OFG Bancorp

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 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 third 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 factor section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Good morning and thank you for joining us. We are pleased to report our third quarter results. Let's go to page three of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year over year, on a 5.6% increase in total core revenue. Loans and core deposit balances increased year over year, with particular growth in commercial loans, which has been a strategic focus, as auto loans moderated something we have been anticipating for a while. Performance metrics continue to be strong, credit was solid, capital continued to grow, and we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico with a continued outlook for growth. Please turn to page four. Our Digital First strategy is making significant strides, expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our Digital First strategy, we're gaining strong momentum in both adoption and new accounts. During the third quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year-over-year growth in digital enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%. All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year, we introduced the Libre account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year. 27% of Libre accounts have been opened digitally versus 19% last year. And new Libre accounts generated a 14% increase in related deposits. The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our Oriental Biz account suite making treasury management easier and secure for small businesses, driving higher new account openings and deposits. The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones. We are providing an average of nine insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years. Now here's Maritza to go over the financials in more detail.

Thank you, Jose. Let's turn to page five to review our financial highlights. All comparisons are to the second quarter, unless otherwise noted. Core revenues total $184 million, driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments, and $1.6 million from one additional business day. Total interest expense was $45 million, an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding, and $0.5 million impact from the extra business day. total banking and financial services revenues were $29 million, a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation. Compared to a year ago, when we were first subject to reduce interchange fees under Durbin, total banking and financial services revenues were up $3 million, or 11%. Our income category was $2.2 million. This included gains from OFG Ventures' investment in FinTech focus funds. Looking at non-interest expenses, they totaled $96.5 million of $1.7 million. This reflected a strategic investment of $1.1 million in technology, people, and process improvement. $1.1 million tried to increase business activity and marketing, and an $800,000 reduction in foreclosed real estate costs. Income tax expenses was $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in discrete items during the quarter and an anticipated rate of 23.06% for the year. Look at some other metrics. Tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average asset was 1.69%. And return on tangible common equity on average tangible common equity was 16.39%. Now, let's turn to page six to review our operational highlights. Total assets were $12.2 billion, up 7% from a year ago, and steady compared to the second quarter. Average loan balances were $8 billion, up close to 2% from the second quarter. End of period loans held for investment totaled $8.1 billion. Sequentially, loans declined $63 million, or 0.8%, mainly due to repayment of commercial lines of credit funded in the second quarter. Year by year, loans increased 5%, reflecting our strategy to grow commercial lending in Puerto Rico and the US. Loan yield was 7.90%, down one basis point. New loan origination was $624 million, As Jose mentioned, this reflected, in part, moderation in auto loans that we have been anticipating, and unexpected easing of auto sales after a surge of pre-tariff purchasing in the second quarter. Year over year, originations were up 9%, and the commercial pipeline continues to look good. Average core deposits were $9.9 billion, up close to 1%. End of period balance, $1.8 billion, decreased $76 million, or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposits and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million, or 3%. Core deposit cost was 1.47%, up 5 basis points. Excluding public funds, cost of deposit was 103 basis points compared to 99 basis points in the second quarter. The increase in cost mainly reflects higher average balances in savings accounts within the upper pricing tiers. Investment total $2.9 billion, up $154 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32%, partially offset by repayments. Cash at $740 million declined 13%, reflecting the new securities purchases. Average borrowings and brokerage deposits totaled $769 million, compared to $672 million. The aggregate rate paid was 4.11%, level with the second quarter. End of period balances were $746 million, compared to $732 million. The third quarter reflected increased variable rate borrowings and decreased brokerage deposits. Net interest margin was 5.24% compared to 5.31%. This quarter, NIMS reflected increased interest income from the securities portfolio, a slightly higher cost of deposits, and increased variable rate borrowings. Please turn to page 7 to review our credit quality and capital strengths. Credit quality continues to be stable. Provision for credit losses was $28.3 million, up $7 million. Reflected, $13.5 million for increased loan volume, $5.6 million for specific reserves on two commercial loans, the impact of two items from our annual assumptions update, $4.3 million from updated repayment assumptions in commercial loan and residential mortgage portfolio, and $2.9 million for microeconomic factors. Provision also included $1.3 million due to the auto-qualitative adjustment related to the seasonal increase in early delinquency not captured in the model. Net charge-off totaled $20 million, up $7.4 million. Total net charge-off rate was 1% up 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year-over-year, the net charge-off rate improved in consumer and auto portfolios, and there was a higher recovery rate in mortgage. Looking at other credit metrics, the early and total delinquency rates were up from the second quarter, but in line with the rate range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%. Stockholders' equity total, $1.4 billion, up $41 million. And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize the third quarter. Net interest income continued to grow, reflecting our strategy of an increased volume of loans, in particular commercial, more than offsetting our lower needs. We continue to anticipate annual loan growth in the range of 5 to 6%. While deposits were down sequentially, they increased year over year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32% for the nine months, in line with our target range of 5.30 to 5.4 for the year. During the fourth quarter, we anticipate a range of 5.10 to 5.20%. credit quality remains stable, reflecting the strong economic environment in Puerto Rico. Third quarter non-interest expense were a little above our range, but we continue to anticipate there will be between $95 to $96 million a quarter. As I mentioned, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.9%. Ninety percent. Capital continues to build, and we anticipate continuing to buy back shares on a regular basis.

Now, here's Jose. Thank you, Maritza. Please turn to page eight. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also got a boost this summer from a surge in tourism. More importantly, new developments in onshoring confirmed Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing. Turning to OFG, we will continue to pursue our differentiated, unique, customer-centric strategies. Our Libre and Elite accounts and our Oriental-based commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid, and our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future. With this, we end our formal presentation. Operator, let's start the Q&A.

Certainly. 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. Again, that is star and one for your questions. We will take our first question from Aaron Saganovich with Truist. Your line is open.

Good morning. Thank you. Maybe we could talk a little bit about the deposits in the quarter. The costs of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that.

Yep, first of all, welcome to our call, your first call with OFG, and thank you for covering us at Truist, so I appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Libre account, which is mass, but we talk about the Elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account, paying a little higher rate, and that's kind of the short-term cost of it, but also betting on a long-term strategy of deepening that relationship with the customer, and that's how that product is structured. So what you're starting to see is a little bit of a higher cost on the savings side because we're being very successful with our strategy. We're really happy with the results. And we'll continue to leverage the added features that we're adding to our deposit customers in terms of the insights and the predictive insights that we provide through AI, which are unique to each customer. And that's actually something that no other bank in Puerto Rico offers, and it giving us great momentum for us to attract new customers and potential for deepening. So that's a little bit of what's driving some of that higher customer cost on the savings side.

Okay, that helps. And then in terms of the commercial loan originations, those were solid, but you had some paydowns on lines of credit. Maybe you'd talk about the dynamics for commercial and outlook for commercial loan growth ahead.

Sure. So as Maritza pointed out in her remarks, part of what occurred in the third quarter was the repayment of some of the commercial lines that were drawn in the second quarter. So that's a little bit of what drove the balances to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico and Oriental going after the those opportunities. So we're very confident about our commercial pipeline in the fourth quarter and starting to build the 2026 pipeline also.

Okay. All right. Thank you.

Yep. You're welcome. Thank you. And again, welcome to the team. Appreciate it.

We'll take our next question from Timmer Brasileir with Wells Fargo. Your line is open.

Hi, good morning. Thanks for the question. Good morning, Timur. Just a follow-up on paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, you know, where are you really targeting to take some market share here?

Yep, so as I explained earlier a little bit, we go after the mass market with a zero-cost account. It's a checking account, and we drive the growth through our uniqueness in terms of the offering. On the elite account, the average cost is around 1% plus, let's say 1.5% on average, let's just say. And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is, again, playing very nicely for us on our strategy. And the key here is deepening, right? And how do we... Jorge Mancilla- be are able to deepen that relationship through debit card utilization auto loans mortgage loans wealth management, etc, which we offer throughout. Jorge Mancilla- And and and that's kind of what's driving that that a higher cost on the savings side and that's. Jorge Mancilla- there's there's nothing else to it.

David. got it thanks and then maybe two questions around credit. The first, if you could just provide any kind of additional color on the two commercial loans, and then looking at that commercial portfolio on the mainland in particular, two out of the last three quarters, we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within mainland CRE?

Yeah, so let me answer your second question first. On the mainland, portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on the small and midsize commercial lending with some partners, and that strategy continues to play out. On the first part of your question, You've seen some charges in the last several quarters. It's part of our way of managing risk within that portfolio. And it's actually started like a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks, and it required some charges. So that's kind of, we don't see that as, we see it more idiosyncratic than being more market-wide and feel comfortable with our team and the efforts that we're doing. Now, in particular to this quarter, there are the two commercial loans. One is a U.S. loan and one is a Puerto Rico loan. The U.S. loan, it's a $5 million loan where we basically took a provision and the charge of this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that acquired a large, did a large acquisition. They're having some operating and financial weaknesses and we're proactively provisioning for that loan. So these are idiosyncratic. We don't see them as being market related.

Okay, thanks. And then just lastly on auto loans, the pickup and charge-offs there, it's kind of, more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time. We finally got that there. Just maybe talk a little bit more about just broader auto trends, both from a growth standpoint and then from a credit standpoint.

So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations, and we might see slightly higher in the fourth quarter. But these are more normal levels in our view, and we feel comfortable with the originating levels that we're having right now in Timor. Cesar, can you talk about the credit?

Yes, on the charge-ups, what we're seeing is seasonal dynamics of the retail portfolios. We're usually at the lowest levels at the first quarter, and then gradually those statistics come up and they peak towards the fourth quarter. So what we saw quarter-by-quarter is a modest increase on charge-ups and all the statistics. But when we compare it to the same period last year, we see a better trend. So we're optimistic based on those comparisons.

Great. Thanks for the call.

Yep.

Thank you Tim Martin. Thank you for the call.

We will take our next question from Kelly Mata with KBW. Your line is open.

Hey, good morning. Thanks for the question. Hi Kelly. hi um maybe circling back to the q4 margin guidance 310 of sorry 510 to 520. um wondering maritza what that um what that what the fed funds assumption is in that given that you guys are asset sensitive um one and then two maybe you could talk a little bit about um i think we on on the last quarter call if you were calling for some margin expansion, provided we got some loan growth all else equal, just with the margin being down, kind of, if there was anything in that that, you know, differed from your expectations maybe three months ago that drove that. Thank you.

Thank you, Kelly, for your question. And first, I think one point when we look back at the quarter and the PB, Lupita D Montoya, A inflows into the deposits that has been better than expected in the savings account that that is one of the deviation from from our arena estimate know a so so that's that's that's the answer to that so, so the second the second part relates to what we are expecting in the fourth quarter. And the reality is that we are asset sensitive and the last cut was end of September. So we will have most of that impact during the fourth quarter. The repricing, the full effect will be on the cash and in the variable rate portfolio that we have in the commercial that is half of it. So that's why we are reviewing our guidance towards 5.10 to 5.20. and always depending on the funding mix. So right now, everything remaining equal is mostly related to the 25 basis point cuts.

And I don't know if you realize, too, but we do have inflows and outflows throughout the quarter of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Marita said, fourth quarter guidance as the one that she mentioned, 510 to 520.

Does that, just to clarify, does that 510 to 520 contemplate any additional cuts here in fourth quarter?

Well, we are expecting 50 basis point cuts, but since it won't be outstanding most of the quarter, most of this impact relates to the 25 basis point that was made late September.

But yes, we are modeling 50 basis points reduction in Fed funds in the fourth quarter.

Great. That's really helpful. Maybe one for you, Jose. You've highlighted the investments you're making ai to drive some efficiencies ahead and that drove expenses a bit higher i know that over time to um generate greater revenues or um recognize you know better improvement on the expense side so maybe if you could talk a bit more about that and kind of like the cadence because i know it takes some time to realize that so how are you strategically approaching thanks yep uh thank you um not only you know just to clarify we're making the investments but we're also delivering on the uh

on the features and the benefits for our customers on the value proposition that we provide, and it's unique. And no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward. Now, regarding the investments that we're making in technology, we will continue to make those investments, but we are also starting to see opportunities for us to bring efficiencies in our banking operations. And we will be guiding you guys into the expenses of 2026 in the fourth quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. We're very cognizant of the investments that we're making in technology, but we're equally cognizant of the importance of bringing efficiencies, and we're seeing it in the operating side of the bank, particularly with people efficiencies.

That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings. What's a go-forward outlook? Can you remind us of capital priorities here, including M&A?

Sure. I mean, capital is strong. We feel that we have a great opportunity to fund loan growth, and that's our priority. But we're going to be a lot more active on the buyback in the future. in the fourth quarter and into 2026 because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by a Puerto Rico economy that remains pretty good and it's driving infrastructure investment. We mentioned the on-shoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned geographically, given the current geopolitical challenges in the Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy, and certainly it's going to drive our business forward. So from a capital management perspective, loan growth, number one. buybacks and dividends in number two and number three because we really are in a good spot right now.

Great. Thank you so much for all the color. I'll step back.

Yep. Thank you, Kelly, for your question.

We'll move next to Anya Pelshaw with Hovde. Your line is open. Hey, guys.

I'm asking questions on behalf of Brett here. So now you guys already talked about loan growth, but I was hoping you could expand on any path activity that might also affect commercial in the future.

I'm sorry, I could not understand well your question and you repeat it.

Yeah, you've already talked about loan growth, but could you expand and talk about any payoff activity that might also affect commercial from here?

Yeah, payoffs is hard to predict, but. What we are seeing is there's usually some small seasonality on the lines of credit in the third quarter, given some clients that we have that receive funds, federal funds, either for construction services or education, and they kind of... They... get a line of, you know, they draw on the line of credit in the second quarter, and then they get the funding in the third quarter and pay them off. That's usually on the third quarter. But we are not expecting any significant variability on the draws on the lines of credit in the fourth quarter.

Thank you. You've talked about charge-offs a little bit, but is there anything else you guys might be seeing as far as credit quality goes?

As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier. The rest on the consumer book and the auto book, we're not seeing anything that concerns us, we're seeing, again, supported by an economy that has a lot of activity and liquidity in the system. So we're not seeing anything that drives us to be concerned on credit.

Thank you. Appreciate it.

Yep. Thank you for your questions.

And again, if you would like to ask a question, please press star 1. We'll pause a moment. At this time, there are no further questions. I will now turn the call back over to management for closing remarks.

Thank you, operator. Thanks again to all our team members. Thank all our stakeholders who have listened in.

Actually, my apologies. We do have a follow-up from Tamer.

Thank you. Got in there at the last second. Jose, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed in the Trump 2.0 administration?

What we know is what we hear and listen and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices. Others are pharmaceuticals. We're seeing solar panels. We're seeing textiles. So it's a little bit broader than what we have seen in the past. But again, it points out to Puerto Rico's positioning in terms of manufacturing that we've been for many years. And it's an opportunity for these companies to expand their production line. Some of them have already operations. There's one or two that have announced new operations in Puerto Rico, but the majority are existing companies that are announcing investments in additional production lines in the island. So overall, I think it's all driven because of the onshoring benefits that provide the tariffs, the tariff threats, and all the tariffs that have been imposed And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging. And that will drive indirect benefits because there's a lot of Hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now, but it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. So to us, it's a win-win. That's great, Tyler. Thank you. Yep. Thank you, Timur. Well, thank you, everybody, for the call. I appreciate everyone participating and looking forward to the fourth quarter results. Have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.