OFG Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. OFG is a Puerto Rico-based financial holding company operating through Banking, Wealth Management, and Treasury segments. Figures below are in U.S. dollars; amounts are rounded.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $126.5m | $102.7m | $346.8m | $303.2m |
| Provision for (recapture of) credit losses | $7.1m | ($5.0m) | $15.4m | ($7.0m) |
| Non-interest income | $30.6m | $32.5m | $98.4m | $95.1m |
| Non-interest expense | $87.5m | $78.9m | $253.9m | $239.3m |
| Net income | $41.9m | $41.7m | $119.9m | $112.9m |
| Diluted EPS | $0.87 | $0.81 | $2.47 | $2.15 |
| Net interest margin | 5.23% | 4.12% | 4.84% | 4.20% |
| Efficiency ratio | 55.80% | 58.59% | 57.77% | 60.47% |
Quarterly net income was nearly flat year over year despite higher net interest income: increased credit provision and operating costs offset much of the benefit. Nine-month net income rose 6.2%. Q3 return on average assets was 1.65%; return on average tangible common equity was 18.05%.
Financial position, cash flow, and capital
- Balance sheet at September 30: Total assets were $10.06bn, loans net of allowance were $6.59bn, investments were $2.04bn, and deposits were $8.86bn. Compared with December 31, 2021, loans rose 4.1%, investments rose 128.0%, and deposits rose 2.9%.
- Liquidity and funding: Cash and cash equivalents were $815.3m, down from $2.02bn at year-end 2021, principally as cash was redeployed into securities and loan funding. Management reported $1.7bn in unpledged investment securities and $682.3m of additional FHLB borrowing capacity. Deposits were the primary funding source; brokered deposits were $11.4m.
- Debt: Borrowings totaled $27.3m, mainly short-term FHLB advances. OFG redeemed $36.1m of subordinated capital notes during Q1 2022.
- Cash flows, nine months: Operating activities provided $115.5m; investing activities used $1.49bn; financing activities provided $167.3m. Cash, cash equivalents, and restricted cash declined $1.21bn to $815.4m.
- Capital and equity: OFG’s CET1 ratio was 13.38% and its leverage ratio 9.82%; OFG and the Bank were reported as well capitalized. Stockholders’ equity was $993.9m, down 7.0% from year-end. Tangible book value per share was $18.46.
Material changes and notable items
- Higher rates and asset growth lifted Q3 net interest margin to 5.23% from 4.12% a year earlier. OFG attributed the improvement to higher loan and securities yields and Federal Reserve rate increases.
- Available-for-sale securities recorded substantial fair-value declines: accumulated other comprehensive loss was $103.9m at quarter-end, versus $5.2m of accumulated other comprehensive income at year-end 2021. Nine-month after-tax other comprehensive loss was $109.0m, primarily from securities valuation changes as rates rose.
- OFG repurchased 2.35m shares for $64.1m during the first nine months under its $100m authorization; no shares were repurchased during Q3. The regular quarterly dividend increased to $0.20 per share in Q3 from $0.12 a year earlier.
- Loan balances grew year over year, led by commercial, consumer, and auto lending; mortgage balances declined. Nonperforming assets decreased 6.0% from year-end to $121.3m, or 1.21% of assets. The allowance for credit losses was $155.2m, and Q3 net charge-offs were $11.3m versus $6.1m in Q3 2021.
- Wealth-management and broker-dealer assets under management/gathered declined from year-end, which OFG attributed primarily to market-value decreases associated with higher interest rates.
Outlook, risks, and contingencies
- Hurricane Fiona: The September hurricane temporarily disrupted Puerto Rico economic activity and affected banking-service revenue; OFG waived certain customer fees and incurred $1.4m of response expenses. It recorded $6.9m of additional pre-tax loan-loss provision for anticipated hurricane-related losses. Management said activity had begun returning to pre-hurricane levels after quarter-end; borrower assessments and moratorium requests remained ongoing.
- Economic and credit outlook: Management cited solid employment, commercial demand, and consumer demand in Puerto Rico, alongside uncertainty from inflation, higher interest rates, possible recession, supply-chain pressures, geopolitical conflict, and the effects of natural disasters. It said reconstruction and stimulus funding were mitigating some pressures. The filing provides no formal numerical earnings or revenue guidance.
- Concentration and funding risks: Most operations and credit exposure are in Puerto Rico. A prolonged local downturn, government-debt developments, or another disaster could adversely affect borrowers, collateral, operations, and liquidity. Management cautioned that funding sources may become less available or more costly in stressed markets.
- Interest-rate risk: OFG’s one-year simulation estimated that an instantaneous +100-basis-point parallel rate shift would increase net interest income by 4.38%, while a gradual +100-basis-point increase would raise it by 2.09%. These are model estimates, not forecasts, and depend on assumptions about customer behavior, prepayments, and balance-sheet management.
- Legal and other commitments: The filing reports ordinary-course legal and regulatory matters, with a $3.0m accrued liability. Management considered reasonably possible loss estimates not significant, but noted that unpredictable adverse outcomes could affect particular periods. Commitments to extend credit were $1.37bn; these are not equivalent to expected cash outflows.
- Other items: The nine-month results included a $4.7m gain from sale of a legacy branch building. OFG was transitioning LIBOR-linked contracts to alternative reference rates and stated its LIBOR exposure was 3.7% of total assets.
Key facts for investors to verify
- Whether Hurricane Fiona-related delinquencies, payment accommodations, and the $6.9m loss estimate change as borrower reviews are completed.
- Trends in auto and consumer charge-offs, commercial credit quality, nonperforming assets, and allowance coverage.
- Deposit stability, deposit pricing, liquidity levels, and the availability and cost of contingent funding as rates and market conditions change.
- The effect of securities valuation losses on tangible book value and capital, and whether OFG may need to sell securities to meet liquidity needs.
- Whether net interest margin gains persist as deposit costs reprice and loan and securities yields change.
- Execution of the remaining share-repurchase authorization and the sustainability of the increased dividend.