OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Madison. I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the first quarter 2025 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties. Outlined in the risk factors section of 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 background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Good morning and thank you for joining us. We are pleased to report our first quarter results. As we look at page three of our presentation, it was another strong start to the year with solid overall performance. We had consistent financial results generating earnings per share diluted of $1. This was driven by excellent operating execution and loan and deposit growth. Consumer credit reflected higher seasonal customer liquidity in Puerto Rico. And we bought back shares and raised our dividend supported by our strong capital generation and balance sheet. Please turn to page four. Our strategic investment in technology through our Digital First strategy continues to drive innovation. This is freeing up our people to build stronger customer relationships through our island-wide branch network. Looking at the numbers, 96% of all routine retail customer transactions, 97% of retail deposit transactions, and 68% of retail loan payments were made through our digital and self-service channels. This has been driven by year-over-year growth of 12% in digital enrollment 21% in digital loan payments, 40% in virtual teller utilization, and close to 5% customer growth. During the quarter, we launched three digital tools, all first in Puerto Rico. Our Omnichannel online mobile app that provides customers with a fast, easy, and seamless banking experience across all digital points. Smart Banking Insights, that offers advice to help customers achieve greater financial progress. This reinforces our innovative position in the banking market in Puerto Rico with intelligent and personalized solutions and tools, and Apple Pay for both debit and credit cards. This is new in the local banking industry, giving our customers another option for easy and secure in-store, in-app, and online purchases. I'd like to add that our self-service portal, which we launched in 2023, was nominated for a Banking Tech Award for Best Use of Technology in Consumer Banking, which is another first for a Puerto Rican bank. As you can imagine, we're very proud of all these accomplishments. Now here's Maritza to go over the financials in more detail. Then I'll come back and provide our outlook for Puerto Rico and OFG.

Thank you, Jose. Please turn to page five to review our financial highlights. All comparisons are to the fourth quarter, unless otherwise noted. Core revenues total $178 million. Looking at key components, total interest income was $189 million, a decline of $941,000. This mainly reflects two fewer business days which negatively affected interest income by $3 million. Partially upsetting these were higher balances and yields on investment securities and higher loan balances. Total interest expense was $40 million, a decline of $874,000. This mainly reflects the two fewer business days and higher average balances of core deposits at a lower rate were partially upset by higher average balances of borrowings and brokerage deposits. Total banking and financial service revenues were $29 million, a decrease of $3.6 million. The fourth quarter included $4.8 million combined in annual insurances and favorable MSR valuation change. Excluding that, total banking and financial service revenues increased for the quarter. Looking at non-interest expense, they totaled $93.5 million, down $6.3 million. First quarter compensation included $1.6 million in increase in seasonal FICA expenses and merit raises. General and administrative expenses included a $3.1 million volume incentive payment from business partners. It also included $1.2 million in higher electronic banking volume and related costs as compared to the last quarter. Note that the fourth quarter included $4.8 million in early retirement, business licensing, and annual performance incentives. Taking all these factors into consideration, we were in line with our guidance of 95 to $96 million in quarterly non-interest expense in 2025. Income tax expense was $13.9 million. The tax rate was 23.34%. That reflects an anticipated rate of 26.14% for the year and the benefit of $1.7 million in discrete items. The annual book value was 26.66 cents per share. During the quarter, we bought back $23.4 million of shares and raised our dividend 20%. Looking at our performance metrics, efficiency ratio was 52.42%, return on average assets was 1.56%, And return on tangible common equity was 15.28%. Please turn to page 6 to review our operational highlights. Total assets were $11.7 billion, up 5% from a year ago and 2% from the fourth quarter. Average loan balances were $7.8 billion, up close to 1%. Health for Investment totaled $7.9 billion, up 4.2% from a year ago, and up $60 million, $61 million from the last quarter. The sequential increase mainly reflects growth in auto and consumer loans, U.S. and Puerto Rico commercial loans, and repayments of residential mortgages. Growth of Puerto Rico commercial loans included a higher level of line of credit utilization. Loan yield was 7.99% down two basis points. New loan origination of $559 million was down 9.3% from the fourth quarter, but up 4.2% from a year ago. First quarter originations reflected seasonal declines in Puerto Rico commercial lending, partially upset by an increase in U.S. commercial. We continue to have a strong commercial pipeline at this time. Average core deposits were $9.6 billion, up close to 1%. End of period balances of $9.8 billion increased $308 million or 3.3% quarter-over-quarter, and $211 million, or 2.2%, year-over-year. The sequential increase reflects growth in retail, commercial, and government deposits. It also reflects growth in savings, time deposits, and demand deposits. Core deposit cost was 1.42%, down four basis points from the fourth quarter. Excluding public funds, cost of deposits was 1% compared to 0.96% last quarter. Average borrowing and brokerage deposits were $517 million compared to $426 million. The aggregate trade rate was 4.32%, down 8 basis points. End of period balances were $421 million compared to $557 million. During the first quarter, $145 million in short-term repurchase agreement and federal home loan bank advances matured. Separately, a two-year $200 million federal home loan bank advance was renewed at 4.14%, compared to previous rate of 4.52%. Cash at $710.6 million was up 20%, and investment total $2.8 billion, up 2%. During the first quarter, we acquired $100 million of mortgage-backed securities, yielding 5.40%. Net interest margin was 5.42% compared to 5.40%. First quarter NIMS benefited slightly from the investment securities portfolio and lower cost of government deposits. Please turn to page seven to review our credit quality and capital strength. Credit quality continues to be stable. Net charge-off totaled $20 million, up $4.5 million. The first quarter included a $2.9 million partial charge-off of a previously reserved commercial loan as compared to the fourth quarter, which included $2.6 million in recoveries from the sale of previously charged-off auto and consumer loans. First quarter auto net charge-offs were unchanged, 1.63 percent. Consumer net charge-off ratio increased 62 points to 4.34 percent. And there were continued recoveries in mortgage and Puerto Rico commercial loans. Total net charge of rate was 1.05% of 23 basis points sequential. Year over year, it wasn't changed. Provision for credit losses was $25.7 million, down $4.5 million. The first quarter included $17.4 million for increased volume, $4.8 million for specific reserve for three commercial loans, and $3.5 million to the effect of auto current loss given default trends post-pandemic. Looking at other credit metrics, the early and total delinquency rates were 2.19% and 3.49% respectively, both down from the fourth quarter. The non-performing loan rate was 1.11%. Looking at other capital metrics, Our CDP-1 ratio was 14.27%, stockholders' equity totaled $1.3 billion, up about $41 million, and the tangible common equity ratio increased 11 basis points to 10.30%. To summarize the first quarter, net interest income remained stable as growth in loan balances and a declining deposit cost largely neutralized the impact of two fewer days. Loan growth continued to do well in auto and consumer and U.S. and Puerto Rico commercial. Retail and commercial deposit balances increased as we continue to deepen consumer relationship and grow our client base. Net interest margin was slightly higher than expected from higher yielding investment securities and lower cost of government deposits Credit quality continues to be well managed. The trends are stable, reflecting the solid economic environment in Puerto Rico. Non-interest expenses were in line when you remove the effect of the specific items in the fourth and first quarter. Results also benefited from a lower tax rate and share counts. Regarding capital allocation, in addition to buying back shares, the dividend was increased, and our CEP ratio provides us with a strong foundation during volatile or challenging times. Now, here's Jose.

Thank you, Maritza. Please turn to page eight. As you all know, we're navigating an uncertain environment, and this is how we see things today. On the one hand, in Puerto Rico, wages and employment are at historically high levels. The business environment is constructively positive, investments in public and private projects continue to flow, and the economy continues to grow, albeit at a slower pace. On the other hand, higher levels of volatility due to macroeconomic and geopolitical events, if they continue, they will eventually have an impact, an economic impact. Our team members are in close contact with our customers to make sure we have a good pulse on how they're adapting to the environment and how ORG can better serve them. Turning to OFG, our digital first strategy is proving to be highly effective. We will continue to invest in and deploy new customer innovations to further differentiate our business model, increase efficiencies, and most important, help both our retail and commercial customers. Consumer credit trends are good. Supported by a strong balance sheet and a well-tested leadership team, we continue to methodically execute our business plan and be there for our clients and the communities we serve. As always, our results could not have been achieved without the hard work and dedication of all our team members. We are extremely thankful to them and excited for what's to come. We hold our annual shareholders meeting next Wednesday. With this, we conclude our remarks and we open the call for questions.

If you have a question at this time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, press star 2 on your telephone keypad. And we will take our first question from Frank Sheraldi with Piper Sandler. Please go ahead.

Good morning. Good morning, Frank. Jose, just in terms of the digital channel, obviously, you cite some pretty impressive numbers in terms of transactional use. Are you able to see deposit account openings through the digital channel? Is that something that's ramping up? Is that something still yet to come? How is that?

Actually, Frank, yes, we do have online digital account opening, and it's through the self-service channel. So, yes, we do have that capability. And everything that we've done from the digital first step, a strategy that we have deployed throughout the years, it requires us to be kind of the educators in the market in terms of how things can move into the digital channels and all that. So right now, around 25, 26% of our checking accounts and certificates of deposits are opened through the digital channel. The rest are open at the branches. So we have seen increasing trends there also.

OK.

And then just in terms of the deposit growth from here, can you detail any seasonality here in the first quarter? And could you talk about the timing of some assumed, I think you had assumed some public deposit outflow in February? Just trying to get thoughts around growth from here.

Yep. So first quarter is always somewhat seasonal in terms of deposits. We do have the tax refunds, the child tax credit also is part of the equation on the first quarter in terms of deposits. So we do acknowledge that the first quarter has some important seasonal components. But we are very encouraged with the way our online and branch network are um moving along and and growing our client base so we we do expect to uh continue to see some deposit growth from here um on in terms of uh your second part of your question which i forgot if you can recall just on the government government deposits i thought there was some yeah yeah yeah yeah we have we have a yes we have a billion or so uh government deposit that uh We expect to be renewed for another several months, so that is something that we will update every quarter. But it's still there, and we're expecting to renew it in the next couple of weeks.

Okay. And if I could just sneak in one more, just in terms of consumer charge-offs, can you speak to the... expect continue to see some normalization there i know you had some commercial as well that i'm sure can be more volatile um but on the consumer side just wondering your thoughts around um uh charge off levels and if you anticipate continued normalization on that front yeah i'll ask says our chief risk officer to give you some color on that one so consumer we have two main portfolios we have the auto portfolio which is the largest one and then we have uh

unsecured personal loans. On the auto portfolio, we, and both of them actually, we expected the trend to improve during this quarter because it's a seasonal improvement. The first quarter is always good for all credit statistics, and we experienced that, so that was realized. On the second, on auto portfolio, we are seeing now a stabilization, too, on the recovery rate from the collaterals. I think that was a positive effect on the issues with the tires that the customers are, you know, having an increased demand for this used vehicle. So that's a positive trend. And the third part of the auto is that we're seeing vintages that have better grade on the grading. We've got three titans. Back in 2022, we tightened grade on the grading standard. So we're starting seeing those better grade on the grading vintages coming into play for the net charge. So this quarter was a positive quarter because we expected it, but it was actually better than we expected because the quarter behaved very good. So next quarter, we do expect an increase, a slight increase, because of the for this first quarter. But overall, we are going to expect stabilization on both portfolios, on all the credit metrics.

OK. OK. Thank you. Yep, thank you. Thank you for your questions.

And we will take our next question from Timur Brazilir with Wells Fargo. Please go ahead.

Hi, good morning. Good morning. The security yields were up nicely again this quarter. I'm just wondering what's the current duration of the bond books? And, um, just some of the highlights on what's coming off, maybe, uh, from a cash flowing standpoint in the next couple of quarters and where those reinvestment rates are coming on right now.

Yeah. Well, the duration we have mostly mortgage tax, security agency paper, and is around five to six years. And the, the duration right now and repayments are coming around this quarter was $84 million and. We will keep monitoring the market to see opportunities, but right now cash is yielding around 4.25. So we will keep looking at the funding side and manage the as we've been more appropriate.

Okay. And then maybe more broadly around the margins, certainly hold up better than I was expecting. And part of that was the security yields, loan yields also seem to hold up better. Just where we are today, forget about the impact of additional rate cuts. Is the next move likely some pressure on the margin or maybe some of the bond reinvestment and could offset that? I guess what's the trajectory for margin here?

Yeah, we share with you in the last poll that we have you know, a range between 5.3% to 5.4% margin for the year. That range will move. It depends a lot on the funding side, particularly if the government deposit exit at certain point, because we will need it to replace with a wholesale funding, which will cut it a little bit higher funding than these government deposits. But as long as it remain in the bank, I will see that range in the upper level. Okay.

Okay, great thanks and then just last for me any additional color for the specific reserve on the commercial loans or those mainland or Puerto Rico and I guess yeah any similarities across those three.

So these are three loans wanting to Puerto Rico long standing substandard loan that we placed in non accrual. And the other two loans are U.S. loans. They're totaling both in the aggregate around $10 million, and they were placed in substandard, and we took the provision for that. Great. Thank you. Yep. Thank you for your questions.

And we will take our next question from Brett Robinson with Hovde Group. Please go ahead.

Hey, good morning. um wanted to start um jose rafael could you give us you know i haven't seen a lot since the power uh outage last week and so you know i haven't seen a lot in the press about what's happened with the luma contract and anything else going on related to the power grid and seems like it's a continues to be an area of opportunity for more sustainable and cheaper power but just want to see if you've heard anything regarding

So the only comment I can add here, Brad, is this is going to be a long process. It's going to take at least a decade, and we are into a two-year kind of or so privatization program. It's been privatized for two years only or so. So it's going to take a long time, and we're going to have these – events sporadically. Probably in the summer we'll have some too when the heat comes up and the demand increases because it's a fragile system. That's the reality. The other reality is that we are pretty much ready to cover all these issues because most of the businesses have power generators or solar panels or they have been able to do what it requires to adapt to these unexpected events. So, yes, it does have an impact on the economy. It was said that it was a hundred and some million dollars, the impact, because it was a total blackout. And it's unfortunate and there's no way to sugarcoat it. But the reality is that it's going to take a while to get this fixed from the generation as well as from the transmission and distribution. to make it resilient, to make it low-cost, to make it diversified. The electric grid in Puerto Rico was destroyed by the hurricanes, and so it's going to take a while. And it requires execution by the private resort, and it requires oversight by the government. And those are areas of opportunity, if I should say, taking a bit of your words.

Yeah. Yeah, and it also seems like some of the Some of the opportunity could still be there for onshoring pharmaceuticals and that kind of stuff, but I haven't seen anything on that really either other than just talking about potential.

Correct. I think the tariff environment, though, Brett, does pose a good opportunity for the Puerto Rican government to position itself in a way that can take some share of the onshoring given the current situation infrastructure in terms of the pharmaceutical and medical devices, the expertise that we have, the educated workforce that we have. So all that should be good, positive incentives and motivation for some of the onshoring coming back to Puerto Rico. But I agree with you, it's been talked and not necessarily evidence of it has been seen. But I'm encouraged to tell you the truth because the tariffs is a catalyst for that. So being part of the United States and our history in the manufacturing side, remember Puerto Rico's economy is 40% manufacturing. So it plays very, very well. It will require, again, good systematic execution from the government.

Okay. That's great, Kyle. Um, and then maybe Marissa on fee income, you know, typically wealth management is a little soft in one queue and then stronger, stronger in two queue. Um, want to make sure I understood that the outlook for fee income from here, and then, you know, obviously mortgage banking is, is, is tough to, to, um, forecast, but would assume that that, that level also from here.

This quarter was better than expected in the sense that the banking fees were higher even though we did have two less days in business activity. So this quarter we were at $29 million. We shared with you last quarter that we are seeing $29 to $30 million at the wrong rate for those in fees for the year. So that's how we're seeing the fees at this moment. And this quarter particularly was really active in the debit card transactionality and the POS.

Okay.

You know, and if I could add, Brett, if I could add just one thing here that Maritza just pointed out in terms transactionality, we do are seeing a lot more activity from our customers and utilization of our debit cards and our services. So that is definitely very encouraging for us because it validates not only our strategy, right, the digital first strategy, but it also validates that we are being recognized and our brand is gaining additional traction here in the market.

Okay. And does Apple, does Apple pay rollout? Does that, does that mean a lot to you guys transactionally from here? Or how do you think about the Apple pay rollout?

It's good to have, to be honest, it's good to have people in Puerto Rico was not, uh, Apple, Apple, uh, permitted. It was just more of an Apple thing than a Puerto Rico thing. Uh, but, um, you know, we, we were. Together with another institution in Puerto Rico, there were only two institutions that were able to get the Apple Pay available for our customers, and we were one of those. And we're proud of that. We're proud of that because we are leaders in innovation and technology, and we continue to improve it by delivering on a timely basis, even to the requirements of Apple, which are somewhat elusive to some others.

Okay. And then this last quick one, tax rate from here, you know, any thoughts on full year and then maybe what are the trends relative to the past two quarters?

Yeah, we are seeing a 26% ATR for the year, for the full year.

Okay. Great. Thanks. Appreciate all the color.

Yeah. Thank you. Have a great day.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. And your next question comes from Kelly Motta with KPW. Please go ahead.

Hi, good morning. Thanks for the question. Maybe circling back to the margin, Maritza, could you help us out and remind us how much of the asset base is more rate sensitive and impacted by, you know, an immediate reset on fed funds. How to think through that and how that fits into that margin guidance?

Yes, in the asset side, the most elastic asset is the commercial book, which right now 53% is tied to variable rates and the cash. So that's the two assets that are more sensitive to any change in the market.

okay that's helpful um and then it was it looks like you know the the deposit costs are um continuing to perform well i'm wondering if you could provide an update as to the competitive environment in puerto rico um what are what are you seeing in terms of um you know your your competitors are Is it still relatively high competition, or have you seen pressure there back off in the last quarter or two?

Look, competitors are competitors, and they are relentless. So I hope they stay the same of us. So it is what it is. But yeah, the market remains the same, Kelly. We were looking out for the best for our customers. On the deposit side, there were some credit unions that were laggards in terms of rates. That's certainly normalized. And we're really happy with our core performance, particularly on the deposit side. We continue to grow demand and savings and time deposits. We've grown. That's driven primarily by not only existing customers bringing in deposits and us deepening the relationship, but also new customers. We're seeing a net growth of 5% year-over-year in net customers, and that is also driving. There's a particular aspect of the deposit growth that is also interesting for us, and that is that we're growing non-interest-bearing deposits, too, in the quarter. So those are good indicators. We'll see how much of it is seasonal, how much of it is – a part of structural savings and deposits from the economy that we're operating in Puerto Rico, but certainly a pretty solid quarter.

Thanks for that. And then I also appreciate the commentary about Puerto Rico having a lot of manufacturing in the economy. Wondering if you've seen any movement there. Puerto Rico could theoretically be a beneficiary on a move to greater onshoring to the US. I'm wondering if you're seeing any movement there, what the discussion is on the ground and your thoughts around that as I know it's a moving target here.

It's too early to tell. We haven't seen any movement to speak of. is certainly a good opportunity. And it's too early to tell. As you can read in the papers and online, the world is trying to figure things out. And we're not an exception. We're also looking at what's going on around the world and seeing all the tariffs and all that. Right now, I believe pharmaceutical products are not being tariffed, additional tariffs. So it's still not yet being added to the list. So we'll see. We'll see. We're seeing some good news coming out of the market yesterday and today. So we'll see. We have to take a hard look this quarter and and see how things evolve. And we speak to our customers. As I mentioned, we were visiting customers, particularly on the commercial side, asking them how they're adapting, how are they seeing things. And again, it's too early to tell, but they are definitely managing the uncertainties by building up inventories, making a little bit of a pause in some of the projects, but not necessarily putting a full stop. And that's the caller we get from our customers. And we're trying to make sure that we're as close to them as possible because that's what banks are for.

Got it. I really appreciate the caller. Most of my questions have been asked and answered. I'll step back. Thank you.

Thank you. Have a great day.

And once again, if you would like to ask a question, please press star then the number one on your telephone keypad. And we will pause for just a moment to allow any further questions to queue. And at this time, there are no further questions. I will now turn the call back over to Mr. Fernandez for closing remarks.

Thank you all for joining us in the call today. We look forward to seeing you in the next quarter. We'll have our shareholders meeting next week. So thank you for being with us. Have a great day.

This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.