OFG Bancorp (OFG) Earnings Call Transcript & Summary

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Madison. I will be your operator today. Our speakers 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 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. [Operator Instructions] After the speakers' remarks, there will be question and answer session. 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 3 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 $1.00. 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 4. 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 enrollments, 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 firsts 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 are very proud of all these accomplishments. Now here is 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 5 to review our financial highlights. All comparisons are to the fourth quarter unless otherwise noted. Core revenues totaled $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 offsetting this 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, partially offset by higher average balances of borrowings and brokered 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 insurance fees and favorable MSR valuation change. Excluding that, total banking and financial services revenues increased for the quarter. Looking at noninterest expenses, they totaled $93.5 million, down $6.3 million. First quarter compensation included $1.6 million 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 volumes and related costs as compared to the last quarter. Note that the fourth quarter included $4.8 million in early retirement, business rightsizing and annual performance incentives. Taking all these factors into consideration, we were in line with our guidance of $95 million to $96 million in quarterly noninterest 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. Tangible book value was $26.66 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%. End-of-period loans held for investment totaled $7.9 billion, up 4.2% from a year ago and up $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 2 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 offset 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 4 basis points from the fourth quarter. Excluding public funds, cost of deposits was 1% compared to 0.96% last quarter. Average borrowings and brokered deposits were $517 million compared to $426 million. The aggregate rate paid 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 funding 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 investments totaled $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 NIM benefited slightly from the investment securities portfolio and lower cost of government deposits. Please turn to Page 7 to review our credit quality and capital strength. Credit quality continues to be stable. Net charge-offs 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%. 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 1.05%, up 23 basis points sequentially. Year-over-year, it was unchanged. 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 a specific reserve for three commercial loans and $3.5 million to reflect 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 nonperforming loan rate was 1.11%. Looking at other capital metrics. Our CET1 ratio was 14.27%. Stockholders' equity totaled $1.3 billion, up about $41 million, and the tangible common equity ratio increased basis points to 10.30%. To summarize the first quarter, net interest income remained stable as growth in loan balances and a decline in deposit costs largely neutralized the impact of 2 fewer days. Loan growth continued to do well in auto and consumer and U.S. and Puerto commercial. Retail and commercial deposit balances increased as we continue to deepen customer relationships 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 effect of the specific items in the fourth and first quarter. Results also benefited from a lower tax rate and share count. Regarding capital allocation, in addition to buying back shares, the dividend was increased and our CET1 ratio provides us with a strong foundation during volatile or challenging times. Now here's José.

Thank you, Maritza. Please turn to Page 8. As you all know, we are 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 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 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.

[Operator Instructions] We will take our first question from Frank Schiraldi with Piper Sandler.

Jose, just in terms of 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 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 as everything that we've done from the digital first 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.

Okay. 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.

Yes. 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 moving along 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 deposits, I thought there was some...

Yes, we have $1 billion or so government deposit that 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 -- do you 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 normalization on that front.

Yes. 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 is the largest one, and then we have 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 -- our auto portfolio, we are seeing now a stabilization too on the recovery rates from the collaterals. I think that's a positive effect on the issues with the tariffs that the customers are having an increased demand for used vehicles. So that's a positive trend. The third part of the auto is that we're seeing vintages that have better credit underwriting. Recall back in 2022, we tightened credit underwriting standards. So we started seeing those better credit underwritten vintages coming into play for the net charge-offs. So this quarter 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 the first quarter. But overall, we are going to expect a stabilization on both portfolios on all the credit metrics.

And we will take our next question from Timur Braziler with Wells Fargo.

The securities 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 highlights on what's coming off maybe from a cash flow standpoint in the next couple of quarters and where those reinvestment rates are coming on right now?

We have mostly mortgage-backed securities, agency paper and it is around 5 to 6 years, 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 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 security yields. Loan yields also seem to hold up better. Just where we are today, forget about the impact of additional rate cuts. Is there -- is the next move likely some pressure on the margin or maybe some of the bond reinvestments and loan growth could offset that? I guess what's the trajectory for margin here?

Yes. We shared with you in the last call that we have 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 exits at a certain point because we will need it to replace it with wholesale funding, which would carry a little bit higher funding than these government deposits. But as long as it remains in the bank, I will see that range in the upper level, okay?

Okay. Great. And then just last for me. Any additional color for the specific reserve on the commercial loans? Were those Mainland or Puerto Rico? And I guess, any similarities across those 3?

So these are 3 loans. One is a Puerto Rico long-standing substandard loan that we placed in nonaccrual. And the other 2 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.

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

I wanted to start, José Rafael, could you give us -- I haven't seen a lot since the power outage last week. And so 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 it seems like it continues to be an area of opportunity for more sustainable and cheaper power. But just want to see if you heard anything regarding…

So the only comment I can add here, Brett, 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 or so privatization program. It's been privatized for 2 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 $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 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 sector and it requires oversight by the government. And those are areas of opportunity, if I should say, taking a bit of your words.

Yes. And it also seems like 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.

Yes. 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 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 talk and not necessarily evidence of it has been seen. But I'm encouraged to tell you truth because the tariff is 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 well. It will require, again, good systematic execution from the government.

Okay. That's great color. And then maybe, Maritza, on fee income. Typically, wealth management is a little soft in 1Q and then stronger in 2Q. I want to make sure I understood the outlook for fee income from here. And then obviously, mortgage banking is tough to forecast, but I would assume that, that level also improves 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 million to $30 million as a run rate for us 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.

Brett, if I could add just one thing here and that Maritza just pointed out in terms of transactionality. We 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, 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 Pay rollout, 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. Puerto Rico was not Apple permitted. It was just more of an Apple thing than a Puerto Rico thing. But 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 prove it by delivering on a timely basis even to the requirements of Apple, which is somewhat elusive to some others.

Okay. And then just last quick one, tax rate from here. Any thoughts on full year and then maybe where it trends relative to the past two quarters?

We're seeing a 26% ETR for the year -- for the full year.

[Operator Instructions] And your next question comes from Kelly Motta with KBW.

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 an immediate reset on Fed funds, how to think through that? And how do you include that within that margin guidance?

On 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. And then it looks like the deposit costs are continuing to perform well. I'm wondering if you could provide an update as to the competitive environment in Puerto Rico. What are you seeing in terms of your competitors? 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. I hope they say the same of us. So it is what it is. But, yes, the market remains the same, Kelly. We are 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. 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 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 noninterest-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 structural savings and deposits from the economy that we're operating in Puerto Rico, but certainly a pretty solid quarter.

And then I also appreciate the commentary about Puerto Rico being -- 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 U.S. 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, but it's 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. 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 tariffed. 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 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.

[Operator Instructions] 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 on 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.