OFG Bancorp (OFG) Earnings Call Transcript

Good morning, everyone. Thank you for joining OFG Bancorp's conference call. My name is Bo and I will be your operator today. Our speakers today 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 home page of the OFG website under the Second 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. Please go ahead, sir.

Good morning, and thank you for joining us. We are pleased to report our second quarter results. We had another all-around outstanding quarter with good momentum in all areas. Let's go to Page 3 of our presentation. We continue to show strong financial performance. Earnings per share increased 21% year-over-year on 4% growth in total core revenues. This was driven by consistent loan growth, core deposit strength, stable credit quality and effective balance sheet management. We saw continued solid and steady momentum across all our businesses, supported by disciplined execution, excellent customer engagement and our differentiated operating model. During the quarter, we launched a new branding campaign highlighting our strategic and financial evolution into a digital bank with a human touch. One that combines innovative technology and our customer-focused culture. With healthy consumer and business liquidity, wage growth and historically low [ unemployment ], Puerto Rico's economy continues to be resilient. Please turn to Page 4. Our core digital strategy is focused on three key areas of execution. The first area is offering value to customers through innovative account products that meet their specific needs. [ Levered ] for the mass market, a [ lead ] for the mass affluent and [ my base ] for small businesses. The second focus is technology. Our omnichannel platform allows customers to interact with us seamlessly across all our digital channels. This is driving digital [ adoption ], generating efficiencies and savings. In turn, this enables us to reinvest in new ways to serve our customers and transform our branches into places for relationship building as opposed to transaction processing. The third focus is intelligent banking. We're leveraging data to provide real-time personalized insights with unique value, helping customers better manage their finances. Overall, this approach differentiates OFG in the marketplace, drives higher digital adoption levels and most importantly, deepens customer relationships. All [ this ] translates into consistent steady growth of the business. Please turn to Page 5. The results continue to show up in our key performance indicators. Most retail customers are doing almost all routine and deposit transactions and loan payments through our digital and self-service channels. During the second quarter, we saw year-over-year growth of 4% in net new retail and commercial customers, 11% in active digital users, 6% in digital loan payments and 3% in virtual teller [ use ]. Combined with our increased level of service, our products and people are delivering added value to our customers every day. Year-to-date, as of June, 28% of [ liver ] accounts were opened digitally. We're the only bank in Puerto Rico with this full digital capabilities. More than 1.1 million personalized smart banking insights have been delivered monthly with more than 90% positive feedback from customers. And more than 68,000 customers have accessed our [ live ] remote tellers during times when the rest of the banks in Puerto Rico are closed. Now I'd like to pass the call to Maritza to go over the financials in more detail.

Thank you, Jose. All comparisons are to the first quarter unless otherwise noted. Now let's turn to Page 6. Our financial performance was very strong this quarter. EPS climbed to $1.39. Efficiency ratio was 54%. Return on average assets rose to 1.93%, and return on average tangible common equity increased to almost 18%. Loans to the [ portion ] ratio was 85% and the payout ratio was 25%, which reflects the higher income in this quarter versus the first quarter. Let's turn to Page 7 to review our income statement highlights. Core revenues increased $4.5 million to $190 million. Total interest income was $197 million, an increase of $3 million. This reflected higher average balances of loans at higher average rates, which more than offset slightly lower income from cash and securities. The quarter included $4.1 million from three [ paid ] in full commercial loans. This compares to $3.3 million from [ Asia ] alone paying in full in the first quarter. There was one additional day in the quarter. This increased interest income by about $1.6 million. Total interest expense was $40 million, a decrease of $0.5 million. This reflected lower average balances of broker [ CDs ] and [ borrowings ], which more than offset the cost of higher average balances of core deposits. The [ adidas ] increased interest expense by about $0.4 million. Total banking and financial service revenues increased $1 million to $33 million. Reflecting higher banking service and wealth management revenues, which included $1 million in annual insurance and annuity fees. Noninterest expense increased $8.1 million to $103 million. This included $5.8 million in business operational charges, while the [ first ] quarter included $1 million in capital market [ readiness ] and registration costs and the benefit of $3.6 million in a business-related volume incentives. Income tax was $15.7 million, reflecting an anticipated ETR of 22.64% for the year and the benefit of some [ discrete ] items. Now let's turn to Page 8 to review our balance sheet highlights. Average loan balances grew $78 million to $8.2 billion, [ and ] end-of-period balances grew $62 billion or 0.8% due to increases in Puerto Rico commercial and consumer loans. New loan production was $750 million, an increase of $146 million or almost 24%, reflecting increases in Puerto Rico commercial, residential mortgage and consumer lending. Production in the year ago period was slightly higher due to the spike in the auto sales from the [ threat ] of [ Aris ] in the second quarter of 2025. Average core deposit balances grew $145 million to $9.7 billion with end-of-period balances of $85 million or 0.9%, reflecting over commercial and retail deposit growth. Regarding our large government deposits, $400 million [ into ] 3 and 6 months time deposits with approximately $175 million remaining in the demand deposit category. Average cash balances fell $45 million, but increased $109 million end of period as a result of deposit growth and repayments from the investment portfolio. Average investment fell $84 million and $92 million end of period due to principal pay downs in the mortgage-backed securities. And average borrowings and broker deposits fell $133 million, [ and ] increased $49 million end of period, reflecting our liquidity management. Now let's turn to Page 9 to review net interest margin. Loan yields increased 3 basis points to [ 7.90% ] excluding the 3 loan repayments in the second quarter and the one in the first quarter, loan yield was 7.7% compared to [ 1 ] to 7.71%. Core deposits cost was level at 1.29%, reflecting growth of $92 million in noninterest-bearing deposits to $2.7 billion. Excluding public funds, cost of deposits was 98 basis points compared to 1%. Net interest margin increased 9 basis points to 5.45%. Now let's turn to Page 10. Capital continued to build. CET1 ratio increased to 14.07%. Total stockholders' equity rose to $1.4 billion. TCE ratio continued to climb to 10.9% and tangible book value continued to expand to $31.12 per share. Looking at share buybacks. If you recall, we bought a large number of shares in the first quarter. Cesar will provide more detail about credit in a moment, but let me summarize a little bit where we are at midpoint this year. We continue to expect low single-digit loan growth for the year, with commercial more than offsetting the anticipated decline in [ auto ], though [ otohas ] been slightly stronger than expected. We continue to anticipate deposit growth, excluding the large government deposits, benefiting from our [ Libra Eli ] and [ maybes ] accounts as well as growth of commercial and government clients. On our last call, we expected net interest margin to range from 5.10% to 5.20% this year. Now we expect NIM to range from 5.25% to 5.35% in the second half of 2025. This is in line with the 5.30% NIM we had in the second quarter and 5.25% in the first quarter, excluding the loan [ pay ] downs. Our second half outlook in corporate deposit growth and the relocation of the government of the large government deposits. We continue to anticipate no records this year with the Fed cutting rates once next year. We remain on track to keep expenses in a range of $380 million to $385 million this year. Our estimated tax rate for the year continues to be 22.6% not including discrete items. And while we are not active buying back shares in the second quarter, our strategy has not changed. We have $194 million in remaining authorization and we will continue to be selective and opportunistic [ balance ] shareholder returns and disciplined growth. Now here, Cesar.

Thank you, Maritza. Please turn to Page 11. All comparisons are to the first quarter unless otherwise noted. Credit reflected disciplined execution, proactive risk management and continued improvement in overall portfolio quality. Net charge-offs increased $7.4 million and were 1.0% of average loans. At the same time, nonperforming loans fell $53.6 million to 0.81% of average loans. This reflected the successful sale of the stand-alone telecom exposure discussed in previous quarter and of another nonperforming commercial relationship. These actions reduce concentration and [ tail ] risk and improve their commercial portfolio's overall risk profile and long-term credit quality. Retail net charge-off rates improved in auto and consumer and remained stable in mortgage. Auto decreased to 1.11%, an improvement on 41 basis points. Consumer improved to 3.78%, down 62 basis points. Provision for credit losses fell $9.5 million to $13 million. This primarily reflected $14.7 million for increased loan volume and $1.9 million in commercial loan recoveries. This compares to the first quarter which [ includes ] $17.5 million for increased loan volume, $3.7 million for increased allowance for [ retailing ] loans and $1 million for newly classified small commercial loans. Looking at other credit metrics, early and total delinquency rates were 2.5% and 3.7% respectively reflecting typical seasonality we continue [ normization ] across consumer portfolios. This mix of modest early-stage delinquency and stable back-end losses continued to demonstrate the resiliency of underlying portfolio quality. Despite some [ bombarding ] early-stage delinquencies, the stability in net charge offs reinforces the strength of recent vintages and the quality of new originations. Credit should remain stable in the second half, in line with seasonal trends which show declines in the first half and increases in the second half and then decline again in the first half of the next year. Here's Jose to wrap it up.

Thank you, Cesar. Please turn to Page 12. The Puerto Rico economy remains resilient in addition to what I said earlier, [ favorable ] reconstruction funding, infrastructure projects and private investment continue to support economic activity, manufacturing expansion and new onshoring initiatives reinforce the long-term growth outlook. Having said that, we remain very attentive to evolving macroeconomic conditions, including, in particular, interest rate outlook and geopolitical developments. Within this environment, OFG is well positioned to grow. Our digital at the core strategy continues to create more personalized customer experience, simplify how we operate and support sustainable market share growth. We continue to invest in people, technology and AI to enhance capability and drive long-term operating efficiencies. We see a healthy commercial pipeline and stable [ credit ] trends supported by strong risk management and balance sheet discipline. Together with Puerto Rico's favorable operating environment, our agile and disciplined execution positions us well to continue to navigate evolving market conditions and pursue attractive growth opportunities. With this, we end our formal presentation. Operator, let's start the Q&A.

[Operator Instructions] We'll go first this morning to Kelly Motta with KBW.

Congrats to the team on a great quarter. Maybe kicking it off on the margin, you materially raised your NIM outlook for the second quarter in a row. I think I caught that maybe $500 million of the government deposits moved into [ CDs ]. Just wondering what your new [ $525 ] to [ $535 ] outlook assumes in terms of these the longevity of these deposits sticking around on balance sheet and ex that some of the underlying dynamics you're seeing in terms of new loan originations and incremental cost of core funding?

Kelly, before I let Maritza give you the details. You hit it on the nail when talking about margin -- the government deposit is the one that is kind of the variable that we kind of do not control much. But the good news is that this is a long-term relationship that we have at the bank for many years. And we have been able to methodically diversify the deposit into wealth management as we saw last year. And now we are terming out a little bit on the CDs. So we can help the client optimize it's liquidity as well as the yields as they take a little bit longer look at the deposits. So we feel much more confident about our margin guidance, and that's why you're seeing us resetting it in this call. So I'll let Maritza go into the details, but you hit it on the nail when you address the government deposits.

Yes. Thank you, [ Kelly ], for the question. The reality is that we completed that relocation end of June. So we were able to assess what -- [ for ] the next half of the year. And now we will not need to go to the market to replace that funding and provide us with additional spread. So that's why we are increasing the guidance. We continue to be asset sales feet slightly asset sensitive. And since we are not expecting changes in the market rates at least in this year, we are expecting a more stable type of NIM that resemble what we saw during the first 2 quarters, 25% the first quarter without the recoveries of 5.3% in the second quarter without the special recoveries that are nonrecurrent. So that's why our guidance is -- has been increased.

Another point that I'd like to add to is that we're also seeing higher loan balances and particularly from the commercial side. And that's something that we're very happy with, and we continue to see a very strong pipeline that should support the single-digit loan growth that Maritza mentioned in her prepared remarks.

Got it. That's helpful. I guess maybe I'll switch to loan growth. I just to keep the thread here. Clearly, Puerto Rico is still operating at a really nice level here. Wondering if this increase in commercial [ is ] you're starting to see tailwinds from -- I know it's really early, but from onshoring or any other color as to what seems like a better operating environment overall that you're seeing here?

Yes. Kelly, good point also. We've been talking about the Puerto Rico economy for several -- I would say, 2 or 3 or even more years now since the economy is doing a lot better than in my, let's say, my first 17 years as CEO. So when we look at it, it certainly provides a lot of confidence to operate a bank when you have a stable, steady, consistent economy. And the metrics that we're seeing continue to reflect [ a ] low unemployment, high liquidity levels on the [ console ] side. We're seeing great interest on businesses to expand because there is demand out there for them to do so. We're not yet seeing the benefits of the onshoring as you alluded to yet, but there's still -- [ there ] a pipeline of [ $3 ] million or so billion dollars of projects coming through in the next several years that all funds continue to flow in. So we're -- I think we're benefiting from that environment -- economic environment that I can understand why there is some, let's say, trepidation about Puerto Rico's economy given our history, but as we keep on passing quarter after quarter, what we're seeing, and you saw it this quarter on the consumer credits, we're seeing a different type of economy, a different type of environment that it's supported by real investments. And I think then you add to that, that we're -- there's a 3-bank market here. We kind of run the financial market in the island. And then you look at the third pillar that I look at, and that is who we are, and OFG has a unique strategy. OFG has positioned itself in a very different way, investing in technology, leveraging the digital early on and deploying it very effectively, thanks to a great team that we have, and that is showing the results. So what we're seeing is all the wheels running at 150 miles per hour in the right direction, and we're executing. And so we feel extremely happy and confident that what we're bringing to the market is differentiating and we're seeing it in growth. So that's kind of how overall I see from [ 36,000 ] feet what's going on for us here at.

Got it. Last one and then I'll step back. It looks like credit was a highlight. It did look like though some early DQs picked up, wondering if maybe you can provide some color as to what you're seeing there.

Yes. I'll let Cesar give you the details. I'll tell you, we -- we sold the credit that was nonperforming or nonaccrual that definitely sends a message to investors that we really -- when we need to act, we act, and that's what we did. We worked on it for the last 3 or 4 months, and we successfully sold that credit. So that's the main kind of large ticket item. But in general, when we're seeing, and as I mentioned earlier, the credit on the consumer side is pretty steady. And I'll let Cesar give you some details there on the consumer.

The consumer, you see nonperforming levels similar or better than last year for both our auto and consumer lending. We are seeing vintages that are already better [ bet ] than when we adjusted the undergirding standard back in 2022. So the vintages are taking over now [ a ] better vintage in terms of credit on the rating standards. So that is starting to equate into the formula. So we are positive in terms of the outlook for these portfolios. Even though, as you know, the second half of the year seasonality start kicking up those delinquency trends. And we are seeing also the gas prices even though they improved significantly from prior quarter. We're still seeing them above the 1 liter, which is the equivalent of your[ $4 ] to the gun in the states. So seeing the portfolios, we are positive in terms of what we're seeing in the behavior and the customer continues to pay very well during this quarter. But we expect that seasonality to start seeing or reflecting in the numbers for the next half of the year.

We'll go next now to Manuel Navas with Piper Sandler.

And just to stay on credit for a moment. Does that mean that low loss reserve ticked down on the payoff or the sale of the telecom loans and the U.S. exposure. Should it kind of tick up a little bit as across the back half of the year and then improve again in the first half of next year? Is that the general direction you expect for seasonality?

Do you see that [ seasonality ] Yes, in the reserves to definitely.

Okay. I appreciate that. One quick modeling question. Maybe there's a lot of noise, but what was the June NIM? I know that there were some movements in the public funds, so maybe it's not all represented there, but what was kind of the June [ in ] entering the back half of the year?

Thanks for the question because at the end, as I mentioned before, we did the relocation [ Miton ]. So the month of June reflects [ and ] it was around 5.26% June NIM.

Okay. I appreciate that. And then just kind of -- can you level set on the buyback. You had pretty aggressive in the first quarter. You took a step back this quarter, just kind of thought process on near-term expectations on the buyback from here?

Yes. Nothing has changed. We did have a higher than -- higher purchases in the first half -- in the first quarter, as we pointed out, this quarter, we saw a lot of activity in the market in terms of our loan origination, et cetera. So we're just being patient also. But that -- when we look forward, we still have $194 million of the approved buyback, and we are planning on executing it as we see our our stock undervalued versus our peers. So we will continue to be out there and be methodical about our acquisition of our stock or purchase of our stock.

We go next now to Arren Cyganovich with Truist Securities.