OFG Bancorp — Q2 2022 Form 10-Q
Business context and period. OFG Bancorp is a Puerto Rico-based financial holding company operating in banking, wealth management and treasury. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are primarily with December 31, 2021.
Key financial metrics
| Metric | Q2 2022 | Comparison |
|---|---|---|
| Net interest income | $115.1 million | Up 12.6% year over year |
| Net interest margin | 4.80% | 4.22% in Q2 2021; 4.47% in Q1 2022 |
| Provision for credit losses | $6.7 million | $8.3 million recapture in Q2 2021 |
| Non-interest income | $36.2 million | Up 12.5% year over year; includes a $4.7 million gain on sale of a branch building |
| Non-interest expense | $85.3 million | Up 3.1% year over year |
| Net income | $40.4 million | Down 1.0% year over year |
| Diluted earnings per share | $0.84 | $0.78 in Q2 2021 |
| Efficiency ratio | 58.27% | 62.02% in Q2 2021 |
- Six-month results: Net interest income was $220.3 million, up 9.9%; net income was $78.0 million, up 9.5%; diluted EPS was $1.59 versus $1.35. Provision expense was $8.2 million, compared with a $2.0 million recapture in the prior-year period.
- Balance sheet at June 30: Total assets were $10.25 billion; net loans $6.59 billion; total deposits $9.03 billion; and stockholders’ equity $1.01 billion. Versus year-end 2021, loans grew 4.0%, deposits 5.0%, and investments 92.8% to $1.73 billion.
- Credit: Allowance for credit losses was $159.0 million, or 2.4% of loans. Nonperforming loans were $108.2 million (1.61% of loans) and nonperforming assets $125.8 million (1.23% of assets). Non-accrual loans were $98.2 million; allowance coverage of nonperforming loans was 147.0%.
- Cash flow, first half: Operating activities provided $89.7 million; investing activities used $1.12 billion, primarily reflecting loan growth and securities purchases; financing activities provided $311.3 million. Cash, cash equivalents and restricted cash decreased $716.4 million to $1.31 billion.
- Funding and liquidity: Deposits were the primary funding source; borrowings fell to $27.6 million after redemption of $36.1 million of subordinated notes. OFG reported $1.31 billion of unrestricted cash, $1.48 billion of unpledged investment securities and $605.6 million of additional FHLB borrowing capacity. Uninsured deposits were $3.75 billion.
- Capital and shareholder returns: OFG’s CET1 ratio was 12.80% and total risk-based capital ratio 14.05%; the company and bank remained “well capitalized.” CET1 declined from 13.77% at year-end, reflecting buybacks, higher risk-weighted assets and market-related securities losses. First-half common dividends were $0.30 per share; OFG repurchased 2.35 million shares for $64.1 million under its $100 million program.
Material changes and management commentary
- Net interest margin and net interest income improved as rates rose, investment balances increased, and deposit and borrowing costs remained lower than in the prior-year period. The Federal Reserve raised rates four times in 2022 through the report’s discussion, including 75-basis-point increases in June and July.
- Loan growth was led by commercial, consumer and auto lending; mortgage balances declined. Total loans held for investment grew 4.7% from year-end, while consumer loans grew 21.8% and commercial loans 9.1%.
- Available-for-sale securities recorded substantial market-value declines as rates rose: accumulated other comprehensive loss moved to $49.5 million from $5.2 million of income at year-end. First-half after-tax other comprehensive loss was $54.7 million, reducing reported equity.
- Management cited improved Puerto Rico employment and economic activity, strong commercial and consumer demand, and reconstruction and stimulus funding as supportive. It also emphasized uncertainty from inflation, supply disruptions, possible recession, Federal Reserve actions, the Ukraine conflict and Puerto Rico’s fiscal and economic conditions.
Outlook, risks and contingencies
- No company earnings or financial-performance guidance is provided in the supplied filing text. Management reported that the board approved an increase in the quarterly dividend to $0.20 per share beginning with the quarter ending September 30, 2022.
- Credit-loss estimates depend on economic forecasts and management assumptions. The quarter’s provision included reserves for loan growth and two commercial loans placed on non-accrual, partly offset by releases related to improving portfolio performance and Puerto Rico economic conditions.
- OFG’s business and credit exposure are concentrated in Puerto Rico. Disclosed risks include economic weakness, government debt restructuring and public-instrumentality exposure, natural disasters, inflation and interest-rate changes, and the effects of pandemic-related disruption and geopolitical conflict, including potential cyberattacks.
- Legal proceedings are ongoing. Accrued legal liabilities were $3.9 million; management said the estimated reasonably possible loss was not significant, while noting that an adverse outcome in particular periods could affect results or cash flows.
- Other exposures include $1.37 billion of commitments to extend credit, $28.7 million of standby letters of credit and financial guarantees, and $115.6 million of mortgage loans sold with recourse. Technology capital-expenditure commitments were $8.9 million.
Most important facts for investors to verify
- Whether higher rates continue to support net interest income and margin as deposit costs reprice and borrower demand or credit quality changes.
- Trends in commercial non-accrual loans, delinquency, charge-offs and the adequacy of the $159.0 million credit-loss allowance.
- The effect of securities valuation losses, further rate movements and any need to sell securities on equity and liquidity.
- Deposit stability and concentration, including the $3.75 billion of uninsured deposits, alongside available liquidity and FHLB capacity.
- Capital headroom after share repurchases, dividend increases, growth in risk-weighted assets and redemption of subordinated notes.
- Progress and remaining capacity under the $100 million buyback program, and the sustainability of the $0.20 quarterly dividend.
- Developments in Puerto Rico’s economy and public finances, legal matters, and the macroeconomic and geopolitical risks identified by management.