Executive Summary / Key Takeaways

• OFG Bancorp delivered a solid start to 2025, reporting diluted EPS of $1.00 in Q1 2025, supported by consistent core operating results and strategic execution.
• The company's "Digital First" strategy is yielding tangible results, with high and increasing digital transaction adoption rates (96% retail transactions, 97% retail deposit transactions in Q1 2025) driving efficiency and customer growth.
• Loan growth continued in Q1 2025, with total loans held for investment increasing 0.8% sequentially and 4.15% year-over-year, reflecting strength across auto, consumer, and commercial segments in both Puerto Rico and the U.S.
• Deposit gathering remains robust, with customer deposits increasing 3.3% sequentially and 2.2% year-over-year in Q1 2025, driven by growth in retail, commercial, and government accounts and successful new product launches.
• OFG maintains strong capital levels (CET1 ratio 14.27% in Q1 2025) and is actively returning capital to shareholders through increased dividends (up 20% in Q1 2025) and ongoing share repurchases ($23.4 million in Q1 2025).

A Challenger's Edge: Digital Transformation Meets Island Resilience

OFG Bancorp, a financial holding company operating primarily in Puerto Rico and the U.S. Virgin Islands, has carved out a distinct position in a competitive regional banking landscape. With over 60 years in business, OFG has evolved from a history that included strategic acquisitions to its current focus on organic growth driven by a "Digital First" strategy. This approach leverages technology to enhance customer experience and operational efficiency, positioning OFG as an agile challenger against larger competitors like Popular, Inc. (BPOP) and First BanCorp (FBP), while also contending with the vast scale and technological prowess of national players like JPMorgan Chase & Co. (JPM) and the disruptive potential of fintechs.

OFG's core business encompasses traditional banking services – deposits and lending across commercial, consumer, auto, and mortgage segments – complemented by wealth management and treasury operations. Its strategic pivot to "Digital First," initiated around 2021-2022, is not merely an IT upgrade but a fundamental reshaping of its business model and culture. This strategy aims to differentiate OFG by providing fast, easy, and seamless customer experiences through digital channels, thereby freeing up its branch network to focus on deeper customer relationships and value-added advice.

The tangible results of this digital push are evident in operational metrics. In Q1 2025, an impressive 96% of all routine retail customer transactions and 97% of retail deposit transactions were conducted through digital and self-service channels. Digital loan payments saw significant year-over-year growth of 21%, virtual teller utilization increased by 40%, and overall digital enrollment grew by 12%. This digital adoption is directly contributing to customer growth, which stood at close to 5% year-over-year in Q1 2025. Recent product innovations like the Omnichannel online/mobile app, Smart Banking insights, and the introduction of Apple (AAPL) Pay (a first in the local banking industry) underscore OFG's commitment to technological leadership and personalization, reinforcing its innovative position in the market. While larger competitors like BPOP may have more mature digital platforms offering faster processing speeds (estimated 20-25% faster than OFG's current systems in some areas) and JPM benefits from massive scale and AI-driven efficiencies (potentially 20% lower per-unit operating costs), OFG's targeted investments are closing the gap and creating a differentiated, customer-centric digital experience that its regional peers like FBP (which lags in digital innovation) struggle to match. This digital edge is a critical component of OFG's competitive moat, potentially driving higher customer loyalty and improved efficiency ratios over time.

The company's performance is also intrinsically linked to the economic environment in Puerto Rico. Despite historical challenges including natural disasters and fiscal issues, management consistently highlights the island's resilience. In early 2025, the Puerto Rican economy continued to show positive signs with high levels of wages and employment, and ongoing public and private investment. This favorable local backdrop provides a foundation for loan and deposit growth, even amidst broader global economic and geopolitical uncertainties. While proposed significant reductions in federal spending and shifts in U.S. trade policy (like the potential imposition of universal tariffs announced in April 2025) pose risks to the local economy, OFG's management remains in close contact with customers to understand and adapt to these evolving conditions.

Performance Reflecting Strategic Momentum

OFG's financial performance in the first quarter of 2025 demonstrated the impact of its strategic focus and the underlying economic conditions. Total core revenues reached $178.3 million, compared to $174.2 million in Q1 2024. Net income available to common shareholders was $45.6 million, or $1.00 per diluted share, compared to $49.7 million, or $1.05 per diluted share, in the prior year quarter. While net income saw a year-over-year decrease, this was influenced by a significantly higher provision for credit losses in Q1 2025 compared to Q1 2024.

Net interest income remained a key driver, increasing 3.4% to $149.1 million in Q1 2025 from $144.1 million in Q1 2024. This growth was supported by a 3.2% increase in average interest-earning assets, which reached $11.15 billion. The net interest margin saw a slight increase of 2 basis points to 5.42%. This reflected a 1 basis point increase in the total average yield on interest-earning assets (6.88% in Q1 2025 vs. 6.87% in Q1 2024) and a 4 basis point decrease in the average cost of total deposits (1.50% in Q1 2025 vs. 1.54% in Q1 2024). The increase in interest income was primarily driven by higher average balances and yields on investment securities and higher loan balances, particularly in auto and consumer loans. Interest expense on deposits decreased despite higher average balances, reflecting a favorable funding mix and lower average cost.

Non-interest income totaled $29.5 million in Q1 2025, a decrease of 2.7% from $30.3 million in Q1 2024. This decline was mainly attributed to a $1.3 million decrease in banking service revenues, primarily due to reduced interchange fees following the implementation of the Durbin Amendment in July 2024. This impact was partially offset by increases in merchant income and a business sponsorship payment. Wealth management revenue saw a healthy 4.3% increase to $8.5 million, driven by higher investment advisory services and insurance income. Mortgage banking activities also increased slightly by 1.8% to $4.8 million, benefiting from higher servicing fees (due to the acquisition of a servicing portfolio in late 2024), favorable valuation of the held-for-sale portfolio, and higher gains on securitization and sales, partially offset by a decrease in MSR valuation and higher losses on repurchased loans.

Non-interest expenses increased by 2.2% to $93.5 million in Q1 2025 compared to $91.4 million in Q1 2024. This was primarily due to higher professional and service fees (reflecting compliance-related expenses), increased occupancy, equipment, and infrastructure costs, and higher taxes other than payroll and income taxes. These increases were partially offset by a decrease in electronic banking charges, influenced by a volume incentive payment from a business partner. Despite the increase in absolute terms, the efficiency ratio remained stable at 52.42% in Q1 2025 compared to 52.49% in Q1 2024, indicating that revenue growth kept pace with expense increases.

The balance sheet continued to expand, with total assets reaching $11.73 billion at March 31, 2025, up 2.0% from $11.50 billion at December 31, 2024. This growth was fueled by increases in cash and cash equivalents ($710.6 million, up 20.2% sequentially), the investment portfolio ($2.79 billion, up 2.4% sequentially), and the loan portfolio ($7.69 billion net, up 0.7% sequentially). The investment portfolio growth included purchases of $100 million in mortgage-backed securities yielding 5.40%. Total loans held for investment reached $7.85 billion (gross) at March 31, 2025, up 0.8% sequentially and 4.15% year-over-year, with growth across auto, US commercial, PR commercial, and consumer loans.

Funding sources also grew, with total deposits increasing 3.3% sequentially to $9.92 billion at March 31, 2025. This reflected increases in demand, savings, and time deposits from commercial, government, and retail accounts. Borrowings decreased significantly by 36.3% sequentially to $255.6 million, reflecting the maturity of repurchase agreements and FHLB advances.

Credit quality, while stable overall, saw an increase in the provision for credit losses to $25.7 million in Q1 2025 from $15.1 million in Q1 2024. This increase primarily reflected adjustments for loan volume growth ($17.4 million), specific reserves for three commercial loans ($4.8 million), and an adjustment to reflect auto current loss given default trends post-pandemic ($3.5 million). Net charge-offs were $20.4 million in Q1 2025 (1.05% of average loans), a slight increase from $19.8 million (1.05%) in Q1 2024. The Q1 2025 figure included a $2.9 million partial charge-off of a previously reserved commercial US loan. Early and total delinquency rates improved seasonally in Q1 2025, and the non-performing loan rate was 1.11%. While auto and consumer net charge-offs saw increases reflecting volume and post-pandemic normalization, commercial loan net charge-offs decreased. OFG's allowance for credit losses stood at $181.2 million at March 31, 2025, representing 2.31% of total loans, with coverage of non-performing loans at 207.1%. Compared to peers like BPOP and FBP, OFG's credit metrics, particularly its ACL coverage ratio, appear robust, reflecting a cautious approach to risk management in its operating environment.

Capital strength remains a highlight. OFG's Common Equity Tier 1 (CET1) ratio was 14.27% at March 31, 2025, comfortably exceeding regulatory minimums and positioning the company as "well capitalized." The tangible common equity ratio also improved to 10.30%. This strong capital generation supports significant capital return to shareholders. In January 2025, OFG increased its quarterly common stock dividend by 20% to $0.30 per share. Furthermore, the company repurchased $23.4 million of common shares in Q1 2025 under its existing programs and announced a new $100 million stock repurchase program in April 2025, signaling confidence in future earnings and capital generation.

Outlook and Considerations

Management's outlook for 2025 remains positive, grounded in the continued resilience of the Puerto Rican economy and the momentum from OFG's strategic initiatives. They anticipate continued loan and deposit growth, supported by strong pipelines and the effectiveness of their Digital First strategy in attracting and retaining customers.

Specific guidance points from management include:

• Quarterly non-interest expense is expected to average $95 million to $96 million in 2025, reflecting ongoing investments in technology and higher electronic banking costs associated with increased digital activity.
• The effective tax rate for the full year 2025 is anticipated to be around 26%, benefiting from business activities with preferential tax treatment.
• Provision for credit losses is expected to run at a quarterly rate of approximately $18 million to $20 million, primarily driven by normal business operations and loan volume growth, assuming stable credit trends.

While the outlook is constructive, investors should remain mindful of key risks. Macroeconomic and geopolitical uncertainties could still impact the Puerto Rican economy. The potential phase-out of federal emergency and stimulus funds, coupled with proposed federal spending cuts and changes in U.S. trade policy, could adversely affect local economic conditions. Credit risk, particularly in consumer and auto portfolios, requires ongoing monitoring, although management expects trends to stabilize. Liquidity risk is managed through strong deposit gathering and access to wholesale funding, but external market disruptions could pose challenges. Operational risks, including cybersecurity threats and the fragility of Puerto Rico's power grid (as evidenced by recent outages), also warrant attention.

OFG's competitive positioning is dynamic. Its Digital First strategy provides a quantifiable edge over regional peers in customer experience and efficiency, potentially allowing it to capture market share. However, it faces challenges from larger institutions with superior scale and innovation budgets. The ability to effectively leverage technology to deepen customer relationships and drive efficiency will be crucial in maintaining profitability and market share against this backdrop. The company's focus on organic growth and capital return, supported by its strong balance sheet, positions it to capitalize on opportunities in its core market while managing inherent risks.

Conclusion

OFG Bancorp's first quarter 2025 results demonstrate a company executing effectively on a clear strategy within a resilient local economy. The "Digital First" initiative is not just a buzzword but a tangible driver of operational efficiency and customer engagement, providing a critical competitive advantage in the Puerto Rican market. Coupled with solid loan and deposit growth, stable credit quality trends (despite increased provision for volume and specific items), and robust capital levels supporting attractive shareholder returns, the investment thesis for OFG appears compelling. While external macroeconomic uncertainties and regional competitive pressures exist, OFG's focused strategy, technological advancements, and strong financial health position it well to continue generating value for shareholders. The outlook for continued growth and consistent capital return, supported by management's clear guidance and proactive risk management, makes OFG Bancorp a noteworthy consideration for investors seeking exposure to a digitally transforming regional bank with a strong foothold in a recovering economy.