tell you that the Board, we are going to be looking at this very closely from a capital management perspective and strategies to deploy that capital. So, the second question was regarding M&A and if there is any opportunity for us to do M&A. I don't see any M&A opportunity here in Puerto Rico. Opportunities in the States, it's something that we are not right now focused on in terms of M&A. So that's not something that we have up our cards. And then, I think the third question you asked me was regarding the U.S. loan program that we have launched on 2017 and kind of give you an update. So we continue to build that book as part of our diversification, geographic diversification. I think it's the right thing to do. We have, I would say, right now 50% of the book is middle market loans. The other 50% are small commercial loans that that we have a partnership with a bank in the States. So that's kind of how we are going at it. We are slowly but surely building that. Certainly the numbers in this quarter, from that bucket, did not do any dent, did not affect significantly the balance of our loan book or the commercial book. Most of the originations are small commercial loans that are mostly lines of credits and really did not affect the loan balances in this quarter. But that's how we see that. And we continue to methodically build that business as part of our longer term strategies. Did I miss any of your questions?

No. That was great. Thank you. And great quarter.

Yes. Thank you. You are welcome.

Thank you. [Operator Instructions]. And at this time there are no further questions. I will now turn the call back over to Jose for closing remarks.

Thank you operator. Thanks again to all our team members who have helped our customers through the pandemic and done a great job in the first half of the year. And thanks to all our stakeholders who have all have listened in. So have a great day. And looking forward for the next quarter call.

Thank you. This does conclude today's conference call. You may now disconnect.