OFG Bancorp

Good morning, everyone. Thank you for joining OFG Bancorp's conference call. My name is Beau and I will be your operator today. Our speakers today are José Rafael Fernández, 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 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. Fernández. Please go ahead, sir.

Good morning and thank you for joining us. We are pleased to report our second quarter results. We had another all-around outstanding quarter with good momentum in all areas. Let's go to phase three of our presentation. We continue to show strong financial performance. Earnings per share increased 21% year-over-year on 4% growth in total core revenues. This was driven by consistent loan growth, core deposit strength, stable credit quality, and effective balance sheet management. We saw continued solid and steady momentum across all our businesses, supported by disciplined execution, excellent customer engagement, and our differentiated operating model. During the quarter, we launched a new branding campaign highlighting our strategic and financial evolution into a digital bank with a human touch, one that combines innovative technology and our customer-focused culture. With healthy consumer and business liquidity, wage growth, and historically low unemployment, Puerto Rico's economy continues to be resilient. Please turn to page four. Our core digital strategy is focused on three key areas of execution. The first area is offering value to customers through innovative account products that meet their specific needs. Libre for the mass market, Elite for the mass affluent, and MyBiz for small businesses. The second focus is technology. Our Omnichannel platform allows customers to interact with us seamlessly across all our digital channels. This is driving digital adoption, generating efficiencies and savings. In turn, this enables us to reinvest in new ways to serve our customers and transform our branches into places for relationship building as opposed to transaction processing. The third focus is intelligent banking. We're leveraging data to provide real-time, personalized insights with unique value. helping customers better manage their finances. Overall, this approach differentiates OFG in the marketplace, drives higher digital adoption levels, and most importantly, deepens customer relationships. All this translates into consistent, steady growth of the business. Please turn to page five. The results continue to show up in our key performance indicators. Most retail customers are doing almost all routine and deposit transactions and loan payments through our digital and self-service channels. During the second quarter, we saw year-over-year growth of 4% in net new retail and commercial customers, 11% in active digital users, 6% in digital loan payments, and 3% in virtual teller users. Combined with our increased level of service, our products and people are delivering added value to our customers every day. Year to date as of June, 28% of Libra accounts were opened digitally. We're the only bank in Puerto Rico with this full digital capabilities. More than 1.1 million personalized smart banking insights have been delivered monthly with more than 90% positive feedback from customers. and more than 68,000 customers have accessed our live remote tellers during times when the rest of the banks in Puerto Rico are closed. Now, I'd like to pass the call to Maritza to go over the financials in more detail.

Thank you, José. All comparisons are to the first quarter, unless otherwise noted. Now, let's turn to page six. Our financial performance was very strong this quarter. EPS climbed to $1.39 efficiency ratio was 54% return on average assets rose to 1.93% and return on average tangible common equity increased to almost 18% loss to deposit ratio was 85% and the payout ratio was 25% which reflects the higher income in this quarter versus the first quarter Let's turn to page 7 to review our income statement highlights. Core revenues increased $4.5 million to $190 million. Total interest income was $197 million, an increase of $3 million. This reflected higher average balances of loans at higher average rates. which more than offset slightly lower income from cash and securities. The quarter included $4.1 million from three paid in full commercial loans. This compares to $3.3 million from a similar loan paid in full in the first quarter. There was one additional day in the quarter. This increased interest income by about $1.6 million. Total interest expense was $40 million, a decrease of $0.5 million. This reflected lower average balances of broker CDs and borrowings, which more than offset the cost of higher average balances of core deposits. The added date increased interest expense by about $0.4 million. So that banking and financial service revenues increased $1 million to $33 million, reflecting higher banking service and wealth management revenues, which included $1 million in annual insurance and annuity fees. Non-interest expense increased $8.1 million to $103 million. These included $5.8 million in business operational charges, while the first quarter included $1 million in capital market readiness and registration costs, and the benefit of $3.6 million in a business-related volume incentive. Income tax was $15.7 million. reflecting an anticipated ETR of 22.64% for the year and the benefit of some discrete items. Now let's turn to page eight to review our balance sheet highlights. Average loan balances grew $78 million to $8.2 billion and end of period balances grew $62 billion or 0.8% Due to increases in Puerto Rico commercial and consumer loans, new loan production was $750 million, an increase of $146 million, or almost 24%, reflecting increases in Puerto Rico commercial, residential mortgage, and consumer lending. Production in the year-ago period was slightly higher due to the spike in the auto sales from the trade of studies in the second quarter of 2025. Average core deposit balances grew $145 million to $9.7 billion, with end-of-period balances of $85 million, or 0.9%, deflecting government commercial and regional deposit growth. Here in our large government deposit, $400 million into three and six month time deposit, with approximately $175 million remaining in the demand deposit category. Average cash balances fell $45 million, but increased $109 million end of period as a result of deposit growth and repayment from the investment portfolio. Average investment fell $84 million and $92 million end of period due to principal pay downs in the mortgage-backed securities. And average balance and brokerage deposits fell $133 million and increased $49 million end of period reflecting our liquidity management. Now let's turn to page nine to review net interest margin. Loan yield increased three basis points to 7.90%. Excluding the three loan repayments in the second quarter and the one in the first quarter, loan yield was 7.70% compared to 7.71%. Core deposit cost was leveled at 1.29% Reflecting growth of $92 million in non-interest-bearing deposits to $2.7 billion. Excluding public funds, cost of deposit was 98 basis points compared to 1%. Net interest margin increased 9 basis points to 5.45%. Now, let's turn to page 10. Capital continued to build. TET-1 ratio increased to 14.07%. Total stockholders' equity rose to $1.4 billion. TCE ratio continued to climb to 10.90%. Untangible book value continued to expand to $31.12 per share. Looking at share buyback, if you recall, we bought a large number of shares in the first quarter. Cesar will provide more detail about credit in a moment, but let me summarize a little bit where we are at midpoint this year. We continue to expect low single-digit loan growth for the year, with commercial more than offsetting the unanticipated decline in auto, though auto has been slightly stronger than expected. We continue to anticipate deposit growth, excluding the large government deposits. benefiting from our Libre, Elip, and MyBiz accounts, as well as growth of commercial and government clients. On our last poll, we expected net interest margins to range from 5.10 to 5.20% this year. Now, we expect NIMH to range from 5.25 to 5.35% in the second half of 2026. This is in line with the 5.30% mean we had in the second quarter and 5.25% in the first quarter, excluding the loan pay down. Our second half outlook incorporated deposit growth and the relocation of the large government deposits. We continue to anticipate no rate cuts this year with the Fed cutting rates once next year. We remain on track to keep expenses in a range of 380 to $385 million this year. Our estimated tax rate for the year continues to be 22.6%, not including discrete items. And while we are not active buying back shares in the second quarter, our strategy has not changed. We have $194 million in remaining authorization. and we will continue to be selective and opportunistic balancing shareholder returns and discipline growth. Now, here is the first.

Thank you, Maritza. Please turn to page 11. All comparisons are to the first quarters unless otherwise noted. Credit reflected discipline execution, proactive risk management, and continued improvement in overall portfolio quality. Net charge jobs increased Thank you very much. Reduce concentration and tail risk and improve the commercial portfolio's overall risk profile and long-term credit quality. Retail net charge of rates improved in auto and consumer and remained stable in mortgage. Auto decreased to 1.11% and improvement on 41 basis points. Consumer improved to 3.78% down 62 basis points. Provision for credit losses fell $9.5 million to $13 million. This primary reflected $14.7 million for increased loan volume and $1.9 million in commercial loan recoveries. If compared to the first quarter, which included $17.5 million for increased loan volume, $3.7 million for increased allowance for the telecom loan, and $1 million for newly classified small commercial loans. Looking at other credit metrics, early and total delinquency rates were 2.5% and 3.7% respectively, reflecting typical seasonality with continued normalization across consumer portfolios. This mix of modest early-stage delinquency and stable back-end losses continues to demonstrate The Resiliency of Underlying Portfolio Quality Despite some movement in early-stage delinquencies, the stability in nature jobs reinforces the strength of recent vintages and the quality of new originations. Credit should remain stable in the second half, in line with seasonal trends, which show declines in the first half and increases in the second half, and then declines again in the first half of the next year. Here's José to wrap it up.

Thank you, Cesar. Please turn to page 12. The Puerto Rico economy remains resilient. In addition to what I said earlier, federal reconstruction funding, infrastructure projects, and private investment continue to support economic activity. Manufacturing expansion and new onshoring initiatives reinforce the long-term growth outlook Having said that, we remain very attentive to evolving macroeconomic conditions, including in particular interest rate outlook and geopolitical developments. Within these environments, OFG is well positioned to grow. Our digital at the core strategy continues to create more personalized customer experience, simplify how we operate, and support sustainable market share growth. We continue to invest in people, technology, and AI, to enhance capability and drive long-term operating efficiencies. We see a healthy commercial pipeline and stable credit trends supported by strong risk management and balance sheet discipline. Together with Puerto Rico's favorable operating environment, our agile and disciplined execution positions us well to continue to navigate evolving market conditions and pursue attractive growth opportunities. With this, we end our formal presentation. Operator, Let's start the Q&A.

Certainly, Mr. Fernández. Thank you. Ladies and gentlemen, at this time, if you do have any questions or comments, please press star 1. If you find your question has been addressed, you may remove yourself from the queue by pressing star 2. Once again, that's star 1 for questions. We'll go first this morning to Kelly Mata with KVW.

Hi. Good morning. Thanks for the question and congrats to the team on a great quarter. Thank you, Kelly. Maybe taking it off on the margin, you materially raised your NIM outlook for the second quarter in a row. I think I caught that maybe $500 million of the government deposits moved into CDs. Just wondering what your new $525 to $535 outlook assumes in terms of the longevity of these deposits sticking around on balance sheet and Thank you. Kelly, before I let Maritza give you the details, you hit it on the nail.

When talking about margin, the government deposit is the one that is kind of the variable that we kind of do not control much. But the good news is that the government deposit is the one that is kind of the variable that we kind of do not control much. Thank you very much. So we feel much more confident about our margin guidance, and that's why you're seeing us resetting it in this call. So I'll let Maritza go into the details, but you hit it on the nail when you addressed the government deposit.

Yeah, thank you, Gary, for the question. The reality is that we completed that relocation end of June, so we were able to assess what But for the next half of the year, and now I will not need to go to the markets to replace that funding and provide us with some additional spread. So that's why we are increasing the guidance. We continue to be asset sensitive, slightly asset sensitive. And since we are not expecting changes in the market rate at least this year, We are expecting a more stable type of NIMH that resembles what we saw during the first two quarters. 5.5 the first quarter without the recoveries and 5.3 the second quarter without the special recoveries that are not recovered. So that's why our guidance has been increased.

Another point that I'd like to add to is that we're also seeing higher loan balances, and particularly from the commercial side, and that's something that we're very happy with, and we continue to see a very strong pipeline that should support the single-digit loan growth that Maritza mentioned in her prepared remarks.

Got it. That's helpful. I guess maybe I'll switch to loan growth then just to keep the thread here. Clearly, Puerto Rico is still operating at a really nice level here. Wondering if this increase in commercials, you're starting to see tailwinds from, I know it's really early, but from onshoring or any other color as to what seems like a better operating environment overall that you're seeing here. Thank you.

Kelly, good point also. We've been talking about the Puerto Rico economy for several, I would say two or three or even more years now since the economy is doing a lot better than in my, let's say my first 17 years as CEO. So when we look at it, it certainly provides a lot of confidence to operate a bank when you have a stable, steady, The benefits that we're seeing continue to reflect the same. Low unemployment, high liquidity levels on the consumer side. We're seeing great interest on businesses to expand because there's demand out there for them to do so. We're not yet seeing the benefits of the unshoring as you alluded to yet, but there's still there a pipeline. line of three or so billion dollars of projects coming through in the next several years. Federal funds continue to flow in. So I think we're benefiting from that environment, economic environment, that I can understand why there is some, let's say, trepidation about Puerto Rico's economy, given our history. But as we keep on Passing quarter after quarter, what we're seeing, and you saw it this quarter on the consumer credits, we're seeing a different type of economy, a different type of environment that is supported by real investments. And I think then you add to that that there's a three-bank market here where we kind of run the financial market in the island. And then you look at the third pillar that I look at, and that is who we are. And OFG has a unique strategy. OFG has positioned itself in a very different way, investing in technology, leveraging the digital early on, and deploying it very effectively, thanks to a great team that we have. And that is showing the results. So what we're seeing is all the wheels running at 150 miles per hour in the right direction and we're executing. So we feel extremely happy and confident that what we're bringing to the market is differentiating and we're seeing it in growth. So that's kind of how overall I see from 36,000 feet what's going on for us here at ORG.

Last one, then I'll step back. It looks like credit was a highlight. It did look like, though, some early DQs picked up, wondering if maybe you could provide some color as to what you're seeing there. Thank you.

I'll let Cesar give you the details. I'll tell you, we sold the credit that was non-performing or non-accrual. That definitely sends a message to investors that we really, when we need to act, we act. And that's what we did. We worked on it for the last three or four months and we successfully sold that credit. So that's the main kind of large ticket item. But in general, when we're seeing, and as I mentioned earlier, the credit on the consumer side is pretty steady. And I'll let Cesar give you some details there on the consumer.

The consumer, you see, no performing levels similar or better than last year for both auto and consumer lending. We are seeing vintages that are already better vintages than when we adjusted the undergranting standard back in 2022. So the vintages that are taking over now are better vintages in terms of grade on the grading standard so that is starting to equate into the formula. So we are positive in terms of the outlook for these portfolios even though as you know the second half of the year seasonality start kicking off those delinquency trends and we are seeing also the gas prices even though they improved significantly from prior quarter we're still seeing them above the $1 liter which is the equivalent of your $4 to the gallon in the States. So seeing the portfolios, we are positive in terms of what we're seeing in the behavior and the customers continue to pay very well during this quarter. But we expect that seasonality to start seeing or reflecting in the numbers for the next half of the year.

Great. Thank you. I will step back in the next quarter again.

Yep. Thank you, Kelly.

Thank you. We'll go next now to Manuel Navas with Piper Sandler.

Hey, just to stay on credit for a moment, does that mean that the loan loss reserve kicked down on the payoff or the sale of the telecom loans and the U.S. exposure? Should it kind of tick up a little bit as across the back half of the year and then improve again in the first half of next year? Is that the general direction you expect for seasonality?

You should see that seasonality, yes, in the reserves too, definitely.

Okay, I appreciate that. One quick modeling question. Maybe there's a lot of noise. But what was the June NIM? I know that there were some movements in the public funds, so maybe it's not all represented there, but what was kind of the June NIM entering the back half of the year?

Thanks for the question, because at the end, as I mentioned before, we did the relocation mid-June, so the month of June reflects that, and it was around 5.26 June NIM.

Okay, I appreciate that. And then, just kind of, can you level set on the buyback? You know, you had pretty aggressive in the first quarter. You said you stepped back this quarter. Just kind of thought process on near-term expectations on the buyback from here.

Yep. Nothing has changed. We did have a higher than We're just being patient also. But when we look forward, we still have $194 million of the approved buyback, and we are planning on executing it as we see our... Our stock undervalued versus our peers, so we will continue to be out there and be methodical about our acquisition of our stock or purchase of our stock.

I appreciate that. I'll step back and take you.

Yep. Thank you, Manuel. Thank you. We go next now to Aaron Siganovich with Truist Securities.

Thanks. The brand marketing campaign that you launched in 2Q, any kind of early feedback on that? It seems like you're really trying to push the digital focus and let folks know that you're leaning into that from your side.

It's a brand evolution. We felt that this is the right time for us to tell the market in a more direct way the capabilities that we have for them to benefit from. It launched early June, so it's too early to share any specifics, but early indicators show that it's Well received. But in the end, it's for us to make sure that we start evolving our brand to communicate who we really are aligned with the capabilities that we have built throughout the last couple of years. So that's kind of the motivation behind it. Really excited for the rest of the years and next year's results.

Got it. And the 5.8 million of charges that were referenced, was that related to this branding or was it due to something else?

No, the 5.8 is basically operational charges. So they were due to operational errors and we took the charge. The problem has been corrected and the charge is non-recurring. So really it's passing the page.

Okay. And then lastly, the, you know, net charge-offs were elevated in the quarter related to the loan sales. If you were to exclude those, you know, previously reserved loans from that number, what would the net charge-off rate look like?

Oh, the consolidated net charge-off would be 0.72% without the liberty charge-off, the telecom charge-off. Okay.

Thank you. Thanks, everyone. Appreciate it.

Yeah. Aaron, you strike that name out of the script, please. Yeah, I didn't hear it.

Thank you. Just a quick reminder, everyone, star one for questions this morning. We'll go next now to Kyle Geerman with StoneX.

Hi, this is Kyle Geerman. I'm for Bet Radican. Congrats on the quarter. Thank you. So just wanted to touch on credit really quick. On the U.S. commercial side, that charge-up rate has bounced around quite a bit. I was wondering how you would characterize the health of the U.S. commercial portfolio?

Back two years ago, we risked a lot of that portfolio. We released under $30 million of loans that we saw at higher risk when we saw the The economy of the United States potentially coming through recession back in summer of two years ago. So right now that portfolio is behaving much, much better than previous years. And we're seeing a stabilization on the portfolio. We are measuring risk rating, internally measuring risk rating on that portfolio. And those risk ratings are very stable. So I would say that that portfolio right now is healthy.

We're very happy with the performance, and as you know, it serves as somewhat of a geographic diversification for us outside of Puerto Rico, so playing its role.

Thank you. Then maybe moving on to Lonio. Saw they were up a few basis points, 7.9. I was wondering how much fixed rate repricing tailwind is still ahead of you, and what are the new commercial loans coming in on today relative to the back book?

So, 7.9 was including the recovery, but if we exclude the recoveries on both quarters, The yield on loan was 7.7 this quarter versus 7.71, so it's pretty stable. The yields on the commercial book, it would be different because the U.S. have a different price than Puerto Rico, but if we blend all together, there are around 7.25%, including small business within that. That's the new entry price.

and then variable versus fixed. It's a little bit like, I would say 60% variables, 40% fixed, give or take. So on the commercial side. Remember, we also have the auto book, which is fixed rate and it yields around eight and a half or so. So that's a different bucket.

Thank you for taking my questions. I'll step back.

Yep, thank you.

Thank you, Cass.

Thank you. We'll take a follow-up question now from Manuel Navas with Piper Sandler. Manuel, your line is opening. You might be on mute.

I was. Thank you. Sorry. Sorry to jump back on. I just want to follow up a little bit on some of the deposit trends. It seems like you speak to your three accounts quite well. Could you just kind of So, on the retail side, the deposit accounts are driven by a higher net customer growth.

I mean, we're seeing not only the existing clients, but we're starting to see a deepening of that relationship But more importantly, we're growing customers at a 4% a year, and that is adding to our growth on the deposit side, on the retail side. We're also seeing a bit on the retail side on CDs, so we're starting to see clients kind of trying to move into CDs in some cases. I'm referring here more to the mass market Libre accounts. On the elite account, which is more the mass affluent, there what we're seeing is a pretty steady, consistent flow of deposits coming in. It not necessarily has a significant customer growth level, but it's a steady inflow of deposits, which we feel very happy with as it kind of helps to Cesar Ortiz-Marcano working on deepening the relationships towards cash management and potentially lending in some cases. So that's kind of how high level we see the three accounts that we are focusing on and it makes our life extremely focused because we don't get distracted with several other accounts that we need to deal with. On the corporate side, we call it corporate which is a larger commercial That is relationship driven and it's an area where our team goes out and establishes very good relationship and starts bringing the loans many times and then the deposits flow with it. So we're seeing all those efforts working in tandem and the results show for it.

I appreciate that. With some of the movements you've had, where do you expect kind of deposit costs to go? I mean, on a core basis, it was down two basis points in that quarter. There's some movements with the public funds. Where can kind of deposit costs go from here?

Yeah, well, given what we said about the large deposit where we're kind of fixing it and we kind of are taking it out of the, let's say, hopefully of the potential conversation going forward because it doesn't It doesn't complicate our margin guidance. We're seeing deposit costs going forward in the next two quarters relatively at the same level that we have in the first half of the year. Again, given the expectation of rates remaining on the short end where they are. So that's kind of our outlook for the second half on those.

I appreciate that. Thank you so much.

Yep, you're welcome. And we'll take a follow-up question now from Kelly Mata at KBW.

Hey, my question got answered in that, so I'm going to step back. Thank you.

Thank you. Thank you, Ms. Mata. And again, ladies and gentlemen, just a final reminder, Star 1, please, for any further questions. We'll pause for just one moment. And it appears we have no further questions this morning. Mr. Fernández, I'd like to turn things back to you, sir, for any closing comments.

Thank you, operator. Thanks again to all our team members for an outstanding quarter. And thanks to all our shareholders who have listened in. Looking forward to our next call. Have a great day.

Thank you again, ladies and gentlemen. This will conclude OFG Bancorp's conference call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.