Business context and reporting period
OFG Bancorp filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The Puerto Rico-based financial holding company operates Banking, Wealth Management and Treasury businesses, principally in Puerto Rico and the U.S. Virgin Islands. It sold its retirement-plan administration business at the end of 2022, affecting year-over-year comparisons in wealth-management revenue.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $139.6 million | $115.1 million | $275.5 million | $220.3 million |
| Provision for credit losses | $15.0 million | $6.7 million | $24.5 million | $8.2 million |
| Non-interest income | $30.1 million | $36.2 million | $59.0 million | $67.8 million |
| Non-interest expense | $88.9 million | $85.3 million | $179.1 million | $166.4 million |
| Net income | $44.2 million | $40.4 million | $90.4 million | $78.0 million |
| Diluted EPS | $0.93 | $0.84 | $1.89 | $1.59 |
- Q2 net interest margin was 5.90%, versus 4.80% a year earlier; return on average assets was 1.76% and the efficiency ratio was 52.13%.
- Management reported Q2 core revenue of $170.5 million, up 16.5% year over year, and pre-provision net revenue of $80.8 million. Core revenue is a management measure; GAAP net interest income plus non-interest income was $169.7 million.
- At June 30, total assets were $10.03 billion, loans net of allowance $6.99 billion, deposits $8.54 billion, FHLB advances $226.5 million, and stockholders’ equity $1.10 billion. Loans held for investment grew 4.1% from year-end; deposits declined 0.4%.
- Six-month cash flows: $99.3 million provided by operating activities, $24.2 million provided by investing activities and $125.0 million provided by financing activities. Cash and cash equivalents rose $248.5 million to $799.0 million.
- OFG and the Bank were reported as well capitalized. OFG’s CET1 ratio was 14.03% and total risk-based capital ratio 15.29%; tangible book value per share was $21.06.
Material changes versus comparable periods
- Q2 net income increased 9.3% and diluted EPS increased 10.7% year over year. Higher interest income lifted Q2 net interest income 21.3%, while interest expense rose 157.4% as deposit and borrowing costs increased.
- Credit costs rose substantially: Q2 provision more than doubled year over year, and six-month net charge-offs increased to $16.7 million from $5.1 million. Management cited loan growth and additional commercial-loan reserves, including a $9.1 million specific reserve for three U.S. commercial loans.
- Q2 non-interest income fell 16.9%, mainly because the prior-year period included a $4.7 million gain on a branch-building sale and 2023 included a $1.1 million loss on sale of Treasury securities. Six-month banking and financial service revenue also declined, partly reflecting lower mortgage and trust-related revenue and the business sale.
- Operating expenses increased 4.3% in Q2 and 7.6% for the first half. Higher compensation, technology and infrastructure costs were partly offset by lower professional fees. Management attributed technology spending in part to its digital transformation program.
- OFG sold $203.3 million of available-for-sale U.S. Treasury securities in the first half, recognizing a $1.1 million loss. Available-for-sale securities had $107.0 million of gross unrealized losses at quarter-end; held-to-maturity securities had $64.0 million. Accumulated other comprehensive loss was $89.6 million, net of tax.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management described Puerto Rico’s economy as resilient, citing continued employment, retail-sales and economic-activity growth, and remained optimistic while monitoring inflation, interest rates and possible U.S. recession conditions.
- Management said deposits remained stable at approximately $8.5 billion despite industry bank failures, and reported a 16% cumulative deposit beta. Uninsured deposits were $3.655 billion. Available liquidity sources included $799 million of cash, $1.289 billion of unpledged investment securities and $431 million of additional FHLB borrowing capacity. The Bank also reported $804 million of securities eligible for the Bank Term Funding Program.
- Interest-rate sensitivity simulations estimated that a parallel instantaneous +100-basis-point shift would increase one-year net interest income 3.86%; a gradual +100-basis-point increase would increase it 1.62%. A corresponding instantaneous decline of 100 basis points was estimated to reduce it 4.60%. These are model estimates, not forecasts.
- Key risks include credit deterioration, deposit competition and funding costs, interest-rate and securities-value changes, Puerto Rico’s economic and fiscal conditions, and hurricanes, earthquakes or other disruptions. OFG’s business and credit exposure are concentrated in Puerto Rico.
- A Q2 U.S. commercial-loan modification included $4.6 million of principal forgiveness in exchange for private-company stock valued at $1.6 million. In July, another U.S. commercial loan with $4.4 million unpaid principal was forgiven in exchange for stock valued at $279,000; the loan had already been provisioned at June 30.
- Legal proceedings are ongoing. The company had a $1.3 million accrued legal liability and said it did not expect the matters, based on current information, to materially adversely affect its financial condition; it cautioned outcomes remain uncertain. Commitments to extend credit totaled $1.282 billion.
Important facts for investors to verify
- Whether higher deposit costs and reliance on FHLB advances continue to pressure funding costs and net interest margin.
- Performance and reserve adequacy of the U.S. commercial exposures, including the loans with specific reserves or principal forgiveness.
- Trends in net charge-offs, delinquencies and non-performing assets; reported non-performing assets were $109.8 million, or 1.09% of assets, at June 30.
- Liquidity and deposit stability, especially uninsured deposits, pledged collateral and the availability and terms of contingent borrowing sources.
- Realized or further changes in securities values, and the potential effect of any additional securities sales.
- Progress and costs of digital and technology initiatives, and the durability of the reported efficiency improvement.