Business Overview and History

OFG Bancorp (OFG) is a diversified financial holding company that has been serving the Puerto Rico market for over six decades. The company's three principal subsidiaries - Oriental Bank, Oriental Financial Services, and Oriental Insurance - provide a wide range of retail and commercial banking, lending, and wealth management products and services primarily in Puerto Rico and the U.S. Virgin Islands.

OFG Bancorp was founded in 1964 as Oriental Federal Savings and Loan Association, one of the smallest banks in Puerto Rico at the time. Over the years, the company has undergone a remarkable transformation, growing into one of the top three banks on the island. In 1994, the company reorganized and became a financial holding company, adopting the name OFG Bancorp. This restructuring allowed OFG to diversify into other financial services beyond traditional banking.

During the economic recession in Puerto Rico in the 2000s and 2010s, OFG faced significant challenges. The island experienced over a decade of economic contraction, a government fiscal crisis, and the impacts of natural disasters like Hurricane Maria in 2017. OFG had to navigate these difficult economic conditions, which led to increases in non-performing assets and credit losses in its loan portfolio. Despite these challenges, OFG remained committed to serving its customers and communities in Puerto Rico, working to support its borrowers through loan modification programs and loss mitigation efforts.

To further diversify its operations, OFG expanded into the U.S. Virgin Islands and established a U.S. commercial lending program to complement its Puerto Rico-focused business. In 2014, OFG relocated its stock listing from the NYSE Amex to the New York Stock Exchange, where it continues to trade today under the ticker symbol OFG. The company celebrated its 60th anniversary in 2024 and its 30th year listing on the NYSE, demonstrating its resilience and ability to adapt over the decades.

Through strategic acquisitions and organic growth, OFG has steadily expanded its geographic footprint and diversified its product and service offerings. In 2005, the company acquired Eurobank, a Puerto Rico-based commercial bank, further strengthening its commercial banking capabilities. In 2012, OFG established its international banking entity, Oriental International Bank, to serve customers with assets and liabilities outside of Puerto Rico.

Over the past decade, OFG has made significant investments in its digital transformation, launching its "Digital First" strategy in 2021. This initiative has enabled the company to enhance its customer experience, improve operational efficiency, and expand its market share. As of the fourth quarter of 2024, 96% of all routine retail customer transactions, 97% of retail deposit transactions, and 68% of retail loan payments were made through digital and self-service channels.

Financial Performance and Ratios

OFG Bancorp has demonstrated consistent financial performance, even amidst the challenges posed by the COVID-19 pandemic and the island's economic recovery. In 2024, the company reported net income of $198.2 million, or $4.23 per diluted share, representing a 10.4% increase from the previous year. Total core revenues for the year were $750.3 million, up 3.9% year-over-year.

The company's net interest margin remained strong at 5.43% in 2024, reflecting its effective asset-liability management and the repricing of its loan and investment portfolios. OFG's return on average assets (ROA) was 1.75%, and its return on average tangible common equity (ROTCE) was 17.17% for the year. The return on average equity (ROE) was 15.43% in 2024.

For the fourth quarter of 2024, OFG reported revenue of $169 million and net income of $50.3 million, representing year-over-year growth of 3.6% and 11.2%, respectively. Earnings per share for the quarter were $1.09, up 11.2% from the same period in the previous year.

In terms of capital strength, OFG's common equity Tier 1 (CET1) ratio stood at 14.26% as of December 31, 2024, well above the regulatory minimum. The company's tangible common equity ratio was 10.13%, demonstrating its solid capitalization and ability to withstand potential economic downturns.

Liquidity

OFG Bancorp maintains a strong liquidity position, which is crucial for its ability to meet customer demands and navigate potential economic uncertainties. The company's liquidity management strategy includes maintaining a diverse funding base, managing its loan-to-deposit ratio, and maintaining access to various funding sources, including the Federal Home Loan Bank and the Federal Reserve Bank.

As of December 31, 2024, OFG had cash and cash equivalents of $591.1 million. The company also had a borrowing capacity of $383.1 million available at the Federal Home Loan Bank and a secured line of credit through the Federal Reserve discount window with $2.7 billion in loans pledged. This robust liquidity position provides OFG with significant flexibility to pursue growth opportunities and manage potential economic headwinds.

Operational Highlights and Outlook

OFG's "Digital First" strategy has been a key driver of its operational success. The company has consistently grown its digital customer base, with year-over-year increases in digital enrollment, digital loan payments, and virtual teller utilization. This has enabled OFG to improve efficiency, reduce costs, and better serve its clients' evolving needs.

In 2024, OFG acquired the servicing rights to a $1.7 billion Puerto Rico residential mortgage loan portfolio, further strengthening its mortgage banking business. The company also introduced several new products and services, including the mass market "Libre" account and the mass affluent "Elite" account, which have been well-received by customers.

Looking ahead to 2025, OFG expects to maintain its net interest margin in the range of 5.30% to 5.40%, consistent with the Q4 2024 level of 5.40%. The company anticipates a provision for credit losses of approximately $18 million to $20 million per quarter, assuming stable economic conditions. Non-interest expenses are projected to be in the range of $95 million to $96 million per quarter. OFG also expects its full-year effective tax rate to be around 26%, down from 24% in 2024.

The company plans to continue its share buyback program in 2025, aiming for a more methodical approach to timing compared to 2024. OFG remains cautiously optimistic about the economic outlook in Puerto Rico, with signs of steady recovery, high levels of business activity, and employment. However, the company is mindful of potential macroeconomic headwinds, such as the impact of rising interest rates and geopolitical tensions, and is prepared to navigate these challenges.

Business Segments

OFG Bancorp operates through three major business segments: Banking, Wealth Management, and Treasury.

The Banking segment, which includes the operations of Oriental Bank, is the company's primary revenue driver. In 2024, the Bank's loan portfolio grew by 3.4% to $7.79 billion, driven by increases in commercial, auto, and consumer loans, partially offset by a decrease in mortgage loans. The allowance for credit losses (ACL) for the Banking segment increased by $6.92 million in 2024, reflecting adjustments for loan volume, loss rate model changes, and specific reserves related to certain U.S. commercial loans. Net charge-offs for the Banking segment were $67.79 million in 2024, up from $51.84 million in 2023, primarily due to higher charge-offs in the auto and consumer loan portfolios.

The Wealth Management segment, which includes Oriental Financial Services, Oriental Insurance, OFG Reinsurance, and the Bank's trust division, saw strong growth in 2024. Segment revenue increased by 8.0% to $35.62 million, driven by higher broker-dealer fees, insurance income, and trust fees. The segment's net income before taxes increased from $16.02 million in 2023 to $17.89 million in 2024.

The Treasury segment, responsible for OFG's asset-liability management activities, experienced significant growth in 2024. Net interest income for this segment increased by $50.24 million, or 75.6%, to $116.75 million, primarily due to the purchase of higher-yielding agency mortgage-backed securities and U.S. Treasury securities. The segment's income before taxes increased from $60.90 million in 2023 to $113.30 million in 2024.

Risks and Challenges

OFG's business operations and financial performance are closely tied to the economic conditions in Puerto Rico, which has faced numerous challenges over the past decade, including a prolonged recession, a government fiscal crisis, and the aftermath of natural disasters. While the island's economy has shown signs of improvement, any setbacks or further economic downturns could adversely impact OFG's loan portfolio quality, funding sources, and overall profitability.

The company is also subject to heightened regulatory scrutiny and requirements as a result of crossing the $10 billion asset threshold in 2023. This includes the implementation of the Durbin Amendment, which has reduced the company's debit card interchange fee income. Despite this challenge, OFG was able to increase average interest-earning assets by 11.8% year-over-year in 2024.

Additionally, OFG faces competition from other financial institutions, both local and mainland-based, as well as from alternative financial service providers. The company's ability to maintain its market share and continue its growth trajectory will depend on its ability to differentiate its product and service offerings, enhance its digital capabilities, and provide a superior customer experience.

Conclusion

OFG Bancorp has a long and successful history of serving the Puerto Rico market, weathering economic challenges and positioning itself for sustained growth. The company's strategic investments in digital transformation, diversified product and service offerings, and prudent risk management have enabled it to consistently deliver strong financial performance and create value for its shareholders.

As OFG navigates the evolving economic and regulatory landscape, its focus on innovation, customer service, and operational efficiency will be key to maintaining its competitive edge and capitalizing on the growth opportunities in its core markets. With a solid capital position, a diversified business model, and a seasoned management team, OFG is well-equipped to continue its trajectory of success in the years to come. The company's positive outlook for both the Puerto Rico economy and its own performance in 2025, expecting continued growth in loans, deposits, and its customer base, reinforces its strong market position and potential for future success.