OFG Bancorp — 2023 Form 10-K Summary
Business context and reporting period
OFG Bancorp is a Puerto Rico-headquartered financial holding company whose principal subsidiary, Oriental Bank, operates in Puerto Rico and the U.S. Virgin Islands, with some U.S. mainland commercial lending. Its businesses are Banking, Wealth Management and Treasury. This annual report covers the fiscal year ended December 31, 2023; fourth-quarter figures are also highlighted below. Financial statements are audited, and KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income | $560.9 million | $482.1 million |
| Provision for credit losses | $60.6 million | $24.1 million |
| Non-interest income | $128.4 million | $131.7 million |
| Non-interest expense | $363.4 million | $345.5 million |
| Net income | $181.9 million | $166.2 million |
| Diluted EPS | $3.83 | $3.44 |
| Net interest margin | 5.79% | 5.05% |
| Efficiency ratio | 53.22% | 56.85% |
| Return on average assets | 1.79% | 1.64% |
Core revenue, defined in the filing as net interest income plus banking and financial service revenue, was $682.7 million, up from $607.8 million. Net interest income rose 16.3%, reflecting higher loan balances and yields, particularly on commercial loans, and higher investment yields. Interest expense increased to $88.0 million from $33.5 million as deposit and borrowing costs rose. Non-interest income declined 2.5%; mortgage banking revenue was lower, partly offset by a $6.3 million gain on sale of non-performing small-business loans. The 2022 comparison included a $4.7 million gain on sale of a branch building.
Operating cash flow was $295.7 million, investing cash flow was negative $1.405 billion, and financing cash flow was positive $1.307 billion. The large investing outflow principally reflected loan originations and investment purchases; financing inflows principally reflected deposit growth. Cash and cash equivalents ended the year at $748.2 million.
Balance sheet, credit, capital and liquidity
- Total assets were $11.34 billion, up 15.5% year over year. Net loans were $7.40 billion, up 10.1%; gross loans held for investment grew 10.2%, led by commercial, auto and consumer lending. Investment securities increased 36.3% to $2.69 billion.
- Total deposits were $9.76 billion, up 13.9%; total borrowings were $200.8 million, compared with $27.0 million a year earlier. Deposits included $1.616 billion of Puerto Rico government and related public funds, including a $1.2 billion deposit received in December from a long-standing government client. Management says it does not rely on that deposit as a long-term funding source.
- Uninsured deposits totaled $4.885 billion, or 50% of deposits, versus $3.498 billion, or 41%, in 2022. Public funds are collateralized; the filing reports $1.645 billion of securities and commercial loans pledged against those deposits.
- Credit costs increased: net charge-offs were $51.8 million, up from $27.7 million, and the allowance for credit losses was $161.1 million, up 5.5%. The allowance equaled 2.1% of gross loans held for investment. Non-performing assets declined 13.6% to $100.0 million, or 0.88% of assets; non-performing loans were $85.2 million, and allowance coverage of non-performing loans was 189.1%.
- OFG’s CET1 ratio was 14.12%, compared with 13.64% in 2022; the Bank’s CET1 ratio was 13.01%. Both were reported as well capitalized. Tangible common equity to tangible assets was 9.68%, and tangible book value per share was $23.13.
- Reported year-end liquidity included $748.2 million of unrestricted cash, $1.024 billion of unpledged investment securities, $446.0 million of additional FHLB borrowing capacity and $770.0 million of Federal Reserve discount-window borrowing capacity. About $500 million of Treasury securities were expected to mature in the first half of 2024.
Material changes, outlook, risks and unusual items
- Fourth quarter: diluted EPS was $0.98, versus $0.95 in Q3 2023 and $0.97 in Q4 2022. Core revenue was $175.6 million. Net interest margin was 5.62%, ROA 1.76%, and the efficiency ratio 53.59%. Q4 included the $6.3 million pre-tax loan-sale gain and $3.2 million of severance and lease-cancellation costs from early retirement and rightsizing initiatives.
- Credit trends: annual net charge-offs rose materially, with increases in consumer, auto and commercial portfolios. Management attributed consumer and auto loss increases in part to fading pandemic-era stimulus. The 2023 credit-loss provision included $13.1 million for commercial-specific reserves, mainly in U.S. commercial lending, and $4.8 million of qualitative adjustments. Management’s scenario-weighted ACL estimate gave more weight to baseline conditions, except for U.S. loans, where the moderate-recession scenario received greater weight.
- Rate and funding exposure: management identifies deposit competition and higher funding costs as risks. Its one-year simulation estimated that an instantaneous 200-basis-point rate increase would raise net interest income by 5.01%, while a 200-basis-point decrease would reduce it by 5.41%; gradual-rate scenarios showed smaller effects. Actual outcomes may differ, and the estimates depend on assumptions about customer and balance-sheet behavior. OFG had no derivatives outstanding at year-end.
- Management outlook: management described Puerto Rico economic activity, employment and private-sector conditions as resilient, while monitoring inflation, interest rates and the possibility of a U.S. recession. It redeployed cash and maturing Treasury positions into longer-term mortgage-backed securities in anticipation of a potentially lower-rate environment in the second half of 2024. The filing provides no specific earnings or revenue guidance.
- Regulatory and strategic item: because assets exceeded $10 billion, OFG estimated the Durbin Amendment would reduce annual debit-card interchange income by approximately $10–$11 million beginning July 1, 2024, based on current volume. Crossing the threshold also brings increased regulatory oversight and requirements.
- Other risks and contingencies: key exposures include concentration in Puerto Rico and the U.S. Virgin Islands, local fiscal and economic conditions, hurricanes and earthquakes, commercial real estate values, credit losses, deposit volatility, uninsured deposits, cybersecurity and third-party technology, regulation, and tax changes affecting international banking entities. Legal proceedings are described as ordinary-course matters; management considers a material adverse effect unlikely based on current information, but acknowledges outcomes could affect results or cash flows in particular periods. Goodwill impairment was not identified at year-end.
- Capital actions: the 2023 quarterly dividend was raised to $0.22 per share; OFG repurchased $18.7 million of shares during 2023. In January 2024, the Board approved a $0.25 quarterly dividend beginning in Q1 2024 and a new $50 million repurchase program.
Most important facts for investors to verify
- Whether the $1.2 billion government-client deposit remains, and the resulting effect on deposit concentration, liquidity and funding costs.
- Subsequent deposit balances, deposit pricing and uninsured-deposit trends, including the maturities of brokered deposits early in 2024.
- Loan delinquency, net charge-offs and ACL trends, particularly in auto, consumer and U.S. commercial lending, and whether reserves remain adequate.
- The realized impact of the Durbin Amendment and any associated compliance or operating costs after the July 2024 effective date.
- Whether mortgage-backed securities values recover as expected, and the potential effects of rates, prepayments and securities sales on earnings, liquidity and capital.
- Whether planned dividends and repurchases remain consistent with earnings, capital requirements and regulatory limits on distributions from the Bank.