OFG Bancorp (OFG) 2025 Q2 法說會逐字稿

Good morning. Thank you for joining OFG Bancorp conference call. My name is Margot, and I'll be your operator today.

Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors; Maritza Arizmendi, Chief Financial Officer; and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the second 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 the OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Instructions will be given at that time.

I would now like to turn the call over to Mr. Fernandez. Please go ahead.

Good morning and thank you for joining us. We are pleased to report our second quarter results. To start, let's go to page 3 of the presentation.

It was another strong quarter ending with record assets of more than $12 billion and record loans of more than $8 billion. We had excellent financial results generating earnings per share diluted of $1.15 for a 6.5% increase year over year on a 1.5% increase in total core revenue with a high return on average assets and equity.

Operating execution was highlighted by strong loan origination and core deposit flows. Credit reflected stable economy in Puerto Rico and high levels of liquidity held by individuals and businesses. We announced a new $100 million buyback -- stock buyback authorization and bought back more shares supported by our strong capital generation and balance sheet. Please turn to page 4.

We continue to see strong momentum with our omni-channel digital platform. Our strategic investments in technology and innovation through our digital first strategy is paying off.

We're growing accounts and building deeper customer relationships. During the second quarter, nearly all of our routine teller, retail customer transactions and deposits, as well as 70% of retail loan payments were made through our data and cell service channels. This was being driven by continued year-over-year growth in digital enrollment, digital loan payments, virtual teller utilization, and 4% new net customer growth.

In the second quarter, we introduced two new products and services. We launched Oriental Marketplace, an online feature that gives our customers exclusive discounts on travel, restaurants, and retail products. And we also introduced a US government money market fund, a new addition to our DGI family of funds to provide customers with another convenient investment option.

Now here's Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page 5 to review our financial highlights. All comparisons are to the first quarter unless otherwise noted.

Core revenues total $182 million. Looking at the key components, total interest income was $194 million, an increase of $5 million. This mainly reflects higher balance, average balances of loans and cash, and $1.5 million from one additional business day.

So that interest expense was $42 million, an increase of $2 million. This mainly reflects higher average balances of core deposits and higher average balances of borrowings and brokerage deposits, and $0.4 million from one additional business day.

Total banking and financial service revenues were $30 million an increase of $1 million. This mainly reflects increases in mortgage banking activities and wealth management.

Looking at net interest expenses, they total $94.8 million, up $1.4 million. This is in line with our continued outlook of $95 million to $96 million in quarterly non-interest expenses in 2025.

Compared to the first quarter, the second quarter reflected $1.4 million less in seasonal payroll taxes and foreclosed real estate costs. Keep in mind, in the first quarter included a $3.1 million incentive payment from a business partner.

Income tax expense was $14.1 million with a tax rate of 21.37%. That reflects an anticipated rate of 24.90% for the year and the benefits in the second quarter of $1.7 million in discrete items.

Looking at some other metrics, Tangible book value was $27.67 per share. During the quarter, we bought back 186,000 shares. Efficiency ratio was 52%, return on average assets was 1.73%, and return on average tangible common equity was 17%. Now please turn to page 6 to review our operational highlights.

Total assets were $12.2 billion, up 9% from a year ago and 4% from the first quarter. Average loan balances were $8 billion, up close to 2% from the first quarter.

End of period's loans held for investment total $8.2 billion, up 7% from a year ago, and up $328 million from the last quarter. The sequential increase mainly reflects our strategy to grow commercial lending in the US and Puerto Rico. Long yield was 7.91%, down eight basis points.

New loan origination of $784 million was up 38% from the from the first quarter and 33% from a year ago. Second quarter originations reflect increases in all lending channels in both Puerto Rico and the US.

The commercial pipeline continues to look strong. Average core deposits were $9.7 billion, up close to 1%. End of period balances of $9.9 billion increased $139 million or 1.4% quarter over quarter, and $291 million or 3% year over year.

The sequential growth reflects increased commercial and government deposits and reduced retail balances. In addition, it reflects increased time and saving deposits and reduced demand deposits.

Core deposit cost was even with the first quarter at 1.42%. Excluding public funds, cost of deposit was 0.99% compared to 1% last quarter.

Average borrowing and brokerage deposits were $672 million compared to $570 million. The aggregate rate paid was 4.11%, down 21 basis points. End of period balances were $732 million compared to $421 million.

The second quarter reflected $200 million in a new two-year federal home loan than advance at 4.13% and $82.5 million in additional broker deposits. We use these funds to increase liquidity in addition to higher deposits as part of our strategy to grow commercial loans.

Cash at $852 million was up 20%, reflected some of the new wholesale funding pending continued loan growth. Investments totaled $2.8 billion remaining relatively unchanged. This reflected repayments mostly offset by purchases of $50 million of mortgage-backed securities yielding 5.55% and (inaudible) securitization of our own mortgage lending.

Net interest margin was 5.31% compared to 5.42%. Excluding the new federal home loans, NIM would have been around the higher end of our 5.30% to 5.40% range. All this being equal, as long growth continues, we should see NIM expand from the second quarter level. Please turn to page 7 to review our credit quality and capital strength.

Credit quality continues to be stable. Net charge of total $30 million, down $7.6 million from the first quarter. Net charge of rate was 0.64%, down 41 basis points sequentially. Year over year, the net charge of rate was down 15 basis points.

Provision for credit losses was $21.7 million, down $4 million. The second quarter included $70.2 million for increased volume, $3.7 million for a specific reserve for four commercial loans, and $7 million due to the alignment of (inaudible) options and risk weighting factors mainly in Puerto Rico.

Looking at other credit metrics, the early and total delinquency rates were 2.46% and 3.59% respectively, and the non-performing loan rate was 1.19%. Looking at other capital metrics, our CET ratio was 13.99%, stockholders' equity total $1.3 billion, up $39 million and tangible common equity ratio decreased 10 basis points to 10.20%.

To summarize the quarter, net interest income increased due to long growth, in particularly our strategy to grow commercial loans. We saw continued deposit growth driven by commercial and government balances. Net interest margin was towards the lower end of our expected range, reflecting our decision to put more liquidity in place to fund future strategic growth in commercial loans.

Credit quality continues to reflect the solid economic environment in Puerto Rico for both consumers and businesses. Non-interest expenses were in line with our expected range and should continue to do so.

With a strong CET1 ratio and earnings power, we put a new $100 million share buyback in place to return capital to stockholders, and we continue to acquire shares in the open market.

Now here's Jose.

Thank you, Maritza. Please turn to page 8.

The Puerto Rico economy continues to show stable growth despite concerns about global macroeconomic and geopolitical political events. The situation remains the same. Wages and employment are at historically high levels, the business environment is constructively positive, the economy continues to grow, and the outlook is positive.

Turning to OFG, our continuous improvement culture and our digital first strategy is proving to be highly effective. New services are proving -- are providing customers with better insights to better manage their finances. New tools are giving us the ability to further streamline processes and become more efficient. The end result is continued value creation and differentiation in the marketplace.

Long growth and credit trends are solid, and our risk management capabilities are strong. We continue to execute our plans strategically and thoughtfully, growing market share by creating value and helping our customers achieve progress. All this supported by a very strong capital position.

As always, we could not have achieved these results without the hard work of all our team members. We are very thankful to them and optimistic for the future.

With this, we end the formal presentation. Operator, let's start the Q&A.

(Operator Instructions)

Timur Braziler, Wells Fargo.

Hi, good morning.

Good morning.

Maybe starting off on the margin, that's good commentary that you think margin starts to expand off of these levels. I'm just wondering maybe from a deposit standpoint; those costs seem to tick higher a little bit in the second quarter. I guess as you look out into the back end of the year, is it just the better loan growth trajectory that drives margin higher? I guess can you just talk to the interplay between the expected loan growth and maybe what the deposit competition is doing on the island.

Yeah, so thank you for your question, Timur. I'll take a stab at it first and then I'll let Maritza give you additional color.

So when you -- on the point on deposit cost ticking higher, remember that the government deposits are tied to variable rate treasury bill kind of formula. And during the quarter, you have that -- those fluctuations kind of trend up and down. So this quarter, we have a little bit of that noise there. That's why you're seeing a little bit of that uptick on the cost of deposits.

But let me just also step back also and give you a little bit of our thoughts on deposits and how we see customer deposits moving forward because what you have seen throughout the last year and a half is that our net new account growth in retail customers has continued to grow, particularly in checking during, as I said, the past year and a half. So that's one of the key drivers for us.

Also, you have to look at the changes that we have implemented within our value proposition and our differentiation for custom -- for retail customers. We have added a couple of new targeted products, deposit products and services. We have expanded as you know, the self-service capabilities and also the digital capabilities.

We have provided additional insights for our customers to help them manage their finances, so we're adding additional tools for them to help them achieve financial health. And we're starting to see, we're in the early innings, but we're starting to see some of the loan only clients starting to add relationships and deepening their relationship with us by opening checking and savings accounts with us.

So and I'm speaking particularly from auto and mortgage as well as small and mid-size commercial clients, owners and employees. So that's a little bit of a context on why we're seeing good momentum across the board on the deposits, particularly on the retail side. So when you put all this together, the overall retail customer deposit will continue to grow in the second half. We expect that to continue, and also into 2026.

Then I'd like to add also the commercial side. It's a little trickier, right, because as I said, we have government deposits that are variable rate and tied to treasury bills, but we also have some larger clients that have ins and outs during the quarter that might kind of give us a little bit volatility on the commercial side. But all in all, we're really happy with the path that we're taking on our deposit growth as well as the cost of deposits from a competition.

What we're seeing -- we're seeing a little bit more competition from a small commercial bank that has operations in Florida that they're kind of positioning themselves as higher yielding, higher kind of paying CDs. We're also seeing some competition from US credit unions that have been doing the same for the last couple of years. But all in all, I would say that the competition is pretty rational.

Maritza, is there anything you want to add on the margin?

I'm not sure if that clear up your question or you need more color on other aspect of the name.

No, I think that's helpful. Thank you.

Maybe switching to the loan growth, pretty impressive here it seems like both in Puerto Rico and on the mainland. I'm just wondering the cadence there, did you see a real pick up early in the quarter and then maybe that tapered off towards the back end of the quarter? Was that growth consistent throughout the quarter? And just maybe give us a lay of the land for borrower appetite both in Puerto Rico and then maybe on your mainland operations as well.

For sure, yeah. So yeah, we had a really strong quarter on loan growth this second quarter. So what drove it, it was primarily a very strong pipeline coming into the second quarter in both Puerto Rico and the US, and we mentioned in the -- in our last earnings call that we felt that we had a very strong pipeline, and some credits were kind of pushed into the second quarter. So that's number one.

In addition to that, this quarter, we also saw an increasing commercial line utilization from some larger commercial clients. A third, Puerto Rico's economy continues to be doing well and it's in solid shape.

Clearly, the Puerto Rico paradigm shift -- Puerto Rico economy paradigm shift continues to play out and businesses are building up their capabilities and infrastructure. Some industries are consolidating. Puerto Rico is investing in its infrastructure, et cetera. You've heard me talk about it in the last year and a half or so or two years. So we continue to see solid pipeline for commercial loans.

Consumers are in good shape, so we expect loan balances to grow for the full 2025, now closer to the 5%, 6% versus the 3%, 4% that we previously guided. So things continue to be moving in the right direction and in spite of all the global geopolitical and all the uncertainty created by all the things that you guys know better than I do, I think Puerto Rico remains resilient.

And I'm building a big hole in the economy that was created after 10 years of a kind of a 20% economic contraction, so sometimes the economist's numbers, which are correct, show a very slow-moving economy. But if you put it in the context of building up a hole or filling up a hole that was created after 10 years of aggregate 20% contraction, really, the economy is doing pretty strong from the consumer and the commercial side.

So being a bank and having a strong capital base with a very prudent and a risk culture, it's -- this is what we got. And we're really excited to be able to continue to grow and deploy our capital for our customers.

Great, thank you. I'll step back.

Yeah, thank you for your questions.

Kelly Motta, KBW.

Hey, good morning. Thanks for the question.

I would love to circle back to this concept of margin. Looking at your balance sheet, it looks like, and you called out the FHLB and wholesale funding. You put on it looks like liquidity was somewhat elevated during the quarter.

Just thinking through the expectations of March and how you're thinking about funding and moving the balance sheet ahead from here, can you just help us with some of the dynamics of the moving parts of maybe the timing of the wholesale funding and how to think about threading that with liquidity and loan growth ahead given your expectations? Thank you.

So as you saw it in the quarter, Kelly, the driver was the volume factor for the NIA to continue expanding. That's something that we have consistently sharing with the market that probably will range between 5.30 to 5.4. And compared to prior year NIM, there is a contraction, but volume will be the driver on the NII and that's what happened this quarter.

And as we continue to see loan growth as a good dynamic here that Jose was mentioning, we decided to accelerate and put funding into the books with a good rate because at the end it's 4.13. we have margin if we put it in cash, but we wanted to anticipate that liquidity at that moment we were opportunistic. And now we have flexibility to continue investing and going forward with the opportunities as I mentioned before. We have a great pipeline, good potential, and we wanted to have that flexibility and that's why we decided to put that into work, okay.

Got it.

And specifically, to your very specific question about the timing of those, it was halfway through the quarter that we made those, that call. We saw the pipelines, we're seeing the loan originations, we see the line utilization levels inching up, and that's when we decided but because we also saw the good rate like Maritza mentioned from our perspective.

Got it. That's helpful.

And then I mean the story of the quarters you guys just had such strong loan growth. I'm just wondering. How are spreads holding up? Any kind of like competitive dynamics there because, Jose Rafael, you said you now are expecting a bit higher loan growth for the year.

Just wondering, I mean, I understand some of the dynamics and the push into to 2Q, but it really was remarkable. So I'm hoping you can discuss some of the pricing dynamics there and kind of how where that new business is coming from.

Yeah, so pricing dynamics, different than deposits. The market is much more competitive on the lending side, and we're seeing, a particularly on the commercial side, we're seeing a little bit more pricing pressure, and that's part of also what we're seeing that's mostly on the pricing side.

In terms of loan growth, well, auto had a little bit of a benefit this quarter because of the announcement of the tariffs and like it happened in the states too. There was a little bit of a let me go out and buy the car before tariffs come in type of thing, but we're still seeing a pretty steady loan origination pipeline there from the car dealers in spite of some stabilization in the auto sales in Puerto Rico.

On the -- as I mentioned, on the Puerto Rico commercial, we see still a good pipeline and it's very well diversified from industries as well as from the type of kind of loans that they're seeking. Some of them are part of a consolidation strategy in the industry, some of it is building infrastructure as I mentioned in my prepared remarks, et cetera.

On the mortgage, we really have inched up in the last several quarters. And this quarter, we did a $22 million more than. In the first half of this year, we've done $22 million more than the first half of last year. And it's mostly driven by stabilization in the real estate, prices.

We, they gone up and they remain relatively stable at those levels and our ability also to look at the non-conforming market and be able to offer alternatives that are relatively more competitive than in the past. So that's also another area where we're looking to focus on.

And then lastly, on the US loan business that we have, again, we had a little bit of a accumulated pipeline from the first quarter, but we also -- we are also seeing some a good well diversified CNI. It's also industry diversified. It's nationwide and it's focusing on the small and mid-market segment in the US and the economy in the US remains resilient also, and in spite of all the things that are going out there.

So again, it's a pretty good economic picture that we're seeing in spite of all the clouds, and we're on the lookout. We're not going to -- we're going to be relentless in looking for opportunities to grow, but we're going to also be making sure that we don't become complacent, and that's why Cesar and his team on the risk side are keeping a close eye on all the risks to make sure that we keep the focus on both sides. So that's my view on the loan side, Kelly.

Got it. I will step back. Thank you very much.

Yeah, you're welcome, Kelly, thanks for your question.

(Operator Instructions)

Brett Rabatin, Hovde Group.

Hey, good morning, everyone.

I wanted to start -- I'm good, thanks. I wanted to start with just talking about what's going on with the power grid here recently and the new Fortress contracts. Can you give us any color on your vantage point, what's going on with the -- with energy in Puerto Rico, and just I know we've talked about this before but you know, just any update would be helpful.

Sure.

So what's going on right now is they're trying to bring in natural gas to fill in some generators that would potentially cover the grid in case of higher demands during the summer, which will happen. And that way minimize or mitigate some of the potential shutdowns that the system is having or the kind of turndowns that that the system is having.

So that's the objective of the well documented contract that the fiscal board has canceled but. But I look at this as I've said in the past, this is a long journey for energy in Puerto Rico. This is year 5 or so. They -- they're still in bankruptcy, they're too private sources, the government is in the middle, so they're in the ring and they are -- they're throwing punches at each other and sometimes they pat themselves on the back, depends on the perspective, so it's going to be noisy.

But at the end, it's not making any impact on the economy. It's having an effect on the economy, but it's not -- if we wouldn't have this issue, the economy will be doing a lot better because it will reduce a lot of uncertainty from the business side and the consumer side. But it's the economy is in such, strong base right now that even all this noise is precluding businesses and consumers from holding back, it's becoming a little bit of a kind of part of doing business until things just get resolved and it's going to take a while.

Okay, that's helpful.

And then from a credit... I'm sorry?

I hope that helps.

Yes, that's helpful.

And then from a credit quality perspective, the delinquencies in the early stage auto ticked back up from being really low last quarter, but charge offs were really low this quarter and I know the USA portfolio didn't have any charge offs. But just wanted to get your thoughts on the charge off levels and 2Q and if that was an anomaly or if this is kind of a new level of benchmark to think about for credit for you guys.

Yeah, let Cesar give you the specifics on that.

Let me clarify, the first quarter always benefit from in delinquencies and non-performing loan statistics because it's a seasonal positive quarter because of tax refunds, end of holiday season, et cetera. So we always expect a pickup in the second quarter and third quarter from the first quarter because of that seasonality.

But when we compare it to last year's same quarter, it's much better. So it's a new vintage coming in, better vintages coming in that we adjusted back in 2022. So those new vintages with better credit performance are going to continue coming in into the statistics. So that's going to continue stabilizing and getting hopefully better charge of rates and non-performing loan and delinquency rate than previous benefits. So that's basically the outcome.

Thank you.

Okay, so if I heard that correctly, it sounds like the outlook from here is net debt improved, just kind of given the vintages in the recent performance.

Correct.

Okay. Alright, great. Appreciate all the color.

Thank you. Have a great day.

Kelly Motta, KBW.

Hi, thanks for letting me jump back on.

I apologize if you answered this more directly. If so, I may have missed it. But on the government deposits, I think last quarter, you talked about a billion left that had signed on a couple months to stay and that was kind of the determined the determining factor for kind of where you would end up in the margin range. Just wondering if you have an update as to your expectations for the potential of those deposits to remain with OFG at least for here now.

Yeah, so the expectation is relatively the same as in past quarters. It's an ongoing kind of every three, four months, and we feel that we're going to see this deposit kind of roll over in several more quarters.

Okay, that's helpful. And then maybe if we could touch on expenses. I don't think we addressed that yet.

You guys did an excellent job controlling expenses and you mentioned you've been investing a lot in the tech and certain efficiencies to just drive customer experience. Just wondering if you could provide a high-level update as to what other sort of investments are in the works and how you think about balancing your investment in the business and your ability to serve your customers ahead with capital return to investors given your strong capital position.

Yeah, well, that's a great question, Kelly.

We -- how do we do it? Every day we push for efficiencies and certainly technology is helping out. And I think we look at efficiencies from the back office and we see processes that can be simplified and we see areas where technology after that the process has been simplified can come in and be a lot more efficient for us.

We are not yet seeing some of those efficiencies, but we are expecting to see them in the years to come in the next year or so. And that's part of the push that we're constantly addressing internally.

So because we have to continue to invest in technology, we need to continue to invest for the improvement of the customer experience. We need to continue to create value for our customers, not only on the retail side but also on the commercial side.

Look, we have formidable competitors that are really aggressive. And in their investments, they have deep -- deeper pockets, so we need to play it both ways. We need to invest, but we need to be very much intentional in eking out efficiencies constantly on all our processes and that's why what we're asking internally is also to continue to transform our culture to one where we have to be a lot more focused on change management and challenging each other to do better.

And that's the best I can share with you, Kelly, because otherwise, I would have said it's just an art and it's sometimes a picture and sometimes it's an awful picture, but it's an art. It takes a team to work and a team to be buying in into what we need to achieve. And we are a very happy to have that team in Oriental right now, and excited to continue to grow and to show value to our customers and shareholders as well.

Got it.

Last very little ticky tacky question from me for Maritza is the tax rate guidance that you provided in the earnings release, you did have the tax benefit in 1Q. Was wondering if that was including or excluding that. I just wanted to get clarification so I can model the second half of the year ahead.

Excuse me. The expectation that we share with you is 24.9 for the year, and it doesn't have any discrete items included within that. I'm not sure if that's your question, but is the flat rate for the year without any benefits.

So excluding that $1.7 million that you had?

Yes, correct. That's correct.

Okay, perfect. Thank you so much. Awesome, thank you. I will step back thanks guys great quarter.

Yeah, thank you. Thank you for your questions, Kelly.

At this time, there are no further questions. I will now turn the call back over to Jose Rafael Fernandez for closing remarks.

Thank you, operator. Thanks again to all our team members and thanks to all our stakeholders who are listening. Looking forward to see you next quarter. Have a great day.

Thank you, and ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.