OFG Bancorp Q4 2024 Earnings Report

OFG Bancorp EPS Results

• Actual EPS: $1.09
• Consensus EPS: $0.97
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: $0.98

OFG Bancorp Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $148.05 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

OFG Bancorp Announcement Details

• Quarter: Q4 2024
• Date: 1/22/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, January 22, 2025
• Conference Call Time: 10:00AM ET

OFG Bancorp (NYSE:OFG), a financial holding company, provides a range of banking and financial services. It operates through three segments: Banking, Wealth Management, and Treasury. The company offers checking and savings accounts, and individual retirement accounts; certificate of deposits, as well as time deposit products; commercial, consumer, auto leasing, and mortgage lending services; credit cards; cash management; financial planning and insurance services; and corporate and individual trust, and retirement services. In addition, it provides securities brokerage and investment advisory services, including various investment alternatives, such as tax-advantaged fixed income securities, mutual funds, stocks, and bonds to retail and institutional clients; and separately-managed accounts and mutual fund asset allocation programs. Further, the company engages in the insurance agency and reinsurance businesses; administration and servicing of retirement plans; and various treasury-related functions with an investment portfolio consisting of mortgage-backed securities, obligations of U.S. government sponsored agencies, and U.S. Treasury securities and money market instruments. Additionally, it offers money management and investment banking services; and engages in the asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. The company provides investment brokerage, transactional, international trade financing, residential mortgage, and consumer finance services. OFG Bancorp was founded in 1964 and is headquartered in San Juan, Puerto Rico.

OFG Bancorp Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Madison. I will be your operator today.

[Operator]

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 Q4 2024 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.

[Operator]

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.

[Operator]

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

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Good morning, and thank you for joining us. We are pleased to report our Q4 and 2024 results. It was another outstanding quarter and year of performance. Looking at the quarter, earnings per share were up 11.2% year over year on a 3.6% increase in total core revenues. We showed consistent operational growth on our plans, including our digital first strategy.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We steadily grew our banking market share. Digital adoption of our new and upgraded products, services and self-service tools keeps expanding. Results also benefited from lower taxes, and we bought back about $46,000,000 of common shares in the 4th quarter. Please turn to Page 3 for a summary of our Q4 results. Looking at the income statement.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We reported earnings per share diluted of $1.09 on total core revenues of $182,000,000 Net interest margin was 5.4%. Provision was $30,200,000 Noninterest expenses were $99,700,000 This resulted in slightly lower pretax income, which was more than offset by reduced year end taxes. Pre provision net revenues totaled $83,000,000 Turning to the balance sheet. Total assets were $11,500,000,000 up 1.4 percent from a year ago. Customer deposits were $9,400,000,000 Loans held for investment totaled $7,800,000,000 New loan production was a solid $609,000,000 Investments were $2,700,000,000 up 1% from a year ago and 4% from the last quarter and cash at $591,100,000 was down 13% from last quarter.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Looking at capital, the CET1 ratio was 14.26 percent and we bought back $46,000,000 in stock. That leaves $29,700,000 remaining on our buyback authorization as of December 31, 2024. Please turn to Page 4 for a summary of our full year results. Earnings per share of $4.23 increased 10.4 percent year over year on a 3.9% increase in total core revenues for a total of $710,000,000 Net interest margin was 5.43 percent, provision was $82,000,000 non interest expense totaled $376,000,000 and pre provision net revenues was $336,000,000 Capital Management played a big role. Even with Durbin taking effect mid year, we were able to increase average interest earning assets by 11.8% year over year.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

In addition, we acquired the servicing rights to a $1,700,000,000 Puerto Rico residential mortgage loan portfolio. We bought back a total of 1,800,000 shares, and we increased the quarterly dividend 14% to $0.25 per quarter or $1 per share annually. Puerto Rico's economy continues to do well with high levels of business activity and employment. We concluded our 60th year in business in excellent position, fulfilling our purpose of bringing progress to all our stakeholders. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Please turn to Page 5. We're really building some real muscle with our Digital First strategy. As of 4th quarter, 96% of all routine retail customer transactions, 97% of retail deposit transactions and 68% of retail loan payments were all made through our digital and or self-service channels. This has been driven by year over year growth of 12% in digital enrollment, 54% in digital loan payments, 34% in virtual teller utilization and close to 5% customer growth. Over the last 1.5 years, we have introduced or relaunched 4 major new products and services.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Oriental Servicing Portal was introduced mid-twenty 23. By the end of December of last year, a third of all retail clients were using it. The MyBiz small business account was relaunched March 2024. As part of our overall offering, this helped to achieve 14% growth in loans to local businesses last year. The retail mass market Liberty account was relaunched in April 2024 and the mass affluent elite account with its unique cash back program was launched June 2024.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Both are doing extremely well, bringing in new customers and deposits. There are more detailed first on the pipeline coming in this year. Now here's Maritza to go over the financials in more detail.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Thank you, Jose. Please turn to page 6 to review our financial highlights. Starting with the components of core revenues, total interest income was $190,000,000 up $1,100,000 from the 3rd quarter. This increase mainly reflects higher balances and higher yields on investment securities, higher loan balances, dollars 700,000 from prepayment of 2 commercial loans and reduced interest income from cash. If you recall, since late last year, we have been growing the investment portfolio to help manage the anticipated lower rate environment going forward, adding higher yielding U.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

S. Guaranteed longer duration securities. Total net interest expense was $41,000,000 slightly down from the Q3. The decrease reflects a slightly lower average balances and cost of core deposits and higher average balances of borrowings and brokerage deposits. Total Banking and Financial Service revenues were $33,000,000 an increase of $6,500,000 from the 3rd quarter.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

The increase mainly reflects $2,100,000 annual insurance commission recognition in Wealth Management Revenues, dollars 4,800,000 in favorable MSR valuations due to higher long term rates and $800,000 from the previously mentioned acquisition of Puerto Rico Residential Mortgage Servicing Portfolio in August. Looking at North interest expenses, they totaled $99,700,000 up $8,100,000 from the Q3. The increase mainly reflects $3,400,000 in early retirement and business rightsizing, $1,400,000 in annual performance incentives and the absence of the Q3 $2,300,000 card processing rebates. We expect 2025 non interest expense to average $95,000,000 to $96,000,000 a quarter. This mainly reflects a combination of increased technology spending and amortization and higher electronic banking fees and transaction costs as we grow larger.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

The 4th quarter efficiency ratio was 54.82% compared to 50 point 52.60% in the 3rd quarter. Please note this includes the early retirement and performance incentive expenses that I just mentioned. Without those, the efficiency ratio would have been 52.18%. Other performance metrics remained high. Return on average assets was 1.75%.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Return on average tangible common equity was 16.71 percent and tangible book value per share was $25.43 That's down 3% from the Q3, mainly due to capital use in share buybacks and lower other comprehensive income. Please turn to page 7 to review our operational highlights. Average loan balances were $7,700,000,000 up slightly from the Q3. End of period balances of loans held for investments increased 0.5 percent or $41,000,000 compared to the quarter. The increase mainly reflects growth in auto, U.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

S. Commercial and Puerto Rico consumer loans more than offsetting prepayments of Puerto Rico commercial and residential mortgages. Year over year, 4th quarter loans held for investments increased 3.3%. Loan yield was 8.01%, down 4 basis points from the 3rd quarter. 4th quarter new loan originations of $609,000,000 increased 5.5% from the 3rd quarter.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

This reflects increases in Puerto Rico commercial, auto and residential mortgage lending, partially offset by a decrease in U. S. Commercial and Puerto Rico consumer lending. We continue to have a strong commercial pipeline in Puerto Rico. In particular, small commercial had a very good 4th quarter year.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Residential mortgage lending improved. Average core deposits were $9,600,000,000 down slightly from the Q3. End of period balances decreased $84,000,000 or 0.9%. This reflects decline in government deposits, partially offset by a small increase in commercial and retail. Excluding government deposits, savings and time increased more than offsetting the decline in demand.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Year over year ex government deposits, retail and commercial also increased. Core deposit cost was 146 basis points, down 7 basis points from the 3rd quarter. Excluding public funds, cost of deposit was 96 basis points compared to 91 last quarter. Average borrowings and broker deposits were $426,000,000 compared to $262,000,000 in the 3rd quarter. The aggregate rate paid was 4.40 percent, down 20 basis points.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

End of period balance was $557,000,000 compared to $346,000,000 Net interest margin was 5.40 percent compared to 5.43 percent in the 3rd quarter. 4th quarter NIM benefited slightly from the commercial loan prepayment I mentioned before. Please turn to Page 8 to review our credit quality and capital strength. Credit quality continues to be stable. Net charge offs totaled $16,000,000 down $1,200,000 from the 3rd quarter.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Net charge offs benefited from a $2,600,000 recovery from the sale of a portfolio of fully charged off auto and consumer loans. Auto net charge off rate fell 1 basis point to 1.63%. Consumers net charge off rate fell 90 8 basis points to 3.72%. At the same time, there were continued recoveries in mortgage and Puerto Rico commercial loans. As a result, the total net charge off rate was 82 basis points, down 8 basis points sequentially and down from 88 basis points in the year ago quarter.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Provision for peso losses totaled $30,200,000

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

up

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

$8,800,000 from the 3rd quarter. The increase mainly reflects $18,100,000 from increased loan volume,

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

dollars

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

7,600,000 for a specific reserve related to 4 U. S. Commercial loans and the previously mentioned $2,600,000 recovery from the sale of auto and consumer loans. The 4th quarter also included a $5,700,000 qualitative adjustment related to recent increase in auto delinquency trends, which the model doesn't fully capture yet. Looking at other credit metrics.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

The early and total delinquency rates were 2.95% and 4.38% respectively. The non performing loan rate was 1 point 6%. Looking at other capital metrics, total stockholders' equity decreased about $64,000,000 from the end of last quarter. And the tangible common equity ratio decreased 59 basis points to 10.13%. That mainly reflects share buybacks and lower other comprehensive income.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Income tax expense was $2,400,000 compared to $14,900,000 in the 3rd quarter. The decrease mainly reflects a reduction in the 2024 ETR for higher than previously forecasted forecasted business activities with preferential tax treatment and $2,300,000 of discrete benefits. Excluding discrete items, ETR was 24 0.03% for 2024 compared to 32.08 percent for 2023. For 2025, we anticipate the full year ETR would be about 26%. To summarize the Q4, net interest income grew driven by the investment portfolio and loans, partially offset by lower interest income from lower cash balances.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Loan growth continued to do well, particularly in the small business area. Ex public funds, retail and commercial deposit balances increased with savings and time deposits higher. As we continue to grow and deepen customer relationship with the recent added value products and services. Net interest margin held fairly steady as the yield from investment securities and reduced cost of core deposits helped offset some of the decline in interest rates. Credit quality continued to be well managed.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

The trends are mostly stable, reflecting the solid economic environment in Puerto Rico. Non interest expenses were higher, mainly due to early retirement, business rightsizing and increased annual performance incentive, as well as higher electronic banking fees and technology spending and amortization. Regarding capital allocation, we increased our buyback during the Q4. Now here's Jose.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you, Maritza. Please turn to Page 9. Our outlook for both Puerto Rico and OFG continues to be positive. Looking at Puerto Rico, the island's economy is steadily growing, wages and employment are at high levels. Altogether, the business environment here remains optimistic.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

As always, we remain vigilant regarding the big macro uncertainties. Turning to OFG. We continue to be well positioned for growth of loans and deposits as well as our customer base. Consumer credit trends should remain at current levels. Our digital first strategy will continue to evolve, and we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model, while at the same time increasing efficiencies.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Although we look forward to a solid altogether, we look forward to a solid 2025 overall performance. Our results could not have been achieved without the hard work and dedication of all our team members. We're very thankful to them and excited for what's to come. With this, we end our formal presentation. Operator, let's start the Q and A.

[Operator]

Thank you. And we will take our first question from Kelly Motta with KBW. Please go ahead.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hi, good morning. Thanks for the question.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Good morning.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Maybe starting off with the margin, your NII was really strong and the margin came in towards the high end of what you had said previously. As we look ahead and assuming there's only maybe a cut or 2 in 2025, I'm wondering if you could kind of walk us through both what you're seeing on the deposit side and the competitive environment there. And wondering if you have the ability to kind of build off this $540,000,000 level as we look through 2025.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So let me Kelly, thank you for your question. Let me just start by talking a little bit about the competitive and deposits and that part of the question, and I'll let Maritza finish it off with her NIM perspective. So what we're seeing in the island from a competitive perspective hasn't changed much. It's really intense in all facets. We need to work hard for our business.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

That's for sure. On the loan side and as well as on the deposit side. But we are also very rational in this market. So from that perspective, on the deposit side, we're also getting some benefit from that, right, across the market. We're seeing good customer growth, and it gives me an opportunity here to share with you a little bit of what we have achieved throughout this year because it's important to highlight that the momentum that we carried from 'twenty three to 'twenty four and now from 'twenty four to 'twenty five continues.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We've grown 5% our client base pretty much both years, 2023 2024. And that puts us in a very good situation on the retail side, particularly on the deposit side. We're seeing very good acceptance on our mass checking account, Libre account and as well as the newly launched in the middle of the summer mass affluent elite account. Both of those are having good traction, well received, and it's bringing in good levels of deposits for us. So that's on the deposit side.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

And certainly, those products and the momentum we've had with the Digital First strategies that we've implemented are driving our customer growth and certainly will help us with the net interest margin. So I'll let Maritza give you the specifics.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Yes. Thank you, Kelly, for your question. We remain with the same the similar guidance that we provided in the Q3. We're looking at the range between 5.30 percent to 5.40 percent because be mindful that we will have the full effect of the 100 basis points cost of 2024. We will have the full effect in 2020, 2025.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

But the reality is with the extension in the investment portfolio that we have done that will mitigate most of that impact. And I think what is critical in that range is the funding mix.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

And I think

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Jose provide you with how we see the market and that's why we're keeping the range as it is even we are anticipating probably 2 costs next year in rates. And we continue to be very slightly sensitive asset sensitive, but still have an impact there, okay?

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

That's super helpful. Thank you. Next question I have would be on the expenses. There was kind of some push pull in that. You had some early retirements and potentially some saves that come through there, but also even excluding that, it looks like general and administrative expenses were running higher.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

As you look ahead to next year, given your outlook the initiatives that you continue to run and your work to capture market share. Wondering if you can share what you're thinking of in terms of how you're managing expense growth? And is it commensurate with the revenue growth? And maybe if NII is higher, you might use some of that reinvest in the business?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Understood. Yes. Good point. And let me just give you my overall view on expenses, and it's driven by how we've executed on our digital first vision here in our market. And just it has 2 components.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

1 is how do we deploy the technology and how do we invest in technology and in people and in processes to kind of get our digital first execution going. That started back in 2021, 2022. So we've gone a long way. Just to give you some perspective here too and context. In from 2021 to 2024, the level of transactions in the bank has doubled on a year over year basis.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

It's doubled from 2021 to 2024. Now at the same time, in that same time period, the amounts of transactions done at the branches on a monthly basis has been reduced by 150,000 transactions. And that is totally driven by the investments we've made with the sales service portal, with the digital account opening, with all the services that the clients can serve themselves with at the bank kiosk with the virtual tellers and through online and mobile. And that is not a small accomplishment in the market that we operate where it's really several years behind in terms of digital adoptions versus in banking versus the markets in the States. So given the growth we've had plus the efficiencies we've gotten from the branches, we've been able to reduce some of the workforce on the branch side, particularly on the teller side.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We've also seen, in spite of that customer growth or transactional growth that we've seen in those 4 years, we've also seen how we've been more efficient on the back office. We've been able to see some efficiencies there, and we see more efficiencies there too. Now all of that is being said to also highlight the point that we can't stop here. We got to keep moving forward, and we got to keep investing on our people and in our technology and the processes. So when we look into expenses into next year, our range now is around $95,000,000 to $96,000,000 a quarter.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

And that takes everything into account: business growth, efficiencies, investments in technology and in people. And really, we're really confident that how we're building this model and how we're deploying the strategy is creating great momentum for us to grow and further grow from where we are today.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you, Jose. That was very, very helpful. Maybe last question from me and then I will step back would be on the reserve build you had. I think in your prepared remarks you described credit as being stable, but you did have a specific reserve related to those U. S.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Commercial loans that were called out in the release as well as the quality build related to auto delinquencies. Can you talk a bit about what you're seeing in both on those commercial loans as well as just in Puerto Rico, the an update on the credit environment and your decision to take that reserve and how you're feeling overall on asset quality? Thanks.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. So big picture and I'll let Cesar Ortiz give you some more specifics on the credit in Puerto Rico and any color on the 4 loans in the U. S. But from a big picture, as I said in my remarks, the economy remains solid, steady. We're seeing good optimism in the business sector across the entire island.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

There's a lot of construction going on and there's a lot of investments being made to different businesses across the island and across different industries. So we're not seeing anything that has changed from a macro perspective. We'll continue to see consumers to be having stronger liquidity than prior to the years where we had not so good economic background. So we're seeing a stronger balance sheet on the individuals as well as on the businesses. And the economy overall is performing well.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So that's kind of the background, Kelly. And Alexis, I'll give you some color on the Puerto Rico credit and particularly on the consumer side.

[Analyst]

Thank you. The besides the macroeconomic, the macroeconomic good situation that we have in Puerto Rico, delinquencies will show an increasing trend towards this quarter. It's been seasonal. We're seeing every year is a holiday seasonal increase in delinquency. And we should be seeing an improvement too in the Q1 of next year because it's also seasonal improvement in next quarter.

[Analyst]

But two additional things that I want to point out as key things that gives us a comfort for the outlook, right? The first one is the nonperforming levels. We see slightly better nonperforming levels at the same period last year, especially for the auto portfolio, which is the largest retail portfolio. And we're also seeing the auto portfolio is now, as of December, an 87% prime portfolio. It's been increasing since pre pandemic, 65% and we have discussed this every quarter.

[Analyst]

So those two things gives us a good outlook in terms of the performance of the retail portfolio in Puerto Rico. The other question you have was the 4 specific loans in the specific reserves that we recorded for this quarter in the U. S. I want to point out these are unique challenges that each borrower has operational challenges. We continue working with them, engaging with them proactively to ensure that the risks that we have noted this quarter, which made us record their reserves, continues to be mitigated, but these are unique situations for those borrowers.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. That's helpful. I will step back. Thank you so much.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. Thank you for your questions, Kelly.

[Operator]

Thank you. And we will take our next question from Yenera Bohun with Hovde Group. Please go ahead.

[Ynyra Bohan, Equity Research Associate at Hovde Group]

Hi. Thank you for taking my questions.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you. Thank you. Hi.

[Ynyra Bohan, Equity Research Associate at Hovde Group]

And my first question has to do with your tax rate going forward. There was quite a reduction. So do you guys have any guidance on what we should expect going into the next quarter and next year?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. I'll let Maritza give you.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Yes. As I mentioned in my prepared remarks, this 2024 full EDR was about 24% when compared to 2023, which was 32% because we were have higher activity with business activity with preferential tax rate. Going forward, we continue to see benefiting our operations from those type of activity and that's why we're forecasting our 26% EBITDA for 2025.

[Ynyra Bohan, Equity Research Associate at Hovde Group]

Thank you. And with your non interest income there was it seemed to be an uptick in the mortgage banking activities. Do they continue with this uptick as the run rate going forward?

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Well,

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

this last quarter this Q4 as well as the Q3 were impacted differently both for the MSR valuation. In this one, we did have a positive impact in the MSR valuation that it will depend on the market rates. But if we extract that, that is about for the quarter was about $2,700,000 we can expect the run rate to be the one that we have this quarter without that $2,700,000

[José Fernández, President, CEO & Chairman at OFG Bancorp]

On non interest expense income?

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

And not as you're referring to the mortgage banking activity. Because as I comment on my prepared remarks, this Q4 we did have the full effect of the acquisition of the MSR that we acquired in the Q3. That's about $1,000,000 more that we will have on a quarterly basis.

[Ynyra Bohan, Equity Research Associate at Hovde Group]

Perfect. Thank you so much. That was all my questions.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you for your questions.

[Operator]

Thank you. And we will take our next question from Tamir Braziler with Wells Fargo. Please go ahead.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Hi, good morning.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Good morning.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Looking at the linked quarter reduction in demand deposits, what component of that was from public funds?

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

It's about $100,000,000 around $100,000,000

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Okay. And then I guess just what you're broadly seeing from the deposit base on the island, if there's any kind of seasonality in the 4th quarter trend and generally what you're seeing from the level of consumer liquidity, what that looks like?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. From our vantage point, what we're seeing is steady inflow. We're starting to see a kind of a shift from CDs back to savings and demand. It's going to happen throughout 2025, I believe. But what we're seeing is a net inflow of slow and methodical growth in consumer and commercial deposits throughout all our businesses.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Great. And then I guess just from a competitive standpoint, from a deposit standpoint, how that's trending, the ability to maybe work down costs even though they're so low to begin with? And just on public funds, if there's expectation for further declines there throughout 2025?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Well, on the public funds, remember, they're variable rates. So if rates go down, they'll trend downwards also. On the commercial and consumer, I would say the banking market in Puerto Rico is very rational and very stable in terms of pricing. But don't forget that there are credit unions in Puerto Rico, federal credit unions that they definitely are trying to disrupt to some degree the market and they're bringing in higher yielding accounts. And that definitely is a factor.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

But we do have, as a bank, OFG, we do have a very strong franchise with very sticky core consumer deposits that we feel with the 2 products that I mentioned earlier that we have developed and introduced recently, we have done very well at growing our customers as well as our retail deposits as well.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Okay, great. And then just a couple of follow ups on credit. The 4 U. S. Commercial loans, are those all in a similar geography or is that spread out somewhat?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

No. Remember our U. S. Strategy is more of a diversification, a geographic diversification strategy. So it's nationwide, industry wide.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So we are not specific to our geography. So and these are all mostly, I would say, all of them are C and I commercial loans across the United States.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

And then I understand, I guess, the addition to the reserves for kind of calibration of the auto book today at 2.25 reserves to loans. I mean, that seems like a high number. How are you thinking about the reserve level as we go through 'twenty five increase now for 2 straight quarters. Is there going to be an ability at some point to start seeing some reserve release? Or is that really off the table until we get a level of plateauing on the consumer and auto books?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. I'll let Lalisa give you

[José Fernández, President, CEO & Chairman at OFG Bancorp]

the specifics. In my mind, I think the economy in Puerto Rico is shifting from 2 decades of depression to a stimuli kind of sugar high to a more cyclical type of economy. So that's how we're looking at the world from our vantage point. Going forward, we're seeing the economy in Puerto Rico doing fine. We're doing we're seeing the economy having good growth and all, but we're starting to see the economy in Puerto Rico also entering into a more normal cyclical behavior.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

And we're just trying to make sure that when we look at our credit exposures, we also are cognizant of those changes from a macro perspective. I'll let Marisa give you the specifics on this.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

I think what sharing the same view on hostess economy and having a stable and good economy. I think we have reached a good level of allowance coverage at this point. And when we look forward, we see our burn rate of about $18,000,000 to $20,000,000 mostly as our normal business operation. If you look at this quarter, the volume factor was $18,000,000 So that will be our main benchmark going forward and remain with the same level of allowance coverage that we have right now.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So provision around $18,000,000 to $20,000,000 a quarter and assuming wholesale all things remain equal. So that's kind of the outlook here, Timur.

[Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo]

Great. Thank you. Thank you.

[Operator]

Thank you. And we will take our next question from Baader Hyla with Piper Sandler. Please go ahead.

[Bader Hijleh, Equity Research Associate at Piper Sandler Companies]

Hey, good morning guys.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Good morning.

[Maritza Arizmendi, Chief Financial Officer at OFG Bancorp]

Good morning.

[Bader Hijleh, Equity Research Associate at Piper Sandler Companies]

Just want to touch on fee income again. I know you talked about the mortgage banking segment. Could you give us some more color on the other components? And I might have missed it, but do you also happen to have maybe a run rate or an outlook for fee income heading into 2025?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. So let me give you

[José Fernández, President, CEO & Chairman at OFG Bancorp]

a big picture here. We're looking when we look at Wealth Management, we're seeing a very good momentum with Wealth Management, particularly on the brokerage and insurance, both doing well and seeing good momentum. Particularly on the brokerage financial services side, we're seeing a very good opportunity to deepen the relationships of our customers, not only on the deposit side to the brokerage side, but also from the brokerage to the deposit side. And when we're seeing we're seeing that on the wealth management, but we're also focusing on deepening our relationships with the auto clients and mortgage clients and small business clients. We do see a very good opportunity to work internally.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

And that will help us to the earlier question by someone on the deposit. We not only see growth in deposits from bringing in new customers. We're seeing it from deepening the relationships of our existing loan customers, and we're putting up strategies for it as we speak. So now going back to your fee income question, Wealth Management is doing well. I think we have good opportunities there.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Insurance also as part of Wealth Management is contributing. I think banking, when you look at banking, we need to think about Durbin since we're now $11,600,000,000 So last second half of last year, we had the impact of Durbin. But in spite of that, we have been able to mitigate somewhat the effect on the banking services income by the acquisition of the servicing portfolio that Maritza mentioned earlier as well as by growing our clients, growing the transactionality and the debit and the transactions of our customers and the fees that we generate. So I think that the team has done a very good job at mitigating the impacts on Durbin. And then mortgage banking, as you know, it fluctuates given the evaluation on the MSR and how interest rates have fluctuated.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We've seen more volatility on interest rates. So that's why you're seeing more volatility on the MSR. But all in all, we're very excited about the ability for us to continue to steadily grow our fee income.

[Bader Hijleh, Equity Research Associate at Piper Sandler Companies]

Understood. Thanks. And then if I may ask to with regards to new loan originations, do you happen to have what the rates are coming on the books at and if possible maybe by segment?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So we're seeing auto business and consumer business rates coming in around the same levels in spite of the potential lower interest rates. We're seeing commercial coming in at a slightly lower rate, more fixed than I'm sorry, more variable than fixed, but slightly lower assuming we see 2 additional 25 basis points rate cuts that will have an impact there. So all in all, we're seeing yields on the books trending slightly lower, but not that much. That's why Maritza reaffirms the net interest margin at $530,000,000 to $540,000,000 We feel that on the loan side, we see quite a bit of inelastic behavior, particularly on the consumer portfolios.

[Bader Hijleh, Equity Research Associate at Piper Sandler Companies]

Got it. And one last question. Is there any concern that the new administration would slow down any federal disbursements to the island or maybe what you're hearing in regards to that?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. So look, we've had, I would say, more than 50% of the funds that were initially allocated to Puerto Rico, more than 50% have been obligated. So they should come in and will continue to be deployed on the projects that have started or about to start as they have been obligated. So I think there are a lot of backlogs in projects, and there's a lot of steps that need to go through in the federal government. So in general, it's a different situation when you're starting versus when you have had 5 or 6 years of run rate in terms of getting the funds deployed and invested in the infrastructure.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

So yes, there's always a risk. There's no doubt about it. But I don't think the risk is as significant or as major as it could be it could have been potentially 4 or 5 years ago.

[Bader Hijleh, Equity Research Associate at Piper Sandler Companies]

Awesome. That's all my questions. Thank you.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you for your questions.

[Operator]

Thank you. And we will take our next question from Kelly Motta with KBW. Please go ahead.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, thanks for letting me jump back in. My question is specifically on capital. I think last call you had mentioned that you were maybe behind a bit on the buyback. It was really nice to see that come through quarter. Wondering if you could give us a refresh on how you're viewing capital allocation and rank stacking that as well as you have a bit left on the buyback, if an additional one is a consideration given the strong capital you have and profitability?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Yes. Nothing better than having a fortress balance sheet with tremendous amounts of capital. So we love to operate with good capital, Kelly. So where do we deploy our excess capital, which we know we do have? We deploy it first in loans, and we're going to see some good opportunities, rational opportunities for us to put money to work here in Puerto Rico and also in the U.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

S. We're going to look at the dividend. We're going to look at the buybacks. You saw what we did last quarter. Last year in general, I think we had a very solid buyback execution for us.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

And I see 2025 relatively the same. We're seeing dividends going up and the buyback being executed as well as deploying capital primarily for our loan growth. So the game plan is the same, and we'll try not to be on the catch up at the end of the year on the buyback as we did last year. But so we'll be more methodical on that one. But in general, that's how we see it, Kelly.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Great. That's super helpful. And then I would also like to touch on M and A. Obviously, Puerto Rico is very consolidated at this point. But obviously, with

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

the new

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

administration potentially making acquisitions easier, wondering about your vantage point on that, if there's potential opportunities to expand the U. S?

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Well, we have our strategy in the U. S. And our strategy in the U. S. Is somewhat different from some of our peers here in Puerto Rico.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

We feel that the U. S. Banking system is well served by more than 5,000 banks and particularly right now. But that's how we will continue to execute on our loan participation program that we have on the commercial side and continue to use that as a diversification strategy from Puerto Rico. And that's kind of our way of looking at it.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

From an M and A perspective, certainly here in Puerto Rico, there's really not much of M and A to talk about. But I think given where Puerto Rico is and given where OFG is positioned right now, I think the focus for us has to be on growing organically and focusing really hard on gaining market share and executing on our strategy, and that's our focus. So and I think you mentioned M and A. I tend to think regulatory. I don't think there's going to be much changes from the regulatory front on the day to day basis.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

But I do think that there is going to be, on the longer term, a change in approach in terms of the regulatory. And as you know, we're now past the $10,000,000,000 mark. So looking forward to see how is that being impacted with the new administration and the new regulatory regime that is coming in. So those are my thoughts on the M and A in general, Kelly.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you so much for those insights. I will step back.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you, Kelly.

[Operator]

Thank you. And at this time, there are no further questions. I will now turn the call back over to Jose for closing remarks.

[José Fernández, President, CEO & Chairman at OFG Bancorp]

Thank you, operator. Thanks again to all our team members, and thanks to all our stakeholders who have listened in. Have a great day.

[Operator]

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

Participants

Executives

• José Fernández, President, CEO & Chairman
• Maritza Arizmendi, Chief Financial Officer

Analysts

• Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)
• Analyst
• Ynyra Bohan, Equity Research Associate at Hovde Group
• Timur Braziler, Director - Mid-Cap Bank Equity Research at Wells Fargo
• Bader Hijleh, Equity Research Associate at Piper Sandler Companies