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OFG BANCORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please read the following discussion and analysis of our financial condition and results of operations together with the "Selected Financial Data" and our consolidated financial statements and related notes included under Item I, "Financial Statements" of this report on Form 10-Q. This discussion and analysis contains forward-looking statements. Please see "Forward-Looking Statements," "Risk Factors," and "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 and set forth in our Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K"), for discussion of the uncertainties, risks and assumptions associated with these statements. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Item 2 of our Form 10-Q for the quarter endedMarch 31, 2021 . Other factors not identified above, including those described under the headings in our Annual Report on Form 10-K for the year endedDecember 31, 2021 may also cause actual results to differ materially from those described in our forward-looking statements. OFG is a publicly-owned financial holding company that provides wide range of banking and financial services such as commercial, consumer and mortgage lending, auto loans and leasing, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. OFG operates through three major business segments: Banking, Wealth Management, andTreasury , and distinguishes itself based on quality service. OFG conducts its business through its main office inSan Juan, Puerto Rico , forty nine branches inPuerto Rico and two branches in theU.S. Virgin Islands (the "USVI"). OFG has three subsidiaries with operations inPuerto Rico : the Bank,Oriental Financial Services andOriental Insurance ; three subsidiaries inthe United States , OPC,OFG USA andOFG Ventures ; and one subsidiary in theCayman Islands , OFG Reinsurance. OFG's long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, continuously improving our already effective asset-liability management, growing non-interest revenue from banking and financial services, and achieving greater operating efficiencies. OFG's diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, reinsurance and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, OFG's commitment is to continue producing a balanced and growing revenue stream.
RECENT DEVELOPMENTS
Capital Actions
InJanuary 2022 , OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend by 25%, to$0.15 per common share from$0.12 per share, beginning on the quarter endedMarch 31, 2022 . The Board of Directors also approved a new stock repurchase program to purchase$100 million of its common stock in the open market, which OFG expects to complete during the 2022 fiscal year. AtMarch 31, 2022 , OFG has repurchased 1.2 million shares of common stock for$33.5 million .
Covid-19 Pandemic and Economic Conditions
SinceMarch 2020 , the COVID-19 pandemic has adversely affected our communities and the way we do business, as well as, economic activity globally, nationally and locally. Among other things, interest rates declined, unemployment increased and economic output slowed dramatically during 2020. Within the last year, as restrictions related to the pandemic eased inthe United States , employment increased and pent-up demand was released, which together with COVID-19 lockdowns in foreign jurisdictions created global supply chain issues and shortages of goods, which in turn has triggered price inflation. In an effort to address inflation, theFederal Reserve Bank ("FRB") has slowed monetary accommodation and onMarch 16, 2022 increased the federal funds rate 25 bps, in the first of what is expected to be a series of rate increases during 2022. 59 -------------------------------------------------------------------------------- Adding to economic uncertainty and increased inflationary pressures are military actions taken byRussia againstUkraine commencing inFebruary 2022 , which have added stress to existing supply chain concerns and placed upward pressure on oil and natural gas prices. The macroeconomic outlook forPuerto Rico continues to show strength. Unemployment, employment participation, manufacturing, residential home values are all moving in the right direction. Our commercial clients are experiencing a higher demand for their products and services. Consumer demand also remains strong, and at long last,Puerto Rico has exited bankruptcy. Nevertheless, any recovery of the Puerto Rican economy could be adversely impacted by macroeconomic developments withinthe United States and across the globe. The global macroeconomic outlook continues to remain uncertain and at this time, OFG cannot reasonably estimate the term or intensity of any possible adverse impact on our financial position, operations or liquidity, resulting from economic disruption and uncertainty related to COVID-19 variants, trade and supply chain disruption, continuing inflationary pressures, ongoing military actions againstUkraine , and the uncertainty of the timing and extent of potential actions that might be taken by the FRB. However, the high levels of reconstruction and stimulus funds are serving as a good cushion to dampen the negative effects.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in "Note 1-Summary of Significant Accounting Policies" of our 2021 Form 10-K. In the "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" section of our 2021 Form 10-K, we identified the Allowance for Credit Losses related to loans collectively evaluated for impairment as a critical accounting policy and estimate, because it involves significant estimation uncertainty that has or is reasonably likely to have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2021 Form 10-K.
FINANCIAL HIGHLIGHTS
During the quarter endedMarch 31, 2022 , OFG's core business demonstrated strong momentum with solid loan and deposit growth, net interest margin ("NIM") expansion, and lower provision. Total assets reached$10.2 billion , expenses remained in line, and OFG repurchased$33.5 million of shares of common stock as part of our$100 million buyback program. ThePuerto Rico economic environment continues to trend positively, while OFG continues to focus on improving the customer experience and growing together with our clients and the communities we serve. During the quarter, for example, OFG introduced fully proprietary digital processes to apply for consumer loans and to open and contribute into our IRA fund.
Earnings Per Share diluted was
2021 and
Net Interest Income was$105.2 million compared to$104.2 million in the fourth quarter of 2021 and$98.2 million in the first quarter of 2021. NIM expanded to 4.47% from 4.18% in the fourth quarter of 2021 primarily due to increased volume of loans and investments. Interest Income totaled$112.9 million compared to$112.6 million in the fourth quarter of 2021 and$111.0 million in the first quarter of 2021. Compared to the fourth quarter of 2021, interest income benefited from higher yields on higher average balances of loans and investment securities and higher average yields on cash, which was offset by two fewer days that reduced interest income by$1.7 million . 60 -------------------------------------------------------------------------------- Total Interest Expense of$7.8 million compared to$8.4 million in the fourth quarter of 2021 and 12.8 million in the first quarter of 2021. Compared to the fourth quarter of 2021, interest expense reflected lower average balances and costs of deposits and borrowings, partially offset by$0.4 million to expense unamortized issuance costs as a result of the redemption of$36.1 million in 3.23% variable rate subordinated notes. Banking and Financial Service Revenues was$31.2 million compared to$29.5 million in the first quarter of 2021 and$36.8 million in the fourth quarter of 2021, which included$4.3 million in annual insurance commissions. These revenues reflected higher levels of banking service, mortgage banking, and wealth management revenues compared to the first quarter of 2021.
Pre-Provision Net Revenues totaled
the fourth quarter of 2021 and
Provision for credit losses of$1.6 million compared to$7.2 million in the fourth quarter of 2021 and$6.3 million in the first quarter of 2021. The provision for credit losses included a$4.0 million increase related to the growth of loan balances and a$4.2 million increase for a commercial loan previously placed in non-accrual, partially offset by a$5.7 million reduction in the qualitative adjustment due to improved economic conditions. The fourth quarter of 2021 included a provision of$9.7 million related to transferring certain past due loans to held for sale. Credit Quality: Net charge off rate and early and total delinquency rates fell to 0.04%, 1.97% and 3.17%, respectively, compared to the previous and year ago quarters. The first quarter of 2022 net charge offs included a$2.8 million recovery from an acquired PCD loan and a$1.1 million recovery as part of the final settlement of the non-performing mortgage loans sale contracted for in the fourth quarter of 2021. Non-Interest Expenses totaled$81.2 million compared to$86.5 million in the fourth quarter of 2021 and$77.7 million in the first quarter of 2021. The$5.3 million reduction from the fourth quarter of 2021 primarily reflected lower legal reserve provisions ($2.4 million ) and lower combination of other items (totaling$2.1 million ), including operational losses, technology related expenses, and training costs. Loans Held for Investment were$6.55 billion compared to$6.40 billion atDecember 31, 2021 and$6.59 billion atMarch 31, 2021 . Loans grew$145.4 million from the fourth quarter of 2021, reflecting increases in commercial loans (net of PPP forgiveness) as well as increases in consumer and auto loans. New Loan Originations of$623.2 million compared to$632.7 million in the fourth quarter of 2021 and$527.6 million in the first quarter of 2021, which included$126.3 million of PPP loans. The first quarter of 2022 reflected continued, high levels of auto lending, commercial lending inPuerto Rico and US, and increased demand for consumer lending. Customer Deposits totaled$8.97 billion atMarch 31, 2022 compared to$8.59 billion atDecember 31, 2021 and$8.72 billion atMarch 31, 2021 . Core deposits grew$375.1 million fromDecember 31, 2021 , reflecting increases in commercial and retail accounts. Capital: CET1 ratio was 13.24% compared to 13.77% atDecember 31, 2021 and 13.56% atMarch 31, 2021 . Tangible book value per share was$18.90 compared to$19.08 atDecember 31, 2021 and$17.39 atMarch 31, 2021 . The decline in CET1 and tangible book value per share fromDecember 31, 2021 reflected the repurchase of 1.2 million shares of common stock and reduction in other comprehensive income, partially offset by an increase in retained earnings. 61 --------------------------------------------------------------------------------
Selected income statement and balance sheet data and key performance indicators
are presented in the tables below:
Quarter Ended March 31,
2022 2021 Variance %
EARNINGS DATA: (In thousands, except per share data)
Interest income $ 112,949 $ 110,976 1.8%
Interest expense 7,755 12,778 (39.3)%
Net interest income 105,194 98,198 7.1%
Provision for loan and lease losses 1,551 6,324 (75.5)%
Net interest income after provision for loan and
leases losses 103,643 91,874 12.8%
Non-interest income 31,606 30,413 3.9%
Non-interest expenses 81,155 77,666 4.5%
Income before taxes 54,094 44,621 21.2%
Income tax expense 16,573 14,248 16.3%
Net income 37,521 30,373 23.5%
Less: dividends on preferred stock - (1,255) (100.0)%
Income available to common shareholders $ 37,521 $ 29,118 28.9%
PER SHARE DATA:
Basic $ 0.77 $ 0.57 35.1%
Diluted $ 0.76 $ 0.56 35.7%
Average common shares outstanding 48,968 51,397 (4.7)%
Average common shares outstanding and equivalents 49,484 51,752 (4.4)%
Cash dividends declared per common share $ 0.15 0.08 87.5%
Cash dividends declared on common shares $ 7,438 4,116 80.7%
PERFORMANCE RATIOS:
Return on average assets (ROA) 1.48 % 1.21 % 22.3%
Return on average tangible common stockholders'
equity 15.88 % 13.11 % 21.1%
Return on average common equity (ROE) 14.08 % 11.43 % 23.2%
Efficiency ratio 59.50 % 60.84 % (2.2)%
Interest rate spread 4.45 % 4.21 % 5.7%
Interest rate margin 4.47 % 4.26 % 4.9%
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March 31, December 31, Variance
2022 2021 %
PERIOD END BALANCES AND CAPITAL RATIOS: (In thousands, except per share data)
Investments and loans
Investment securities $ 1,258,718 $ 895,818 40.5%
Loans, net 6,449,130 6,329,311 1.9%
Total investments and loans $ 7,707,848 $ 7,225,129 6.7%
Deposits and borrowings
Deposits $ 8,978,222 $ 8,603,118 4.4%
Other borrowings 28,035 64,571 (56.6)%
Total deposits and borrowings $ 9,006,257 $ 8,667,689 3.9%
Stockholders' equity
Common stock 59,885 59,885 -%
Additional paid-in capital 633,796 637,061 (0.5)%
Legal surplus 121,389 117,677 3.2%
Retained earnings 426,320 399,949 6.6%
Treasury stock, at cost (180,717) (150,572) 20.0%
Accumulated other comprehensive (loss) income (20,638) 5,160 (500.0)%
Total stockholders' equity $ 1,040,035 $ 1,069,160 (2.7)%
Per share data
Book value per common share $ 21.37 $ 21.54 (0.8)%
Tangible book value per common share $ 18.90 $ 19.08 (0.9)%
Market price $ 26.64 $ 26.56 0.3%
Capital ratios
Leverage capital 9.54 % 9.69 % (1.5)%
Common equity Tier 1 capital 13.24 % 13.77 % (3.8)%
Tier 1 risk-based capital 13.24 % 14.27 % (7.2)%
Total risk-based capital 14.49 % 15.52 % (6.6)%
Financial assets managed
Trust assets managed $ 3,608,480 $ 3,758,895 (4.0)%
Broker-dealer assets gathered 2,311,922 2,466,004 (6.2)%
Total assets managed $ 5,920,402 $ 6,224,899 (4.9)%
ANALYSIS OF RESULTS OF OPERATIONS
The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters endedMarch 31, 2022 and 2021. 63 --------------------------------------------------------------------------------
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED
Interest Average rate Average balance
March 2022 March 2021 March 2022 March 2021 March 2022 March 2021
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 112,949 $ 110,976 4.80 % 4.81 % $ 9,540,266 $ 9,358,377
Tax equivalent adjustment 2,476 2,170 0.11 % 0.09 % - -
Interest-earning assets - tax
equivalent 115,425 113,146 4.91 % 4.90 % 9,540,266 9,358,377
Interest-bearing liabilities 7,755 12,778 0.35 % 0.60 % 8,864,175 8,682,584
Tax equivalent net interest
income / spread 107,670 100,368 4.56 % 4.30 % 676,091 675,793
Tax equivalent interest rate
margin 4.67 % 4.39 %
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 4,455 2,176 1.88 % 1.68 % 949,035 518,038
Interest bearing cash and
money market investments 929 595 0.18 % 0.11 % 2,072,112 2,204,431
Total investments 5,384 2,771 0.72 % 0.41 % 3,021,147 2,722,469
Non-PCD loans
Mortgage 9,353 10,774 5.29 % 5.35 % 706,715 806,090
Commercial 29,571 27,726 5.36 % 5.29 % 2,236,213 2,126,872
Consumer 12,716 11,615 11.20 % 11.45 % 460,571 411,377
Auto and leasing 34,991 32,815 8.30 % 8.59 % 1,710,216 1,549,535
Total Non-PCD loans 86,631 82,930 6.87 % 6.87 % 5,113,715 4,893,874
PCD loans
Mortgage 17,342 20,031 5.89 % 5.57 % 1,178,444 1,437,214
Commercial 3,250 4,588 6.16 % 6.68 % 213,964 278,550
Consumer 47 37 14.24 % 8.05 % 1,319 1,810
Auto and leasing 295 619 10.25 % 10.26 % 11,677 24,460
Total PCD loans 20,934 25,275 5.96 % 5.80 % 1,405,404 1,742,034
Total loans (1) 107,565 108,205 6.69 % 6.61 % 6,519,119 6,635,908
Total interest-earning assets 112,949 110,976 4.80 % 4.81 % 9,540,266 9,358,377
Interest-bearing liabilities:
Deposits:
NOW Accounts 2,140 2,393 0.31 % 0.40 % 2,813,037 2,397,673
Savings and money market 1,198 2,124 0.22 % 0.43 % 2,248,193 2,003,963
Time deposits 2,057 5,507 0.70 % 1.26 % 1,199,340 1,775,828
Total core deposits 5,395 10,024 0.35 % 0.66 % 6,260,570 6,177,464
Brokered deposits 8 163 0.30 % 1.44 % 11,366 45,955
5,403 10,187 0.35 % 0.66 % 6,271,936 6,223,419
Non-interest bearing deposits - - - 0.00 % 2,547,977 2,358,214
64
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Fair value premium and core deposit intangible amortizations 1,638 1,837 - 0.00 % - - Total deposits 7,041 12,024 0.32 % 0.57 % 8,819,913 8,581,633 Borrowings: Securities sold under agreements to repurchase - - - % - % - - Advances from FHLB and other borrowings 193 459 2.77 % 2.87 % 28,184 64,868 Subordinated capital notes 521 295 13.15 % 3.31 % 16,078 36,083 Total borrowings 714 754 6.54 % 3.03 % 44,262 100,951 Total interest-bearing liabilities 7,755 12,778 0.35 % 0.60 % 8,864,175 8,682,584 Net interest income / spread$ 105,194 $ 98,198 4.45 % 4.21 % Interest rate margin 4.47 % 4.26 % Excess of average interest-earning assets over average interest-bearing liabilities$ 676,091 $ 675,793 Average interest-earning assets to average interest-bearing liabilities ratio 107.63 % 107.78 %
(1) Includes loans held for sale and excludes allowance for credit losses.
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investment securities $ 1,957 $ 322 $ 2,279
Interest bearing cash and money market investments (36) 370 334
Loans 617 (1,257) (640)
Total interest income 2,538 (565) 1,973
Interest Expense:
NOW Accounts 373 (626) (253)
Savings and money market 233 (1,159) (926)
Time deposits (1,532) (1,918) (3,450)
Brokered deposits (75) (80) (155)
Fair value premium and core deposit intangible
amortizations - (199) (199)
Advances from FHLB and other borrowings (251) (15) (266)
Subordinated capital notes (240) 466 226
Total interest expense (1,492) (3,531) (5,023)
Net Interest Income $ 4,030 $ 2,966 $ 6,996
65
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Net Interest Income
Net interest income is a function of the difference between rates earned on OFG's interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). OFG constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.
Comparison of quarters ended
Net interest income of
Tax equivalent basis net interest income of
Interest rate spread increased 24 basis points to 4.45% from 4.21% and net
interest margin increased 21 basis points to 4.47% from 4.26%. This increase
reflects a decrease of 25 basis point in the total average cost of
interest-bearing liabilities.
Net interest income was positively impacted by:
•Lower interest expense by$5.0 million , reflecting both a reduced cost and lower average balances of total deposits and borrowings, partially offset by a$405 thousand write off unamortized issuance costs related to the early redemption of$36.1 million variable rate subordinated capital notes during the quarter. •An increase of$2.3 million in interest income from investments securities related to purchases of available-for-sale and held-to-maturity mortgage backed securities during 2022 and 2021.
Net interest income was negatively impacted by a decrease in interest income
from loans of
commercial and mortgage loan portfolios purchased with credit deterioration
("PCD"), offset by higher interest income of
commercial and consumer loans.
TABLE 2 - NON-INTEREST INCOME SUMMARY
Quarter Ended March 31,
2022 2021 Variance
(In thousands)
Banking service revenue $ 17,562 $ 16,497 6.5 %
Wealth management revenue 7,857 7,388 6.3 %
Mortgage banking activities 5,782 5,573 3.8 %
Total banking and financial service revenue 31,201 29,458 5.9 %
Net gain (loss) on:
Other non-interest income 405 955 (57.6) %
Total non-interest income, net $ 31,606 $ 30,413 3.9 %
Non-Interest Income
Non-interest income is affected by the amount of the Bank's trust department
assets under management, transactions generated by clients' financial assets
serviced by OFG's securities broker-dealer, insurance agency and reinsurance
subsidiaries, the level of mortgage banking activities, fees generated from
loans and deposit accounts, and gains on sales of assets.
Comparison of quarters ended
OFG recorded non-interest income, net, in the amount of
to
non-interest income was mainly due to:
•An increase of$1.1 million in banking service revenues, as a result of an increase of$370 thousand in servicing and prepayment loan fees,$213 thousand in electronic banking fees from transaction volumes,$188 thousand in credit life commissions,$183 thousand in checking account fees, and$88 thousand in international fees;
•An increase of
reinsurance business income of
broker-dealer revenues of
66 --------------------------------------------------------------------------------
decreased due to lower income from equity and mutual fund retailer fees by
thousand
•An increase of
on repurchase loans and other mortgage banking activities by
offset by lower gains on loans sold by
The increases mentioned above were partially offset by a$592 thousand decrease in other non-interest income, primarily related to the effect in the prior year quarter of a recovery of$610 thousand on a receivable previously written-off.
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Quarter Ended March 31,
2022 2021 Variance %
(In thousands)
Compensation and employee benefits $ 34,768 $ 32,618 6.6 %
Occupancy, equipment and infrastructure costs 11,916 13,128 -9.2 %
Electronic banking charges 9,786 8,232 18.9 %
Professional and service fees 5,421 4,536 19.5 %
Information technology expenses 4,804 4,254 12.9 %
Taxes, other than payroll and income taxes 3,307 3,661 -9.7 %
Insurance 2,635 2,455 7.3 %
Loan servicing and clearing expenses 1,922 1,841 4.4 %
Advertising, business promotion, and strategic
initiatives 2,062 1,431 44.1 %
Pandemic expenses 881 1,769 -50.2 %
Communication 1,116 966 15.5 %
Printing, postage, stationery and supplies 1,092 1,217 -10.3 %
Director and investor relations 249 300 -17.0 %
Foreclosed real estate and other repossessed assets
income, net of expenses (1,482) (50) 2,864.0 %
Other 2,678 1,308 104.7 %
Total non-interest expenses $ 81,155 $ 77,666 4.5 %
Relevant ratios and data:
Efficiency ratio 59.50 % 60.84 %
Compensation and benefits to non-interest expense 42.84 % 42.00 %
Compensation to average total assets owned
(annualized) 1.38 % 1.30 %
Average number of employees 2,259 2,231
Average compensation per employee (annualized, in
thousands) $ 61.56 $ 58.5
Average loans per average employee $ 2,886 $ 2,974
Non-Interest Expenses
Comparison of quarters ended
Non-interest expense was
The increase in non-interest expense was mainly due to:
•Increase in compensation and employee benefits by$2.2 million , mainly due to a one-time$1.3 million pandemic employee tax credit in prior year quarter,$1.5 million higher salary expenses associated with an increase in minimum hourly wages during the third quarter of 2021 and annual salary increase during the current quarter. These increases were offset by a$825 thousand decrease in commissions and incentives mainly due to a change in payout structure; •Increase in electronic banking charges by$1.6 million driven by increases in merchant fees and debit and credit card billing fees due to higher transaction volumes in the current quarter; 67 -------------------------------------------------------------------------------- •Increase in other non-interest expense by$1.4 million , mainly reflecting higher claims and settlements by$873 thousand due to the reversal of$1.2 million reserve in the prior year quarter as a result of a favorable arbitration award, and$568 thousand higher operational losses; and
•Increase in professional and service fees by
consulting, outsourcing and legal fees.
The increase in non-interest expense was partially offset by:
•Improvements in foreclosed real estate and other repossessed assets income by$1.4 million reflecting an increase of$924 thousand in gains on sales of other repossessed assets and$559 thousand in net gain on sale of foreclosed real estate; and •Decrease in occupancy, equipment and infrastructure expenses by$1.2 million reflecting lower rent, building maintenance and security guard expenses related to branch consolidations during 2021 and 2022. The efficiency ratio was 59.50% and improved from 60.84%. The efficiency ratio measures how much of OFG's revenues is used to pay operating expenses. OFG computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are excluded from the adjusted efficiency ratio computation for the quarters endedMarch 31, 2022 and 2021 amounted to$405 thousand and$955 thousand , respectively.
Provision for Credit Losses
Comparison of quarters ended
Based on an analysis of the credit quality and the composition of OFG's loan portfolio, management determined that the provision for the quarter endedMarch 31, 2022 was adequate to maintain the allowance for credit losses at an appropriate level to provide for expected credit losses based upon an evaluation of known and inherent risks. Provision for credit losses decreased$4.8 million from$6.3 million to$1.6 million . The provision for credit losses for the quarter endedMarch 31, 2022 includes a provision of$4.0 million related to growth in loan balances, an increase of$4.2 million related to a commercial loan previously placed in non-accrual status, and a decrease of$5.7 million associated with qualitative adjustments due to improved macroeconomic conditions. The provision for credit losses for prior year quarter included a$3.7 million release of Covid-19 related loan reserves and a$3.5 million provision for a commercial loan in workout prior to the pandemic.
Income Taxes
Comparison of quarters ended
OFG's effective tax rate ("ETR") was 30.6% in 2022 compared to 31.9% in 2021.
The decrease in ETR is mainly related to a discrete income tax windfall for
stocks vested during the quarter.
Business Segments
OFG segregates its businesses into the following major reportable segments: Banking, Wealth Management, andTreasury . Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG's organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG's methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters endedMarch 31, 2022 and 2021. 68 --------------------------------------------------------------------------------
Quarter Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 108,483 $ 5 $ 4,461 $ 112,949 $ - $ 112,949
Interest expense (7,532) - (223) (7,755) - (7,755)
Net interest income 100,951 5 4,238 105,194 - 105,194
Provision (recapture)
for credit losses 1,710 - (159) 1,551 - 1,551
Non-interest income 23,550 8,006 50 31,606 - 31,606
Non-interest expenses (75,916) (4,585) (654) (81,155) - (81,155)
Intersegment revenue 489 - - 489 (489) -
Intersegment expenses - (343) (146) (489) 489 -
Income before income
taxes 47,364 3,083 3,647 54,094 - 54,094
Income tax expense 16,564 - 9 16,573 - 16,573
Net income $ 30,800 $ 3,083 $ 3,638 $ 37,521 $ - $ 37,521
Total assets $ 8,176,217 $ 24,695 $ 3,036,638 $ 11,237,550 $ (1,047,430) $ 10,190,120
Quarter Ended March 31, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 108,230 $ 12 $ 2,734 $ 110,976 $ - $ 110,976
Interest expense (12,136) - (642) (12,778) - (12,778)
Net interest income 96,094 12 2,092 98,198 - 98,198
Provision (recapture)
for credit losses 6,588 - (264) 6,324 - 6,324
Non-interest income 22,873 7,531 9 30,413 - 30,413
Non-interest expenses (73,874) (2,829) (963) (77,666) - (77,666)
Intersegment revenue 553 - - 553 (553) -
Intersegment expenses - (291) (262) (553) 553 -
Income before income
taxes 39,058 4,423 1,140 44,621 - 44,621
Income tax expense 14,236 - 12 14,248 - 14,248
Net income $ 24,822 $ 4,423 $ 1,128 $ 30,373 $ - $ 30,373
Total assets $ 8,312,367 $ 28,505 $ 2,849,709 $ 11,190,581 $ (1,037,239) $ 10,153,342
69
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Comparison of quarters ended
Banking
OFG's banking segment net income before taxes increased by
•Lower interest expense by
average balances of core deposits;
•Decrease in provision for credit losses by$4.9 million . The provision for credit losses for the first quarter of 2021 included a$3.5 million provision for a commercial loan in workout prior to the pandemic; and •An increase of$677 thousand in non-interest income, mainly from a$1.1 million increase in banking service revenues on servicing and other loan fees, electronic banking fees, credit life commissions, checking accounts, and international fees;$209 thousand increase in mortgage-banking activities due to lower losses on repurchased loans and other mortgage banking activities, partially offset by lower gains on loans sold due to a decrease in sales; and a$592 thousand decrease in other non-interest income, primarily related to the effect in prior year quarter of receivable recoveries previously written-off. The net income before taxes was partially offset by an increase in non-interest expenses by$2.0 million , mainly due to a one-time$1.3 million pandemic employee tax credit in the prior year quarter,$1.5 million higher salary expenses associated with an increase in minimum hourly wages during the third quarter of 2021 and annual salary increase during the current quarter. These increases were offset by a$825 thousand decrease in commissions and incentives mainly due to a change in payout structure.
Wealth Management
Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment decreased by$1.3 million due to higher non-interest expense by$1.8 million , mainly reflecting higher claims and settlements by$873 thousand due to the reversal of$1.2 million reserve in the prior year quarter as a result of a claim settled in favor of OFG, higher consulting and advisory expenses by$245 thousand and higher compensation and employee benefits by$201 thousand . This decrease was partially offset by an increase in non-interest income of$475 thousand , mainly due to new reinsurance business income of$803 thousand and lower broker-dealer revenues by$235 thousand .
reflecting:
•An increase in interest income by$1.7 million related to the purchases of available-for-sale and held-to-maturity mortgage backed securities during 2022 and 2021; and
•Lower interest expense by
million
balances of brokered deposits.
70 --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At
increase of
2021
The investment portfolio increased by$362.9 million , or 40.5%, primarily related to the purchase of agency mortgage-backed securities during the first quarter of 2022 amounting to$398.9 million . OFG's strategy is to invest its liquidity in mortgage-backed securities and designate them as available for sale or held-to-maturity after taking into account the bond's characteristics with respect to yield and term and the current market environment. OFG's loan portfolio is comprised of residential mortgage loans, commercial loans secured by real estate, other commercial and industrial loans, consumer loans, and auto loans and leases. AtMarch 31, 2022 , OFG's net loan portfolio increased by$119.8 million , or 1.9%, reflecting increases in commercial, consumer and auto loans, offset by a decrease in mortgage loans, SBA PPP loans forgiven during the quarter of$33.2 million and the sale of$21.9 million of past due mortgage loans held for sale. Cash and due from banks of$1.850 billion decreased by$164.6 million , reflecting cash used to purchase agency mortgage-backed securities, disbursements for loans originated during the quarter, and the redemption of$36.1 million in 3.23% variable rate subordinated notes, partially offset by an increase in commercial and government-related deposits.
Financial Assets Managed
OFG's financial assets include those managed by OFG's trust division, retirement
plan administration subsidiary, and assets gathered by its broker-dealer and
insurance subsidiaries. OFG's trust division offers various types of individual
retirement accounts ("IRAs") and manages 401(k) and Keogh retirement plans and
custodian and corporate trust accounts, while the retirement plan administration
subsidiary manages private retirement plans. At March 31, 2022 , the total assets
managed by OFG's trust division and retirement plan administration subsidiary
amounted to $3.608 billion , compared to $3.759 billion at December 31, 2021 .
OFG's broker-dealer subsidiary offers a wide array of investment alternatives to
its client base, such as tax-advantaged fixed income securities, mutual funds,
stocks, bonds and money management wrap-fee programs. At March 31, 2022 , total
assets gathered by the broker-dealer and insurance agency subsidiaries from
their customers' investment accounts amounted to $2.312 billion , compared to
$2.466 billion at December 31, 2021 . Changes in trust and broker-dealer related
assets primarily reflect changes in portfolio balances and differences in market
values.
Goodwill
OFG's goodwill is not amortized to expense but is tested at least annually for
impairment. A quantitative annual impairment test is not required if, based on a
qualitative analysis, OFG determines that the existence of events and
circumstances indicate that it is more likely than not that goodwill is not
impaired. OFG completes its annual goodwill impairment test as of October 31 of
each year. OFG tests for impairment by first allocating its goodwill and other
assets and liabilities, as necessary, to defined reporting units. A fair value
is then determined for each reporting unit. If the fair values of the reporting
units exceed their book values, no write-down of the recorded goodwill is
necessary. If the fair values are less than the book values, an additional
valuation procedure is necessary to assess the proper carrying value of the
goodwill.
As of March 31, 2022 and December 31, 2021 , OFG had $86.1 million of goodwill
allocated as follows: $84.1 million to the banking segment and $2.0 million to
the wealth management segment. Please refer to Note 9 - Goodwill and Other
Intangible Assets to our consolidated financial statements for more information
on the annual goodwill impairment test.
71
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TABLE 4 - ASSETS SUMMARY AND COMPOSITION
March 31, December 31, Variance
2022 2021 %
(In thousands)
Investments:
FNMA and FHLMC certificates $ 918,696 $ 550,809 66.8 %
Obligations of US government-sponsored agencies - 1,183 -100.0 %
US Treasury securities 10,763 10,825 -0.6 %
CMOs issued by US government-sponsored agencies 21,105 24,430 -13.6 %
GNMA certificates 287,196 288,578 -0.5 %
Equity securities 18,556 17,578 5.6 %
Other debt securities 2,384 2,395 -0.5 %
Trading securities 18 20 -10.0 %
Total investments 1,258,718 895,818 40.5 %
Loans, net 6,449,130 6,329,311 1.9 %
Total investments and loans 7,707,848 7,225,129 6.7 %
Other assets:
Cash and due from banks (including restricted cash) 1,850,081 2,014,698 -8.2 % Money market investments 5,648 8,952 -36.9 % Foreclosed real estate 15,297 15,039 1.7 % Accrued interest receivable 56,097 56,560 -0.8 % Deferred tax asset, net 87,608 99,063 -11.6 % Premises and equipment, net 97,403 92,124 5.7 % Servicing assets 49,446 48,973 1.0 % Goodwill 86,069 86,069 0.0 % Right of use assets 28,576 28,846 -0.9 % Core deposit, customer relationship and other intangibles 33,947 36,093 -5.9 % Other assets and customers' liability on acceptances 172,100 188,174 -8.5 % Total other assets 2,482,272 2,674,591 -7.2 % Total assets$ 10,190,120 $ 9,899,720 2.9 % Investment portfolio composition: FNMA and FHLMC certificates 73.0 % 61.5 % Obligations of US government-sponsored agencies 0.0 % 0.1 % US Treasury securities 0.9 % 1.2 % CMOs issued by US government-sponsored agencies 1.7 % 2.7 % GNMA certificates 22.8 % 32.2 % Equity securities 1.5 % 2.0 % Other debt securities and trading securities 0.1 % 0.3 % 100.0 % 100.0 % 72
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TABLE 5 - LOAN PORTFOLIO COMPOSITION
March 31, December 31, Variance
2022 2021 %
(In thousands)
Loans held for investment:
Commercial $ 2,499,914 $ 2,379,330 5.1 %
Mortgage 1,848,641 1,907,271 (3.1) %
Consumer 455,792 409,675 11.3 %
Auto and leasing 1,743,624 1,706,310 2.2 %
6,547,971 6,402,586 2.3 %
Allowance for credit losses (157,075) (155,937) 0.7 %
Total loans held for investment 6,390,896 6,246,649 2.3 %
Mortgage loans held for sale 26,761 51,096 (47.6) %
Other loans held for sale 31,473 31,566 (0.3) %
Total loans, net $ 6,449,130 $ 6,329,311 1.9 %
OFG's loan portfolio is composed of mortgage, commercial, consumer, and auto
loans. As shown in Table 5 above, total loans, net, amounted to $6.449 billion
at March 31, 2022 and $6.329 billion at December 31, 2021 . OFG's loans
held-for-investment portfolio composition and trends were as follows:
•Commercial loan portfolio amounted to $2.500 billion (38.2% of the gross loan
portfolio) compared to $2.379 billion (37.2% of the gross loan portfolio) at
December 31, 2021 .
Commercial production, excluding PPP loans, increased 120.7%, or $155.3 million
from $128.7 million in prior year quarter to $283.9 million in the quarter ended
March 31, 2022 . During the first quarter of 2021, OFG originated $126.3 million
of PPP loans. There were no originations of PPP loans during the quarter ended
March 31, 2022 , as the program concluded in 2021.
•Mortgage loan portfolio amounted to
portfolio) compared to
portfolio) at
Mortgage loan production totaled$63.9 million for the quarter endedMarch 31, 2022 which represents a decrease of 33.4% from$95.9 million in prior year quarter. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to$9.7 million and$14.5 million atMarch 31, 2022 andDecember 31, 2021 , respectively. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. •Consumer loan portfolio amounted to$455.8 million (7.0% of the gross loan portfolio) compared to$409.7 million (6.4% of the gross loan portfolio) atDecember 31, 2021 . Consumer loan production increased 253.2% to$97.1 million in the quarter endedMarch 31, 2022 from$27.5 million in the prior year quarter. •Auto and leasing portfolio amounted to$1.744 billion (26.6% of the gross loan portfolio) compared to$1.706 billion (26.7% of the gross originated loan portfolio) atDecember 31, 2021 . Auto loans production increased 19.4% to$178.3 million in the quarter endedMarch 31, 2022 compared to$149.3 million in the prior year quarter.
TABLE 6 -
March 31, 2022
Maturity
Carrying Value 1 to 3 Years More than 3 Years
Loans: (In thousands)
Municipalities $ 86,089 $ 35,020 $ 51,069
73
--------------------------------------------------------------------------------
At
Rico
Credit Risk Management
Allowance for Credit Losses
OnJanuary 1, 2020 , OFG adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management's best estimate of future expected credit losses inherent in OFG's relevant financial assets.
Tables 7 through 9 set forth an analysis of activity in the allowance for credit
losses and present selected credit loss statistics for the quarters ended
addition, Table 5 sets forth the composition of the loan portfolio.
Please refer to the "Provision for Credit Losses" and "Critical Accounting Estimates" sections in the Management's Discussion and Analysis of Financial Condition and Results of Operations section and Note 7 - Allowance for Credit Losses of this report for a more detailed analysis of provisions and allowance for credit losses. Non-performing Assets OFG's non-performing assets include non-performing loans and foreclosed real estate (see Tables 10 and 12). AtMarch 31, 2022 , OFG had$86.8 million of non-accrual loans, including$11.2 million PCD loans, compared to$101.9 million atDecember 31, 2021 . AtMarch 31, 2022 andDecember 31, 2021 , loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to$123.4 million and$125.9 million , respectively, as they were performing under their new terms. Delinquent residential mortgage loans insured or guaranteed under applicable FHA andVA programs are classified as non-performing loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, those loans are included as non-performing loans but excluded from non-accrual loans. AtMarch 31, 2022 , OFG's non-performing assets decreased by 10.6% to$115.3 million (1.13% of total assets) from$129.0 million (1.30% of total assets) atDecember 31, 2021 . Foreclosed real estate and other repossessed assets amounting to$15.3 million and$2.6 million , respectively, atMarch 31, 2022 , increased from$15.0 million and$1.9 million , respectively, atDecember 31, 2021 , recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. AtMarch 31, 2022 , the allowance coverage ratio to non-performing loans was 161.3% (139.2% atDecember 31, 2021 ). Upon adoption of the current expected credit losses ("CECL") methodology, OFG elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for PCD loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed the pool is classified as non-accrual, the accretion/amortization of the non-credit (discount) premium will cease. OFG follows a conservative residential mortgage lending policy with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain majorU.S. mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.
The following items comprise non-performing loans held for investment, including
Non-PCD and PCDs:
Commercial loans - At
amounted to
decrease from
74 -------------------------------------------------------------------------------- performing loans). Non-PCD commercial loans are placed on non-accrual status when they become 90 days or more past due and are written down, if necessary, based on the specific evaluation of the underlying collateral, if any. Mortgage loans - AtMarch 31, 2022 , OFG's non-performing mortgage loans totaled$37.1 million (38.1% of OFG's non-performing loans), a 6.7% decrease from$39.7 million (35.5% of OFG's non-performing loans) atDecember 31, 2021 . Non-PCD mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA andVA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due. Consumer loans - AtMarch 31, 2022 , OFG's non-performing consumer loans amounted to$2.0 million (2.1% of OFG's non-performing loans), an 11.9% decrease from$2.3 million atDecember 31, 2021 (2.1% of OFG's non-performing loans). Non-PCD consumer loans are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. Auto and leasing loans - AtMarch 31, 2022 , OFG's non-performing auto and leasing loans amounted to$12.5 million (12.8% of OFG's total non-performing loans), a decrease of 37.0% from$19.8 million atDecember 31, 2021 (17.6% of OFG's total non-performing loans). Non-PCD auto and leasing loans are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. OFG has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-Conforming Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing OFG's losses on non-performing mortgage loans. The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA,VA , RURAL, PRHFA, conventional loans guaranteed byMortgage Guaranty Insurance Corporation (MGIC), conventional loans sold toFNMA and FHLMC, and conventional loans retained by OFG. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and deed in lieu of foreclosure. The Non-Conforming Mortgage Loan Program is for non-conforming mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-conforming mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting guidelines of FHA/VA /FNMA / FHLMC, and performing loans not meeting secondary market guidelines processed pursuant OFG's current credit and underwriting guidelines. OFG achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan. In order to apply for any of our loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor's financial difficulties. 75 --------------------------------------------------------------------------------
TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN
March 31, December 31, Variance
2022 2021 %
(In thousands)
Allowance for credit losses:
Non-PCD
Commercial $ 37,097 $ 32,262 15.0 %
Mortgage 14,952 15,299 -2.3 %
Consumer 21,100 19,141 10.2 %
Auto and leasing 64,195 65,363 -1.8 %
Total allowance for credit losses $ 137,344 $ 132,065 4.0 %
PCD
Commercial $ 3,622 $ 4,508 -19.7 %
Mortgage 15,881 19,018 -16.5 %
Consumer 31 34 -8.8 %
Auto and leasing 197 312 -36.9 %
Total allowance for credit losses $ 19,731 $ 23,872 -17.3 %
Allowance for credit losses summary
Commercial $ 40,719 $ 36,770 10.7 %
Mortgage 30,833 34,317 -10.2 %
Consumer 21,131 19,175 10.2 %
Auto and leasing 64,392 65,675 -2.0 %
Total allowance for credit losses $ 157,075 $ 155,937 0.7 %
Allowance composition:
Commercial 25.9 % 23.6 %
Mortgage 19.6 % 22.0 %
Consumer 13.5 % 12.3 %
Auto and leasing 41.0 % 42.1 %
100.0 % 100.0 %
Allowance coverage ratio at end of year:
Commercial 1.6 % 1.6 % 5.2 %
Mortgage 1.7 % 1.8 % -7.2 %
Consumer 4.6 % 4.7 % -0.9 %
Auto and leasing 3.7 % 3.9 % -4.2 %
2.4 % 2.4 % -1.6 %
Allowance coverage ratio to non-performing loans:
Commercial 89.0 % 73.3 % 21.3 %
Mortgage 83.1 % 86.4 % -3.8 %
Consumer 1040.9 % 832.6 % 25.0 %
Auto and leasing 515.3 % 331.2 % 55.6 %
161.3 % 139.2 % 15.9 %
76
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TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY
Quarter Ended March 31,
2022 2021 Variance %
(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period $ 155,937 $ 204,809 -23.9 %
Provision for credit losses 1,715 6,269 -72.6 %
Charge-offs (12,417) (17,518) -29.1 %
Recoveries 11,840 8,413 40.7 %
Balance at end of period $ 157,075 $ 201,973 -22.2 %
77
--------------------------------------------------------------------------------
TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES
Quarter Ended March 31,
2022 2021 Variance %
(Dollars in thousands)
Non-PCD
Mortgage
Charge-offs $ (3) $ (787) -99.6 %
Recoveries 2,074 615 237.2 %
Total 2,071 (172) -1,304.1 %
Commercial
Charge-offs (544) (68) 700.0 %
Recoveries 192 430 -55.3 %
Total (352) 362 -197.2 %
Consumer
Charge-offs (2,659) (4,469) -40.5 %
Recoveries 655 565 15.9 %
Total (2,004) (3,904) -48.7 %
Auto and leasing
Charge-offs (7,890) (9,083) -13.1 %
Recoveries 4,891 5,817 -15.9 %
Total (2,999) (3,266) -8.2 %
PCD Loans:
Mortgage
Charge-offs $ (1,134) $ (2,590) (56.2) %
Recoveries 845 146 478.8 %
Total (289) (2,444) (88.2) %
Commercial
Charge-offs (34) (43) (20.9) %
Recoveries 3,023 436 593.3 %
Total 2,989 393 660.6 %
Consumer
Charge-offs (39) (22) 77.3 %
Recoveries 23 21 9.5 %
Total (16) (1) 1,500.0 %
Auto and leasing
Charge-offs (114) (456) (75.0) %
Recoveries 137 383 (64.2) %
Total 23 (73) (131.5) %
Total charge-offs (12,417) (17,518) (29.1) %
Total recoveries 11,840 8,413 40.7 %
Net credit losses $ (577) $ (9,105) (93.7) %
78
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TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES (CONTINUED)
Quarter Ended March 31,
2022 2021 Variance %
(Dollars in thousands)
Net credit losses to average
loans outstanding:
Mortgage (0.38) % 0.47 % -181.06 %
Commercial (0.43) % (0.13) % 242.9 %
Consumer 1.75 % 3.78 % -53.7 %
Auto and leasing 0.69 % 0.85 % -18.5 %
Total 0.04 % 0.55 % -93.5 %
Recoveries to charge-offs 95.35 % 48.02 % 98.5 %
Average Loans Held for Investment
Mortgage $ 1,885,159 $ 2,243,304 -16.0 %
Commercial 2,450,177 2,405,422 1.9 %
Consumer 461,890 413,187 11.8 %
Auto and leasing 1,721,893 1,573,995 9.4 %
Total $ 6,519,119 $ 6,635,908 -1.8 %
TABLE 10 - NON-PERFORMING ASSETS
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans $ 24,420 $ 24,539 -0.5 %
Other loans 51,202 64,465 -20.6 %
Accruing loans
Troubled-Debt Restructuring loans 9,832 9,087 8.2 %
Other loans 738 1,038 -28.9 %
Total $ 86,192 $ 99,129 -13.1 %
PCD 11,187 12,879 -13.1 %
Total non-performing loans $ 97,379 $ 112,008 -13.1 %
Foreclosed real estate 15,297 15,039 1.7 %
Other repossessed assets 2,625 1,945 35.0 %
$ 115,301 $ 128,992 -10.6 %
Non-performing assets to total assets 1.13 % 1.30 % -13.1 %
Non-performing assets to total capital 11.09 % 12.06 % -8.0 %
Quarter Ended March 31,
2022 2021
(In thousands)
Interest that would have been recorded in the period if the
loans had not been classified as non-accruing loans
$
486
79 --------------------------------------------------------------------------------
TABLE 11 - NON-ACCRUAL LOANS
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-accrual loans
Non-PCD
Commercial $ 34,893 $ 37,604 -7.2 %
Mortgage 26,204 29,268 -10.5 %
Consumer 2,030 2,303 -11.9 %
Auto and leasing 12,495 19,829 -37.0 %
Total $ 75,622 $ 89,004 -15.0 %
PCD
Commercial $ 10,877 $ 12,545 -13.3 %
Mortgage 310 334 -7.2 %
Total $ 11,187 $ 12,879 -13.1 %
Total non-accrual loans $ 86,809 $ 101,883 -14.8 %
Non-accruals loans composition percentages:
Commercial 52.7 % 49.2 %
Mortgage 30.5 % 29.1 %
Consumer 2.3 % 2.3 %
Auto and leasing 14.5 % 19.4 %
100.0 % 100.0 %
Non-accrual loans ratios:
Non-accrual loans to total loans 1.33 % 1.59 % -16.35 %
Allowance for credit losses to non-accrual loans 180.94 % 153.05 % 18.22 %
80
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TABLE 12 - NON-PERFORMING LOANS
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial $ 34,892 $ 37,603 -7.2 %
Mortgage 36,775 39,394 -6.6 %
Consumer 2,030 2,303 -11.9 %
Auto and leasing 12,495 19,829 -37.0 %
Total $ 86,192 $ 99,129 -13.1 %
PCD
Commercial $ 10,877 $ 12,545 -13.3 %
Mortgage 310 334 -7.2 %
Total $ 11,187 $ 12,879 -13.1 %
Total non-performing loans $ 97,379 $ 112,008 -13.1 %
Non-performing loans composition percentages:
Commercial 47.0 % 44.8 %
Mortgage 38.1 % 35.5 %
Consumer 2.1 % 2.1 %
Auto and leasing 12.8 % 17.6 %
100.0 % 100.0 %
Non-performing loans to:
Total loans 1.49 % 1.75 % -14.86 %
Total assets 0.96 % 1.13 % -15.0 %
Total capital 9.36 % 10.48 % -10.7 %
Non-performing loans with partial charge-offs to:
Total loans 0.46 % 0.46 % - %
Non-performing loans 30.70 % 26.53 % 15.7 %
Other non-performing loans ratios:
Charge-off rate on non-performing loans to
non-performing loans on which charge-offs have been 96.85 % 170.31 % -43.1 %
taken
Allowance for credit losses to non-performing loans on 232.77 %
189.49 % 22.8 %
which no charge-offs have been taken
81 --------------------------------------------------------------------------------
TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Deposits:
Non-interest bearing deposits $ 2,667,508 $ 2,501,644 6.6 %
NOW accounts 2,837,072 2,702,636 5.0 %
Savings and money market accounts 2,295,111 2,177,779 5.4 %
Time deposits 1,177,891 1,220,262 -3.5 %
Total deposits 8,977,582 8,602,321 4.4 %
Accrued interest payable 640 797 -19.7 %
Total deposits and accrued interest payable 8,978,222 8,603,118 4.4 %
Borrowings:
Advances from FHLB 28,035 28,488 -1.6 %
Subordinated capital notes - 36,083 -100.0 %
Total borrowings 28,035 64,571 -56.6 %
Total deposits and borrowings 9,006,257 8,667,689 3.9 %
Other Liabilities:
Derivative liabilities 191 804 -76.2 %
Acceptances outstanding 29,858 35,329 -15.5 %
Lease liability 30,287 30,498 -0.7 %
Other liabilities 83,492 96,240 -13.2 %
Total liabilities $ 9,150,085 $ 8,830,560 3.6 %
Deposits portfolio composition percentages:
Non-interest bearing deposits 29.7 % 29.1 %
NOW accounts 31.6 % 31.4 %
Savings and money market accounts 25.6 % 25.3 %
Time deposits 13.1 % 14.2 %
100.0 % 100.0 %
Borrowings portfolio composition percentages:
Advances from FHLB 100.0 % 44.1 %
Subordinated capital notes 0.0 % 55.9 %
100.0 % 100.0 %
Liabilities and Funding Sources
As shown in Table 13 above, atMarch 31, 2022 , OFG's total liabilities were$9.150 billion , 3.6% more than the$8.831 billion reported atDecember 31, 2021 . Deposits and borrowings, OFG's funding sources, amounted to$9.006 billion atMarch 31, 2022 compared to$8.668 billion atDecember 31, 2021 . Deposits, excluding accrued interest payable, increased 4.4% mainly from higher commercial and retail deposits by$417.6 million , offset by a decrease of$42.5 million in time deposits from maturities, with the majority of them transferred into demand deposit and savings accounts. As ofMarch 31, 2022 borrowings consist of FHLB-NY advances amounting to$28.0 million . Borrowings decreased by$36.5 million , when compared to$64.6 million atDecember 31, 2021 , reflecting the redemption during the quarter endedMarch 31, 2022 of all$36.1 million variable rate subordinated capital notes before maturity. 82
--------------------------------------------------------------------------------
Stockholders' Equity
AtMarch 31, 2022 , OFG's total stockholders' equity was$1.040 billion , a 3% decrease when compared to$1.069 billion atDecember 31, 2021 . This reduction in stockholders' equity reflects decreases (i) in treasury stock of$30.1 million and additional paid-in capital of$3.3 million , from$33.5 million in repurchases of common stock as part of the$100 million buyback program adopted during the first quarter of 2022; and (ii) in accumulated other comprehensive income, net of tax, of$25.8 million from changes in the market value of available-for-sale securities. The decrease was partially offset by an increase in retained earnings of$26.4 million and legal surplus of$3.7 million , mainly due to$37.5 million in net income, partially offset by$7.4 million common stock dividends issued during the quarter endedMarch 31, 2022 .
OFG and the Bank are subject to regulatory capital requirements established by theFederal Reserve Board and theFDIC . The current risk-based capital standards applicable to OFG and the Bank ("Basel III capital rules"), which have been effective sinceJanuary 1, 2015 , are based on the final capital framework for strengthening international capital standards, known as Basel III, of theBasel Committee on Banking Supervision . As ofMarch 31, 2022 , the capital ratios of OFG and the Bank continue to exceed the minimum requirements for being "well-capitalized" under the Basel III capital rules. OnJanuary 1, 2020 , the Company implemented CECL using the modified retrospective approach, with an impact to capital of$25.5 million , net of its corresponding deferred tax effect. OnMarch 27, 2020 , in response to the Covid-19 pandemic,U.S. banking regulators issued an interim final rule that the Company adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, OFG added back to common equity tier 1 ("CET1") capital 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting onJanuary 1, 2022 , the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over a three-year period. During the quarter endedMarch 31, 2022 , OFG redeemed all of its$36.1 million subordinated capital notes and, as a result, OFG's tier 1 capital was reduced by the corresponding$35.0 million qualified trust preferred securities, which were previously included in tier 1 capital. The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as ofMarch 31, 2022 andDecember 31, 2021 , are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets. 83 --------------------------------------------------------------------------------
The following are OFG's consolidated capital ratios under the Basel III capital
rules at
TABLE 14 - CAPITAL, DIVIDENDS AND STOCK DATA
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands, except per share data)
Capital data:
Stockholders' equity $ 1,040,035 $ 1,069,160 (2.7) %
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio 13.24 % 13.77 % (3.8) %
Minimum common equity tier 1 capital ratio required 4.50 % 4.50 % 0.0 %
Actual common equity tier 1 capital $ 955,221 964,284 (0.9) %
Minimum common equity tier 1 capital required $ 324,661 315,219 3.0 %
Minimum capital conservation buffer required (2.5%) $ 180,367 175,122 3.0 %
Excess over regulatory requirement $ 450,193 473,943 (5.0) %
Risk-weighted assets $ 7,214,692 7,004,876 3.0 %
Tier 1 risk-based capital ratio 13.24 % 14.27 % (7.2) %
Minimum tier 1 risk-based capital ratio required 6.00 % 6.00 % 0.0 %
Actual tier 1 risk-based capital $ 955,221 $ 999,284 (4.4) %
Minimum tier 1 risk-based capital required $ 432,882 $ 420,293 3.0 %
Minimum capital conservation buffer required (2.5%) $ 180,367 175,122 3.0 %
Excess over regulatory requirement $ 341,972 $ 403,869 (15.3) %
Risk-weighted assets $ 7,214,692 $ 7,004,876 3.0 %
Total risk-based capital ratio 14.49 % 15.52 % (6.6) %
Minimum total risk-based capital ratio required 8.00 % 8.00 % 0.0 %
Actual total risk-based capital $ 1,045,437 $ 1,086,897 (3.8) %
Minimum total risk-based capital required $ 577,175 $ 560,390 3.0 %
Minimum capital conservation buffer required (2.5%) $ 180,367 175,122 3.0 %
Excess over regulatory requirement $ 287,894 $ 351,385 (18.1) %
Risk-weighted assets $ 7,214,692 $ 7,004,876 3.0 %
Leverage capital ratio 9.54 % 9.69 % (1.5) %
Minimum leverage capital ratio required 4.00 % 4.00 % 0.0 %
Actual tier 1 capital $ 955,221 $ 999,284 (4.4) %
Minimum tier 1 capital required $ 400,333 $ 412,359 (2.9) %
Excess over regulatory requirement $ 554,888 $ 586,925 (5.5) %
Tangible common equity to total assets 9.03 % 9.57 % (5.6) %
Tangible common equity to risk-weighted assets 12.75 % 13.52 % (5.7) %
Total equity to total assets 10.21 % 10.80 % -5.5 %
Total equity to risk-weighted assets 14.42 % 15.26 % (5.5) %
Stock data:
Outstanding common shares 48,673,113 49,636,352 (1.9) %
Book value per common share $ 21.37 $ 21.54 (0.8) %
Tangible book value per common share $ 18.90 $ 19.08 (0.9) %
Market price at end of year $ 26.64 $ 26.56 0.3 %
Market capitalization at end of year $ 1,296,652 $ 1,318,342 -1.6 %
84
--------------------------------------------------------------------------------
From December 31, 2021 to March 31, 2022 , tangible common equity to tangible
total assets decreased from 9.69% to 9.14%, leverage capital ratio decreased
from 9.69% to 9.54%, tier 1 risk-based capital ratio decreased from 14.27% to
13.24%, total risk-based capital ratio decreased from 15.52% to 14.49% and
common equity tier 1 capital ratio decreased from 13.77% to 13.24%. The
decreases in capital ratios were mainly due to common stock repurchases of $33.5
million , dividends of $7.4 million issued, and lower CECL transition provision
by $6.9 million from the expiration of the Covid-19 deferral period, partially
offset by net income for the quarter. Also, during the quarter ended March 31,
2022 , OFG completed the redemption and cancellation of subordinated capital
notes, further reducing tier 1 capital and total risk based capital by $35.0
million .
The following table presents a reconciliation of OFG's total stockholders'
equity to tangible common equity and total assets to tangible assets at
March 31 , December 31,
2022 2021
(In
thousands, except share or per share
information)
Total stockholders' equity $ 1,040,035 $ 1,069,160
Goodwill (86,069) $ (86,069)
Core deposit intangible (25,992) $ (27,630)
Customer relationship intangible (7,884) $ (8,368)
Other intangibles (71) $ (95)
Total tangible common equity (non-GAAP) $ 920,019 $ 946,998
Total assets $ 10,190,120 9,899,720
Goodwill (86,069) (86,069)
Core deposit intangible (25,992) (27,630)
Customer relationship intangible (7,884) (8,368)
Other intangibles (71) (95)
Total tangible assets $ 10,070,104 $ 9,777,558
Tangible common equity to tangible assets 9.14 % 9.69 %
Common shares outstanding at end of period 48,673,113 49,636,352
Tangible book value per common share $ 18.90 $ 19.08
The tangible common equity ratio and tangible book value per common share are
non-GAAP measures and, unlike tier 1 capital and common equity tier 1 capital,
are not codified in the federal banking regulations. Management and many stock
analysts use the tangible common equity ratio and tangible book value per common
share in conjunction with more traditional bank capital ratios to compare the
capital adequacy of banking organizations. Neither tangible common equity nor
tangible assets or related measures should be considered in isolation or as a
substitute for stockholders' equity, total assets or any other measure
calculated in accordance with GAAP. Moreover, the manner in which OFG calculates
its tangible common equity, tangible assets and any other related measures may
differ from that of other companies reporting measures with similar names.
Non-GAAP financial measures have inherent limitations, are not required to be
uniformly applied, and are not audited. To mitigate these limitations, OFG has
procedures in place to calculate these measures using the appropriate GAAP or
regulatory components. Although these non-GAAP financial measures are frequently
used by stakeholders in the evaluation of a company, they have limitations as
analytical tools and should not be considered in isolation or as a substitute
for analyses of results as reported under GAAP.
85
--------------------------------------------------------------------------------
The following table presents OFG's capital adequacy information under the Basel
III capital rules:
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital $ 955,221 $ 964,284 (0.9) %
Additional tier 1 capital - 35,000 (100.0) %
Tier 1 capital 955,221 999,284 (4.4) %
Additional Tier 2 capital 90,216 87,613 3.0 %
Total risk-based capital $ 1,045,437 $ 1,086,897 (3.8) %
Risk-weighted assets:
Balance sheet items $ 6,630,593 $ 6,406,115 3.5 %
Off-balance sheet items 584,099 598,761 (2.4) %
Total risk-weighted assets $ 7,214,692 $ 7,004,876 3.0 %
Ratios:
Common equity tier 1 capital (minimum required,
including capital conservation buffer - 7%) 13.24 % 13.77 % (3.8) %
Tier 1 capital (minimum required, including capital
conservation buffer - 8.5%)
13.24 % 14.27 % (7.2) %
Total capital (minimum required, including capital
conservation buffer - 10.5%)
14.49 % 15.52 % (6.6) %
Leverage ratio (minimum required - 4%) 9.54 % 9.69 % (1.5) %
Equity to assets 10.21 % 10.80 % -5.5 %
Tangible common equity to assets 9.03 % 9.57 % (5.6) %
86
--------------------------------------------------------------------------------
The Bank is considered "well capitalized" under the regulatory framework for
prompt corrective action. The table below shows the Bank's regulatory capital
ratios at March 31, 2022 and December 31, 2021 :
March 31, December 31, Variance
2022 2021 %
(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets 12.68% 13.09% (3.13) %
Actual common equity tier 1 capital $ 910,777 $ 908,717 0.2 %
Minimum capital requirement (4.5%) $ 323,197 $ 312,371 3.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 179,554 $ 173,540 3.5 %
Minimum to be well capitalized (6.5%) $ 466,840 $ 451,203 3.5 %
Tier 1 Capital to Risk-Weighted Assets 12.68% 13.09% (3.1) %
Actual tier 1 risk-based capital $ 910,777 $ 908,717 0.2 %
Minimum capital requirement (6%) $ 430,930 $ 416,495 3.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 179,554 $ 173,540 3.5 %
Minimum to be well capitalized (8%) $ 574,573 $ 555,327 3.5 %
Total Capital to Risk-Weighted Assets 13.93% 14.34% (2.9) %
Actual total risk-based capital $ 1,000,591 $ 995,549 0.5 %
Minimum capital requirement (8%) $ 574,573 $ 555,327 3.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 179,554 $ 173,540 3.5 %
Minimum to be well capitalized (10%) $ 718,216 $ 694,159 3.5 %
Total Tier 1 Capital to Average Total Assets 9.17% 8.87% 3.4 %
Actual tier 1 capital $ 910,777 $ 908,717 0.2 %
Minimum capital requirement (4%) $ 397,348 $ 409,855 (3.1) %
Minimum to be well capitalized (5%) $ 496,685 $ 512,319 (3.1) %
OFG's common stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "OFG." At March 31, 2022 and December 31, 2021 , OFG's market
capitalization for its outstanding common stock was $1.297 billion ($26.64 per
share) and $1.318 billion ($26.56 per share), respectively.
The following table provides the high and low prices and dividends per share of
OFG's common stock for each quarter of the last three calendar years:
Cash
Price Dividend
High Low Per share
2022
March 31, 2022 $ 30.54 $ 26.21 $ 0.15
2021
December 31, 2021 $ 27.33 $ 23.84 $ 0.12
September 30, 2021 $ 25.66 $ 20.04 $ 0.12
June 30, 2021 $ 25.14 $ 21.61 $ 0.08
March 31, 2021 $ 22.93 $ 16.48 $ 0.08
2020
December 31, 2020 $ 18.54 $ 12.59 $ 0.07
September 30, 2020 $ 14.35 $ 12.12 $ 0.07
June 30, 2020 $ 15.10 $ 9.38 $ 0.07
March 31, 2020 $ 23.50 $ 9.32 $ 0.07
87
-------------------------------------------------------------------------------- InJanuary 2022 , the Company announced the approval by the Board of Directors of a new stock repurchase program to purchase an additional$100 million of the Company's common stock in the open market, in effect atMarch 31, 2022 . The shares of common stock repurchased are to be held by OFG as treasury shares. During the quarter endedMarch 31, 2022 , OFG repurchased 1,219,132 shares under this program for a total of$33.5 million , at an average price of$27.46 per share. OFG did not repurchase any shares of its common stock in the quarter endedMarch 31, 2022 , other than through its publicly announced stock repurchase program. There were no stock repurchases by OFG during the quarter endedMarch 31, 2021 . AtMarch 31, 2022 , the number of shares that may yet be purchased under such program is estimated at 2,497,051 and was calculated by dividing the remaining balance of$66.5 million by$26.64 (closing price of OFG's common stock atMarch 31, 2022 ).
Impact of Inflation and Changing Prices
The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.
REPUBLIC BANCORP INC /KY/ – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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