OFG Bancorp — Q3 2023 Form 10-Q
Business context and period. OFG is a Puerto Rico-based financial holding company operating through Banking, Wealth Management and Treasury segments. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. OFG also operates in the U.S. Virgin Islands and the mainland United States.
Financial performance and condition
- Q3 earnings: Net income was $44.9 million, up 7.0% year over year; diluted EPS was $0.95 versus $0.87. Nine-month net income was $135.3 million, up 12.8%, and diluted EPS was $2.84 versus $2.47.
- Revenue and margins: Q3 net interest income rose 12.1% to $141.8 million; net interest margin was 5.80% versus 5.23% a year earlier. Total non-interest income was $30.7 million, nearly flat year over year. Nine-month net interest income increased 20.3% to $417.3 million, while non-interest income declined 8.9% to $89.7 million. The Q3 efficiency ratio improved to 52.36% from 55.80%.
- Credit costs and profit: Q3 provision for credit losses was $16.4 million, up from $7.1 million; net charge-offs were $18.8 million versus $11.3 million. Nine-month provision was $40.9 million versus $15.4 million, and net charge-offs were $35.6 million versus $16.5 million. Management attributed provisions to loan growth, commercial-specific reserves and qualitative adjustments.
- Loans and credit quality: Net loans were $7.13 billion, up 6.1% from year-end; held-for-investment loans grew 8.6% year over year. Non-performing assets were $102.6 million, or 1.00% of assets, down from $115.7 million and 1.18% at year-end. The allowance for credit losses was $157.5 million; management reported coverage of non-performing loans at 177.8%.
- Funding and liquidity: Deposits were $8.54 billion, slightly below year-end and down from $8.84 billion a year earlier. Time deposits increased while demand and savings balances decreased. The weighted-average deposit rate was 0.70% at quarter-end; deposit interest expense rose sharply year over year. Borrowings increased to $451.5 million from $27.0 million at year-end, including $200 million of two-year FHLB advances, $100 million of short-term FHLB advances and $150.7 million of repurchase agreements. Cash and cash equivalents were $532.7 million. Management reported $1.361 billion of unpledged investment securities and $346.4 million of additional FHLB borrowing capacity.
- Cash flow: For the first nine months, operating activities provided $188.1 million, investing activities used $548.5 million and financing activities provided $342.6 million. Cash, cash equivalents and restricted cash decreased $17.8 million to $532.7 million.
- Capital and equity: Stockholders’ equity was $1.095 billion, up 5.1% from year-end. OFG’s CET1 ratio was 14.06% and total risk-based capital ratio was 15.31%; the Bank’s respective ratios were 12.84% and 14.09%. Both were reported as well capitalized. Tangible book value per share was $21.01.
Material changes versus comparable periods
- Higher loan yields and balances, plus higher investment income, lifted Q3 net interest income; rising deposit and borrowing costs partly offset the benefit. Management cited a cumulative deposit beta of 19%.
- Loan balances grew, led by commercial, auto and consumer lending; mortgage balances declined. Credit costs and charge-offs increased, including significant charge-offs on U.S. commercial loans and higher consumer and auto losses.
- Nine-month non-interest income fell partly because the prior-year period included a $4.7 million gain on a branch-building sale. 2023 also included a $1.1 million loss on sale of U.S. Treasury securities. Prior-year comparisons include the retirement-plan administration business, sold effective December 31, 2022.
- Non-interest expense rose 6.0% for the first nine months, with higher compensation, technology and occupancy costs, partly offset by lower professional and service fees. The company continued technology investment, including digital, data analytics, cloud and cybersecurity initiatives.
- Available-for-sale securities had $150.9 million of gross unrealized losses at September 30, and accumulated other comprehensive loss was $127.7 million, net of tax. OFG said it believed capital and liquidity supported holding securities through market recovery.
Outlook, risks and unusual items
Management described Puerto Rico’s economy as resilient, citing growth in economic activity, retail sales, employment and wages, alongside continued federal reconstruction funding. It also highlighted inflation, higher interest rates and the possibility of a U.S. recession. The filing provides no formal earnings or revenue guidance. Management expects to maintain adequate liquidity through cash, loan and securities repayments, deposits and available borrowing sources, while noting that funding access and costs could worsen in market disruption.
Key exposures include Puerto Rico economic and fiscal conditions, concentration in the region, hurricanes and other natural disasters, credit deterioration, interest-rate and securities-market movements, deposit behavior, liquidity access, cyber and operational risks, and possible regulatory changes following bank failures. OFG said it had not experienced significant deposit changes following industry bank failures. The allowance for credit losses depends on management estimates and economic scenarios; the company increased the weight assigned to a moderate-recession scenario for U.S. loans.
Other items to monitor include $3.747 billion of uninsured deposits; $1.291 billion of commitments to extend credit; and legal matters with a $1.2 million accrued liability. Management said reasonably possible legal losses were not significant in aggregate, but acknowledged that an adverse outcome could materially affect results or cash flows in a particular period. OFG repurchased 743,699 shares for $18.7 million during the first nine months under its $100 million program; $17.2 million remained available at quarter-end.
Important facts for investors to verify
- Whether loan-loss expense, charge-offs and commercial-specific reserves continue to rise, particularly in U.S. commercial, consumer and auto portfolios.
- How deposit mix, deposit pricing and reliance on FHLB advances and repurchase agreements affect funding costs and net interest margin.
- The liquidity and capital implications of uninsured deposits, pledged securities and unrealized securities losses if market conditions or deposit behavior change.
- Whether loan growth, digital investment and expense trends support future profitability, and how the sale of the retirement-plan administration business affects comparisons.
- Developments in Puerto Rico’s economy and fiscal position, natural-disaster exposure, regulatory requirements and pending legal matters.