OFG Bancorp ($OFG)

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Nicky. I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of Board of Directors; Martiza Arizmendi, Chief Financial Officer; and Cesar Ortiz, Chief Risk Officer. The presentation accompanies today's remarks. It can be found on the home page of the OFG website under the First Quarter 2026 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] 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. Let's go to Page 3 of our presentation. We started the year with a strong financial performance. Earnings per share diluted were up 26% year-over-year on 4% growth in total core revenues. This was driven by ongoing loan growth, high-quality credit performance, core deposit strength, expense and proactive balance sheet management. Loans grew 5% year-over-year, and new loan production grew 9%. Reported core deposits declined 1%. Excluding the previously announced $500 million government deposit transfer, core deposits grew more than 4% year-over-year. This demonstrates how our strategies and operating model continue to deliver, supported by momentum in our businesses and disciplined execution across the franchise. We further our commitment to capital management, repurchasing $44.5 million of common shares and increasing the dividend 17%. Despite growing geopolitical uncertainties and their effect on energy prices, Puerto Rico economy continues to grow and businesses and consumers' balance sheets are solid with high liquidity levels. Please turn to Page 4. Our core digital strategy consists of three main pillars: The first is our service offerings. We are targeting specific customer segments with accounts that meet their needs. Libre for the mass market, Elite for the Math Appland and MyBiz for small businesses. This targeted approach is driving strong market adoption and deeper customer relationship. The second pillar is technology. Our omni-channel platform allows customers to interact with us seamlessly across all touch points. This is driving continued digital adoption, resulting in efficiency and savings that we reinvest in new ways to serve our customers. The third pillar is intelligent banking. We're leveraging data and real-time insights to help customers better manage their finances, while increasingly seeing real customer connections being built through our digital channels. Please turn to Page 4. As proof of our success, we're driving innovation year-over-year. Retail digital enrollments are up by 10%, digital loan payments, 5% and virtual usage up by 7%. Net new retail and commercial customers each grew by close to 3%. The added benefit is that this enables us to free up more teams to provide personal value-added services, focus on sales to expand our market share and develop new digital products and services. Now here's Maritza to go over the financials in more detail.

Thank you, Jose. Let's turn to Page 6 to review our financial highlights. All comparisons are to the fourth quarter unless otherwise noted. Core revenues at $186 million were approximately [ zero. ] Total interest income was $194 million, a decrease of $3 million. This reflected lower average balances of cash and investment securities at lower average yields. This was partially offset by higher average balances of loans at higher average yield. First quarter interest income included $3.3 million from a PCV loan paid in full. There were two fewer days in the first quarter. This negatively affected interest income by about $3.1 million. Total interest expense was $40 million, a decrease of $4 million. This reflected lower average balances of core deposits at lower average yields. This was partially offset by higher average balances of brokered cities and borrowings at lower average yields. So the two fewer days reduced interest expense by approximately $1 million. Total banking and financial service revenues were $32 million, a decrease of $0.6 million. This reflected favorable MSR valuation of about $1.3 million, while the fourth quarter included $2.3 million in annual insurance commission recognition. The other income category was $0.2 million compared to a loss of $1.1 million. The change reflected the absence of several previously reported items from the fourth quarter. Noninterest expense totaled $95 million, down $10.3 million from the fourth quarter. The first quarter included $1 million in raises, $0.7 million in taxes costs, $1 million in costs related to our capital market readiness and registration process, $3.6 million in business-related volume incentives compared to $3.1 million a year ago and $2.5 million in planned cost savings. The fourth quarter included net $6.8 million in previously reported expense items. Income tax was $14.9 million compared to a benefit of $8.5 million in the fourth quarter. The first quarter ETR was 21.60%. Looking at some other metrics. The annual book value was $30.14 per share. Efficiency ratio was 51%. Return on average assets was 1.78%, and return on average tangible common equity was 16.4%. Now let's turn to Page 7 to review our operational highlights. Average loan balances were $8.2 billion, up $50 million from the fourth quarter. This reflected increases in Puerto Rico and U.S. commercial loans, partially offset by lower balances in residential mortgage, auto and consumer. Loan yield was 7.87%, up 14 basis points. Excluding the first quarter loan recovery, loan yield was 7.71%, down 2 basis points from the fourth quarter. New loan production was $609 million. This mainly reflected an increase in auto loan production. Year-over-year, new loan production increased 9%, primarily reflecting increases in new commercial loans with order moderating as anticipated. Average core deposit balances were $9.6 billion, down 4% from the first quarter. This reflected the $500 government deposit transfer to wealth management early in the first quarter. By the end of the quarter, this was partially offset by increases in retail and commercial deposits totaling more than $150 million across all categories, demand, savings and to a lower extent, time deposits. Core deposit cost was 1.29%, down 13 basis points. This was mainly due to the previously mentioned government deposit withdrawal, combined with lower average rates. Excluding public funds, cost of deposit was 1% compared to 1.02%. Also reported average noninterest-bearing deposits totaled $2.7 billion in the first quarter, an increase of 1.41% sequentially and 4.55% year-over-year. Investment totaled $2.8 billion, down $55 million. This reflected principal paydowns and maturities. This was partially offset by purchases of $49.2 million of mortgage-backed securities and residential mortgage securitization of $23.5 million. Average borrowings and brokerage deposits totaled $929 million compared to $787 million in the fourth quarter. The aggregate rate paid was 3.98%, down 5 basis points. By the end of the first quarter, balances were down to $747 million due to intentional runoff compared to $897 million in the fourth quarter. End of [indiscernible] cash at $636 million, was 39% lower due to the government deposit transfer. Net interest margin was 5.36%, reflecting the previously mentioned $3.3 million interest recovery and lower cost of deposits and borrowings. Cesar will provide more detail on our credit quality in a moment, but first, let me summarize the quarter. We demonstrated year-over-year loan growth and production in line with expectations and continue to expect low single-digit growth with our expanding presence in commercial more than offsetting a decline in auto. Our digital-first strategy is continuing to lead to more customer and digital and debit card transactions. Digital first also helped grow deposits in line with our strategies. We continue to anticipate growth this year with our Libre, Elite and MyBiz accounts. We now expect net interest margin to range from 5.10% to 5.20%. This updated range assumes no additional rate cuts in 2026 compared to two cuts previously expected, and incorporates the exit of the large remaining government deposits later this year. Noninterest expense were maintained within our expected run rate. We remain on track to keep expenses in a range of $380 million to $385 million this year. Based on our first quarter results, the estimated tax rate for 2026 is anticipated with 22.3%, excluding any discrete items. We were very active returning capital to shareholders. We will continue to be selective and opportunistic, balancing shareholder returns with disciplined growth. Now dear Cesar.

Thank you, Maritza. Please turn to Page 8. Before getting into the details, let me start with the key highlights for the quarter. Our thesis that customer -- higher customer liquidity in the first quarter drives better credit metrics was reinforced. We saw that most clearly across the retail portfolios, where early stage and total delinquency trends improved sequentially, consistent with normal seasonality. Net charge-offs totaled $21 million, down $5.5 million, reflecting normal portfolio activity with continued improvement in retail loss trends. Net charge-offs reflected $3.9 million from a final settlement of a previously reserved U.S. loan, while the fourth quarter included $4.8 million related to a nonperforming loan sale. The net charge-off rate was 1.05%, an improvement of 27 basis points from the fourth quarter. The auto net charge-off rate declined sequentially to 1.52%, an improvement of 29 basis points. The consumer net charge-off rate also improved to 4.40%, 15 basis points better from the fourth quarter. Provision for credit losses was $22.5 million, down $9 million from the fourth quarter. This reflected $17.5 million from increased loan volume, $3.7 million in added reserves for a previously reserved commercial loan and for newly classified small commercial loans. Allowance coverage remained strong at 2.48% of loans and reserve levels continue to appropriately reflect the risk profile of the portfolio. Looking at other retail credit metrics. Early and total delinquency rates declined meaningfully from the fourth quarter to 2.2% and 3.4%, respectively. These improvements were broad-based across the retail portfolio with auto, consumer and mortgage, all showing better early-stage performance. The non-performing loan rate was 1.47%, down 12 basis points. Retail nonperforming loan rates improved sequentially in auto and consumer while remaining stable in mortgage. Overall, retail credit behavior was consistent with the seasonal improvement we typically see in the first quarter, supported by higher customer liquidity and strong employment conditions in Puerto Rico. Turning to commercial. The non-performing loan rate declined to 2.36% from 2.50% last quarter, reflecting sequential improvement. Commercial asset quality outside of one specific trade continues to perform as expected. As we discussed last quarter, the commercial portfolio continues to include a single name telecommunication exposure that moved to non-accrual late last year. This exposure remains well understood and idiosyncratic and does not represent a broader trend within the commercial portfolio. Overall, credit continues to perform well. While we remain mindful that there are various geopolitical and economic headwinds that may increase the cost of living or inflationary pressures in Puerto Rico, the first quarter performance benefited from strong employment conditions and higher seasonal customer liquid. Credit metrics remain well controlled and within our risk appetite and the portfolio is performing in line with our expectations and risk framework. Here's Jose to wrap up.

Thank you, Cesar. Please turn to Page 9. The Puerto Rico economy continues to perform well. Business and consumer liquidity levels are strong and unemployment is at historically low levels. Public reconstruction funds, private investments and new onshoring projects continue producing economic tailwinds. And as Cesar mentioned, we are closely watching geopolitical macroeconomic uncertainties and their impact on the island, particularly with higher energy prices and overall inflation. Against this economic backdrop, OFG remains very well positioned. Our digital strategy is driving unique customer experiences, attracting deposits and growing our customer base steadily. Our culture of continued improvement and investments in people, technology and automation are producing tangible efficiencies. We continue to have a solid commercial loan pipeline, stable credit trends and strong risk management and disciplined asset liability. All these factors combined with Puerto Rico level of business activity positions us well for continued growth. Before I end my prepared remarks, I want to highlight the recognition we received in the first quarter, where we were honored with a 2026 Gallup Exceptional Workplace Award. For us, this recognition goes well beyond employment engagement scores. It reinforces a culture we've been intentionally building for many years, one that emphasizes agility, openness to challenge and innovation. At OFG, our teams are encouraged to question how things have always been done to move quickly in responding to customer and market needs and to continuously improve how we operate. That mindset enables faster decision-making, more innovation across our digital and operating platforms and better execution in a dynamic environment. This recognition highlights how our people, culture and strategy are united by a shared sense of purpose, driving meaningful progress for all our stakeholders. It is this commitment to purpose that empowers us to consistently achieve strong long-term results while making a positive impact across all our stakeholders. With this, we end our formal presentation. Operator, please open the call for Q&A.

[Operator Instructions] We'll take our first question from Brett Rabatin with Stone X.

Wanted to start just on the margin, even excluding the $3.3 million that would have made at about 5.24%. That was obviously better than anticipated. And when I look at the cost of deposits, if I heard correctly, 1% excluding the government deposits in the quarter. It seems like things turned out better than expected on the margin. And I know the guidance is for a slightly lower level from here. But just any thoughts on the potential positives for the margin relative to the guidance, whether it be loan pricing or any other factors? It seems like you're probably getting close to a bottom here on funding costs.

So Brett, before I let Maritza give you the specifics. Let's just be clear here. For us to provide guidance on the margin is a little tricky given the uncertainty on when, and how much of the large government deposit will exit, and how those funds will be replaced. So when we give a guidance on the NIM, we're using the most conservative guidance possible because we just really don't want to promise something that we really don't want to not deliver on. So bear that in mind, we still have a significant deposit from the government that has been telegraphed to us that it will depart some time. We don't know if it's tomorrow, if it's next year. So replacing those deposits we certainly bet that our business teams, the commercial team as well as the retail team has dated this first quarter will deliver and deliver substantially better than what we expected in the first quarter. It definitely has a lot to do with the economic background that we are living in Puerto Rico. And sometimes, we undermine that in our own forecast given the 22 or 23 years that we've operated in the island. But bear that in mind before I pass -- now I'll pass the answer to Maritza, so she can give you the specific details.

Yes, Jose for that cover. And we need that for the first quarter, definitely, the fact that deposits increased at a higher rate than expected. It was a very good momentum for us. The reality is that going forward, we don't see thinking about the rate scenario that we're money with no cost. We don't see much of a flexibility to push down more the cost of deposits. So we will continue to see deposits at the same level as we saw in the first quarter. And the element that we is embedded within the range that I provide is the asset composition because we will continue to see grade commercial book being having a higher proportion as auto continues to go down, as I shared with you in the prepared remarks. So that means we also have some impact on the loan yield that during this quarter went down 2 basis points. So we are seeing the asset sensitivity and the liability sensitivity somehow compensating. But between the two of them and seeing the NIM that we saw during the quarter going to stable, maybe 5 basis points down, 5 basis points off, but that's why we're giving the 5.10% to 5.20% range guidance. So for the quarter, if we exclude the recovery, it was 5.25%, and we will need to manage liquidity through the year, as so was mentioning. So that's why we're giving that base case scenario as a range.

And you guys know us, we're going to be conservative on our guidance in all the guidance that we provide. We've been doing that for many years. So that's kind of where we stand, Brent.

Okay. And can you remind me, Jose, Rafael, how much of the government deposit pieces left, and it sounds like you're unsure of the timing, but just any thoughts on.

Around $600 million on the one deposit. Remember, the other $500 million went to our broker dealers. So we're getting a little bit of a fee there. So that's where it stands right now.

Okay. And then on credit quality, I heard the comments and totally, if you look at the numbers, it makes sense. There's some there's some seasonality related to early-stage delinquencies, but there was some nice improvement this quarter. Was there anything else that might have been driving the improvement other than seasonality in customers having higher liquidity during 1Q. Are you seeing any other broad-based things that were improving credit?

Well, back in 2022 at the late stage of 2022, we adjusted we improved the rating standards to make sure that we're in book higher because that was record-breaking period. So we didn't -- we wanted to make sure that we use that moment to improve our portfolio quality. So now we're seeing the results of those improvements in the credit quality where the auto portfolio is 91% prime. So we are starting to see the benefits in the credit metrics of those adjustments that we did back in the 2022 year.

Yes. And when you think about it, Brett, the seasonality of the vintage that is coming due in '26 is one that already has 80-plus percent in prime. So we expect to have lower loss content in the vintages that are becoming season in the next couple of years. So that's part of an additional kind of element of our -- the consumer credit portfolio.

Yes.

Yes.

Okay. And then just last one for me around just the broad macro. I saw this morning that construction in Puerto Rico, it was slightly off in January, maybe February, but all this stuff going on with higher oil prices, inflation. Just wanted to hear anything you're seeing in terms of macro and Puerto Rico and maybe opportunities or challenges?

So you heard me before talk about Puerto Rico economy, and it remains very constructive, very positive Puerto Rico is probably in its best economic position in many, many, many decades. So if you think about it, right now, Puerto Rico has only 30% debt to GDP. Puerto Rico is -- has the lowest levels of unemployment in 70-some years, Puerto Rico received around $4 billion to $6 billion in reconstruction funds a year, and we'll continue to receive them for the next 5 to 7 years. Puerto Rico is benefiting from onshoring of medical devices, pharmaceutical and leveraging that infrastructure that has been in place for many years. Remember, Puerto Rico's manufacturing is around 45% of the entire economy in the island. So that is also healthy. So I think Puerto Rico, going back to our history, we are back on the limelight in terms of our geopolitical, geographic positioning. And you saw it when the military went into Venezuela. It all came from Puerto Rico, and they're hiring -- they're increasing their military presence in the island. So when you look at all that, it's just a very good economic backdrop that will certainly have to face threats, and those threats will come from the geopolitical that is going on around the world and the inflationary pressures and the United States potentially going into a recession and we'll get some of those effects Puerto Rico is in a much stronger position today than several decades ago to embark in those challenges. So when you think of the quarter-to-quarter or month-to-month changes in economic data points and stuff, yes, they're real. But at the same time, what we're seeing on the ground is high levels of strong interest in building infrastructure, strong private investments, and we're meeting with commercial clients. I had lunch yesterday with commercial clients that are really putting more to play in the island in different industries. And I think the next several years in Puerto Rico are going to continue to be pretty steady growth. And that's what we're seeing, Brett. We're seeing a pretty solid positive economic environment that is not exempt of threats, and it's not exempt of risk. But I think we've been managing them for many years, and we're confident that we continue to grow our client base, we'll continue to grow our loans and our deposits. We have been doing in the last several decades being very strategic, being very intentional. And again, as I said, highlighting our team, our people are really focused on trying to be the challenger bank in the island and gaining market share out of it. So that's kind of my 10 cents that turned out to be more than 25 cents.

We will move next with Arren Cyganovich with Truist Securities.

The deposit growth surprised me to the upside with the government deposits that you had guided coming out. You had pretty strong growth in the quarter to cover that where I thought it would actually come in to the borrowing side. Maybe you could talk a little bit about -- you mentioned that Libre and Elite and MyBiz all contributed. Are you seeing any particular growth in any one of those particular products? And were you doing anything special to kind of drive that growth in the first quarter?

Yes. Very, very -- I agree with you 100%. The three products are the driving force for us as an offering, very targeted, very focused. We don't have different deposit accounts. We have one for [ Mass, ] one for [ Math Affluent ] and one for small business, and that's how we keep our focus of our team members. And we also have excellent, excellent benefits for each of those accounts. And that is what's driving the the adoption and driving the account opening and driving the customer growth. So it's all across the board. What we saw with Libre in this quarter and Elite on the retail side, show increase in deposits, leverage noninterest-bearing, mostly digital account type of thing, where you can open it online if you want to. So we continue to see great adoption there, growing client base on a monthly basis steadily. On the mass affluent, we also saw great growth too in terms of deposits. We continue to see steadily. Those are higher balances. We continue to see steadily the penetration of different services within the Elite. What I mean by that is, we are seeing more and more Elite customers, deepening the relationship on the lending side with our -- within Oriental, with OFG. And then on my base, it's our flagship. Our team members go out there, and they -- we do have a very good solid cash management offering and the platform is very, very good and solid compares to the one that banks in the states have. So customers are starting to identify all those benefits, and we're seeing the results. Certainly, all of that has to do with the economy, too. So there's a lot of liquidity, so that helps. But I don't want to underestimate the power of our strategy, and how we're executing on it.

Great. That's helpful. Slide 5, you've always kind of talked about the digital first aspect of our banking and the statistics are pretty impressive. What are you doing, or any particular new investments that you're looking at from the technology side where you can kind of continue to improve upon those statistics?

So we've made investments throughout the last several years. And some of what you're seeing today is the the deployment of those -- or the benefits of those investments. And we continue to invest. And right now, the biggest focus for us as we finalize our data kind of management and making sure that we have the data readily accessible for us to be able then to continue to extract insights for for our customers and to improve their lives and give them value add. And that's something that we're already doing, and we are expanding that. And we have a team working on it for many years now. And that's something that we're we're focusing on. I think the benefits of artificial intelligence are, first and foremost, on the efficiency side. And when you hear Maritza talk about expenses. You see the guidance being flat versus last year, as we talked about here in the fourth quarter, we continue to see good opportunities for us to leverage AI and bring efficiencies to the bottom line for '27 and beyond. And then the other side is value add to our customers, how do we make their life simple. And those are the things that we're investing in right now. And it's tricky, and we're probably going to hit a good investment here there in terms of our -- the deployment to our customers, and we might miss some. But that's kind of how we operate. We do bet on the innovation. We think banking will require innovation going forward and Puerto Rico way behind on that innovation curve and OFG is the one who's driving that innovation in Puerto Rico.

We will move next with Kelly Motta with KBW.

Just a real quick one, just a guidance clarification from Maritza, that 5 to 10 to 5.20 margin, just wanted to clarify, is that for the full year or the balance of 20 quarters?

It's for the full year. And I already shared a little bit on how we're seeing and why we're seeing that range and wholesale provide our is to forecast the timing of the big government deposits transfer. So that considered that and the fact that we are not seeing costs during the year.

Got it. That's really helpful. And then similarly, I thought a real strength of the quarter was the core deposits. I know Puerto Rico has believe a government tax rebate. Just wondering if you saw any positive impacts from that in 1Q? Or if not, just if you could help us out with the timing of where you expect that.

That's usually at the end of the quarter. We saw a little bit at the end of the quarter, certainly. And I think that plays out throughout the first half of the year. So we see the child tax credit. We also see the tax refunds in general, and that played out throughout the first half of the year.

Great. That's really helpful. And then maybe to turn to capital. You guys announced the pretty meaningful dividend raise earlier in the quarter and you guys we're also more active the buyback with a new authorization capital looks very healthy here. Can you remind us any guideposts or thoughts around the cattle side things.

Yes. Everything starts with how do we deploy our capital and capital management. We want to deploy it first and foremost in a business in Puerto Rico. So if there are some opportunities for us to deployed in a growing balance sheet, we will certainly do that. And that's kind of the first level of thinking. We also certainly see the buyback as a way for us to continue to return capital to shareholders. methodical about it and opportunistic. And we've shown in the first quarter will continue to be so during the rest of the year. And the dividend, we look at it also and we feel very confident about the earnings power that we have, and how we manage the capital with a 14 -- close to 14% CET1, I think it was a little lower this quarter given the buybacks, but but it's around 13% quarters CET1. And we feel that part of our capital management strategy to deploy back capital to shareholders, and we will continue to do so.

Okay. Great. That's helpful. Maybe last ticky-tacky question for me, just modeling based. I appreciate the color on margin you at the interest recovery. Just looking at your balance sheet, it looks like there was a jump up in PCD interest income. Just to confirm, was that where that interest recovery came in .

Yes, yes, yes. It was a very full of a loan that was within the [indiscernible], yes.

We will move next with Manuel Navas with Piper Sandler.

How much do the taking out of fed rate cuts help that NIM guide? And if we did get one rate cut, what would you expect the impact to be?

Well, thank you, Navas. We continue to be asset sensitive, but the reality is in around 50 basis point cost will have a very low impact, less than 1%. But the reality is that we are taking that into concentration in this new guidance because we were expecting two costs midyear and then at the end of the year. and that's no longer impacting the commercial book. So that's why it is impacting positively the guidance that we provide, and we move it like 10 basis points not necessarily fully related to the change in the expectation on record. But also it's a combination with the fact that the funding mix is better than expected because of the inflows that we received during the first quarter. is encouraging us with the perspective that we had for the rest of the year. So we are expecting to core deposit to continue growing, so that will help funding mix in front of the potential exit of the government deposits, and that's what is embedded with that guidance.

I appreciate that. So the success you're having with the new account types as long as they keep growing, they can replace borrowings and that should only benefit your funding? Is that kind of you will be home?

Yes. And it also has another component that we don't talk about it often, but it's also the large commercial book and business that we have. We do have some good size commercial accounts that have long-standing clients of ours that also are benefiting from higher liquidity levels too.

Great. And on that front, I know your loan growth is commercial led this year, a little bit less on the auto side. How do the pipelines look? Any update to the mix the mix of loan growth from last quarter. It seems like it seems pretty consistent, but just trying to check in on seasonal improvement in growth.

Yes. We do have a pretty good pipeline, and we are continuing to stick with our guidance of low single digits simply because -- not because we don't feel comfortable with the commercial pipeline, but more importantly, because we are modeling a reduction on the auto business, auto loan book that -- but it's hard to predict, Glenn, the landscape here in Puerto Rico. But we're very happy with the business on the commercial side. We continue to grow it. We continue to have a very strong pipeline, Manuel.

And I guess my last question is on credit. Is this kind of improvement in past dues, which is seasonal, could that drive a bit lower net charge-off levels for the year. I think we're looking at close to 1% plus.

We talked about the 1% last quarter 2. I don't want to project this quarter because it's a very quarter because of the seasonality, as you mentioned. So I'll stick to my 1% through the year. And hopefully, it's going to be better because we mentioned already the improvements of the FICO quality of the portfolio, which should may equate into a better charge-off rate. But as of now, I would say 1%.

[Operator Instructions] At this time, there are no further questions. I will now turn the call back over to Mr. Fernandez for closing remarks.

Thank you, operator. Thanks again to all our team members, and thank you to all our shareholders who are listening. Have a great day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.