OFG Bancorp — Q1 2024 Form 10-Q
Business context and 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, investment, insurance and trust services. This unaudited report covers the quarter ended March 31, 2024; comparisons below are principally with Q1 2023 or December 31, 2023, as applicable.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparison |
|---|---|---|
| Net interest income | $144.1 million | Up 6.0% from $135.9 million in Q1 2023 |
| Net interest margin | 5.40% | Down 49 basis points from 5.89% in Q1 2023 |
| Core revenue, as defined by management | $174.2 million | $164.4 million in Q1 2023; down from $175.6 million in Q4 2023 |
| Net income | $49.7 million | Up 7.5% from $46.2 million |
| Diluted earnings per share | $1.05 | Up from $0.96 |
| Provision for credit losses | $15.1 million | Up from $9.4 million |
| Net charge-offs | $19.8 million | Up from $10.1 million; included $3.5 million from previously fully reserved PPP loans |
| Non-interest income / expense | $30.3 million / $91.4 million | Income up 5.0%; expense up 1.3% year over year |
| Efficiency ratio | 52.49% | Improved from 54.87% |
| Loans, net / total assets | $7.41 billion / $11.16 billion | Loans up 0.1% and assets down 1.6% from year-end 2023 |
| Deposits / FHLB advances | $9.55 billion / $200.8 million | Deposits down 2.2% from year-end; borrowings were nearly unchanged |
| Cash and cash equivalents | $754.4 million | $748.2 million at year-end 2023 |
| Stockholders’ equity / CET1 ratio | $1.22 billion / 14.45% | Equity up 1.9%; CET1 was 14.12% at year-end |
| Cash dividends per share | $0.25 | Up from $0.22 in Q1 2023 |
For Q1 2024, operating, investing and financing cash flows were $61.0 million provided, $163.5 million provided and $218.3 million used, respectively; cash and cash equivalents increased $6.2 million. These cash-flow figures should be read in the context of the company’s banking and securities activities.
Credit indicators included $72.1 million of non-accrual loans, down from $79.4 million at year-end, and $95.2 million of non-performing assets, down from $100.0 million. The allowance for credit losses was $156.6 million, or 2.1% of loans held for investment; allowance coverage of non-performing loans was reported at 202.1% in the credit-quality discussion. Management reported early and total delinquency rates of 2.41% and 3.30%, respectively.
Material changes and notable items
- Higher loan and securities income increased net interest income, but deposit and borrowing costs rose sharply: interest expense was $39.3 million versus $13.1 million in Q1 2023. Deposit costs and a higher average deposit balance contributed to the increase, compressing net interest margin.
- Loan balances were broadly flat from year-end but up 10.0% year over year. Auto and consumer balances increased during the quarter, partly offset by mortgage paydowns and securitizations and seasonal commercial-line paydowns.
- Deposits declined $213.9 million from year-end, including a $159.6 million reduction in brokered deposits. A $1.2 billion deposit from a Puerto Rico government client had been received in December 2023; public-fund deposits stood at $1.59 billion at quarter-end.
- Investments fell 7.6%, mainly reflecting the sale of $149.4 million of U.S. Treasury securities, mortgage-backed-security repayments and unfavorable fair-value changes. Available-for-sale securities recorded a $17.6 million pretax unrealized loss for the quarter; accumulated other comprehensive loss increased to $81.7 million after tax.
- Management cited increases in auto, consumer and commercial net charge-offs. It also noted that auto and consumer charge-offs had risen as pandemic-era stimulus faded, while stating that these figures remained below pre-pandemic levels.
- OFG approved a new, open-ended $50 million share repurchase program, replacing its prior program; no shares were repurchased under the new program in Q1. The quarterly dividend increased to $0.25 per share.
Outlook, risks and contingencies
- The filing gives no specific full-year earnings or revenue guidance. Management expects a 2024 effective tax rate of approximately 28.5%; Q1’s reported rate was 26.8%, including a $1.1 million discrete stock-vesting tax benefit.
- Management described Puerto Rico business activity and consumer liquidity as resilient and said its balance sheet was positioned for a prolonged higher-rate environment. It also cited inflation, interest-rate uncertainty, geopolitical events and recession risk as factors to monitor.
- Interest-rate sensitivity simulations estimate that a parallel instantaneous +100-basis-point shock would increase one-year net interest income by 2.91%, while a -100-basis-point shock would reduce it by 3.30%. Gradual rate changes produce smaller modeled effects. The filing cautions that results depend on assumptions and may differ from actual outcomes.
- Liquidity resources disclosed include $754.4 million of unrestricted cash, $825.4 million of unpledged investment securities, $457.5 million of additional FHLB borrowing capacity and $1.198 billion of Federal Reserve discount-window borrowing capacity against pledged loans. These resources are subject to availability and collateral conditions.
- Uninsured deposits were $4.89 billion, approximately 51% of deposits. Puerto Rico government deposits represented about 17% of total deposits and are collateralized; their level may fluctuate. Management says it does not rely on the large government-client deposit as long-term funding.
- Most securities are U.S. Treasury or agency-backed. Management attributed unrealized securities losses primarily to interest-rate volatility, stated it did not intend to sell the affected investments, and said it was not more likely than not that it would be required to sell them before recovery of amortized cost.
- OFG and its Bank subsidiary reported that they met regulatory capital requirements and were “well capitalized.” The company identified Puerto Rico economic and fiscal conditions, natural disasters, credit quality, funding and interest-rate changes, cybersecurity and operational matters, and regulatory developments as risks.
- The company is involved in ordinary-course litigation and regulatory matters. Accrued legal contingencies were $725,000; management said reasonably possible losses were not significant, while acknowledging that an adverse outcome could materially affect results or cash flows in a particular period. The filing also notes a $940,000 accrual related to regulatory examinations in Q1 expenses.
Important facts for investors to verify
- Whether deposit balances and funding costs stabilize, particularly given the concentration in uninsured and government-related deposits.
- Whether higher auto and consumer credit losses persist, and how charge-offs, delinquencies, loan grades and allowance adequacy evolve.
- How net interest margin responds to rate changes, deposit repricing and shifts in the mix of loans and securities.
- Whether unrealized securities losses, pledged collateral and available borrowing capacity affect practical liquidity under stressed conditions.
- Progress under the $50 million repurchase authorization and the sustainability of dividends relative to earnings, capital and funding needs.
- Developments in regulatory examinations, litigation and other contingencies; the filing does not quantify a clear maximum exposure for these matters.