OFG Bancorp — Q2 2021 Form 10-Q Summary
Business context and reporting period
OFG Bancorp is a Puerto Rico-based financial holding company operating through Banking, Wealth Management and Treasury segments. It provides commercial, consumer, auto and mortgage lending, deposit, brokerage, insurance and trust services. This unaudited 10-Q covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020.
Key financial results and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $102.3 million | $105.1 million | $200.5 million | $210.2 million |
| Provision/(recapture) for credit losses | $(8.3) million | $17.7 million | $(2.0) million | $64.8 million |
| Non-interest income | $32.2 million | $27.2 million | $62.6 million | $58.6 million |
| Non-interest expense | $82.7 million | $85.5 million | $160.3 million | $172.8 million |
| Net income | $40.8 million | $21.8 million | $71.2 million | $23.6 million |
| Diluted EPS | $0.78 | $0.39 | $1.35 | $0.39 |
- Q2 net interest margin was 4.22%, down from 4.78% a year earlier; the six-month margin was 4.24% versus 4.84%. Management attributed pressure principally to lower asset yields and reduced loan interest income, partly offset by lower deposit costs.
- Q2 banking and financial services revenue increased 34.4% year over year to $31.0 million, led by electronic banking activity and higher wealth-management and mortgage-banking revenues. The efficiency ratio improved to 62.02% from 66.70%.
- At June 30, assets were $10.46 billion, up 6.5% from year-end; cash and cash equivalents were $2.77 billion. Net loans were $6.35 billion, down 2.3%, while investments rose 40.3% to $643.5 million.
- Deposits grew 8.0% to $9.09 billion, primarily from core deposits; borrowings declined 2.3% to $100.0 million. The reported weighted-average deposit rate was 0.60% at June 30, versus 0.80% at year-end.
- Six-month cash flows were $68.4 million provided by operating activities, $5.9 million used in investing activities and $549.6 million provided by financing activities. Cash, cash equivalents and restricted cash increased $612.1 million to $2.77 billion.
- OFG’s CET1 ratio was 13.95%, compared with 13.08% at year-end; its leverage ratio was 9.84%, compared with 10.30%. OFG and the Bank met applicable capital requirements and were classified as well capitalized.
Material changes versus comparable periods
- Q2 net income rose 87.4% year over year, and diluted EPS doubled. The improvement was substantially driven by an $8.3 million credit-loss recapture versus a $17.7 million provision expense in Q2 2020, alongside higher fee revenue and lower expenses; net interest income declined.
- For the first six months, net income increased to $71.2 million from $23.6 million. Credit-loss expense swung from a $64.8 million provision in 2020 to a $2.0 million recapture in 2021. Comparisons also reflect prior-year securities-sale and Scotiabank acquisition gains.
- Non-performing assets declined 7.0% from year-end to $154.1 million, or 1.47% of assets. Non-performing loans fell 9.8% to $137.3 million; the allowance was $191.7 million, 2.95% of loans and 139.7% of non-performing loans.
- Common equity improved while total stockholders’ equity edged down 0.6% to $1.08 billion, reflecting the redemption of $68 million of Series A and B preferred stock and lower accumulated other comprehensive income. The remaining Series D preferred stock was redeemed on July 15, 2021.
Outlook, commentary, risks and contingencies
- Management described strong Q2 results and improving Puerto Rico economic conditions, citing reopening, vaccination progress and federal reconstruction and pandemic stimulus. It reported Q2 loan originations of $673.6 million, up 27.7% from Q1, and said it intends to pursue organic loan growth and evaluate shareholder returns. The filing provides no formal earnings or financial forecast.
- The Board announced after quarter-end a 50% increase in the quarterly common dividend to $0.12 per share and a new $50 million share-repurchase authorization, replacing the prior program.
- Credit-loss estimates depend on economic forecasts and qualitative reserves. Management noted continuing uncertainty around the pandemic, Puerto Rico’s recovery and government fiscal actions. COVID-related loan deferrals were $74.9 million at June 30, 2021; management said most deferrals had ended.
- Key exposures include Puerto Rico concentration, natural disasters, government fiscal and debt-restructuring developments, interest-rate changes, credit quality, liquidity, cybersecurity and regulatory requirements. Crossing $10 billion in assets brings increased regulatory oversight and related requirements.
- Liquidity resources included approximately $2.8 billion of unrestricted cash, $414.2 million of unpledged investment securities and $734.1 million of FHLB borrowing capacity. Commitments to extend credit totaled $1.23 billion. Direct Puerto Rico government lending was $99.3 million; public-fund deposits were $255.0 million.
- OFG reported a $5.6 million accrual for legal matters. Management did not expect the ultimate aggregate outcome to materially affect financial condition, although an adverse result could affect results or cash flows in a particular period. The filing says no material changes were made to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and fee revenue can offset ongoing net-interest-margin pressure as excess deposits and cash are deployed.
- Whether the large credit-loss recapture and improving delinquency trends are sustainable; review reserve assumptions, charge-offs and remaining COVID-related deferrals.
- Deposit mix, deposit pricing, liquidity deployment and the regulatory and operating effects of exceeding $10 billion in assets.
- The capital and share-count effects of the Series D redemption, increased dividend and new $50 million repurchase authorization.
- Puerto Rico concentration, government-related exposures, legal contingencies, mortgage repurchase obligations and other off-balance-sheet commitments.