OFG BANCORP Q2 2026 Earnings Call

Good morning, everyone. Thank you for joining OFG Bancorp's conference call. My name is Beau, and I will be your operator today. Our speakers today are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, Maritza Arizmendi, Chief Financial Officer, and César Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the second quarter 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. All lines have been placed on mute to prevent any 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. Fernández. Please go ahead, sir. Good morning.

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 three 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 four. 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. Libre for the mass market, Elite for the mass affluent, and My Biz for small businesses. The second focus is technology. Our omni-channel 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 five. 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 Libre Accounts were opened digitally. We're the only bank in Puerto Rico with these full digital capabilities.

More than 1.1 million personalized Smart Banking insights have been delivered monthly, with more than 90% positive feedback from customers. 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, José. All comparisons are to the first quarter unless otherwise noted. Let's turn to page six. 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 deposit 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 seven 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 a similar loan paid in full in the first quarter. There was one additional date 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 brokered CDs and borrowings, which more than offset the cost of higher average balances of core deposits. The added date 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. Non-interest 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 markets readiness and registration costs and the benefit of $3.6 million in a business-related volume incentive.

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 eight to review our balance sheet highlights. Average loan balances grew $78 million to $8.2 billion. End of period balances grew $62 million, 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 tariffs in the second quarter of 2025. Average core deposit balances grew $145 million to $9.7 billion with end of period balances up $85 million or 0.9%, reflecting government, commercial, and retail deposit growth.

Regarding our large government deposits, $400 million into three and six-month 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 repayment from the investment portfolio. Average investments fell $84 million and $92 million end of period due to principal paydowns in the mortgage-backed securities. Average borrowings and brokered deposits fell $133 million and increased $49 million end of period, reflecting our liquidity management. Now let's turn to page nine to review net interest margin. Loan yield increased three basis points to 7.90%. Excluding the three loan repayments in the second quarter and the one in the first quarter, loan yield was 7.70% compared to 7.71%. Core deposit cost was level at 1.29%, reflecting growth of $92 million in non-interest bearing deposits to $2.7 billion.

Excluding public funds, cost of deposit was 98 basis points compared to 1%. Net interest margin increased nine 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 10.90%, 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. Commercial more than offsetting the unanticipated decline in auto, though auto has been slightly stronger than expected. We continue to anticipate deposit growth, excluding the large government deposits.

Benefiting from our Libre, Elite, and My Biz accounts as well as growth of commercial and government clients. On our last call, we expected net interest margins to range from 5.10%-5.20% this year. Now, we expect NIM to range from 5.25%-5.35% in the second half of 2026. 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 paydowns. Our second half outlook incorporates deposit growth and the relocation of the large government deposits. We continue to anticipate no rate cuts this year with the Fed cutting rates once next year. We remain on track to keep expenses in a range of $380 million-$385 million this year. Our estimated tax rate for the year continues to be 22.6%, not including discrete items.

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 balancing shareholder returns and disciplined growth. Now, here's César. Thank you, Maritza.

Please turn to page 11. All comparisons are to the first quarters 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, non-performing loans fell $53.6 million to 0.81% of average loans. This reflected the successful sale of the standalone telecom exposure discussed in previous quarter and of another non-performing commercial relationship. These actions reduce concentration and tail risk and improve the 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 included $17.5 million for increased loan volume, $3.7 million for increased allowance for the telecom loan, 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 with continued normalization across consumer portfolios. This mix of modest early-stage delinquency and stable back-end losses continues to demonstrate the resiliency of underlying portfolio quality. Despite some movement in 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 declines again in the first half of the next year. Here's José to wrap it up.

Thank you, César. Please turn to page 12. The Puerto Rico economy remains resilient. In addition to what I said earlier, federal 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 scalability 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.

Certainly, Mr. Fernández. Thank you. Ladies and gentlemen, at this time, if you do have any questions or comments, please press star one. If you find your question has been addressed, you may remove yourself from the queue by pressing star two. Once again, that's star one for questions. We'll go first this morning to Kelly Motta with KBW.

Hi, good morning. Thanks for the question and congrats to the team on a great quarter.

Thank you, Kelly. Kicking it off on the margin, you materially raised your NIM outlook for the second quarter in a row.

I think I caught that $500 million of the government deposits moved into CDs. Just wondering what your new 5.25%-5.35% outlook assumes in terms of the longevity of these deposits sticking around on the balance sheet, and x that some of the underlying dynamics you're seeing in terms of new loan originations and incremental cost of core funding. Thank you. 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. The good news is that this is a long-term relationship that we have had at the bank for many years. We have been able to methodically diversify the deposit into wealth management as we saw last year. Now we are terming out a little bit on the CDs so we can help the client optimize its liquidity as well as the yields as they take a little bit longer look at the deposit. We feel much more confident about our margin guidance, and that's why you're seeing us resetting it in this call.

I'll let Maritza go into the details, but you hit it on the nail when you addressed the government deposit.

Yeah. Thank you, Kelly, for the question. The reality is that we completed that relocation end of June. We were able to assess what for the next half of the year. Now we will not need to go to the market to replace that funding and provide us with some additional spread. That's why we are increasing the guidance. We continue to be asset sensitive, slightly asset sensitive. Since we are not expecting changes in the market rates, at least this year, we are expecting a more stable type of NIM that resembles what we saw during the first two quarters, 5.25% the first quarter without the recoveries and 5.30% the second quarter without the special recoveries that are non-recurring. That's why our guidance has been increased.

Another point that I'd like to add too is that we're also seeing higher loan balances, and particularly from the commercial side. 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 then just to keep the thread here. Clearly, Puerto Rico is still operating at a really nice level here. I'm wondering if this increase in commercial, if 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. Thank you. Yep. Kelly, good point also.

We've been talking about the Puerto Rico economy for several, I would say two or three 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. When we look at it certainly provides a lot of confidence to operate a bank when you have a stable, steady, consistent economy. The metrics that we're seeing continue to reflect the same. Low unemployment, high liquidity levels on the consumer side. We're seeing great interest on businesses to expand because there's 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 billion or so of projects coming through in the next several years. Federal funds continue to flow in.

I think we're benefiting from that economic environment. I can understand why there is some, let's say, trepidation about Puerto Rico's economy given our history. 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 is supported by real investments. I think then you add to that there's a three-bank market here where we kind of run the financial market in the island. Then you look at the third pillar that I look at, and that is who we are. OFG has a unique strategy.

OFG has positioned itself in a very different way, investing in technology, leveraging the digital early on. Deploying it very effectively thanks to a great team that we have, and that is showing the results. What we're seeing is all the wheels running at 150 miles per hour in the right direction, and we're executing. We feel extremely happy and confident that what we're bringing to the market is differentiating, and we're seeing it in growth. That's kind of how overall I see from 36,000 feet what's going on for us here at OFG.

Got it. Last one, 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 could provide some color as to what you're seeing there. Thank you. Yep. I'll let Cesar give you the details.

I'll tell you, we sold the credit that was non-performing or non-accrual. That definitely sends a message to investors that we're really, when we need to act, we act. That's what we did. We worked on it for the last three or four months, and we successfully sold that credit. That's the main kind of large ticket item. In general, when we're seeing, and as I mentioned earlier, the credit on the consumer side is pretty steady. I'll let Cesar give you some details there on the consumer.

The consumer, you see non-performing levels similar or better than last year for both auto and consumer lending. We are seeing vintages that are already better vintages than when we adjusted the underwriting standard back in 2022. The vintages that are taking over now are better vintages in terms of credit underwriting standards. That is starting to equate into the formula. 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. 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 gallon in the States.

Seeing the portfolios, we are positive in terms of what we're seeing in the behavior, and the customers continue to pay very well during this quarter. We expect that seasonality to start seeing or reflecting in the numbers for the next half of the year.

Great. Thank you. I will step back next quarter again.

Yep. Thank you, Kelly. Thank you.

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

Hey, just to stay on credit for a moment. Does that mean that loan 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 with seasonality?

You should see that seasonality, yes, in the reserves, too, 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 was some movement to the public funds, so maybe it's not all represented there.

Yeah What was kind of the June NIM entering the back half of the year?

Yeah. Thanks for the question because at the end, as I mentioned before, we did the relocation mid-June, so the month of June reflects that, and it was around 5.26 in June NIM.

Okay. I appreciate that. 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.

Yep. Nothing has changed. We did have higher purchases 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. We're just being patient also. When we look forward, we still have $194 million of the approved buyback, and we are planning on executing it as we see our stock undervalued versus our peers. We will continue to be out there and be methodical about our acquisition of our stock or purchase of our stock.

I appreciate that. I'll step back and take cue.

Yep. Thank you, Manuel. Thank you.

We go next now to Arren Cyganovich with Truist Securities.

Sorry, I was muted. Thanks. The brand marketing campaign that you launched in 2Q, any kind of early feedback on that? It seems like you're really trying to push the digital focus and let folks know that you're leaning into that from your side.

Yeah, it's a brand evolution. We felt that this is the right time for us to tell the market in a more direct way The capabilities that we have for them to benefit from.

It launched early in June, so it's too early to share any specifics. Early indicators show that it's been well-received. In the end, it's for us to make sure that we start evolving our brand to communicate who we really are, aligned with the capabilities that we have built throughout the last couple of years. That's kind of the motivation behind it. Really excited for the rest of the year's and next year's results.

Got it. The $5.8 million of charges that were referenced, was that related to this branding, or was it due to something else?

No, the $5.8 is basically operational charges. They were due to operational errors, and we took the charge. The problem has been corrected, and the charge is non-recurring. Really, it's passing the page.

Okay. Then lastly, the net charge-offs were elevated in the quarter related to the loan sales. If you were to exclude those previously reserved loans from that number, what would the net charge-off rate look like?

Oh, the consolidated net charge-off will be 0.72% without the Liberty charge-offs. The telecom charge-offs. Okay. Thank you.

Thanks, everyone. Appreciate it. Yeah.

Aaron, you strike that name out of the script, please.

Yeah. I didn't hear it.

Thank you. Just a quick reminder, everyone, star one for questions this morning. We'll go next now to Kyle Gierman with StoneX.

Hi, this is Kyle Gierman on for Brett Rabatin. Congrats on the quarter. Thank you.

Just wanted to touch on credit really quick. On the U.S. commercial side, net charge-off rate has bounced around quite a bit. I was wondering how you would characterize the health of the U.S. commercial portfolio.

Back in two years ago, the risk, a lot of that portfolio, we released around $30 million of loans that we saw at higher risk when we saw the economy of the United States potentially coming into a recession back in summer of two years ago. Right now, that portfolio is behaving much, much better than previous years, and we're seeing a stabilization on the portfolio. We are internally measuring risk rating on that portfolio. Those risk rating are very stable. I would say that that portfolio right now is healthy.

Yeah. We're very happy with the performance, and as you know, it serves as somewhat of a geographic diversification for us outside of Puerto Rico, so playing its role.

Thank you. Moving on to loan yields, saw they were up a few basis points to 7.9. I was wondering how much fixed rate repricing tailwind is still ahead of you, and what are the new commercial loans coming in on today relative to the back book?

Yeah. 7.9 was including the recovery. If we exclude the recoveries on both quarters, the deal alone was 7.7 this quarter versus 7.71, so it's pretty stable. The deals on the commercial book, it would be different because the U.S. have a different price than Puerto Rico. If we blend all together, they are around 7.25%, including small business within that. That's the new entry price.

Variable versus fixed, it's a little bit like, I would say 60% variable, 40% fixed, give or take. On the commercial side. Remember, we also have the auto book, which is fixed rate and it yields around eight and a half or so. That's a different bucket. Thank you for taking my questions.

I'll step back. Yep. Thank you.

Thank you, Kyle. Thank you.

We'll take a follow-up question now from Manuel Navas with Piper Sandler. Manuel, your line is open. You might be on mute.

I was. Thank you. Sorry. Sorry to jump back on. I just wanted to follow up a little bit on some of the deposit trends. It seems like you speak to your three accounts doing quite well. Could you just kind of add some color on those? Maybe it's also on the commercial side. Just kind of add color on the strength in your deposit growth.

Yep. On the retail side, the deposit accounts are driven by a higher net customer growth. We're seeing not only the existing clients where we're starting to see a deepening of that relationship, but more importantly, we're growing customers at a 4% a year, and that is adding to our growth on the deposit side, on the retail side. We're also seeing a bit on the retail side on CDs. We're starting to see Clients kind of trying to move into CDs in some cases.

I'm referring here more to the mass market Libre Account. On the Elite Account, which is more the mass affluent, there what we're seeing is a pretty steady consistent flow of deposits coming in. It not necessarily has a significant customer growth level, but it's a steady inflow of deposits, which we feel very happy with as it kind of helps to target both markets, the mass market as well as the mass affluent with the Elite. Then on the commercial side, on the small business, similar to what I mentioned on the retail, it's mostly driven by new customers. New account openings driving the commercial small business growth.

I think the team is doing a great job at bringing those customers in with the deposits and then working on deepening the relationships towards cash management and potentially lending in some cases. That's kind of how high level we see the three accounts that we are focusing on, and it makes our life extremely focused because we don't get distracted with several other accounts that we need to deal with. On the corporate side, we call it corporate, which is a larger commercial, that is relationship driven. It's an area where our team goes out and establishes very good relationship and starts bringing the loans many times, and then the deposits flow with it. We're seeing all those efforts working in tandem and the results show for it.

I appreciate that. With some of the movements you've had, where do you expect deposit costs to go? On a core basis, it was down two basis points for that quarter. There's some movements with the public funds. Where can deposit costs go from here?

Well, given what we said about the large deposit where we're kind of fixing it and we kind of are taking it out of the, let's say, hopefully of the potential conversation going forward because it doesn't complicate our margin guidance. We're seeing deposit costs going forward in the next two quarters relatively at the same level that we have in the first half of the year. Again, given the expectation of rates remaining on the short end where they are. That's kind of our outlook for the second half on those.

I appreciate that. Thank you so much.

Yep. You're welcome. We'll take a follow-up question now from Kelly Motta at KBW.

Hey, my question got answered in that, so I'm going to step back. Thank you. Thank you. Thank you, Ms. Mata.

Again, ladies and gentlemen, just a final reminder, star one please for any further questions. We will pause for just one moment. It appears we have no further questions this morning. Mr. Fernández, I'd like to turn things back to you, sir, for any closing comments.

Thank you, operator. Thanks again to all our team members for an outstanding quarter, thanks to all our shareholders who have listened in. Looking forward to our next call. Have a great day. Thank you again, ladies and gentlemen.

Thanks, operator. This will conclude OFG Bancorp's conference call.

Again, thanks so much for joining us, everyone. We wish you all a great day.