OFG Bancorp (OFG) 2025 Q3 法說會逐字稿

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Chloe and I will 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.

(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 3rd quarter results. Let's go to Page 3 of the presentation. We had a strong quarter with earnings per share diluted of $1.16, up 16% year-over-year on a 5.6% increase in total core revenue. Loans and core deposit balances increased year-over-year, with particular growth in commercial loans, which has been a strategic focus as auto loans moderated, something we have been anticipating for a while.

Performance metrics continue to be strong. Credit was solid. Capital continued to grow. And we repurchased $20.4 million of common shares. Business activity remains strong in Puerto Rico, with a continued outlook for growth.

Please turn to page 4. Our digital first strategy is making significant strides, expanding our positioning as leaders in banking innovation in Puerto Rico. As a result of our digital first strategy, we're gaining strong momentum in both adoption and new accounts. During the 3rd quarter, nearly all our routine retail customer transactions were made through our digital and self-service channels. This is driven by continued year over year growth in detail enrollment at 8%, digital loan payments at 5%, virtual teller utilization at 25%, net new customer growth at 4.6%.

All this is being enhanced by two related strategies. The first is our innovative product service offerings. Last year we introduced the Libre account for the mass market and the Elite account for the mass affluent. Both offer reward programs unique to Puerto Rico and have been successful in attracting deposits from new and existing customers. The number of Libre new customers increased 17% year over year. 27% of try accounts have been opened digitally versus 19% last year, and new Libre accounts generated a 14% increase in related deposits.

The Elite account continues to lead the market as a unique alternative for clients who want to maximize their financial progress. We have also enhanced our Oriental Biz account suite, making treasury management easier and secure for small businesses, driving higher new account openings and deposits.

The second strategy is leveraging AI. Customers now receive tailored insights based on cash flows and payment habits, helping them monitor their budgets and access value-added tools to improve their finances directly from their mobile phones.

We are providing an average of 9 insights per month per account. Customer feedback has been running 93% positive. This quarter, we also launched internal initiatives to apply AI to boost efficiency across all banking operations and make it faster and easier to solve our customer questions and needs. All this has directly contributed to our increased market share in retail deposits and positions OFG for continued success in the coming years.

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

Thank you, Jose. Let's turn to Page 5 to review our financial highlights. All comparisons are to the 2nd quarter unless otherwise noted. Core revenues total $184 million, driven by solid performance across key areas. Total interest income was $200 million, an increase of $6 million. This mainly reflects higher balances of loans and investments and $1.6 million from one additional business day.

Total interest expense was $45 million an increase of $3 million. This mainly reflects higher average balances of core deposits, higher average balances of wholesale funding and $0.5 million impact from the extra business day. Total banking and financial services revenues were $29 million a decrease of $1 million. This mainly reflects a decline in mortgage banking revenues due to a change in MSR valuation.

Compared to a year ago when we were first subject to reduced interchange fees under Durbin, total banking and financial service revenues were up $3 million or 11%. Other income category was $2.2 million. This included gains from OFG Ventures investment in fintech-focused funds. Looking at noninterest expenses, they totaled $96.5 million, up $1.7 million. This reflected a strategic investment of $1.1 million in technology, people and process improvements, $1.1 million tied to increased business activity and marketing, and an $800,000 reduction in foreclosed real estate costs.

Income tax expenses was $9.5 million with a tax rate of 15.53%. This reflects a benefit of $2.3 million in discrete items during the quarter and an anticipated rate of 23.06% for the year. Looking at some other metrics, tangible book value was $28.92 per share. Efficiency ratio was 52%. Return on average assets was 1.69%. And return on tangible common equity was 16.39%.

Now let's turn to Page 6 to review our operational highlights. Total assets were $12.2 billion up 7% from a year ago, and steady compared to the 2nd quarter. Average loan balances were $8 billion up close to 2% from the 2nd quarter. End of period loans held for investments total $8.1 billion.

Sequentially, loans declined $63 million or 0.8%, mainly due to repayment of commercial lines of credit funded in the 2nd quarter. Year by year, loans increased 5%, reflecting our strategy to grow commercial lending in Puerto Rico and the US. Loan yield was 7.90%, down 1 basis point.

New loan origination was $624 million. As Jose mentioned, this reflected in part moderation in in auto loans that we have been anticipating and an unexpected easing of our auto sales after a surge of pre-tariff purchasing in the 2nd quarter year over year, originations were up 9%, and the commercial pipeline continues to look good.

Average core deposits were $9.9 billion, up close to 1%. End-of-period balance was $9.8 billion, decreased $76 million or 0.8%. This reflected increased retail and government balances and reduced commercial deposits. By account type, it reflected increased savings deposits and reduced demand and time deposits. Compared to the year-ago quarter, core deposits were up $287 million or 3%.

Core deposit cost was 1.47%, up 5 basis points. Excluding public funds, cost of deposit was 10 103 basis points compared to 99 basis points in the 2nd quarter.

The increase in cost mainly reflects higher average balances in savings accounts with the within the upper pricing tiers. Investments total $2.9 billion of $154 million. This reflected purchases of $200 million of mortgage-backed securities yielding 5.32%, partially offset by repayments. Cash at $740 million declined 13%, reflecting the new securities purchases.

Average borrowings and broker deposits total $769 million compared to $672 million. The aggregate rate paid was 4.11%, level with the 2nd quarter. End of period balances were $746 million compared to $732 million. The 3rd quarter reflected increased variable rate borrowings and decreased brokerage deposits.

Net interest margin was 5.24% compared to 5.31%. This quarter, NIM reflected increased interest income from the securities portfolio, a slightly higher cost of deposits, and increased variable rate borrowings.

Please turn to page 7 to review our credit quality and capital strength. Credit quality continues to be stable. Provision for credit losses was $28.3 million but 7(inaudible)

Reflected $13.5 million for increased loan volume, $5.6 million for a specific reserves on two commercial loans. The impact of two items from our annual assumptions update.

$4.3 million from updated repayment assumptions in commercial loan and residential mortgage portfolio and $2.9 million for microeconomic factors. Provision also included $1.3 million due to the auto qualitative adjustment related to the seasonal increase in early delinquency not captured in the model.

Net charge of total $20 million up $7.4 million. Total net charge off rate was 1% of 36 basis points sequentially. This includes $3.6 million from one of the two commercial loans mentioned before. Year by year, the charge of rate improved in consumer and auto portfolios, and there was a higher recovery in recovery rate in mortgage.

Looking at other credit metrics, the early and total delinquency rates were up from the 2nd quarter, but in line with the rate range over the past year. The non-performing loan rate was 1.22%. On the capital side, our CET ratio was 14.13%, stockholders equity total $1.4 billion up $41 million.

And the tangible common equity ratio increased 35 basis points to 10.55%. Now to summarize, the quarter, the 3rd quarter, net interest income continues to grow, reflecting our strategy of an increased volume of loans, in particular commercial, more than offsetting our lower earnings. We continue to anticipate annual loan growth in the range of 5% to 6%.

While deposits were down sequentially, they increased year by year. We continue to expect annual growth driven by both retail and commercial accounts. Net interest margin was 5.32% for the nine months in line with our target range of 5.3 to 5.4 for the year.

During the 4th quarter, we anticipate a range of 5.10% to 5.20%. Credit quality remains stable, reflecting the strong economic environment in Puerto Rico. 3rd quarter, non-interest expense. We're a little above our range, but we continue to anticipate there will be between $95 to $96 million a quarter.

As I mentioned it, we now anticipate our effective tax rate for the year to be 23.06% compared to our previous expectation of 24.90%. Capital continue to build and we anticipate continuing to buy back shares on a regular basis. Now, here's Jose.

Thank you, Maritza. Please turn to Page 8. The Puerto Rico economy continues to perform well. Wages and employment remain at historically high levels. Consumer and business liquidity is solid. The economy also going to boost this summer from a surge in tourism. More importantly, new developments in onshoring confirmed Puerto Rico's position as a world leader in medical device and pharmaceutical manufacturing.

Turning to OFG, we will continue to pursue our differentiated, unique customer-centric strategies. Our Libre and Elite accounts and our Oriental Biz commercial accounts are helping to grow core deposits and loans. Our commercial pipeline and credit trends are solid.

And our risk management capabilities and asset liability management discipline are strong. Combined with the level of business activity, all this continues to position OFG well for growth and expanded market share. Having said that, we continue to be watchful regarding all the global macroeconomic and geopolitical uncertainties. As always, we could not have achieved these results without the hard work of our dedicated team members. We are thankful to them and excited about the future.

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

Arren Cyganovich, Truist.

Maybe you could talk a little bit about the deposits in the quarter. The cost of your deposits rose modestly. Is that driven by the competitive environment? Maybe you could talk a little bit about the dynamics impacting that.

Yes. First of all, welcome to our call, your first call with OFG. And thank you for covering us at Truist, appreciate that. To answer your question regarding the higher deposit cost, it's really driven by our strategy. When we talk about the Elite account, which is mass affluent, we really are strategically positioning ourselves to attract mass affluent clients through that account paying a little higher rate, and that's kind of the short-term cost of it, but also betting on a long-term strategy of deepening that relationship with the customer.

And that's how that product is structured. So, what you're starting to see is a little bit of a higher cost on the savings side because we've been very successful with our strategy. We've really happy with the results. And we'll continue to leverage the added features that we're adding to our deposit customers in terms of the insights and the predictive insights that we provide through AI which are unique to each customer. And that's actually something that no other bank in Puerto Rico offers, and it's giving us great momentum for us to attract new customers and potential for deepening.

So that's a little bit of what's driving some of that higher customer cost on the saving side.

Okay. That helps. And then in terms of the commercial loan originations, those were solid, but you had some paydowns on lines of credit. Maybe you could talk about the dynamics for commercial and outlook for commercial loan growth ahead.

Sure. So as Maritza pointed out in her remarks, what occurred in the 3rd quarter was the repayment of some of the commercial lines that were drawn in the 2nd quarter. So that's a little bit of what drove the balances to go down. But going forward, we have a very solid pipeline. We continue to see great business activity in Puerto Rico, and Oriental going after the those opportunities.

So we're very confident about our commercial pipeline in the 4th quarter and starting to build the 2026 pipeline also.

Okay. thank you

Timer Braziler, Wells Fargo.

Hi, good morning. Thanks for the question. Just a follow-up on the paying up for some of the savings account deposits. Can you just maybe talk us through what type of rate is being required to win some of those balances? And as you think about from a competitive landscape, where are you really targeting to take some market share here?

Yes. So as I explained earlier a little bit, we go after the mass market with a zero cost account. It's a checking account. And we drive the growth through our uniqueness, in terms of the offering. On the Elite account, average cost is around 1.5% on average, let's just say.

And it's targeting the mass affluent. And again, it's us driving value add and focusing on the customer just to attract those customers to OFG and be able to deepen those relationships as we build trust with them. And that is again playing very nicely for us on our strategy. And the key here is deepening, right? And how we are able to deepen that relationship through debit card utilization, auto loans, mortgage loans, wealth management, et cetera, which we offer throughout.

And that's kind of what's driving that, a higher cost on the saving side, and that's, there's nothing else to it.

Got it. And then maybe two questions around credit. The first, if you could just provide any kind of additional color on the two commercial loans. And then looking at that commercial portfolio, on the Mainland in particular, two out of the last three quarters we saw some pretty large charge-offs out of that portfolio. Can you just maybe speak a little bit more broadly about what you're seeing within Mainland CRE?

Yes. So let me answer your second question first. On the Mainland portfolio, we do see some very good opportunities for us to continue to build the book and use it as a geographic diversification. We do small participations on small and midsized commercial lending with some partners, and that strategy continues to play out. On the second part of your question, where you've seen some charge-offs in the last several quarters, it's part of our way of managing risk within that portfolio.

And it actually started a couple of years ago when we started to feel pressure in the U.S. economy and felt that we should reduce some of those risks and it required some charge-offs. We see it more idiosyncratic than being more market-wide, and feel comfortable with our team and the efforts that we're doing. Now in particular to this quarter, the two commercial loans, one is a U.S. loan and one is a Puerto Rico loan.

The US loan was a $5 million loan where we basically took a provision and the charge-off this quarter because we sold it. And the second loan is a Puerto Rico commercial loan. It's a company that did a large acquisition, they're having some operating and financial weaknesses, and we're proactively provisioning for that loan. So these are idiosyncratic. We don't see them as being market-related.

Okay. And then just lastly on auto loans, the pickup in charge-offs there. It's kind of more in line where it had been 3Q, 4Q, 1Q. Is this kind of just getting back to that type of rate? I know you've been calling for origination sales down in auto for quite some time.

We finally got that there. Just maybe talk a little bit more about just broader auto trends both from a growth standpoint and then from a credit standpoint.

So I'll talk about the growth and I'll pass it to Cesar to talk about the credit. On the growth side, we were expecting the slowdown. I think on the auto lending side, what we're seeing is we see the bottoming coming in right now in terms of loan originations and we might see slightly higher in the 4th quarter. But these are more normal levels in our view, and we feel comfortable with the originating levels that we're having right now, Timur. Cesar, can you talk about the credit?

Yes. On the charge-offs, what we're seeing is seasonal dynamics of the retail portfolio. We're usually at the lowest levels at the first quarter and then gradually those statistics come up and they peak towards the 4th quarter. So what we saw quarter-over-quarter was a modest increase on charge-offs and all the statistics. But when we compare it to last same period last year, we see a better trend.

So we're optimistic based on those comparisons.

Great. Thanks for the call.

Kelly Motta, KBW.

Good morning, thanks for the question. Maybe circling back to the Q4 margin guidance 5.10% to 5.20%. Wondering, Maritza, what the Fed funds assumption is in that given that you guys are asset-sensitive? One. And then two, maybe you could talk a little bit about, I think we -- on the last quarter call, you were calling for some margin expansion, provided we got some loan growth all else equal. Just with the margin being down, kind of if there was anything in that that differed from your expectations maybe 3 months ago that drove that?

Thank you.

First is I think one point when we look back at the quarter and the inflows into the deposits that have been better than expected in the savings account, that is one of the deviations from our original estimate. So that's the answer to that. So the second part relates to what we are expecting in the 4th quarter. And the reality is that we are asset-sensitive and the last cut was end of September. So we will have most of that impact during the 4th quarter.

The repricing, the full effect would be on cash, and in the variable rate portfolio that we have in the commercial is half of it. So that's why we are reviewing our guidance towards 5.10% to 5.20%, and always depending on the funding mix. So right now, everything remaining equal, it's mostly related to the 25 basis point cut.

And I don't know if you realize too, but we do have the inflows and outflows throughout the quarter of large deposits. And that is also part of what creates a little bit of the quarter volatility. But as Maritza said 4th quarter guidance as she mentioned is 5.10% to 5.20%.

Just to clarify, does that 5.10% to 5.20% contemplate any additional cuts here in the 4th quarter?

We are expecting 50 basis point cuts, but since it won't be outstanding most of the quarter, the most of this impact relates to the 25 basis points that was made late September.

But yes, we are modeling 50 basis points reduction in Fed funds in the 4th quarter.

Great. That's really helpful. Maybe one for you, Jose. You've highlighted the investments you're making in AI to drive some efficiencies ahead, and that drove expenses a bit higher. I know that's over time to generate greater revenues or recognize better improvement on the expense side.

So maybe if you could talk a bit more about that and kind of like the cadence because I know it takes some time to realize that. So how you're strategically approaching.

Thank you. Not only -- just to clarify, we are making the investments, but we're also delivering on the features and the benefits for our customers on the value proposition that we provide. And it's unique and no other bank in Puerto Rico is actually today providing any insights to their customers based on their cash flows and their payments and whatnot. So that's a very big differentiation that we're going to continue to drive forward.

Now regarding the investments that we're making in technology, we will continue to make those investments, but we are also starting to see opportunities for us to bring efficiencies in our banking operations. And we will be guiding you guys into the expenses of 2026 in the 4th quarter. But we're starting to see opportunities for us to bring efficiencies and be able to pass those efficiencies as part of our investment in technology. So we're very cognizant of the investments that we're making in technology, but we are equally cognizant of the importance of bringing efficiencies. And we're seeing it in the operating side of the bank, particularly with people efficiencies.

That's really helpful. Maybe last question for me. You guys were more active on the buyback this quarter. Given capital is strong, you're generating a ton of earnings, like what's the go-forward outlook? And can you remind us of capital priorities here, including M&A?

Sure. I mean capital is strong. We feel that we have a great opportunity to fund loan growth, and that's our priority. But we're going to be a lot more active on the buyback in the 4th quarter and into 2026, because the earnings momentum that we have and the earnings power that we're having puts us in a great spot in terms of capital management. Also backed up by a Puerto Rico economy that remains pretty good and it's driving infrastructure investments.

We mentioned the onshoring benefits that are starting to become somewhat of a reality. It will take some time, but it's moving along. We're also seeing Puerto Rico well positioned geographically given the current geopolitical challenges in the Caribbean and Puerto Rico being the hub for that. All those things give us confidence on the Puerto Rico economy and certainly is going to drive our business forward. So from a capital management perspective, loan growth, number one, buybacks and dividends number two, and number three, because we really are in a good spot right now.

Great, thank you so much for all the color. I'll step back.

Anya Pelshaw, Hovde Group.

I'm asking questions on behalf of Brett here. So I know you guys already talked about loan growth, but I was hoping you could expand on any payoff activity that might also affect commercial in the future?

I'm sorry, I could not understand well your question. Can you repeat it?

Yes, you've already talked about loan growth, but could you expand and talk about any payoff activity that might also affect commercial from here?

Yes. Payoffs is hard to predict, but what we are seeing is there's usually some small seasonality on the lines of credit in the 3rd quarter given some clients that we have that receive funds, federal funds either for construction services or education. They draw on the line of credit in the 2nd quarter and then they get the funding in the 3rd quarter and pay them off. That's usually on the 3rd quarter. But we are not expecting any significant variability on the draws on the lines of credit in the 4th quarter.

Thank you. And you've talked about charge-offs a little bit. But is there anything else you guys might be seeing as far as credit quality goes?

As I mentioned, we're not seeing anything apart from a couple of idiosyncratic commercial loans that I mentioned earlier. The rest on the consumer book and the auto book, we're not seeing anything that concerns us. We're seeing, again, supported by an economy that has a lot of activity and liquidity in the system. So we're not seeing anything that drives us to be concerned on credit.

We do have a follow-up from Timur.

José, you made a comment on new onshoring investments in Puerto Rico. Can you just maybe talk us through what those have been and maybe how that's progressed in the Trump 2.0 administration?

What we know is what we hear and listen and read in the papers. We are seeing around 10 or 11 multinationals that are already announcing investments in Puerto Rico. Some of them are medical devices, others are pharmaceuticals. We're seeing solar panels, we're seeing textiles. So it's a little bit broader than what we have seen in the past.

But again, it points to Puerto Rico's positioning in terms of manufacturing, that we've been for many years, and is an opportunity for these companies to expand their production lines. Some of them have already operations. There's one or two that have announced new operations in Puerto Rico. But the majority are existing companies that are announcing investments in additional production lines on the island. So overall, I think it's all driven because of the onshoring benefits from all all the tariffs that have been imposed.

And Puerto Rico being a U.S. jurisdiction and being a manufacturing hub for medical devices and pharmaceuticals is just the right hub for those companies to invest further in the island. So it's something new for Puerto Rico because we haven't seen this in several decades. And for the first time, we're starting to see those announcements. So it's encouraging.

And that will drive indirect benefits because there's a lot of hires with well-paid employees. It also drives indirect suppliers to these companies and all that. So it has a trickle-down effect to the economy that is pretty positive. So we're encouraged with that. Again, this is not flowing in now, but it's a great way of starting to see the light at the end of the tunnel when federal funds start to fade away and we have some private investments coming in. So to us it it's a win-win.

That's great. Thank you. Yes.

Thank you, Timur. Well, thank you everybody for the call. I appreciate, everyone participating and looking forward to the 4th quarter results. Have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.