OFG Bancorp Q1 FY2026 earnings call

• Started the year with strong financial performance, earnings per share diluted up 26% year-over-year on 4% growth in total core revenues, driven by loan growth, credit performance, core deposit strength, expense discipline, and balance sheet management. • Core digital strategy has three pillars: service offerings targeting specific customer segments, technology with omnichannel platform, and intelligent banking leveraging data. • Retail digital enrollments up 10%, digital loan payments 5%, virtual teller usage up 7%, net new retail and commercial customers each grew by close to 3%. • Noninterest expense down $10.3 million from fourth quarter, first quarter included merit raises, payroll taxes, costs related to capital market readiness, business-related volume incentives, and net cost savings. • Puerto Rico's economy continues to grow, businesses' and consumers' balance sheets solid with high liquidity levels. • Recognized with 2026 Gallup Exceptional Workplace Award, reinforcing culture of agility, openness, and innovation

Core revenues at $186 million were approximately level. Total interest income was $194 million, a decrease of $3 million, reflecting lower average balances of cash and investment securities at lower average yields, partially offset by higher average balances of loans at higher average yields. First quarter interest income included $3.3 million from a PCD loan paid in full. Total interest expense was $40 million, a decrease of $4 million, reflecting lower average balances of core deposits at lower average yields, partially offset by higher average balances of brokered CDs and borrowings at lower average yields. Total banking and financial service revenues were $32 million, a decrease of $600 thousand. Noninterest expense totaled $95 million, down $10.3 million from the fourth quarter. Income tax was $14.9 million compared to a benefit of $8 million in the fourth quarter. Average loan balances were $8.2 billion, up $1.55 billion from the fourth quarter. Average core deposit balances were $9.6 billion, down 4% from the fourth quarter. Investments totaled $2.8 billion, down $55 million. Average borrowings and brokered deposits totaled $929 million compared to $787 million in the fourth quarter. Net interest margin was 5.36%. Net charge-offs totaled $21 million, down $5.5 million. The net charge-off rate was 1.05%, an improvement of 27 basis points from the fourth quarter. Provision for credit losses was $22.5 million, down $9 million from the fourth quarter. Allowance coverage remains strong at 2.48% of loans. Retail nonperforming loan rates improved sequentially in auto and consumer, while remaining stable in mortgage. Commercial nonperforming loan rate declined to 2.36% from 2.5% last quarter

• Net interest margin expected to range from 5.1% to 5.2% for full year, assuming no additional rate cuts in 2026 and exit of large remaining government deposit later this year. • Noninterest expenses maintained within expected run rate, on track to keep expenses in range of $380 million to $385 million this year. • Estimated tax rate for 2026 anticipated to be 22.3% excluding discrete items. • Will continue to be selective and opportunistic in returning capital to shareholders, balancing shareholder returns with disciplined growth

• Geopolitical uncertainties and their effect on energy prices may impact Puerto Rico's economy. • Uncertainty regarding timing and replacement of large government deposits. • Potential impact of macroeconomic headwinds such as higher cost of living, inflation, and possible U.S. recession on the business

Q: Good morning. Wanted to start just on the margin. Even excluding the $3.3 million, that would have made it about 5.24%. That was better than anticipated. I know the guidance is for a slightly lower level from here, but any thoughts on potential positives for the margin relative to the guidance, whether it be loan pricing or any other factors? It seems like you are probably getting close to a bottom on funding costs.

A: So, Brett, before I let Maritza give you the specifics, let us be clear. For us to provide guidance on the margin is a little tricky given the uncertainty on when and how much of the large government deposit will exit and how those funds will be replaced. So when we give guidance on the NIM, we are using the most conservative guidance possible because we really do not want to promise something that we do not deliver on. Bear that in mind. We still have significant deposits from the government that have been telegraphed to us that they will depart sometime. We do not know if it is tomorrow or if it is next year. Replacing those deposits, we certainly bet that our business teams—the commercial team as well as the retail team—as they did this first quarter, will deliver and deliver substantially better than what we expected in the first quarter. It definitely has a lot to do with the economic background that we are living in Puerto Rico, and sometimes we undermine that in our own forecast, given the 22 or 23 years that we have operated on the island. Now I will pass the answer to Maritza so she can give you the specific details. Thanks, José, for that. For the first quarter, deposits increased at a higher rate than expected. It was very good momentum for us. The reality is that, going forward, thinking about the rate scenario we are managing—with no cuts—we do not see much flexibility to push down more the cost of deposits. So we will continue to see deposit costs at the same level as we saw during the first quarter. The other element embedded within the range I provided is asset composition, because we will continue to see the commercial book becoming a higher proportion as auto continues to go down, as I shared in the prepared remarks. That means we also have some impact in the loan yield that during this quarter went down 2 basis points ex-recovery. We are seeing the asset sensitivity and the liability sensitivity somehow compensating between the two. Since the NIM we saw during the quarter—excluding the recovery—was 5.25%, we expect it roughly stable, maybe 5 basis points down or up. That is why we are giving the 5.1% to 5.2% range for the full year. We will also need to manage liquidity through the year, as José was mentioning. And you know us—we are going to be conservative in all the guidance that we provide. We have been doing that for many years. That is where we stand, Brett.

Q: And can you remind me, José Rafael, how much of the government deposit piece is left? I know you are unsure of the timing, but any thoughts?

A: Around $600 million on the one deposit. Remember, the other $500 million went to our broker-dealer, so we are getting a little bit of a fee there. That is where it stands right now.

Q: And then on credit quality, I heard the comments and it makes sense—there is some seasonality related to early-stage delinquencies—but there was some nice improvement this quarter. Was there anything else that might have been driving the improvement other than seasonality and customers having higher liquidity during 1Q? Are you seeing any other broad-based things that were improving credit?

A: Back in late 2022, we improved the underwriting standards to make sure that we booked higher quality, because that was a record-breaking period. We wanted to use that moment to improve our portfolio quality. Now we are seeing the results of those improvements in the credit metrics, where the auto portfolio is 99% prime. We are starting to see the benefits in the credit metrics of those adjustments that we did in 2022. When you think about it, the seasonality of the vintage that is coming due in 2026 is one that already has 80% plus in prime. So we expect to have lower loss content in the vintages that are becoming seasonal in the next couple of years. That is an additional element of our consumer credit portfolio.

Q: Thanks. Good morning. The deposit growth surprised me. Despite the government deposit you had guided as coming out, you had pretty strong growth in the quarter to cover that, where I thought it would actually come in through the borrowing side. You mentioned that Libre, Elite, and MyBiz all contributed. Are you seeing any particular growth in any one of those products, and were you doing anything special to drive that growth in the first quarter?

A: The three products are the driving force for us—very targeted, very focused. We do not have 50 different deposit accounts. We have one for mass market, one for mass affluent, and one for small business. That focus helps our team members. We also have excellent benefits for each of those accounts, and that is what is driving adoption, account opening, and customer growth. It is across the board. With Libre and Elite on the retail side, we saw increasing deposits. Libre is mostly noninterest-bearing and a digital account you can open online. We continue to see great adoption there, growing client base steadily. In mass affluent, we also saw great growth in deposits and deeper relationships—more Elite customers using lending with Oriental and OFG Bancorp. On MyBiz, it is our flagship. Our team members go out there; we have a solid cash management offering, and the platform compares well to those banks in the States have. Customers are identifying those benefits, and we are seeing the results. Certainly, the economy helps with a lot of liquidity, but我 do not want to underestimate the power of our strategy and execution.

Q: On Slide 5, you have always talked about the digital-first aspect and the statistics are impressive. Any particular new investments on the technology side to continue to improve those statistics?

A: We have made investments over the last several years, and some of what you are seeing today is the benefit of those investments. We continue to invest. Right now, the biggest focus as we finalize our data management is making sure we have data readily accessible, so we can extract insights for our customers, improve their lives, and provide value-add. We are already doing that and expanding it, with a team working on it for many years. The benefits of artificial intelligence are first and foremost on efficiency. When you heard Maritza talk about expenses and our flat guidance versus last year, we continue to see good opportunities to leverage AI and bring efficiencies to the bottom line for 2027 and beyond. The other side is value-add to our customers—how do we make their lives simpler. Those are the things we are investing in right now. It is tricky—we will hit some good investments and we might miss some—but that is how we operate. We bet on innovation. Banking will require innovation going forward, and Puerto Rico is behind on that curve. OFG Bancorp is the one driving that innovation in Puerto Rico.

Q: Hi. Good morning. Thanks for the question. Just a quick guidance clarification for Maritza: that 5.10% to 5.20% margin—is that for the full year or the balance of 2026 quarters?

A: It is for the full year. I already shared how we are seeing and why we are seeing that range, including the timing of the big government deposit transfer and the fact that we are not seeing rate cuts during the year.

Q: Similarly, I thought a real strength of the quarter was the core deposits. I know Puerto Rico has a government tax rebate. Did you see any positive impacts from that in 1Q, or if not, can you help with the timing?

A: That is usually at the end of the quarter. We saw a little bit at the end of the quarter, and it plays out throughout the first half of the year. We see the child tax credit and the tax refunds in general, and that plays out through the first half.

Q: Turning to capital, you announced a meaningful dividend raise earlier in the quarter and were more active with the buyback with the new authorization out. Capital looks very healthy. Can you remind us of any guideposts or thoughts around the capital side of things?

A: Everything starts with how we deploy our capital. We want to deploy it first and foremost in our business here in Puerto Rico. If there are opportunities to deploy it in a growing balance sheet, we will do that—that is the first level of thinking. We certainly see the buyback as a way to continue to return capital to shareholders. We are methodical and opportunistic, as we showed in the first quarter, and will continue to be so during the rest of the year. For the dividend, we feel very confident about the earnings power we have. With CET1 close to 14%—around 13.75% this quarter given the buybacks—we feel that returning capital to shareholders is part of our strategy, and we will continue to do so, Kelly.

Q: Last modeling question: I appreciate the color on margin and the interest recovery. Looking at your average balance sheet, it looks like there was a jump in PCD interest income. Just to confirm, was that where the interest recovery came in?

A: Yes. It was the pay-in-full of a loan within that book.

Q: Hi. How much did taking out Fed rate cuts help that NIM guide? And if we did get one rate cut, what would you expect the impact to be?

A: Thank you, Manuel. We continue to be asset sensitive, but a 50 basis point rate cut would have a very low impact—less than 1%—to NII. We are taking that into consideration in this new guidance because we were expecting two cuts midyear and then at the end of the year. That is no longer impacting the commercial book, so it is impacting the guidance positively. We moved it about 10 basis points, not necessarily fully related to the change in rate expectations, but also due to a better funding mix from the inflows we received during the first quarter. It is encouraging us for the rest of the year. We expect core deposits to continue growing, which will help funding mix in front of the potential exit of the government deposit. That is embedded in the guidance.

Q: I appreciate that. So the success you are having with the new account types—as long as they keep growing, they can replace borrowings and should benefit your funding. Is that what you are hoping?

A: Yes. It also has another component we do not talk about often: the large commercial book and business we have. We have some good-sized commercial accounts that have been long-standing clients of ours that also are benefiting from higher liquidity levels.

Q: On that front, I know your loan growth is commercial-led this year, a little less on the auto side. How do pipelines look? Any update to the mix of loan growth from last quarter? Is there going to be a seasonal improvement in growth?

A: We have a pretty good pipeline, and we are continuing to stick with our guidance of low single digits. Not because we do not feel comfortable with the commercial pipeline, but because we are modeling a reduction in the auto loan book that is hard to predict given the landscape in Puerto Rico. We are very happy with the commercial business. We continue to grow it and have a very strong pipeline.

Q: My last question is on credit. Is this improvement in past dues—which is somewhat seasonal—likely to drive a bit lower net charge-off levels for the year? I think we are looking at closer to 1% plus.

A: We talked about the 1% last quarter too. I do not want to project this quarter’s seasonality forward. I would stick to 1% for the year, and hopefully it will be better because of the improvements in the FICO quality of the portfolio, which should translate into a better charge-off rate. But as of now, I would say 1%