OFG Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. OFG is a Puerto Rico-based financial holding company operating through Banking, Wealth Management and Treasury segments. It provides commercial, consumer, auto and mortgage lending, deposits, investment, insurance and related financial services. The year-earlier comparison includes the retirement plan administration business sold at the end of 2022.
Financial performance and position
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $135.9 million | Up 29.2% year over year |
| Net interest margin | 5.89% | 4.47% in Q1 2022 |
| Provision for credit losses | $9.4 million | $1.6 million in Q1 2022 |
| Non-interest income | $28.9 million | Down 8.6% year over year |
| Non-interest expense | $90.2 million | Up 11.2% year over year |
| Net income | $46.2 million | Up 23.2% year over year |
| Diluted EPS | $0.96 | $0.76 in Q1 2022 |
| Efficiency ratio | 54.87% | 59.50% in Q1 2022 |
| Operating cash flow | $52.2 million | $39.2 million in Q1 2022 |
Net interest income benefited from higher asset yields and loan balances amid Federal Reserve rate increases; interest expense also rose, including higher deposit costs. Return on average assets was 1.87%, and return on average tangible common equity was 19.13%.
At March 31, total assets were $10.06 billion; loans held for investment were $6.85 billion gross ($6.70 billion net of allowance); deposits were $8.57 billion; cash and cash equivalents were $847.4 million; borrowings were $226.8 million; and stockholders’ equity was $1.09 billion. The allowance for credit losses was $151.9 million.
Net charge-offs were $10.1 million, versus $0.6 million in Q1 2022. Non-performing assets declined to $97.6 million, or 0.97% of assets, from $115.7 million at year-end 2022. Non-performing loans were $83.8 million, or 1.22% of gross loans held for investment; allowance coverage of non-performing loans was 181.2%.
OFG’s consolidated CET1 ratio was 14.07% and the Bank’s was 12.97%; both were reported as well capitalized. The quarter’s operating, investing and financing cash flows were $52.2 million, $70.1 million provided, and $174.7 million provided, respectively. Cash increased $297.0 million from year-end.
Material changes versus comparable periods
- Compared with Q1 2022, higher loan and investment yields drove net interest income up $30.7 million. Interest expense increased $5.3 million.
- Credit provision rose $7.9 million year over year. Management cited loan growth and commercial-specific reserves; net charge-offs also increased substantially, including a $2.1 million commercial loan charge-off.
- Non-interest income fell $2.7 million, mainly reflecting lower mortgage banking activity, including an unfavorable $2.0 million mortgage-servicing-rights valuation impact, and the retirement-plan business sale.
- Non-interest expense increased $9.1 million, with higher compensation, technology, occupancy and electronic banking costs. The efficiency ratio nevertheless improved as revenue growth outpaced expense growth.
- Compared with December 31, 2022, deposits were broadly stable. Borrowings increased by about $199.8 million, principally due to a new $200 million, two-year FHLB advance at 4.52%. Cash rose, while investments declined by $54.3 million.
- Q1 2023 included a $15.1 million after-tax improvement in other comprehensive income, mainly from available-for-sale securities valuation changes. The AFS portfolio still had $94.4 million of gross unrealized losses at quarter-end; HTM securities had $59.3 million of unrealized losses.
Outlook, risks and contingencies
Management described Puerto Rico’s economy, employment and customer demand as resilient, and said deposits remained stable after U.S. regional bank failures. It cited a cumulative deposit beta of about 10%, strong liquidity and capital, and continued investment in digital banking. The Bank was eligible for the Federal Reserve Bank Term Funding Program but had not requested funds and did not expect to do so at the filing date. The filing provides no specific earnings or financial guidance for the remainder of 2023.
Management highlighted uncertainty from inflation, further interest-rate changes, recession risk, financial-market volatility and recent bank failures. These conditions could affect deposit retention and funding costs, securities and loan valuations, liquidity, capital requirements and the availability of wholesale funding. OFG also faces Puerto Rico economic, fiscal and natural-disaster risks; most business activity and a significant portion of credit exposure are concentrated there. Its securities portfolio includes substantial long-duration agency mortgage-backed securities and U.S. Treasury securities.
Other matters to monitor include $3.57 billion of uninsured deposits; $1.42 billion of commitments to extend credit; $108.6 million of loans sold with recourse; and $24.7 million of standby letters of credit and financial guarantees. Legal proceedings are ongoing; the accrued legal liability was $1.2 million. Management said reasonably possible losses beyond recorded accruals were not significant, while cautioning that an adverse outcome could affect results or cash flows in a particular period. Technology capital-expenditure commitments were $10.3 million.
OFG adopted ASU 2022-02 on loan restructurings and disclosures in Q1, with no material financial-statement impact reported. Management adjusted the U.S. loan segment’s credit-loss scenario weighting toward a higher probability of moderate recession. Estimates for credit losses, securities valuation and deferred tax assets remain subject to judgment and changing conditions.
Key facts for investors to verify
- Whether deposit balances and funding costs remain stable, particularly given uninsured deposits of $3.57 billion and increased FHLB borrowing.
- Whether elevated net charge-offs and commercial-specific reserves persist, and how loan delinquencies and non-performing assets develop.
- How interest-rate movements affect net interest margin, deposit pricing, securities values and liquidity; the filing’s rate-sensitivity projections are estimates, not guarantees.
- Whether unrealized securities losses, deferred-tax-asset realizability and the availability of unpledged liquidity change materially.
- Whether regulatory responses to bank failures, Puerto Rico economic or fiscal developments, natural disasters, or litigation create costs or risks beyond those currently disclosed.