OFG Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. OFG is a Puerto Rico-based financial holding company operating in Banking, Wealth Management, and Treasury. Financial statements are unaudited.
Financial performance
- Third-quarter earnings: Net income was $41.7 million, up 51.9% from $27.4 million a year earlier. Diluted EPS was $0.81 versus $0.50. Return on average assets was 1.59%; return on average tangible common equity was 17.72%.
- Nine-month earnings: Net income was $112.9 million versus $51.0 million in 2020; diluted EPS was $2.15 versus $0.89. Income available to common shareholders was $111.6 million.
- Revenue and margin: Third-quarter net interest income was $102.7 million, up 3.2% year over year; net interest margin was 4.12%, down from 4.30% a year earlier and 4.22% in Q2 2021. Banking and financial service revenue was $32.0 million, up 16.5%. Management reported core revenue of $134.7 million, compared with $127.0 million a year earlier.
- Nine-month revenue: Net interest income was $303.2 million, down 2.1%; non-interest income was $95.1 million, up 5.8%. Total interest income fell 6.6%, while interest expense fell 34.0%.
- Credit costs and expenses: Q3 included a $5.0 million net recapture (benefit) for credit losses, versus $13.7 million provision expense in Q3 2020. Nine-month credit-loss recapture was $7.0 million versus $78.5 million of provision expense in 2020. Non-interest expense was $78.9 million in Q3, down 5.4%; the efficiency ratio improved to 58.59% from 65.69%.
- Cash flow: Nine-month operating cash flow was $92.1 million, compared with $49.8 million in 2020. Cash, cash equivalents, and restricted cash increased $600.1 million to $2.756 billion.
Financial position, funding and capital
- Total assets were $10.607 billion at September 30, up 7.9% from year-end 2020. Net loans were $6.282 billion, down 3.4%; investment securities were $902.3 million, up 96.7%.
- Deposits were $9.244 billion, up 9.8%, with growth attributed largely to stimulus-related liquidity and commercial and retail deposits. Time deposits declined as lower-cost core deposits grew. The weighted-average deposit rate was 0.54%.
- Total borrowings were $99.0 million, down 3.3% from year-end. OFG reported approximately $700.5 million of FHLB borrowing capacity and $571.3 million of unpledged investment securities.
- Stockholders’ equity was $1.054 billion, down 3.0%. The CET1 ratio was 13.52%, compared with 13.08% at year-end; the leverage ratio was 9.33%, down from 10.30%. OFG and the Bank met regulatory capital requirements and were classified as well capitalized.
Changes and notable items
- OFG redeemed all $92.0 million of outstanding Series A, B, and D preferred stock during 2021. It repurchased 1.685 million common shares for $40.2 million under a $50 million authorization; $9.8 million remained available at quarter-end.
- The quarterly common dividend increased to $0.12 per share from $0.07 a year earlier. The filing says OFG will continue evaluating shareholder returns, but provides no formal numerical earnings or financial outlook.
- Asset-quality indicators improved versus year-end: non-performing assets were $148.6 million, or 1.40% of assets, down 10.3%; non-accrual loans were $123.9 million, down 16.2%. The allowance for credit losses was $180.9 million, down 11.7%. Q3 net charge-offs were approximately $6.1 million and included a previously reserved commercial loan amount.
- Management attributed results to lower funding costs, improved asset quality, continued lending, and Puerto Rico’s recovery. Loan originations were $556.2 million in Q3. Average loans were lower year over year, with mortgage paydowns and PPP forgiveness partly offset by auto and commercial lending.
- COVID-related loan deferrals were 0.7% of total loans at September 30, compared with 30% a year earlier. Separately, $46.5 million of loans remained deferred under pandemic relief and were not classified as TDRs.
Outlook, risks and contingencies
- Management cited improving Puerto Rico economic conditions and stimulus-driven liquidity, and said it intends to pursue organic loan growth while considering buybacks and dividends. These are directional comments, not quantified guidance.
- Key risks include Puerto Rico’s economy and government fiscal restructuring, borrower and real-estate credit conditions, interest-rate changes, natural disasters, COVID-19 developments, cybersecurity incidents, regulatory changes, and funding or deposit outflows. OFG noted that most business and significant credit exposure are concentrated in Puerto Rico.
- LIBOR-based exposures were 5.9% of consolidated assets, including commercial and mortgage loans, derivatives, and subordinated notes. The transition to alternative reference rates and its effects remained uncertain.
- Legal and regulatory matters had an accrued liability of $5.6 million. Management did not expect the aggregate outcome to materially affect financial condition, but noted an adverse matter could materially affect results or cash flows in a particular period. Credit-related commitments to extend credit were $1.298 billion.
Important facts for investors to verify
- Whether deposit growth and unusually high cash balances persist as government stimulus and other temporary liquidity effects fade.
- Whether the credit-loss recaptures and improving delinquency and non-performing-asset trends are sustainable, and how the allowance compares with future portfolio losses.
- How loan growth, PPP forgiveness, mortgage paydowns, and lower asset yields affect net interest margin and earnings.
- The effects of preferred-stock redemption and share repurchases on capital ratios, tangible book value, and future shareholder distributions.
- Progress on LIBOR transition, and any material developments in Puerto Rico fiscal restructuring, legal matters, or regulatory oversight after exceeding $10 billion in assets.