OFG Bancorp Price & Performance (OFG)

As a result of developments that occur afterwards. All lines have been placed on mute to prevent 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. 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. 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 is being 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 are 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 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 totaled $178,000,000.

Looking at key components, total interest income was $189,000,000. A decline of $941,941,000 dollars. This mainly reflects two fewer business days, which negatively affected interest income by $3,000,000. Partially offsetting these were higher balances and yields on investment securities and higher loan balances.

Total interest expense was $40,000,000. A decline of of of $874,000. This mainly reflects the two fewer business days and higher average balances of core deposits at a lower rate were partially offset by higher average balances of borrowings and brokerage deposits. Total banking and financial service revenues were $29,000,000. A decrease of $3,600,000. The fourth quarter included $4,800,000 combined in annual insurance fees and favorable MSR valuation change. Excluding that, total banking and financial service revenues increased for the quarter. Looking at non interest expense, they total $93,500,000. Down $6,300,000. First quarter compensation included $1,600,000, an increase in seasonal FICA expenses and merit raises.

General and administrative expenses included a $3,100,000 volume incentive payment from business partners. It also included $1,200,000 in higher electronic banking volume and related costs as compared to the last quarter. Note that the fourth quarter included $4,800,000 in early retirement [indiscernible] Taking all these factors into consideration, we were in line with our guidance of 95 to $96,000,000 in quarterly non interest expense in 2025. Income tax expense was $13,900,000. The tax rate was 23.34% That reflects an anticipated rate of 26.14% for the year and the benefit of $1,700,000 in this items. Annual book value was 26.66 per share.

The 26 point 0.66¢ per share. During the quarter, we bought back $23,400,000 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 six to review our operational highlights. Total assets were $11,700,000,000, up 5% from a year ago and 2% from the fourth quarter. Average loan balances were $7,800,000,000, up close to 1%. And of the loans held for investment totaled $7,900,000 billion dollars up 44.2% from a year ago and up $60,000,000 $61,000,000 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 $559,000,000 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 offset by an increase in U. S. Commercial. We continue to have a strong commercial pipeline at this time. Average core deposits were $9,600,000,000.

Up close to 1%. End of period balances of $9,800,000,000 increased $308,000,000 or 3.3% quarter over quarter. And $211,000,000 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 one was 1.42%. Down four basis points from the fourth quarter. Excluding public funds, cost of deposit was 1% compared to point 96% last quarter. Average borrowing and broker deposits were were $517,000,000 compared to $426,000,000. The aggregate rate paid was 4.32% down eight basis points. End of period balances were $421,000,000 compared to $557,000,000 During the first quarter, hundred a hundred, $45,000,000 in short term repurchase agreement after a home loan ban advances mature. Separately, a two a two two year $200,000,000 Federal loan bank advance was renew. At 4.14% compared to previous rate of 4.52%. Cash at $710,600,000 was up [indiscernible] totaled $2,800,000,000. Up 2%. During the first quarter, we acquired $100,000,000 of mortgage backed securities yielding 5.40%. Net interest margin was 5.42% compared to 5.4%. First quarter NIM benefited slightly the investment securities portfolio and lower cost of government deposit. Please turn to page seven to review our trade quality and capital strength. Credit quality continues to be stable. Net charge off totaled $20,000,000 up $4,500,000. The first quarter included a $2,900,000 five charge off of a previously reserved commercial loan as compared to the fourth quarter. Which included $2,600,000 in recoveries from the sale of previously charged off auto and consumer loans.

First quarter auto net charge offs were unchanged 1.63%, Consumer net charge off ratio increased 62 points to 4.34%, and there were continued recoveries in mortgage and Puerto Rico commercial loans. Total net charge off rate was one point o 5% up 23 basis points sequentially. Year over year, it wasn't changed.

Excuse me. Provision per k losses was $25,700,000. Down $4,500,000 The first quarter included $17,400,000 for increased volume $4.4800000.0 dollars for specific reserve for three commercial loans, and $3,500,000 to reflect of auto current loss given default trends post from them. [indiscernible] The early and total delinquency rates were 2.193.49%. Respectively, both down from the fourth quarter.

The number from in loss loan rate was 11.11%. Looking at other capital metrics, our CET1 ratio was 14.27% stockholders' equity totaled $1,300,000,000 up about $41,000,000, and the tangible common equity range increased 11 basis points to 10.30%.

To summarize the first quarter, net interest income remained stable as growth in loan balance balances and a declining deposit costs 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 customer 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. Noninterest expenses were in line when you remove the the effect of the specific items in the fourth and first quarter results also may appear benefited from a lower tax rate and share count. Regarding tariff allocation, in addition to buying back shares, the dividend was increased. And our CD ratio provide us with a strong foundation during volatile or challenging times. Now here's Jose. 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, unemployment 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 OFG 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 without the hard work and dedication of all our team members. 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.

And we will take our first question from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning, Frank.

Jose, just in terms of the the digital channel, obviously, those you cite some pretty impressive, numbers in terms of transactional use are you able to see deposit account openings through the digital channels? Is that something that's ramping up? Is that something still yet to come? How is that actually Yeah. Actually, Frank yes. Yes. We we do have online digital account opening. And if through the service sales service channel. So yes, we do have that capability And as everything that we've done from the first digital first strategy that we have deployed throughout the years, It requires us to be the kind of the educators in the market in terms how things can move into the digital channels and all that. So right now, around 2526% of our checking accounts and certificates of deposits are are opened through the digital channel. The rest are open at the branches. So we're we have seen increasing trends there also.

Okay.

And then just in terms of the deposit growth from here, 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 in February.

I'm 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. Child tax credit also is part of 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 and branch network are moving along and and growing our client base So we do expect to continue to see some deposit growth from here. In terms of 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 government deposit that we expect to be renewed for for another several months. So that is something that we will update every quarter. But it's still there and we're we're expecting to renew it in the next couple of weeks.

And if if I could just sneak in one more just in terms of consumer charge offs. Can you speak to the the expect to continue to see some normalization there? I know you had some commercial as well that I'm sure can be more volatile. But on the consumer side, just wondering your thoughts around charge off levels and if you anticipate continued on that front.

Yep. I'll I'll ask Cesar, 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 the largest one, and then we have unsecured personal loan. On the other portfolio, we and both of them actually we expected the trend to improve during this quarter because it's a seasonal improvement always the first quarter is always good for all credit statistic, and we experienced that. So that was realized. On the second on auto portfolio, we are seeing now as stabilization too on the recovery rates. From the collaterals. I think that was a that's a positive effect on the on the issues with the tariff that the customers are you know, having an increased demand for for this used vehicle. So that's a positive trend. So and this and the third part of the auto is that we're seeing vintages that [indiscernible] [indiscernible] Back in 2022, we tightened Cray on the grinding standards. So we are starting seeing those better create on the written vintages coming into play for the net charge offs. So So this quarter was a positive quarter because we expected 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 seasonality for this first quarter, but overall, we are going to expect stabilization on both portfolios.

On all the credit metrics.

Okay. Okay. Thank you.

Yep. Thank you. Thank you for your questions.

And we will take our next question from Timur Braziler 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 book and, just some of the the highlights on what's coming off maybe, from a cash flowing standpoint in the next couple of quarters.

And where those reinvestment rates are coming on right now?

Yeah. Well, the the duration, what what we have monthly mortgage backed security agency paper. And it's around five to six years. And the the duration right now.

Repayments are coming around this quarter was $84,000,000, and we will keep monitoring the market to see opportunities. But right now, issue is yielding around five 4.25. So we will keep looking at the funding side and manage the asset liability as we deem more appropriate.

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

Yeah. The the we share with you the last the in the last call that we have a you know, a range between five points 3% to 5.4% margin for the year. That that range will move. It depends a lot on on funding side particularly if if the if the government deposit exit at certain point because we will need it to replace with wholesale funding, we should cut it a little bit higher funding than these government deposits. But as long as it remain in the in the bank, I I will see that range in the upper level.

Okay?

Okay.

Great. Thanks. And then just last for me, any additional color for this specific reserve on the commercial loans? Were those Mainland or Puerto Rico? And I guess, any similarities across those three?

Yep. So these are three loans. One is a 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 $10,000,000 And they were placed in substandard and we took the provision for that.

Great.

Thank you.

Yep. Thank you for your call for your questions.

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

Hey, good morning.

I wanted to start Jose Rafael, could you give us you know, I haven't seen a lot since the the power outage last week. And so, you know, I haven't seen a lot in the press about what's happened with the the Luma contract and anything else going on related to the power grid and like it's a continues to be an area of opportunity. For more sustainable and cheaper power. But just wanna see if you heard anything regarding So the only comment I can add here, Brett, is this is gonna be a long process. It's it's It's going to take at least a decade. We are into a two year kind of or so privatization program. It's been privatized for two years only or so.

So so it's gonna 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 and 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 this on events. So yes, it does have an impact on the economy. It was said that it was $100 and some million, 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 a to make it low cost, to make it diversified, 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 sector 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 of the opportunity could still be there for onshoring, you know, pharmaceuticals and and that kind of stuff, but I haven't seen anything on that really. Either other than just Yeah. Talking about potential.

Correct. Think I think the tariff tariff environment though, Brett, does pose a good opportunity for the Puerto Rican government to position itself in a way that that can take some share of the onshoring given the current infrastructure in terms of the pharmaceutical and medical device 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 a catalyst for that. So being part of The United States, is and our history in the manufacturing side, remember, Puerto Rico's economy is 40% manufacturing. It plays very, very well. It will require again, good systematic execution from from the government.

Okay.

That's great color. And then maybe, Maritza, on fee income. You know, typically, wealth management is a little soft in 1Q and then stronger stronger in 2Q. I want to make sure I understood the the outlook for fee income from here and then, you know, obviously, mortgage banking is is is tough to to forecast, but I would assume that that that level also increased from here.

Yeah. Okay. This call was was was better than expected in the sense that the banking fees were higher even though we do have did have to two less days in in business activity. So we are this quarter, were at $29,000,000 We share with you the quarter that we are seeing 29,000,000 to $30,000,000 as the run rate for those in fees for the for the year. So that that's how we're seeing the fees at this moment. And and and when we we we this quarter, particularly, was really active in the debit card transactionality and and the POS.

Okay.

You know, and and And then maybe just I could Brad, if I could add just one one thing here and that Maritza just pointed out in terms of 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? 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 Apple Apple permitted. It was just more of an Apple thing than a Puerto Rico thing. But, you know, we we were together with another institution in Puerto Rico. We were 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 prove it by delivering on a timely basis even to the requirements of Apple, which somewhat somewhat elusive to some others.

Okay. And then just last quick one. Tax rate.

From here, you know, any thoughts on full year and then maybe work trends relative to the past two quarters?

Yeah. We we are we're seeing 26% APR for the year. For the full year.

Okay.

Yeah. Thank you. Have a great day.

And your next question comes from Kelly Motta with KBW. Please go ahead. Hi, good morning. Thanks for the question. Maybe circling back to the margin, Maritza, could you look you help us out and remind us how much of the asset base is more rate and impacted by an immediate reset on on fed funds, how to think through that? And how how to think through that margin guidance?

Yes. In the asset side, the most elastic app 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 the to any change in in the market.

Okay. That's helpful.

And then it was it it looks like, you know, the the deposit costs are continuing to perform well. Wondering if you could provide an update as to the competitive environment in Puerto Rico. What are what are you seeing in terms of you know, your your competitors? Or is it still is it still relatively high competition? Or have you have you seen pressure there back off in the the last quarter or two? [indiscernible] are competitors, and they they are relentless. So hope they say the same of us. So it is what it is. But well, yes, the market remains the same, Kelly. We were looking out for the best for our customers and on the deposit side, there were some credit unions that were out laggards in terms of rates. It's That's certainly normalized. And we're really happy with our core performance, particularly on the deposit side. We We continue to grow demand and savings and time deposit with Rome. That's driven primarily by not only existing customers bringing deposits, and also deepening the relationship, but also new customers. We're we're seeing a growth 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 it's also interesting for us, that is that we're growing nine 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 part of a 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 about you know, Puerto Rico being and being having a lot of manufacturing in in in the economy. Wondering if you've seen any movement there, you know, Puerto Rico could theoretically be a beneficiary on on, a move to greater onshoring to The US wondering if you're seeing any movement there, what the discussion is on the ground and your your thoughts around that as, you know, I know I know it's a target here. Yeah.

Yeah. It's it's too early to tell on on any you know, we haven't seen any any movement to speak of, but it's certainly a good opportunity. And it's too early to tell as you can read on the in in the papers and online, and the world is trying to figure things out. And we're not an exception. So 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 tariffs additional tariffs. So it's still not yet being added to the list. So 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 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 those that's the color 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 color. Most of my have been asked and answered. I'll step back. Thank you.

Thank you. Have a great day.

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.