OFG Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. OFG is a Puerto Rico-based financial holding company operating banking, wealth management and treasury businesses, with most business activity and credit exposure concentrated in Puerto Rico. Financial statements are unaudited.
Financial performance and position
- Earnings: Net income was $37.5 million, up 23.5% from $30.4 million in Q1 2021. Diluted EPS was $0.76 versus $0.56. Return on average assets was 1.48%; return on average common equity was 14.08%.
- Revenue and margins: Net interest income rose 7.1% to $105.2 million, while net interest margin expanded to 4.47% from 4.26%. Non-interest income increased 3.9% to $31.6 million. Total core revenue was reported by management as $136.4 million.
- Credit costs and expenses: Provision for credit losses fell to $1.6 million from $6.3 million. Non-interest expense rose 4.5% to $81.2 million; the efficiency ratio improved to 59.50% from 60.84%.
- Cash flow: Operating activities provided $39.2 million; investing activities used $525.2 million, primarily reflecting securities purchases and net loan funding; financing activities provided $318.0 million, including deposit growth. Cash, cash equivalents and restricted cash declined $167.9 million to $1.856 billion.
- Balance sheet and liquidity: Total assets were $10.19 billion at March 31, up 2.9% from year-end. Loans, net, were $6.45 billion; deposits were $8.98 billion, up 4.4%; borrowings were $28.0 million, down from $64.6 million after redemption of subordinated notes. Management reported $1.856 billion of unrestricted cash, $1.040 billion of unpledged investment securities and $664.3 million of additional FHLB borrowing capacity.
- Capital and shareholder returns: OFG’s CET1 ratio was 13.24% and total risk-based capital ratio 14.49%; OFG and the Bank remained “well capitalized.” Stockholders’ equity was $1.04 billion. Tangible book value per share was $18.90. The quarterly dividend increased to $0.15 per share; the company repurchased 1.22 million shares for $33.5 million under its $100 million buyback program.
Material changes and credit quality
- Gross loans held for investment increased 2.3% from December 31, 2021, led by commercial, consumer, and auto lending; mortgage loans declined. Deposits grew $375.1 million, chiefly in commercial and retail accounts.
- Non-performing assets declined 10.6% to $115.3 million, or 1.13% of assets. Non-accrual loans fell 14.8% to $86.8 million. The reported net charge-off rate was 0.04%; Q1 included significant recoveries, including $2.8 million on an acquired commercial loan and $1.1 million related to previously delinquent mortgage loans.
- The allowance for credit losses was $157.1 million, slightly above year-end. The quarter’s provision reflected loan growth and a commercial credit deterioration, partly offset by a lower qualitative reserve following improved portfolio performance and labor-market conditions.
- Available-for-sale securities had $24.4 million of gross unrealized losses at quarter-end, versus $3.4 million at year-end. The resulting after-tax other comprehensive loss was $25.8 million, reducing reported equity.
Outlook, commentary, risks and unusual items
- Management described loan and deposit growth, margin expansion, and improving Puerto Rico economic indicators, while noting continued uncertainty. The filing gives no specific earnings or financial guidance for the remainder of 2022; management cautions Q1 results are not necessarily indicative of full-year results.
- Management cited inflation, supply-chain disruption, Federal Reserve rate increases, and the Russia-Ukraine conflict as uncertainties. Other key risks include Puerto Rico’s fiscal and economic conditions, government debt-restructuring outcomes, natural disasters, pandemic effects, interest-rate and credit risk, and the company’s geographic concentration.
- The company redeemed $36.1 million of subordinated capital notes before maturity. The redemption reduced borrowings and regulatory capital; approximately $405,000 of unamortized issuance costs was expensed, partly offset by a $42,000 extinguishment gain.
- Legal proceedings are ongoing. Accrued legal liabilities were $4.9 million; management said reasonably possible losses were not significant, while acknowledging adverse outcomes could affect results or cash flows in particular periods.
- Off-balance-sheet exposures included $1.35 billion of commitments to extend credit, $29.4 million of standby letters of credit and guarantees, and $118.7 million of mortgage loans sold with recourse. These amounts do not necessarily represent expected cash outflows.
Key facts for investors to verify
- Whether net interest margin and deposit costs hold up as market rates rise, and how rate changes affect borrowers and securities values.
- Credit trends behind the low reported charge-off rate, including the effect of recoveries, non-performing assets, and the adequacy of the $157.1 million credit-loss allowance.
- The duration and potential capital impact of unrealized securities losses, and the effect of buybacks and dividends on capital ratios.
- Deposit stability and liquidity needs, including uninsured deposits of $3.63 billion and the availability and cost of contingent funding.
- Developments in Puerto Rico’s economy and fiscal position, natural-disaster exposure, inflation, and geopolitical and cyber risks.