OFG Bancorp — 2021 Form 10-K
Business and period: OFG Bancorp is a Puerto Rico-based financial holding company, principally operating Oriental Bank. Its Banking, Wealth Management and Treasury businesses serve Puerto Rico, the U.S. Virgin Islands and selected U.S. commercial markets. This filing covers the fiscal year ended December 31, 2021; the fourth-quarter figures below are management’s highlights. Financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $407.4 million | $408.4 million |
| Net interest margin | 4.20% | 4.55% |
| Non-interest income | $133.2 million | $124.4 million |
| Non-interest expenses | $325.8 million | $345.3 million |
| Provision for credit losses | $0.2 million | $92.7 million |
| Net income | $146.2 million | $74.3 million |
| Diluted EPS | $2.81 | $1.32 |
| Efficiency ratio | 60.70% | 66.49% |
| Operating cash flow | $100.0 million | $35.0 million |
- Total core revenues were $536.6 million, up from $519.3 million. Banking and financial service revenues rose 16.6%, led by banking fees and mortgage banking activity. Annual results included $9.3 million of interest income from forgiven PPP loans.
- Net interest income was nearly flat, as lower funding costs largely offset lower asset yields. The average yield on interest-earning assets fell 64 basis points; the cost of interest-bearing liabilities fell 31 basis points.
- Net cash decreased $131.9 million during the year: operating activities provided $100.0 million, investing activities used $182.9 million and financing activities used $49.0 million. Year-end cash and cash equivalents were $2.023 billion.
- At year-end, total assets were $9.900 billion; net loans were $6.329 billion; investment securities were $895.8 million; deposits were $8.603 billion; borrowings were $64.6 million; and stockholders’ equity was $1.069 billion. Uninsured deposits totaled $3.270 billion.
- Consolidated CET1 capital was 13.77% (13.09% at the Bank); the Bank remained “well capitalized.” Tangible book value per share increased 12.4% to $19.08. OFG redeemed all $92 million of preferred stock and repurchased $49.9 million of common stock during 2021.
Material changes and fourth-quarter highlights
- Annual net income nearly doubled, primarily reflecting a sharp reduction in credit-loss provision and lower operating expenses. The 2020 comparison included pandemic-related reserve building and $16.1 million of merger and restructuring charges; 2021 provision also benefited from improving credit conditions.
- Annual loan production increased to $2.390 billion from $1.730 billion, but net loans declined 2.6%, partly because $362.6 million of PPP loans were forgiven and loans were repaid. Mortgage balances fell 17.3%; auto and leasing balances rose 9.3%.
- Non-performing loans declined to $112.0 million, or 1.75% of loans, from $152.2 million, or 2.28%. Non-performing assets fell 22.1% to $129.0 million.
- Fourth-quarter diluted EPS was $0.66, versus $0.81 in Q3 2021 and $0.42 in Q4 2020. Q4 core revenues were $141.0 million and net interest income was $104.2 million. The quarter included a $7.2 million credit-loss provision, including $9.7 million for the planned sale of $65.5 million of past-due loans; net charge-offs were $32.5 million, primarily related to that decision.
- Deposits fell $641.3 million sequentially to $8.59 billion, mainly from year-end withdrawals by government-related and institutional commercial clients, partly offset by retail deposit growth. Q4 loans held for investment were $6.40 billion, broadly flat sequentially.
Outlook, risks and unusual items
- Management said it sees potential for Puerto Rico economic growth, citing easing pandemic restrictions and anticipated federal recovery and stimulus funding. It intends to pursue organic loan growth and evaluate shareholder returns; the filing provides no formal earnings or revenue guidance.
- After year-end, OFG announced a 25% increase in the quarterly common dividend to $0.15 per share and a new $100 million repurchase program. It also reported that it repurchased $23.5 million of shares during 2022 through the filing date. On January 3, 2022, it repurchased and cancelled $17.3 million of subordinated capital notes.
- Key risks include the company’s concentration in Puerto Rico and exposure to its economic and fiscal conditions, government debt restructuring, natural disasters and climate-related events, and the uncertain effects of COVID-19, inflation and labor or supply-chain constraints. Direct credit exposure to Puerto Rico municipalities and a public corporation was $87.3 million.
- Management expects interest rates to rise in 2022 and cautions that deposit repricing, loan yields and market conditions could affect margins. LIBOR-linked assets and liabilities represented 6.5% of total assets; management described the transition risk as immaterial to the financial statements and said it was preparing fallback language and alternative-rate systems.
- OFG exceeded $10 billion in assets during Q1 2021 but ended the year below that threshold. Management noted that sustained threshold crossings could trigger additional regulatory requirements, including potential debit interchange restrictions. The filing also cites funding, credit, cybersecurity, third-party service, competition and regulatory risks.
- Mortgage loan repurchases were elevated: $38.9 million during 2021 under representations-and-warranties provisions, in addition to loans repurchased under credit recourse. The company had a $7.0 million accrued liability for legal and regulatory matters; management did not expect the aggregate outcome to materially affect financial condition or results, while noting particular matters could affect a period’s results or cash flows.
Investor verification points
- Confirm the drivers and sustainability of earnings growth, especially the unusually low 2021 credit-loss provision, lower net interest margin and the timing of loan-sale-related charge-offs.
- Review credit quality and reserve adequacy, including non-performing and delinquent loans, pandemic-modified credits, troubled-debt restructurings and the remaining impact of the past-due loan sales.
- Assess deposit stability and liquidity, including year-end institutional withdrawals, the $3.270 billion of uninsured deposits, available borrowing capacity and the effect of rates on funding costs.
- Monitor capital distributions and regulatory thresholds, including the 2022 buyback and dividend plans, CECL capital phase-in beginning in 2022, and whether assets again exceed $10 billion for the relevant regulatory tests.
- Reconcile reported figures when consulting the full filing: some segment discussion and summary tables contain differing segment net-income figures, while the consolidated statements report 2021 net income of $146.151 million.