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OFG Bancorp misses on earnings expectations. Reported EPS is $1 EPS, expectations were $1.02.

Operator: Good morning. Thank you for joining OFG Bancorp’s Conference Call. My name is Madison, 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. 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. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Jose Rafael 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. This was driven by excellent operating execution and loan and deposit growth. Consumer credit reflected higher seasonal customer liquidity in Puerto Rico. And we’ve bought back shares and raised our dividends 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 relations through isle and wide branch network.

Looking at the numbers, 96% of all thing retails customers transactions, 97% of retail deposit transactions and 68% of retail loan payment were made through our digital and self-service channels. This has been driven by year-over-year growth of 12% in digital enrollment, 21% in digital loan payments, 40% in virtual teller utilization, and close to 5% customer growth. During the quarter, we launched three digital tools, all first in Puerto Rico. Our omni-channel 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.

Maritza Arizmendi: 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 were 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 first 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 non-interest expense. They totaled $93.5 million, down $6.3 million. First quarter compensation included $1.6 million in increase in seasonal FICA expenses and merit raises. General and administrative expenses included a $3.1 million volume incentive payment from business partners. This also included $1.2 million in higher electronic banking volumes and related costs as compared to the last quarter. Note, that the first 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 non-interest 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 52.2%, 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 $60 million — $61 million from the last quarter. The sequential increase mainly reflects growth in auto and consumer loans, US and Puerto Rico commercial loans and repayments of residential mortgages. Growth of Puerto Rico commercial loans included a higher level of line of credit utilization. Loan yield was 7.99%, down two basis points. New loan origination of $559 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 US 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 the loan deposits. Core deposit costs was 1.42%, down four basis points from the first quarter. Excluding public funds, cost of deposits was 1% compared to 0.96% last quarter. Average borrowings and brokerage deposits were $517 million, compared to $426 million. The average freight was 4.32%, down eight basis points. End of period balances were $421 million, compared to $557 million. During the first quarter, $145 million in short-term repurchase agreement at Federal Home Loan Bank advances matured.

Separately, a two-year $200 million Federal Home Loan Bank advance was renewed at 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 total 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 per reserve for pre-commercial loans and $3.5 million to reflect our auto current loss default trends post pandemic. Looking at other credit metrics. The yearly and total delinquency rates were 2.19% and 3.49%, respectively, both down from the fourth quarter. The non-performing 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 11 basis points to 10.30% [ph]. 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 two 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.

Non-interest 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 tariff allocation, in addition to buying back shares, the dividend was increased and our CET ratio provides us with a strong foundation during volatile or challenging times. Now here’s Jose.

Jose Rafael Fernandez: 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 that this environment is constructively positive. Investments in public and private projects continue to flow and the economy continues to grow, albeit at a slower pace. On the other hand, higher levels of volatility due to macroeconomic and geopolitical events, if they continue, they will eventually have an impact — an economic impact. Our team members are in close contact with our customers to make sure we have a good pulse on how they’re adapting to the environment and how OFG can better serve them.

Turning to OFG. Our Digital First strategy is proving to be highly effective. We will continue to invest in and deploy new customer innovations to further differentiate our business model, increase efficiencies and, most important, help both our retail and commercial customers. Consumer credit trends are good, supported by a strong balance sheet and a well-tested leadership team. We continue to methodically execute our business plan and be there for our clients and the communities we serve. As always, our results could not have been 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: [Operator Instructions] And we will take our first question from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi: Good morning.

Jose Rafael Fernandez: Morning Frank.

Frank Schiraldi: 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–

Jose Rafael Fernandez: Actually, Frank, yes, we do have online digital account opening, and it’s through the service — 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 the, kind of, the educators in the market in terms of how things can move into 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 opened at the branches. So, we’re — we have seen increasing trends there also.

Frank Schiraldi: 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.

Jose Rafael Fernandez: 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,

Frank Schiraldi: Just on the government deposits, I thought there was some–

Jose Rafael Fernandez: Yes, we have a — yes, we have $1 billion or so government deposits 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.

Frank Schiraldi: Okay. And if I could just sneak in one more, just in terms of consumer charge-offs. Can you speak to — do you expect, 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?

Jose Rafael Fernandez: Yes. I’ll ask Cesar, our Chief Risk Officer, to give you some color on that one.

Cesar Ortiz: So consumer, we have two main portfolios. We have the auto portfolio, which is the largest one, and then we have unsecured personal loan. 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. Always — the first quarter always good for all credit statistic, and we experienced that. So that was PL. On the second — on auto portfolio, we are seeing now a stabilization too on the recovery rates from the collaterals. I think that was a positive effect on the issues with the car that the customers are having an increased demand for these used vehicles. So that’s a positive trend. So — and the third part of the auto is that we’re seeing vintages that have better cry on the grading, we called [indiscernible].

Back in 2022, we tied in cry on the grading standard. So we are starting seeing those better cry on the grading vintages coming into play for the net charge-offs. So this quarter was a positive quarter because we expected it, but it was actually better than we expect, of course, the quarter behaved very good. So next quarter, we do expect an increase and a slight increase because of the seasonality for the first quarter. But overall, we expect a stabilization on both portfolios on all required metrics.

Frank Schiraldi: Okay. Thank you.

Jose Rafael Fernandez: Yes, thank you. Thank you for your questions.

Operator: And we will take our next question from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler: Hi, good morning.

Jose Rafael Fernandez: Good morning.

Timur Braziler: The security yields were up nicely again this quarter. I’m just wondering what’s the current duration of the bond book and just some of the 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.

Jose Rafael Fernandez: Yes.

Maritza Arizmendi: Well, the duration, we have mostly mortgage-backed security agency paper and it’s around five to six 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’ve been more attributes.

Timur Braziler: Okay. And then maybe more broadly around the margins, certainly held up better than I was expecting. And part of that was the securities 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?

Maritza Arizmendi: 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 certain point because we will need to replace with wholesale funding, which should carry a little bit higher funding than these government deposits. But as long as it remains in demand, I will see that range in the upper level, okay?

Timur Braziler: Okay. Great. Thanks. 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?

Jose Rafael Fernandez: Yes. So these are three loans: one in Puerto Rico, long-standing substandard loan that we placed in non-accrual. And the other two loans are US loans. They’re totaling both, in the aggregate, around $10 million. And they were placed in substandard, and we took the provision for that.

Timur Braziler: That’s great. Thank you.

Jose Rafael Fernandez: Yeah. Thank you for your questions.

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

Brett Rabatin: Hey, good morning. I wanted to start, Jose 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 Luna 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 I just want to see if you heard anything regarding.

Jose Rafael Fernandez: 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 kind of or so privatization program. It’s been privatized for two 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 tool 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-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 from the generation as well as transmission and distribution to make it resilient, to make it low cost, to make it diversified. Electric grid in Puerto Rico was destroyed by the hurricanes, and so it’s going to take a while. And it requires execution by the privatizor and it requires oversight by the government. And those are areas of opportunity, I should say, taking a bit of your words.

Brett Rabatin: Yeah. It also seems like some of the some of the opportunity could still be there for on-shoring, pharmaceuticals and that kind of stuff, but I haven’t seen anything on that really either other than just talking about potential.

Jose Rafael Fernandez: Yeah. 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 that can take some share of the on-shoring 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 the 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. So it plays very well. It will require, again, good systematic execution from the government.

Brett Rabatin: 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?

Maritza Arizmendi: Yeah. Okay. This quarter was better than expected in the sense that the banking fees were higher, even though we have two less days in business activity, so we are — this quarter, we were at $29 million. We shared with you last quarter that we are seeing $29 million to $30 million as the 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 Rabatin: Okay. And then maybe just…

Jose Fernandez: Brett, if I could add just one thing here that Maritza pointed out in terms of transactionality. We do are seeing a lot more activity from our customers and utilization of our debit cards and our services. So that is definitely very encouraging for us because it validates not only our strategy, right, the digital first strategy, but it also validates that we are being recognized and our brand is gaining additional traction here in the market.

Brett Rabatin: 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?

Jose Fernandez: It’s good to have, to be honest. It’s good to have. People in Puerto Rico was not Apple permitted. It was just more of an Apple thing than a Puerto Rico thing. But we were, 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 improve it by delivering on a timely basis, even to the requirements of Apple, which somewhat elusive to some others.

Brett Rabatin: 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?

Maritza Arizmendi: Yeah. We’re seeing a 26% ETR for the year — for the full year.

Brett Rabatin: Okay. Great. Thanks for sharing all the color.

Jose Fernandez: Yeah. Thank you. Have a great day.

Operator: [Operator Instructions] And your next question comes from Kelly Motta with KBW. Please go ahead.

Kelly Motta: Hi, good morning. Thanks for the question. 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 in the margin guidance?

Maritza Arizmendi: Yes. In 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 are the two assets that are more sensitive to the — any change in markets.

Kelly Motta: Okay, that’s helpful. And then it was — it looks like the deposit costs are continuing to perform well. Wondering if you could provide an update as to the competitive environment in Puerto Rico. What are you seeing in terms of your competitors? Are — is it still relatively high competition? Or have you seen pressure there back off in the last quarter or two?

Jose Rafael Fernandez: Competitors are competitors and they are relentless. So, I hope they stay the same of us. So, it is what it is. But well, yes, the market remains the same, Kelly. We were looking out for the best for our customers. And on the deposit side, there were some credit unions that were laggards in terms of rates. It’s — that 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 a growth — net growth of 5% year-over-year in net customers, and that is also driving.

There’s a particular aspect of the deposit growth that is also interesting for us, and that that is we’re growing non-interest-bearing deposits too in the quarter. So, those are good indicators. We’ll see how much of it is seasonal, how much of it is part of structural savings and deposits from the economy that we’re operating in, in Puerto Rico. But certainly, a pretty solid quarter.

Kelly Motta: Thanks for that. 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 offshoring into the US. 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.

Jose Rafael Fernandez: It’s too early to tell on any — 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 on the — 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 tariff — additional tariffs. So it’s still not yet being added to the list. So we’ll see. We’re seeing some good news coming out of the market yesterday and today. So we’ll see. We have to take a hard look this quarter and see how things evolve. And we speak to our customers. As I mentioned, we were visiting customers particularly on the commercial side, asking them how they’re adapting, how are they seeing things.

And again, it’s too early to tell. But they are definitely managing the uncertainties by building up inventories, making a little bit of a pause in some of the projects, but not necessarily putting a full stop. And those — that’s the color we get from our customers. And we’re trying to make sure that we’re as close to them as possible because that’s what banks are for.

Kelly Motta: Got it. I really appreciate the color. My questions have been asked and answered. I’ll step back. Thank you.

Jose Rafael Fernandez: Thank you. Have a great day.

Operator: [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.

Jose Rafael Fernandez: 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.

Operator: This does conclude today’s presentation. Thank you for your participation. You may disconnect at any time.