OFG Bancorp (NYSE:OFG) Q4 2024 Earnings Call Transcript

OFG Bancorp (NYSE:OFG) Q4 2024 Earnings Call Transcript January 22, 2025

OFG Bancorp beats earnings expectations. Reported EPS is $1.09, expectations were $0.97.

Operator: Good morning. Thank you for joining OFG Bancorp’s Conference Call. My name is Madison, I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Chairman of the Board of Directors; Maritza Arizmendi, Chief Financial Officer; and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today’s remarks. It can be found on the homepage of the OFG website under the fourth quarter 2024 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 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. Fernandez.

Jose Rafael Fernandez: Good morning, and thank you for joining us. We are pleased to report our fourth quarter and 2024 results. It was another outstanding quarter and year of performance. Looking at the quarter, earnings per share were up 11.2% year-over-year on a 3.6% increase in total core revenues. We showed consistent operational growth on our plans, including our Digital First strategy. We steadily grew our banking market share. Digital adoption of our new and upgraded products, services and self-service tools keeps expanding. Results also benefited from lower taxes and we bought back about $46 million of common shares in the fourth quarter. Please turn to page three for a summary of our fourth quarter results. Looking at the income statement, we reported earnings per share diluted of $1.09 on total core revenues of $182 million.

Net interest margin was 5.4%, provision was $30.2 million, non-interest expenses were $99.7 million. This resulted in slightly lower pre-tax income, which was more than offset by reduced year-end taxes. Pre-provision net revenues totaled $83 million. Turning to the balance sheet. Total assets were $11.5 billion, up 1.4% from a year ago. Customer deposits were $9.4 billion. Loans held for investment totaled $7.8 billion. New loan production was a solid $609 million. Investments were $2.7 billion, up 1% from a year ago and 4% from the last quarter, and cash at $591.1 million was down 13% from last quarter. Looking at capital, the CET1 ratio was 14.26%, and we bought back $46 million in stock that leaves $29.7 million remaining on our buyback authorization as of December 31, 2024.

Please turn to page four for a summary of our full year results. Earnings per share of $4.23 increased 10.4% year-over-year on a 3.9% increase in total core revenues, for a total of $710 million. Net interest margin was 5.43%, provision was $82 million. Non-interest expense totaled $376 million and pre-provision net revenues was $336 million. Capital management played a big role even with Durbin taking effect mid-year, we were able to increase average interest-earning assets by 11.8% year-over-year. In addition, we acquired the servicing rights to a $1.7 billion Puerto Rico residential mortgage loan portfolio. We bought back a total of 1.8 million shares and we increased the quarterly dividend 14% to $0.25 per quarter or $1 per share annually.

Puerto Rico’s economy continues to do well with high levels of business activity and employment. We concluded our 60th year in business in excellent position, fulfilling our purpose of bringing progress to all our stakeholders. Thanks to all our team members for always being more than ready to help our clients and customers today and tomorrow. Please turn to page five. We were really building some real muscle with our Digital First Strategy. As of fourth quarter, 96% of all routine retail customer transactions, 97% of retail deposit transactions and 68% of retail loan payments were all made through our digital and/or self-service channels. This has been driven by year-over-year growth of 12% in digital enrollment, 54% in digital loan payments, 34% in virtual teller utilization and close to 5% customer growth.

Over the last 1.5 year, we have introduced or relaunched four major new products and services. Oriental Servicing Portal was introduced mid-2023. By the end of this — of December of last year, a third of all retail clients were using it. The My Biz small business account was relaunched March 2024 as part of our overall offering. This helped to achieve 14% growth in loans to local businesses last year. The retail mass market Libre account was relaunched in April 2024, and the mass affluent Elite account with its unique cashback program was launched June 2024. Both are doing extremely well, bringing in new customers and deposits. There are more Digital First on the pipeline coming in this year. Now here is Maritza to go over the financials in more detail.

Maritza Arizmendi Diaz: Thank you, Jose. Please turn to page six to review our financial highlights. Starting with the components of core revenues, total interest income was $190 million, up $1.1 million from the third quarter. This increase mainly reflects higher balances and higher yields on investment securities, higher loan balances, $700,000 from prepayment of two commercial loans and reduced interest income from cash. If you recall, since late last year, we have been growing the investment portfolio to help manage the anticipated lower rate environment going forward, adding higher-yielding U.S. guaranteed longer-duration securities. Total net interest expense was $41 million, slightly down from the third quarter. The decrease reflects a slightly lower average balances and cost of core deposits and higher average balances of borrowings and brokered deposits.

Total banking and financial service revenues were $33 million, an increase of $6.5 million from the third quarter. The increase mainly reflects $2.1 million annual insurance commission recognition in wealth management revenues, $4.8 million in favorable MSR valuation due to higher long-term rates, and $800,000 from the previously mentioned acquisition of Puerto Rico residential mortgage servicing portfolio in August. Looking at non-interest expenses. They totaled $99.7 million, up $8.1 million from the third quarter. The increase mainly reflects $3.4 million in early retirement and business rightsizing, $1.4 million in annual performance incentives and the absence of the third quarter $2.3 million card processing rebate. We expect 2025 non-interest expense to average $95 million to $96 million a quarter.

This mainly reflects a combination of increased technology spending and amortization and higher electronic banking fees and transaction costs as we grow larger. The fourth quarter efficiency ratio was 54.82%, compared to 52.60% in the third quarter. Please note this includes the early retirement and performance incentive expenses that I just mentioned. Without those, the efficiency ratio would have been 52.18%. Overall, performance metrics remained high. Return on average assets was 1.75%, return on average tangible common equity was 16.71%, and tangible book value per share was $25.43. That’s down 3% from the third quarter, mainly due to capital used in share buybacks and lower other comprehensive income. Please turn to page seven to review our operational highlights.

Average loan balances were $7.7 billion, up slightly from the third quarter. End-of-period balances of loans held for investments increased 0.5% or $41 million from the third quarter. The increase mainly reflects growth in auto, U.S. commercial and Puerto Rico consumer loans more than offsetting repayments of Puerto Rico commercial and residential mortgages. Year-over-year, fourth-quarter loans held for investment increased 3.3%. Loan yield was 8.01%, down 4 basis points from the third quarter. Fourth quarter new loan origination of $609 million increased 5.5% from the third quarter. This reflects increases in Puerto Rico commercial, auto and residential mortgage lending, partially offset by a decrease in U.S. commercial and Puerto Rico consumer lending.

We continue to have a strong commercial top line in Puerto Rico. In particular, a small commercial had a very good fourth quarter and year. Residential mortgage lending improved. Our average core deposits were $9.6 billion, down slightly from the third quarter. End-of-period balances decreased $84 million or 0.9%. This reflects decline in government deposits, partially offset by a small increase in commercial and retail. Excluding government deposits, savings and time increased, more than offsetting the decline in demand. Year-over-year, ex-government deposits, retail and commercial also increased. Core deposit cost was 146 basis points, down 7 basis points from the third quarter. Excluding public funds, cost of deposit was 96 basis points, compared to 91 last quarter.

Average borrowings and broker deposits were $426 million, compared to $262 million in the third quarter. The aggregate rate paid was 4.40%, down 20 basis points. End-of-period balances were $557 million, compared to $346 million. Net interest margin was 5.40%, compared to 5.43% in the third quarter. Fourth quarter NIM benefited slightly from the commercial loan prepayment I mentioned before. Please turn to page eight to review our credit quality and capital strength. Credit quality continues to be stable. Net charge-offs totaled $16 million, down $1.2 million from the third quarter. Net charge-offs benefited from a $2.6 million recovery from the sale of a portfolio of fully charged-off auto and consumer loans. Overall net charge-off rate fell 1 basis point to 1.63%.

Consumers’ net charge-off rate fell 98 basis points to 3.72%. At the same time, there were continued recoveries in mortgage and Puerto Rico commercial loans. As a result, the total net charge-off rate was 82 basis points, down 8 basis points sequentially and down from 88 basis points in the year-ago quarter. Provision for credit losses totaled $30.2 million, up $8.8 million from the third quarter. The increase mainly reflects $18.1 million from increased loan volume, $7.6 million for a specific reserve related to four U.S. commercial loans, and the previously mentioned $2.6 million recovery from the sale of auto and consumer loans. The fourth quarter also included a $5.7 million qualitative adjustment related to recent increase in auto delinquency trends which the model doesn’t fully capture yet.

Looking at other credit metrics, the early and total delinquency rates were 2.95% and 4.38%, respectively. The nonperforming loan rate was 1.06%. Looking at other capital metrics, total stockholders’ equity decreased about $64 million from the end of last quarter. And the tangible common equity ratio decreased 59 basis points to 10.13%. That mainly reflects share buybacks and lower other comprehensive income. Income tax expense was $2.4 million compared to $14.8 million in the third quarter. The decrease mainly reflects a reduction in the 2024 ETR for higher than previously forecasted business activities with preferential tax treatment and $2.3 million of discrete benefit. Excluding discrete items, ETR was 24.03% for 2024 compared to 32.08% for 2023.

For 2025, we anticipate the full-year ETR will be about 26%. To summarize, the fourth quarter, net interest income grew driven by the investment portfolio and loans, partially offset by lower interest income from lower cash balances. Loan growth continued to do well, particularly in the small business area. Ex-public funds, retail and commercial deposit balances increased with savings and time deposits higher, as we continue to grow and deepening customer relationship with the recent added value products and services. Net interest margin held fairly steady, as the yield from investment securities and reduced cost of core deposits helped offset some of the decline in interest rates. Credit quality continues to be well managed. The trends are mostly stable, reflecting the solid economic environment in Puerto Rico.

Non-interest expenses were higher, mainly due to early retirement, business rightsizing and increased annual performance incentives as well as higher electronic banking fees and technology spending and amortization. Regarding capital allocation, we increased our buyback during the fourth quarter. Now here’s Jose.

Jose Rafael Fernandez: Thank you, Maritza. Please turn to page nine. Our outlook for both Puerto Rico and OFG continues to be positive. Looking at Puerto Rico, the island’s economy is steadily growing. Wages and employment are at high levels. Altogether, the business environment here remains optimistic. As always, we remain vigilant regarding the big macro uncertainties. Turning to OFG. We continue to be well-positioned for growth of loans and deposits as well as our customer base. Consumer credit trends should remain at current levels. Our Digital First strategy will continue to evolve and we will continue to invest in and deploy new customer innovations with the twin goals of further differentiating our business model, while at the same time increasing efficiencies.

Although we look forward to a solid — altogether, we look forward to a solid 2025 overall performance. Our results could not have been achieved without the hard work and dedication of all our team members. We are very thankful to them and excited for what’s to come. With this, we end our formal presentation. Operator, let’s start the Q&A.

Operator: Thank you. [Operator Instructions] And we will take our first question from Kelly Motta with KBW. Please go ahead.

Q&A Session

Kelly Motta: Hi, good morning. Thanks for the question.

Jose Rafael Fernandez: Good morning.

Kelly Motta: Maybe starting off with the margin, your NII was really strong and the margin came in towards the high end of what you had said previously. As we look ahead and assuming there’s only maybe a cut or two in 2025, I’m wondering if you could kind of walk us through both what you’re seeing on the deposit side and the competitive environment there and wondering if you have the ability to kind of build off this 5.40% level as we look through 2025?

Jose Rafael Fernandez: So let me — Kelly, thank you for your question. Let me just start by talking a little bit about the competitive and deposits and that part of the question, and I’ll let Maritza finish it off with her NIM perspective. So what we’re seeing in the island from a competitive perspective hasn’t changed much, it’s really intense in all facets. We need to work hard for our business, that’s for sure, on the loan side and as well as on the deposit side. But we are also very rational in this market. So from that perspective on the deposit side, we’re also getting a — some benefit from that, right, across the market. And we were seeing good customer growth and it gives me an opportunity here to share with you a little bit of what we have achieved throughout this year because it’s important to highlight that the momentum that we carried from ’23 to ’24 and now from ’24 to ’25 continues.

We’ve grown 5% our client base pretty much both years, ’23 and ’24 and that puts us in a very good situation on the retail side, particularly on the deposit side. We’re seeing very good acceptance on our mass checking account, Libre account and as well as the newly launched in the middle of the summer a mass affluent Elite account. Both of those are having good traction, well received and is bringing in good levels of deposits for us. And so that’s on the deposit side. And certainly, those products and the momentum we’ve had with the Digital First strategy that we’ve implemented are driving our customer growth and certainly will help us with the net interest margin. So I’ll let Maritza give you the specifics.

Maritza Arizmendi Diaz: Yes, thank you, Kelly, for your question. And, yes, we remain with the same — the similar in guidance that we provide you in the third quarter. We were — we’re looking at the range between 5.30% to 5.40% because be mindful that we will have the full effect of the 100 basis point cost of 2024, we will have the full effect in 2025. But the reality is with the extension in the investment portfolio that we have done, that will mitigate most of that impact. And I think what is critical in that range is the funding mix. And I think Jose provided you with how we see the market and that’s why we’re keeping the range as it is, even we are anticipating probably two costs next year in rates. And we continue to be very slightly sensitive — asset sensitive, but still have an impact there. Okay?

Kelly Motta: That’s super helpful. Thank you. Next question I have would be on the expenses. There’s kind of some push-pull in that. You had some early retirements and potentially some saves that come through there, but also even excluding that, it looks like general and administrative expenses were running higher. As you look ahead to next year, given your outlook and the initiatives that you continue to run and you work to capture market share, wondering if you can share what you’re thinking of in terms of how you’re managing expense growth and is it commensurate with the revenue growth and maybe if NII is higher, you might use some of that to reinvest in the business?

Jose Rafael Fernandez: Understood. Yes, good point. And let me just give you my overall view on expenses and it’s driven by how we’ve executed on our Digital First vision here in our market and just has two components. One is how do we deploy the technology and how do we invest in technology and in people and in processes to kind of get our Digital First execution going. That started back in 2021, 2022 so we’ve gone a long way. Just to give you some perspective here too and context, from 2021 to 2024, the level of transactions in the bank has doubled on a year-over-year basis. It’s doubled from 2021 to 2024. Now at the same time, in that same time period, the amounts of transactions done at the branches on a monthly basis has been reduced by 150,000 transactions.

And that is totally driven by the investments we’ve made with the self-service portal, with the digital account opening with all the services that the clients can serve themselves with at the bank kiosk with the virtual tellers and through online and mobile. And that is not a small accomplishment in the market that we operate, where it’s really several years behind in terms of digital adoptions versus — in banking versus the markets in the States. So given the growth we’ve had plus the efficiencies we’ve gotten from the branches, we’ve been able to reduce some of the workforce on the branch side, particularly on the teller side. We’ve also seen, in spite of that customer growth, our transactional growth that we’ve seen in those four years, we’ve also seen how we’ve been more efficient on the back office and we’ve been able to see some efficiencies there and we see more efficiencies there too.

Now all of that is being said to also highlight the point that we can’t stop here, we got to keep moving forward and we got to keep investing on our people and in our technology and the processes. So when we look into expenses into next year, our range now is around $95 million to $96 million a quarter and that takes everything into account, business growth, efficiencies, investments in technology and in people and really — we’re really confident that how we’re building this model and how we’re deploying the strategy is creating great momentum for us to grow and further grow from where we are today.

Kelly Motta: Thank you, Jose. That was very, very helpful. Maybe last question from me and then I will step back would be on the reserve build you had. I think in your prepared remarks, you described credit as being stable, but you did have a specific reserve related to those U.S. commercial loans that were called out in the release as well as the qualitative build related to auto delinquencies. Can you talk a bit about what you’re seeing in both on those commercial loans as well as just in Puerto Rico, an update on the credit environment and your decision to take that reserve and how you’re feeling overall on asset quality? Thanks.

Jose Rafael Fernandez: Yes. So big picture and let Cesar Ortiz give you some more specifics on the credit in Puerto Rico and any color on the four loans in the U.S. But from a big picture, as I said in my remarks, the economy remains solid, steady. We’re seeing good optimism in the business sector. Across the entire island, there’s a lot of construction going on and there’s a lot of investments being made to different businesses across the island and across different industries. So we’re not seeing anything that has changed from a macro perspective. We will continue to see consumers to be having stronger liquidity than prior to the years, where we had not-so-good economic background. So we’re seeing a stronger balance sheet on the individuals as well as on the businesses and the economy overall is performing well. So that’s kind of the background, Kelly. And I’ll let Cesar give you some color on the Puerto Rico credit and particularly on the consumer side.

Cesar Ortiz Marcano: Thank you. Besides the macroeconomic situation that we have in Puerto Rico, delinquencies will show an increasing trend towards this quarter. It’s been seasonal. We’re seeing every year, it’s a holiday seasonal increase in delinquency and we should be seeing an improvement too in the first quarter of next year because it’s also seasonal improvement in next quarter. But two additional things that I want to point out as key things that gives us comfort for the outlook, right? The first one is the non-performing levels. We see slightly better non-performing levels at the same period last year, especially for the auto portfolio, which is the largest retail portfolio. And we’re also seeing the auto portfolio is now, as of December, an 87% prime portfolio.

It’s been increasing since pre-pandemic, 65% and we have discussed this every quarter. So those two things gives us a good outlook in terms of the performance of the retail portfolios in Puerto Rico. The other question you have was the four specific loans in specific reserves that we recorded for this quarter in the U.S. I want to point out these are unique challenges that each borrower has operational challenges. We continue working with them, we’re engaging with them productively to ensure that the risks, that we have noted this quarter, which made us record their reserves, continues to be mitigated, but these are unique situations for those borrowers.

Kelly Motta: Got it. That’s all. I will step back. Thank you so much.

Jose Rafael Fernandez: Yes. Thank you for your questions, Kelly.

Operator: Thank you. And we will take our next question from Ynyra Bohan with Hovde Group. Please go ahead.

Ynyra Bohan: Hi, thank you for taking my questions.

Maritza Arizmendi Diaz: Thank you. Not thank you, hi.

Ynyra Bohan: And my first question has to do with your tax rate going forward. There was quite a reduction. So do you guys have any guidance on what we should expect going into the next quarter and next year?

Jose Rafael Fernandez: Yes, I’ll let Maritza give you…

Maritza Arizmendi Diaz: Yes. As I mentioned in my prepared remarks, this 2024 full ETR was about 24%, when compared to 2023, which was 32%, because we were — have higher activity with the — business activity with preferential tax rate. Going forward, we continue to see benefiting our operations from those type of activity and that’s why we’re forecasting a 26% ETR for 2025.

Ynyra Bohan: Thank you. And with your non-interest income, there was — it seems to be an uptick in the mortgage banking activities, should we continue with this uptick as the run rate going forward?

Maritza Arizmendi Diaz: Well, this last quarter, this fourth quarter as well as the third quarter were impacted differently both with the — for the MSR valuation. In this one, we did have a positive impact in the MSR valuation that it will depend on the market rates. But if we extract that is about for the quarter was about $2.7 million, and we can expect the run rate to be the one that we have this quarter without that $2.7 million…

Jose Rafael Fernandez: On non-interest income.

Maritza Arizmendi Diaz: And particularly in the mortgage banking side, I’m referring to the mortgage banking activity, because as I comment on my prepared remarks, this fourth quarter, we did have the full effect of the acquisition of the MSR that we acquired in the third quarter, that’s about $1 million more that we will have on a quarterly basis.

Ynyra Bohan: Perfect. Thank you so much. That was all my questions.

Jose Rafael Fernandez: Thank you for your questions.

Operator: Thank you. And we will take our next question from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler: Hi, good morning.

Maritza Arizmendi Diaz: Good morning.

Timur Braziler: Looking at the linked quarter reduction in demand deposits, what component of that was from public funds?

Jose Rafael Fernandez: About $100 million, around $100 million.

Timur Braziler: Okay. And then I guess just what you’re broadly seeing from the deposit base on the island, if there’s any kind of seasonality in the fourth quarter trend and generally what you’re seeing from the level of consumer liquidity, what that looks like?

Jose Rafael Fernandez: Yes. From our vantage point, what we’re seeing is a steady inflow. We’re starting to see a kind of a shift from a CDs back to savings and demand. It’s going to happen throughout 2025, I believe. But what we’re seeing is a net inflow of a slow methodical growth in consumer and commercial deposits throughout all our businesses.

Timur Braziler: Great. And then I guess just from a competitive standpoint, from a deposit standpoint, how that’s trending, the ability to maybe work down costs even though they’re so low to begin with? And just on public funds that there is expectation for further decline there throughout ’25?

Jose Rafael Fernandez: Well, on the public funds, remember their variable rates. So if rates go down, they’ll trend downwards also. On the commercial and consumer, I would say the banking market in Puerto Rico is very rational and very stable in terms of pricing. But don’t forget that there are credit unions in Puerto Rico, federal credit unions that they definitely are trying to disrupt to some degree the market and they’re bringing in higher yielding accounts. And that definitely is a factor. But we do have as a bank OFG, we do have a very strong franchise with very sticky core consumer deposits that we feel with the two products that I mentioned earlier that we have developed and introduced recently, we have done very well at growing our customers as well as our retail deposits as well.

Timur Braziler: Okay, great. And then just a couple of follow-ups on credit piece that for U.S. commercial loans, are those all in a similar geography or is that spread out somewhat?

Jose Rafael Fernandez: Now, remember our U.S. strategy is more of a diversification, a geographic diversification strategy. So it’s nationwide, industry-wide. So we are not specific to our geography. So and these are all mostly, I would say, all of them are C&I commercial loans across the United States.

Timur Braziler: And then, I understand, I guess the addition to the reserves for the kind of calibration of the auto book today at 2.25 reserves to loans. I mean, that seems like a high number. How are you thinking about the reserve level as we go through ’25, increase now for two straight quarters. Is there going to be an ability at some point to start seeing some reserve release or is that really off the table until we get a level of plateauing on the consumer and auto books?

Jose Rafael Fernandez: Yes, I’ll let Maritza give you the specifics. In my mind, I think the economy in Puerto Rico is shifting from two decades of depression to a stimuli kind of sugar high to a more cyclical type of economy. So, that’s how we’re looking at the world from our vantage point. Going forward, we’re seeing the economy in Puerto Rico doing fine. We’re doing the — we’re seeing the economy having good growth and all, but we’re starting to see the economy in Puerto Rico also entering into a more normal cyclical behavior and we’re just trying to make sure that when we look at our credit exposures, we also are cognizant of those changes from a macro perspective. I’ll let Maritza give you the specifics on these.

Maritza Arizmendi Diaz: I think we’re sharing the same view on hosted economy and having a stable and good economy. I think we have reached a good level of allowance coverage at this point. And when we look forward, we see a run rate of about $18 million to $20 million, mostly as our normal business operation. If you look at this quarter, the volume factor was $18 million, so that would be our main benchmark going forward and remain with the same level of allowance coverage that we have right now.

Jose Rafael Fernandez: So provision around $18 million to $20 million a quarter and assuming wholesale, all things remain equal. So that’s kind of the outlook here is — be more.

Timur Braziler: Great. Thank you.

Jose Rafael Fernandez: Thank you.

Operator: Thank you. And we will take our next question from [Bader Hila] (ph) with Piper Sandler. Please go ahead.

Unidentified Analyst: Hey, good morning, guys.

Jose Rafael Fernandez: Good morning.

Maritza Arizmendi Diaz: Good morning.

Unidentified Analyst: Just want to touch on fee income again. I know you talked about the mortgage banking segment. Could you give us some more color on the other components? And I might have missed it, but you also happen to have maybe a run rate or an outlook for fee income heading into 2025?

Jose Rafael Fernandez: Yes, so let me give you a big picture here. We’re looking — when we look at wealth management, we’re seeing very good momentum with wealth management, particularly on the brokerage and insurance, both doing well and seeing good momentum. Particularly on the brokerage, financial services side, we’re seeing a very good opportunity to deepen the relationships of our customers, not only on the deposit side to the brokerage side, but also from the brokerage to the deposit side. And when we’re seeing that on the wealth management, but we’re also focusing on deepening our relationships with the auto clients and mortgage clients and small business clients, we do see a very good opportunity to work internally and that will help us to the earlier question by someone on the deposit.

We not only see growth in deposits from bringing in new customers, we’re seeing it from deepening the relationships of our existing loan customers and we’re putting up strategies for it as we speak. So now going back to your fee income question, wealth management is doing well. I think we have good opportunities there. Insurance also as part of wealth management is contributing. I think banking, when you look at banking, we need to think about Durbin, since we’re now $11.6 billion. So last — second-half of last year, we had the impact of Durbin. But in spite of that, we have been able to mitigate somewhat the effect on the banking services income by the acquisition of the servicing portfolio that Maritza mentioned earlier, as well as by growing our clients, growing the transactionality and the debit and the transactions of our customers and the fees that we generate.

So I think that the team has done a very good job at mitigating the impacts on Durbin. And then mortgage banking, as you know, it fluctuates given the evaluation on the MSR and how interest rates have fluctuated. We’ve seen more volatility on interest rates. So that’s why you’re seeing more volatility on the MSR. But all-in-all, we’re very excited about the ability for us to continue to steadily grow our fee income.

Unidentified Analyst: Understood. Thanks. And then if I may ask to with regards to new loan originations, do you happen to have what the rates are coming on the books at, and if possible, maybe by segment?

Jose Rafael Fernandez: So we’re seeing auto business and consumer business, all rates coming in around the same levels in spite of the potential lower interest rates. We’re seeing commercial coming in at a slightly lower rate and more fixed than — I’m sorry, more variable than fixed, but it was slightly lower, I’m assuming we see two additional 25 basis points rate cuts, that will have an impact there. So all-in-all, we’re seeing yields on the books trending slightly lower, but not that much. That’s why Maritza reaffirms the net interest margin at 5.30% to 5.40%. We feel that on the loan side, we see quite a bit of inelastic behavior, particularly on the consumer portfolios.

Unidentified Analyst: Got it. Thank you. And one last question. Is there any concern that the new administration would slow down any federal disbursements to the island or maybe what you’re hearing in regards to that?

Jose Rafael Fernandez: Yes. So look, we’ve had, I would say, more than 50% of the funds that were initially allocated to Puerto Rico, more than 50% have been obligated. And so they should come in and will continue to be deployed on the projects that have started or about to start as they have been obligated. So I think there are a lot of backlogs in projects and there’s a lot of steps that need to go through in the federal government. So in general, it’s a different situation when you’re starting versus when you have had five or six years of run rate in terms of getting the funds deployed and invested in the infrastructure. So yes, there’s always a risk there’s no doubt about it, but I don’t think the risk is as significant or as major as it could be — it could have been potentially four or five years ago.

Unidentified Analyst: Awesome. That’s all my questions. Thank you.

Jose Rafael Fernandez: Thank you for your questions.

Operator: Thank you. [Operator Instructions] And we will take our next question from Kelly Motta with KBW. Please go ahead.

Kelly Motta: Hey, thanks for letting me jump back in. My question is specifically on capital. I think last call you had mentioned that you were maybe behind a bit on the buyback. It was really nice to see that come through the quarter. Wondering if you could give us a refresh on how you’re viewing capital allocation and rank stacking that as well as you have a bit left on the buyback if an additional one is a consideration given the strong capital you have and profitability?

Jose Rafael Fernandez: Yes, nothing better than having a fortress balance sheet with tremendous amounts of capital. So we love to operate with good capital, Kelly. So where do we deploy our excess capital, which we know we do have, we deployed first in loans and we’re going to see some good opportunities, rational opportunities for us to put money to work here in Puerto Rico and also in the U.S. We’re going to look at the dividend. We’re going to look at the buybacks. You saw what we did last quarter, last year in general, I think we had a very solid buyback execution for us. And I see 2025 relatively the same. We’re seeing dividends going up and the buyback being executed as well as deploying capital primarily for our loan growth. So the game plan is the same and we’ll try not to be on the catch-up at the end of the year on the buyback as we did last year, but — so we’ll be more methodical on that one. But in general, that’s how we see it, Kelly.

Kelly Motta: Great. That’s super helpful. And then I would also like to touch on M&A. Obviously, Puerto Rico is very consolidated at this point, but obviously, with the new administration potentially making acquisitions easier, wondering about your vantage point on that and if there’s potential opportunities to expand the U.S.?

Jose Rafael Fernandez: Well, we have our strategy in the U.S., and our strategy in the U.S. is somewhat different from some of our peers here in Puerto Rico. We feel that the U.S. banking system is well served by more than 5,000 banks and adding one more, it’s really not a good strategy to follow from our side, particularly right now. But — so we will continue to execute on our loan participation program that we have on the commercial side and continue to use that as a diversification strategy from Puerto Rico. And that’s kind of our way of looking at it. From an M&A perspective, certainly here in Puerto Rico, there’s really not much of M&A to talk about. But I think given where Puerto Rico is and given where OFG is positioned right now, I think the focus for us has to be on growing organically and focusing really hard on gaining market share and executing on our strategy and that’s our focus.

So — and I think, you mentioned M&A, I tend to think regulatory. I don’t think there’s going to be much changes from the regulatory front on the day-to-day basis, but I do think that there is going to be on the longer term a change in approach in terms of the regulatory and as we are now past the $10 billion mark. So I’m looking forward to see how is that being impacted with the new administration and the new regulatory regime that is coming in, so those are my thoughts on the M&A in general, Kelly.

Kelly Motta: Thank you so much for those insights. I will step back.

Jose Rafael Fernandez: Thank you, Kelly.

Operator: Thank you. And at this time, there are no further questions. I will now turn the call back over to Jose for closing remarks.

Jose Rafael Fernandez: Thank you, operator. Thanks again to all our team members and thanks to all our stakeholders who have listened in. Have a great day.

Operator: Thank you. This does conclude today’s presentation. Thank you for your participation. You may disconnect at any time.