Timur Braziler

Timur Braziler of Wells Fargo Securities asked for a broader perspective on credit, specifically if a 1% full-year charge-off rate is a good proxy for the current cycle and how the $25 million allowance build in 2025 (reaching 2.46% of loans) might indicate future charge-off activity and a stabilized credit environment for 2026. He also inquired if the telecom credit's non-accrual status in Q4 was due to incremental Q4 events or a recalibration. Finally, he asked about the competitive reaction to OFG's new retail deposit products (Libre, Elite) and the shifting competitive dynamics for Puerto Rico deposits, particularly regarding the potential for lower costs amidst rate cuts.

Answer

Maritza Arizmendi (CFO) confirmed that a 1% net charge-off rate is a reasonable run rate, noting that the 2025 allowance build included a specific reserve for the telecom loan, and future reserve builds might be flatter excluding such specifics. César Ortiz (Chief Risk Officer) clarified that the telecom loan's non-accrual status in Q4 was due to repeated financial deterioration, a prudent decision despite ongoing payments. José Rafael Fernández (CEO) acknowledged an intensifying competitive deposit landscape, particularly from credit unions, but emphasized that OFG's success with Libre and Elite accounts stems from product differentiation, functionality, and value proposition rather than high rates, with no direct rate-based competitive response observed for these products.

Timur Braziler of Wells Fargo Securities asked for a broader perspective on credit, specifically if a 1% full-year charge-off rate is a good proxy for the current cycle and how the $25 million allowance build in 2025 to 2.46% of loans might indicate future charge-off activity and a stabilized credit level. He also inquired if the telecom credit activity in Q4 was incremental or a recalibration, and about the competitive reaction to OFG's new retail deposit products (Libre and Elite) and the potential for lower core deposit costs amidst rate cuts and intensifying competition.

Answer

CFO Maritza Arizmendi confirmed that a 1% net charge-off rate is a reasonable run rate, noting that the 2025 allowance build included a specific reserve for the telecommunications loan, and future reserve builds might be flatter without such specifics. CRO César Ortiz clarified that the telecom loan's non-accrual status was due to repeated financial deterioration in the current period, not a prior recalibration, with CFO Maritza Arizmendi adding it was a prudent move despite ongoing payments. CEO José Rafael Fernández described the competitive landscape as slowly intensifying, driven by other banks' investment portfolios and aggressive credit unions. He emphasized OFG's strategy of product differentiation and value proposition for Libre (non-interest bearing) and Elite (1.28% average cost) over high rates, noting no significant rate-based competitive reaction to these products.

Timur Braziler followed up on José Rafael Fernández's comment about new onshoring investments in Puerto Rico, asking for details on these investments and their progression.

Answer

José Rafael Fernández, CEO and Chairman, described announcements from 10-11 multinationals in medical devices, pharmaceuticals, solar panels, and textiles, indicating a broader scope than in the past. He noted that most are existing companies expanding production lines, with a few new operations. This trend is driven by onshoring benefits, tariff threats, and Puerto Rico's status as a U.S. jurisdiction and manufacturing hub. He highlighted the encouraging long-term benefits of well-paid jobs and indirect suppliers as federal funds eventually recede.

Timur Braziler inquired about the continued improvement in Return on Average Tangible Common Equity (ROTCE), which reached over 14% in Q3, and whether further increases are possible in the coming quarters despite anticipated rate cuts.

Answer

CFO Derek Meyer stated that the opportunity for further ROTCE improvement exists, with the long-term margin side being a significant lever. He expressed confidence in the ability to continue grinding ROTCE higher, citing positive early responses to deposit repricing after the September rate cut.

Timur Braziler asked about the expected acceleration of C&I loan growth once the remaining relationship managers (RMs) come off their non-compete agreements, the drivers behind the impressive Q3 fee income, and the sustainability of the return on average tangible common equity (ROATCE) improvement amidst potential rate cuts.

Answer

President and CEO Andy Harmening indicated that C&I production is up 12% and the pipeline is up 31%, expecting strong C&I growth above market in 2026, with commercial deposit production also showing significant growth. He explained that Q3 fee income included a one-time asset gain, making it less repeatable at that level, but expressed optimism for 2026 due to capital markets and commercial production. CFO Derek Meyer added that the opportunity for ROATCE improvement remains, driven by market response to rates and deposit pricing, expecting it to continue grinding higher with some quarterly fluctuations.