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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 Quarterly 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 endedJune 30, 2022 and set forth in our Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K"), as supplemented and amended by any subsequent Quarterly Reports on Form 10-Q, for a 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 endedJune 30, 2021 . Other factors not identified above, including those described under the headings in our 2021 Form 10-K and any subsequent Quarterly Reports on Form 10-Q may also cause actual results to differ materially from those described in our forward-looking statements. INTRODUCTION OFG is a publicly-owned financial holding company that provides wide range of banking and financial services such as commercial, consumer, auto, and mortgage lending, financial planning, insurance sales, money management, investment banking and securities 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-five 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 . Subsequently, inJuly 2022 , OFG announced that its Board of Directors approved a new increase of its regular quarterly cash dividend by 33%, to$0.20 per common share, beginning on the quarter endedSeptember 30, 2022 . InJanuary 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. AtJune 30, 2022 , OFG has repurchased 2.4 million shares of common stock for$64.1 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. 63 -------------------------------------------------------------------------------- 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 Open Market Committee of theBoard of Governors of theFederal Reserve System ("FRB") has tightened monetary policy and has increased the federal funds rate four times during fiscal year 2022, with the latest increases of 75 basis points each made onJune 15, 2022 andJuly 27, 2022 . The current federal funds target rate range is 2.25% to 2.5% but FRB officials forecast the federal funds target rate will end 2022 at a range of 3.25% to 3.5%. The FRB has also scaled back its asset purchase program that provided liquidity to the bond markets. 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 commodities such as oil and natural gas prices, which have further exacerbated the global macroeconomic uncertainty and increased inflationary pressures. However, we believe that the macroeconomic outlook forPuerto Rico continues to show strength. Recent data show that the Puerto Rico Economic Activity Index, as published by theEconomic Development Bank for Puerto Rico , has been increasing for over a year; therefore, signaling a stable upward trend as employment gains remain solid. Our commercial clients are experiencing a higher demand for their products and services. Consumer demand also remains strong and, following five years of bankruptcy proceedings under Title III of PROMESA, thePuerto Rico central government has begun to implement the plan of adjustment approved by the Title III bankruptcy court onJanuary 18, 2022 , setting the stage for its exit from bankruptcy. Nevertheless, there remain several public instrumentalities whose debt obligations have not been restructured under the mechanisms provided by PROMESA and any recovery of thePuerto Rico 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 scope, 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, economic recessions, trade and supply chain disruption, continuing inflationary pressures, labor shortages, armed conflicts such as the ongoing military actions againstUkraine , and the uncertainty of the timing and extent of potential actions that might be taken by the FRB. However, we believe that the high levels of reconstruction and stimulus funds being channeled towards thePuerto Rico economy are mitigating the foregoing 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.
64
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FINANCIAL HIGHLIGHTS
During the quarter endedJune 30, 2022 , OFG had another strong quarterly performance in all its core businesses. Loans and deposits grew, net interest margin expanded, and banking and wealth management income rebounded. All this confirms an overall increase in business activity, driven by OFG's solid strategic position and continuously improving customer experience. This quarter we increased our number of self-service banking kiosks and introduced digital commercial account opening. We also repurchased$30.6 million of shares, completing$64.1 million of our current$100 million stock buyback program. Capital metrics remain high. Further on a macroeconomic level, despite global headwinds, we believe that thePuerto Rico economic environment continues to trend positively.
Earnings per share diluted was
2022 and
Net interest income was$115.1 million compared to$105.2 million in the first quarter of 2022 and$102.3 million in the second quarter of 2021. Net interest margin expanded to 4.80% from 4.47% in the first quarter of 2022 due to increased volume of loans and investments and FRB federal funds rate hikes. Interest income was$122.2 million compared to$112.9 million in the first quarter of 2022 and$113.5 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 interest income benefited from higher yields on higher average balances of loans and of investment securities, and higher average yields on cash. Total interest expense was$7.1 million compared to$7.8 million in the first quarter of 2022 and$11.2 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 interest expense primarily reflected lower average balances and cost of borrowings. Non-interest income was$36.2 million compared to$31.6 million in the first quarter of 2022 and$32.2 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 non-interest income primarily reflected higher banking service and wealth management revenues, lower mortgage banking revenues, and a$4.7 million gain on sale of a legacy branch building. Provision for credit losses was$6.7 million compared to$1.6 million in the first quarter of 2022 and a recapture of$8.3 million in the second quarter of 2021. The second quarter of 2022 reflected a provision of$5.1 million due to the growth in loan balances and a provision of$4.8 million related to commercial-specific loan reserves as a result of two commercial loans placed in non-accrual, partly offset by a reduction of$4.9 million in qualitative adjustment and loss factors due to the improvement in the performance of loan portfolios and economic conditions inPuerto Rico .
Non-interest expenses were
quarter of 2022 and
million
compliance related professional services expenses due to greater levels of
business activity, as well as higher technology expenses related to digital
transformation.
Loans held for investment were$6.70 billion compared to$6.55 billion atMarch 31, 2022 and$6.50 billion atJune 30, 2021 . Loans grew$154.7 million fromMarch 31, 2022 , primarily reflecting increases in commercial loans as well as increases in consumer and auto loans. New loan origination was$587.2 million compared to$623.2 million in the first quarter of 2022 and$673.6 million in the second quarter of 2021, which included$32.7 million of PPP loans. The second quarter of 2022 reflected continued high levels of auto and consumer lending as well as commercial lending inPuerto Rico andthe United States mainland. Total investments were$1.73 billion compared to$1.26 billion atMarch 31, 2022 and$643.5 million atJune 30, 2021 . Investments grew$468.5 million fromMarch 31, 2022 , taking advantage of the higher yield environment. Customer deposits were$9.02 billion compared to$8.97 billion atMarch 31, 2022 and$9.08 billion atJune 30, 2021 . Core deposits grew by$51.3 million fromMarch 31, 2022 , reflecting increases in commercial and retail accounts.
Total assets were
and
Capital: CET1 ratio atJune 30, 2022 was 12.80% compared to 13.24% atMarch 31, 2022 and 13.95% atJune 30, 2021 . The decline fromMarch 31, 2022 reflected common stock repurchased during the quarter and an increase in risk weighted assets, partially offset by an increase in retained earnings. Tangible book value per share was$18.86 compared to$18.90 atMarch 31, 2022 and$18.13 atJune 30, 2021 . The slight decline fromMarch 31, 2022 reflected the repurchase of common stock and a reduction in other comprehensive income, partially offset by the increase in retained earnings. 65 --------------------------------------------------------------------------------
Selected income statement and balance sheet data and key performance indicators
are presented in the tables below:
Quarter Ended June 30, Six-Month Period Ended June 30,
2022 2021 Variance % 2022 2021 Variance %
EARNINGS DATA: (In thousands, except per share data)
Interest income $ 122,222 $ 113,457 7.7% $ 235,171 $ 224,433 4.8%
Interest expense 7,128 11,206 (36.4)% 14,883 23,984 (37.9)%
Net interest income 115,094 102,251 12.6% 220,288 200,449 9.9%
Provision for (recapture of) credit
losses 6,691 (8,305) (180.6)% 8,242 (1,981)
(516.1)%
Net interest income after provision for credit losses 108,403 110,556 (1.9)% 212,046 202,430 4.8% Non-interest income 36,210 32,197 12.5% 67,816 62,610 8.3% Non-interest expenses 85,258 82,676 3.1% 166,413 160,342 3.8% Income before taxes 59,355 60,077 (1.2)% 113,449 104,698 8.4% Income tax expense 18,923 19,250 (1.7)% 35,496 33,498 6.0% Net income 40,432 40,827 (1.0)% 77,953 71,200 9.5% Less: dividends on preferred stock - - -% - (1,255) (100.0)% Income available to common shareholders$ 40,432 $ 40,827 (1.0)% $ 77,953$ 69,945 11.4% PER SHARE DATA: Basic $ 0.84$ 0.79 6.3% $ 1.61$ 1.36 18.4% Diluted $ 0.84$ 0.78 7.7% $ 1.59$ 1.35 17.8% Average common shares outstanding 48,053 51,636 (6.9)% 48,508 51,517
(5.8)%
Average common shares outstanding and equivalents 48,389 52,048 (7.0)% 48,933 51,885
(5.7)%
Cash dividends declared per common share $ 0.15 0.08 87.5% $ 0.30 0.16
87.5%
Cash dividends declared on common shares $ 7,186 4,281 67.9% $ 14,624 8,397
74.2%
PERFORMANCE RATIOS: Return on average assets (ROA) 1.58 % 1.58 % -% 1.53 % 1.40 %
9.3%
Return on average tangible common stockholders' equity 17.70 % 17.78 % (0.4)% 16.78 % 15.48 %
8.4%
Return on average common equity (ROE) 15.67 % 15.60 %
0.4% 14.86 % 13.54 % 9.7%
Efficiency ratio 58.27 % 62.02 % (6.0)% 58.86 % 61.44 % (4.2)%
Interest rate spread 4.78 % 4.19 % 14.1% 4.61 % 4.20 % 9.8%
Interest rate margin 4.80 % 4.22 % 13.7% 4.64 % 4.24 % 9.4%
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June 30, December 31, Variance
2022 2021 %
PERIOD END BALANCES AND CAPITAL RATIOS: (In thousands, except per share data)
Investments and loans
Investment securities $ 1,727,263 $ 895,818 92.8%
Loans, net 6,585,210 6,329,311 4.0%
Total investments and loans $ 8,312,473 $ 7,225,129 15.0%
Deposits and borrowings
Deposits $ 9,029,570 $ 8,603,118 5.0%
Other borrowings 27,618 64,571 (57.2)%
Total deposits and borrowings $ 9,057,188 $ 8,667,689 4.5%
Stockholders' equity
Common stock 59,885 59,885 -%
Additional paid-in capital 634,612 637,061 (0.4)%
Legal surplus 125,365 117,677 6.5%
Retained earnings 455,590 399,949 13.9%
Treasury stock, at cost (211,138) (150,572) 40.2%
Accumulated other comprehensive (loss) income (49,502) 5,160 (1059.3)%
Total stockholders' equity $ 1,014,812 $ 1,069,160 (5.1)%
Per share data
Book value per common share $ 21.34 $ 21.54 (0.9)%
Tangible book value per common share $ 18.86 $ 19.08 (1.2)%
Market price $ 25.40 $ 26.56 (4.4)%
Capital ratios
Leverage capital 9.46 % 9.69 % (2.4)%
Common equity Tier 1 capital 12.80 % 13.77 % (7.0)%
Tier 1 risk-based capital 12.80 % 14.27 % (10.3)%
Total risk-based capital 14.05 % 15.52 % (9.5)%
Financial assets managed
Trust assets managed $ 3,365,222 $ 3,758,895 (10.5)%
Broker-dealer assets gathered 2,078,342 2,466,004 (15.7)%
Total assets managed $ 5,443,564 $ 6,224,899 (12.6)%
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 and six-month periods endedJune 30, 2022 and 2021. 67 --------------------------------------------------------------------------------
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED
Interest Average rate Average balance
June 2022 June 2021 June 2022 June 2021 June 2022 June 2021
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 122,222 $ 113,457 5.10 % 4.68 % $ 9,613,327 $ 9,726,905
Tax equivalent adjustment 2,990 2,195 0.12 % 0.09 % - -
Interest-earning assets - tax
equivalent 125,212 115,652 5.22 % 4.77 % 9,613,327 9,726,905
Interest-bearing liabilities 7,128 11,206 0.32 % 0.49 % 8,985,609 9,097,792
Tax equivalent net interest
income / spread 118,084 104,446 4.90 % 4.28 % 627,718 629,113
Tax equivalent interest rate
margin 5.02 % 4.36 %
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 7,881 2,696 2.21 % 1.77 % 1,426,851 608,930
Interest bearing cash and
money market investments 2,984 706 0.77 % 0.11 % 1,546,036 2,519,406
Total investments 10,865 3,402 1.47 % 0.44 % 2,972,887 3,128,336
Non-PCD loans
Mortgage 9,586 10,012 5.57 % 5.17 % 688,634 775,303
Commercial 32,105 29,650 5.45 % 5.46 % 2,361,725 2,177,052
Consumer 14,198 11,212 11.27 % 11.28 % 505,418 398,852
Auto and leasing 35,899 34,301 8.18 % 8.67 % 1,759,624 1,586,395
Total Non-PCD loans 91,788 85,175 6.93 % 6.92 % 5,315,401 4,937,602
PCD loans
Mortgage 17,417 20,731 6.15 % 5.97 % 1,120,594 1,372,625
Commercial 1,853 3,521 3.83 % 5.30 % 193,850 266,355
Consumer 42 76 14.19 % 20.11 % 1,170 1,513
Auto and leasing 257 552 10.94 % 10.81 % 9,425 20,474
Total PCD loans 19,569 24,880 5.91 % 5.99 % 1,325,039 1,660,967
Total loans (1) 111,357 110,055 6.73 % 6.69 % 6,640,440 6,598,569
Total interest-earning assets 122,222 113,457 5.10 % 4.68 % 9,613,327 9,726,905
Interest-bearing liabilities:
Deposits:
NOW Accounts 2,174 2,259 0.31 % 0.36 % 2,811,396 2,542,018
Savings and money market 1,289 2,097 0.23 % 0.38 % 2,296,903 2,236,281
Time deposits 1,834 4,243 0.64 % 1.08 % 1,146,522 1,579,414
Total core deposits 5,297 8,599 0.34 % 0.54 % 6,254,821 6,357,713
Brokered deposits 9 24 0.30 % 0.28 % 11,366 34,506
5,306 8,623 0.34 % 0.54 % 6,266,187 6,392,219
Non-interest bearing deposits - - - 0.00 % 2,691,696 2,605,623
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Interest Average rate Average balance
June 2022 June 2021 June 2022 June 2021 June 2022 June 2021
(Dollars in thousands)
Fair value premium and core
deposit intangible
amortizations 1,638 1,837 - % - % - -
Total deposits 6,944 10,460 0.31 % 0.47 % 8,957,883 8,997,842
Borrowings:
Advances from FHLB and other
borrowings 184 452 2.66 % 2.84 % 27,726 63,867
Subordinated capital notes - 294 - % 3.27 % - 36,083
Total borrowings 184 746 2.66 % 2.99 % 27,726 99,950
Total interest-bearing
liabilities 7,128 11,206 0.32 % 0.49 % 8,985,609 9,097,792
Net interest income / spread $ 115,094 $ 102,251 4.78 % 4.19 %
Interest rate margin 4.80 % 4.22 %
Excess of average
interest-earning assets over
average interest-bearing
liabilities $ 627,718 $ 629,113
Average interest-earning
assets to average
interest-bearing liabilities
ratio 106.99 % 106.92 %
(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 $ 4,336 $ 849 $ 5,185
Interest bearing cash and money market investments (369) 2,647 2,278
Loans 2,349 (1,047) 1,302
Total interest income 6,316 2,449 8,765
Interest Expense:
NOW Accounts 225 (310) (85)
Savings and money market 55 (863) (808)
Time deposits (1,045) (1,364) (2,409)
Brokered deposits (17) 2 (15)
Fair value premium and core deposit intangible
amortizations - (199) (199)
Advances from FHLB and other borrowings (241) (27) (268)
Subordinated capital notes (147) (147) (294)
Total interest expense (1,170) (2,908) (4,078)
Net Interest Income $ 7,486 $ 5,357 $ 12,843
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TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED
Interest Average rate Average balance
June 2022 June 2021 June 2022 June 2021 June 2022 June 2021
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 235,171 $ 224,433 4.95 % 4.74 % $ 9,576,999 $ 9,543,525
Tax equivalent adjustment 5,466 4,366 0.12 % 0.09 % - -
Interest-earning assets - tax
equivalent 240,637 228,799 5.07 % 4.83 % 9,576,999 9,543,525
Interest-bearing liabilities 14,883 23,984 0.34 % 0.54 % 8,925,227 8,891,198
Tax equivalent net interest
income / spread 225,754 204,815 4.73 % 4.29 % 651,772 652,327
Tax equivalent interest rate
margin 4.85 % 4.38 %
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 12,336 4,872 2.07 % 1.73 % 1,189,263 563,735
Interest bearing cash and
money market investments 3,913 1,301 0.44 % 0.11 % 1,807,621 2,362,788
Total investments 16,249 6,173 1.09 % 0.43 % 2,996,884 2,926,523
Non-PCD loans
Mortgage 18,939 20,786 5.43 % 5.26 % 697,625 790,611
Commercial 61,676 57,376 5.41 % 5.38 % 2,299,316 2,151,963
Consumer 26,914 22,827 11.23 % 11.36 % 483,119 405,080
Auto and leasing 70,890 67,116 8.24 % 8.63 % 1,735,055 1,568,068
Total Non-PCD loans 178,419 168,105 6.90 % 6.90 % 5,215,115 4,915,722
PCD loans
Mortgage 34,759 40,763 6.05 % 5.80 % 1,149,376 1,404,929
Commercial 5,103 8,107 5.05 % 6.01 % 203,852 272,232
Consumer 89 113 14.22 % 13.54 % 1,244 1,663
Auto and leasing 552 1,172 10.57 % 10.52 % 10,528 22,456
Total PCD loans 40,503 50,155 5.93 % 5.90 % 1,365,000 1,701,280
Total loans (1) 218,922 218,260 6.71 % 6.65 % 6,580,115 6,617,002
Total interest-earning assets 235,171 224,433 4.95 % 4.74 % 9,576,999 9,543,525
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Interest Average rate Average balance
June 2022 June 2021 June 2022 June 2021 June 2022 June 2021
(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts 4,314 4,652 0.31 % 0.38 % 2,812,212 2,470,244
Savings and money market 2,487 4,220 0.22 % 0.40 % 2,272,683 2,120,764
Time deposits 3,891 9,748 0.67 % 1.17 % 1,172,785 1,677,079
Total core deposits 10,692 18,620 0.34 % 0.60 % 6,257,680 6,268,087
Brokered deposits 17 187 0.30 % 0.94 % 11,366 40,199
10,709 18,807 0.34 % 0.60 % 6,269,046 6,308,286
Non-interest bearing deposits - - - % - % 2,620,233 2,482,464
Fair value premium and core
deposit intangible
amortizations 3,276 3,677 - % - % - -
Total deposits 13,985 22,484 0.32 % 0.52 % 8,889,279 8,790,750
Borrowings:
Advances from FHLB and other
borrowings 377 911 2.71 % 2.86 % 27,954 64,365
Subordinated capital notes 521 589 13.15 % 3.29 % 7,994 36,083
Total borrowings 898 1,500 5.04 % 3.01 % 35,948 100,448
Total interest bearing
liabilities 14,883 23,984 0.34 % 0.54 % 8,925,227 8,891,198
Net interest income / spread $ 220,288 $ 200,449 4.61 % 4.20 %
Interest rate margin 4.64 % 4.24 %
Excess of average
interest-earning assets over
average interest-bearing
liabilities $ 651,772 $ 652,327
Average interest-earning
assets to average
interest-bearing liabilities
ratio 107.30 % 107.34 %
(1) Includes loans held for sale and excludes allowance for credit losses.
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C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investment securities $ 6,218 $ 1,246 $ 7,464
Interest bearing cash and money market investments (368) 2,980 2,612
Loans 3,847 (3,185) 662
Total interest income 9,697 1,041 10,738
Interest Expense:
NOW Accounts 593 (931) (338)
Savings and money market 284 (2,017) (1,733)
Time deposits (2,569) (3,288) (5,857)
Brokered deposits (87) (83) (170)
Fair value premium and core deposit intangible
amortizations - (401) (401)
Advances from FHLB and other borrowings (492) (42) (534)
Subordinated capital notes (741) 673 (68)
Total interest expense (3,012) (6,089) (9,101)
Net Interest Income $ 12,709 $ 7,130 $ 19,839
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
Interest rate spread increased 59 basis points to 4.78% from 4.19% and net interest margin increased 58 basis points to 4.80% from 4.22%. This increase reflects an increase of 42 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 17 basis points. Net interest income was positively impacted by:
•An increase of
related to purchases of available-for-sale and held-to-maturity securities
during 2022 and 2021;
•Lower interest expense by$4.1 million , driven by both a reduced cost and lower average balance of total deposits and borrowings, which resulted in an increase in net interest income of approximately$2.9 million and$1.2 million , respectively; •An increase of$2.3 million in interest income from interest bearing cash and money market investments related to the increase in federal fund rates. The FRB target rates increased from a range of 0% to 0.25% in the second quarter of 2021 to a range of 1.50% to 1.75% for the second quarter of 2022; and
•An increase of
yields on higher balances of loans.
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Comparison of the six-month periods ended
Net interest income of$220.3 million increased$19.9 from$200.4 million . Tax equivalent basis net interest income of$225.8 million increased$21.0 million , or 10.25%, from$204.8 million . Interest rate spread increased 41 basis points to 4.61% from 4.20% and net interest margin increased 40 basis points to 4.64% from 4.24%. This increase reflects an increase of 21 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 20 basis points.
Net interest income was positively impacted by:
•Lower interest expense by$9.1 million , reflecting both a reduced cost and lower average balances of total deposits and borrowings, which resulted in an increase in net interest income of approximately$6.1 million and$3.0 million , respectively; •A$7.5 million increase in interest income from investment securities related to purchases of available-for-sale and held-to-maturity securities during 2022 and 2021;
•A
market related to the increase in federal fund rates; and
•A
yields on new loans originated during the period.
TABLE 2 - NON-INTEREST INCOME SUMMARY
Quarter Ended June 30, Six-Month Period Ended June 30,
2022 2021 Variance % 2022 2021 Variance %
(In thousands) (In thousands)
Banking service revenue $ 18,141 $ 18,251 (0.6) % $ 35,703 $ 34,748 2.7 %
Wealth management revenue 8,270 8,263 0.1 % 16,127 15,651 3.0 %
Mortgage banking activities 4,803 4,540 5.8 % 10,585 10,113 4.7 %
Total banking and financial
service revenue 31,214 31,054 0.5 % 62,415 60,512
3.1 %
Other non-interest income 4,996 1,143 337.1 % 5,401 2,098 157.4 % Total non-interest income, net$ 36,210 $ 32,197 12.5 %$ 67,816 $ 62,610 8.3 % Non-Interest Income Non-interest income is affected by fees generated from loans and deposit accounts, the amount of assets under management of the Bank's trust department, transactions generated by clients' financial assets serviced by OFG's securities broker-dealer, insurance agency and reinsurance subsidiaries, the level of mortgage banking activities, 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:
•A$3.9 million increase in other non-interest income, primarily related to a$4.7 million gain recognized on the sale of a branch building during the second quarter of 2022. 73
--------------------------------------------------------------------------------
Comparison of the six-month periods ended
OFG recorded non-interest income, net, in the amount of
to
non-interest income was mainly due to:
•An increase of$1.0 million in banking service revenues, primarily related to an increase of$404 thousand in credit life insurance commissions,$325 thousand in checking and saving account fees,$319 thousand in servicing and prepayment loan fees, and$180 thousand in international transaction fees. These variances were partially offset by a decrease of$344 thousand in electronic banking fees; •An increase of$476 thousand in wealth management revenue, primarily related to the new reinsurance business income of$1.8 million , partially offset by decreases of$849 thousand in broker-dealer revenues,$192 thousand in trust division fees,$184 thousand in insurance income from annuities and other commissions, and$33 thousand in OPC revenues; •An increase of$472 thousand in mortgage-banking activities, primarily related to lower losses on repurchase loans and other mortgage banking activities by$2.9 million and higher servicing fees of$725 thousand , offset by a$3.1 million decrease in gains on loans sold and securitization due to decrease in sales; and •An increase of$3.3 million in other non-interest income, primarily related to a$4.7 million gain recognized on the sale of a branch building during the first six months of 2022. 74 --------------------------------------------------------------------------------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Quarter Ended June 30, Six-Month Period Ended June 30,
2022 2021 Variance % 2022 2021 Variance %
(In thousands) (In thousands)
Compensation and employee benefits $ 34,730 $ 32,919 5.5 % $ 69,498 $ 65,537 6.0 %
Occupancy, equipment and
infrastructure costs 12,861 12,528 2.7 % 24,777 25,656 -3.4 %
Electronic banking charges 9,722 9,316 4.4 % 19,508 17,548 11.2 %
Professional and service fees 7,362 5,399 36.4 % 12,783 9,935 28.7 %
Information technology expenses 5,528 5,532 -0.1 % 10,332 9,786 5.6 %
Taxes, other than payroll and income
taxes 3,266 3,617 -9.7 % 6,573 7,278 -9.7 %
Insurance 2,429 2,673 -9.1 % 5,064 5,129 -1.3 %
Loan servicing and clearing expenses 2,243 1,942 15.5 % 4,165 3,782 10.1 %
Advertising, business promotion, and
strategic initiatives 1,827 1,707 7.0 % 3,889 3,137 24.0 %
Pandemic expenses 1,099 1,531 -28.2 % 1,980 3,300 -40.0 %
Communication 1,132 1,039 9.0 % 2,248 2,004 12.2 %
Printing, postage, stationery and
supplies 785 941 -16.6 % 1,877 2,159 -13.1 %
Director and investor relations 346 324 6.8 % 595 623 -4.5 %
Foreclosed real estate and other
repossessed assets (income)
expenses, net (1,404) 327 -529.4 % (2,886) 278 -1,138.1 %
Other 3,332 2,881 15.7 % 6,010 4,190 43.4 %
Total non-interest expenses $ 85,258 $ 82,676 3.1 % $ 166,413 $ 160,342 3.8 %
Relevant ratios and data:
Efficiency ratio 58.27 % 62.02 % 58.86 % 61.44 %
Compensation and benefits to
non-interest expense 40.74 % 39.82 % 41.76 % 40.87 %
Compensation to average total assets
owned (annualized) 1.36 % 1.27 % 1.37 % 1.29 %
Average number of employees 2,232 2,239 2,246 2,235
Average compensation per employee
(annualized, in thousands) $ 62.24 $ 58.81 $ 61.89 $ 58.65
Average loans per average employee $ 2,975 $ 2,947 $ 2,930 $ 2,960
Non-Interest Expenses
Comparison of quarters ended
Non-interest expense was$85.3 million , representing an increase of 3.1%, or$2.6 million , compared to$82.7 million . The increase in non-interest expense was mainly due to:
•Increase in professional and service fees by
compliance related expenses due to greater levels of business activity;
•Increase in compensation and employee benefits by
increases in minimum hourly wages and annual salaries; and
•Increase in electronic banking charges by$406 thousand driven by increase in debit and credit card billing fees, ATM-related expenses, and merchant fees due to higher transaction volumes during the quarter endedJune 30, 2022 . 75 --------------------------------------------------------------------------------
The increase in non-interest expense was partially offset by improvements in
foreclosed real estate and other repossessed assets income by
reflecting an increase of
estate and a decrease of
The efficiency ratio was 58.27% and improved from 62.02%. 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 endedJune 30, 2022 and 2021 amounted to$5.0 million and$1.1 million , respectively.
Comparison of the six-month periods ended
Non-interest expense was
Non-interest expenses were positively impacted by:
•Increase in compensation and employee benefits by$4.0 million , primarily related to a one-time$1.3 million pandemic employee tax credit in prior year period, and increases in minimum hourly wages and annual salaries in the current period; •Increase in professional and service fees expenses by$2.8 million , reflecting higher compliance related expenses due to greater levels of business activity; and •Increase in electronic banking charges by$2.0 million mainly due an increase in debit and credit card billing fees, ATM-related expenses and merchant fees due to higher transaction volumes.
The increase in non-interest expense was partially offset by:
•Improvements in foreclosed real estate and other repossessed assets income by$3.2 million reflecting$1.9 million increase in gains on sales of foreclosed real estate,$680 thousand increase in net gain on sale of other repossessed assets, and$605 thousand decrease in credit-related expenses;
•Decrease in pandemic-related expenses by
supplies and sanitation services expenses compared to prior period; and
•Decrease in occupancy, equipment and infrastructure costs by
reflecting lower rent, building maintenance, utilities and other expenses
related to branch consolidations.
The efficiency ratio was 58.86% and improved from 61.44%. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the six-month periods endedJune 30, 2022 and 2021 amounted to$5.4 million and$2.1 million , respectively.
Provision for Credit Losses
Comparison of quarters ended
Provision for credit losses increased by$15.0 million to$6.7 million from a recapture of$8.3 million . The provision for credit losses for the quarter endedJune 30, 2022 includes a provision of$5.1 million due to the growth in loan balances and a provision of$4.8 million in commercial-specific loan reserves as a result of two commercial loans placed in non-accrual, partly offset by a$3.9 million recapture associated with qualitative adjustments due to the improvement in the performance of loan portfolios and economic conditions inPuerto Rico . The provision for credit losses for the prior-year quarter included$2.1 million net charge-offs and a$10.4 million recapture, which reflected continued improvement in asset quality trends.
Comparison of the six-month periods ended
Provision for credit losses decreased by$10.2 million to$8.2 million from a recapture of$2.0 million . The provision for credit losses for the six-month period endedJune 30, 2022 reflected a provision of$9.1 million related to the growth in loan balances and a provision of$9.5 million related to commercial-specific loan reserves due to certain commercial loans 76 --------------------------------------------------------------------------------
placed in non-accrual, offset by a
qualitative adjustments due to the improvement in the performance of loan
portfolios and economic conditions in
reflected continued improvement in asset quality trends.
Income Tax Expense
Comparison of quarters ended
OFG's ETR was 31.9% in 2022 compared to 32.0% in 2021. The decrease in ETR is mainly related to an increase inUS Treasury bills and other exempt investments during the quarter.
Comparison of the six-month periods ended
OFG's ETR was 31.3% in 2022 compared to 32.0% in 2021. The decrease in ETR is related to an increase inUS Treasury bills and other exempt investments and a discrete tax windfall on stock options during the six-month period endedJune 30, 2022 .
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 and six-month periods endedJune 30, 2022 and 2021. 77 --------------------------------------------------------------------------------
Quarter Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 109,292 $ 5 $ 12,925 $ 122,222 $ - $ 122,222
Interest expense (6,280) - (848) (7,128) - (7,128)
Net interest income 103,012 5 12,077 115,094 - 115,094
Provision for credit
losses 6,634 - 57 6,691 - 6,691
Non-interest income 27,802 8,408 - 36,210 - 36,210
Non-interest expenses (79,656) (4,795) (807) (85,258) - (85,258)
Intersegment revenue 543 - - 543 (543) -
Intersegment expenses - (376) (167) (543) 543 -
Income before income
taxes 45,067 3,242 11,046 59,355 - 59,355
Income tax expense 18,580 - 343 18,923 - 18,923
Net income $ 26,487 $ 3,242 $ 10,703 $ 40,432 $ - $ 40,432
Total assets $ 8,235,814 $ 28,240 $ 2,997,323 $ 11,261,377 $ (1,013,603) $ 10,247,774
Six-Month Period Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 216,115 $ 10 $ 19,046 $ 235,171 $ - $ 235,171
Interest expense (13,651) - (1,232) (14,883) - (14,883)
Net interest income 202,464 10 17,814 220,288 - 220,288
Provision for (recapture
of) credit losses 8,344 - (102) 8,242 - 8,242
Non-interest income 51,352 16,414 50 67,816 - 67,816
Non-interest expenses (155,447) (9,380) (1,586) (166,413) - (166,413)
Intersegment revenue 1,057 - - 1,057 (1,057) -
Intersegment expenses - (719) (338) (1,057) 1,057 -
Income before income
taxes $ 91,082 $ 6,325 $
16,042
Income tax expense
35,062 - 434 35,496 - 35,496 Net income$ 56,020 $ 6,325 $ 15,608 $ 77,953 $ -$ 77,953 Total assets$ 8,235,814 $ 28,240 $ 2,997,323 $ 11,261,377 $ (1,013,603) $ 10,247,774 78
--------------------------------------------------------------------------------
Quarter Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 110,446 $ 6 $ 3,005 $ 113,457 $ - $ 113,457
Interest expense (10,712) - (494) (11,206) - (11,206)
Net interest income 99,734 6 2,511 102,251 - 102,251
Recapture of provision
for credit losses (7,737) - (568) (8,305) - (8,305)
Non-interest income 24,215 7,974 8 32,197 - 32,197
Non-interest expenses (76,623) (5,015) (1,038) (82,676) - (82,676)
Intersegment revenue 545 - - 545 (545) -
Intersegment expenses - (302) (243) (545) 545 -
Income before income
taxes 55,608 2,663 1,806 60,077 - 60,077
Income tax expense 19,239 - 11 19,250 - 19,250
Net income $ 36,369 $ 2,663 $ 1,795 $ 40,827 $ - $ 40,827
Total assets $ 8,271,348 $ 31,165 $ 3,232,968 $ 11,535,481 $ (1,073,668) $ 10,461,813
June 30, 2021
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 218,676 $ 18 $ 5,739 $ 224,433 $ - $ 224,433
Interest expense (22,848) - (1,136) (23,984) - (23,984)
Net interest income 195,828 18 4,603 200,449 - 200,449
Recapture of provision
for credit losses (1,149) - (832) (1,981) - (1,981)
Non-interest income 47,088 15,505 17 62,610 - 62,610
Non-interest expenses (150,497) (7,844) (2,001) (160,342) - (160,342)
Intersegment revenue 1,098 - - 1,098 (1,098) -
Intersegment expenses - (593) (505) (1,098) 1,098 -
Income before income
taxes $ 94,666 $ 7,086 $ 2,946 $ 104,698 $ - $ 104,698
Income tax expense 33,475 - 23 33,498 - 33,498
Net income $ 61,191 $ 7,086 $ 2,923 $ 71,200 $ - $ 71,200
Total assets $ 8,271,348 $ 31,165 $ 3,232,968 $ 11,535,481 $ (1,073,668) $ 10,461,813
79
--------------------------------------------------------------------------------
Comparison of quarters ended
Banking
OFG's banking segment net income before taxes decreased by
•An increase in provision for credit losses of$14.4 million . The provision for the current quarter reflected increases due to growth of loan balances and commercial-specific loan reserves from commercial loans placed in non-accrual, partly offset by a reduction in qualitative adjustment due to the improvement in the performance of loan portfolios and economic conditions inPuerto Rico . The provision for the prior-year quarter included a release related to improvements in asset quality; and •An increase in non-interest expenses of$3.0 million , mainly due to: (i) higher compensation and employee benefits by$2.5 million due to increases in minimum hourly wages and annual salaries, (ii) higher compliance related professional expenses by$1.8 million due to greater levels of business activity, and (iii) higher electronic banking charges by$406 thousand due to higher transaction volume; partially offset by improvements in foreclosed real estate and other repossessed assets income by$1.7 million reflecting an increase of$1.3 million in gains on sales of foreclosed real estate.
These variances were partially offset by:
•Lower interest expense by
average balances of core deposits; and
•An increase of
million
quarter ended
Wealth Management
Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage and insurance activities. Net income before taxes from this segment increased by$0.6 million reflecting higher non-interest income of$434 thousand mainly due to$1.0 million in income from a new reinsurance business which began operations during the last quarter of 2021, partially offset by a$644 thousand decrease in revenues subject to commissions from the broker-dealer subsidiary.
reflecting an increase in interest income from the purchases of
available-for-sale and held-to-maturity securities during the current period.
Comparison of six-month periods ended
Banking
OFG's banking segment net income before taxes decreased by
•An increase in provision for credit losses of$9.5 million . The provision for the current period reflected increases due to growth in loan balances and commercial-specific loan reserves from commercial loans placed in non-accrual, partly offset by a reduction in qualitative adjustment due to the improvement in the performance of loan portfolios and economic conditions inPuerto Rico . The provision for the prior-year period included releases related to improvements in asset quality; 80 -------------------------------------------------------------------------------- •An increase in non-interest expenses of$5.0 million , mainly due to: (i) a$4.4 million increase in compensation and employee benefits reflecting a one-time$1.3 million pandemic employee tax credit in the prior-year period and increases in minimum hourly wages and annual salaries; (ii) a$2.4 million increase in compliance related professional expenses due to greater levels of business activity; a$2.0 million increase in electronic banking charges due to higher transaction volume; and (iii) a$721 thousand increase in advertising and marketing; partially offset by improvements in foreclosed real estate and other repossessed assets income by$3.2 million reflecting: (i) a$1.9 million increase in gains on sales of foreclosed real estate, (ii) a$680 thousand increase in net gain on sale of other repossessed assets, and (iii) a$605 thousand decrease in credit-related expenses.
The increases in the banking segment's net income were partially offset by:
•Lower interest expense by
and lower average balances of core deposits; and
•An increase of
million
quarter ended
Wealth Management
Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage and insurance activities. Net income before taxes from this segment decreased by$0.8 million reflecting an increase in non-interest expenses by$1.5 million , primarily related to higher claims expenses as a result of a$1.2 million reversal from a case settled during the prior year period. The decrease in net income before taxes was partially offset by a$909 thousand increase in non-interest income related to$1.8 million in income from the new reinsurance business, partially offset by decreases of$849 thousand in broker-dealer revenues.
reflecting:
•Increase in interest income by
MBS and
•Decrease in interest expense by$96 thousand reflecting the cancellation of$33.1 million of FHLB advances during 2021 and the early redemption of$36.1 million subordinated capital notes during the six-month period endedJune 30, 2022 . 81
--------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At
increase of
2021
The investment portfolio increased by$831.4 million , or 92.8%, primarily related to the purchase of available for sale agency mortgage-backed securities and held-to-maturityUS Treasury securities amounting to$719.0 million and$196.7 million , respectively, during the six-month period endedJune 30, 2022 . OFG's strategy is to invest its liquidity in highly liquid securities and designate them as available for sale or held-to-maturity after taking into account the investment'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. AtJune 30, 2022 , OFG's net loan portfolio increased by$255.9 million , or 4.0%, reflecting increases in commercial, consumer and auto loans, partially offset by$54.0 million PPP loans forgiven by theSmall Business Administration and the sale of$21.9 million of past due mortgage loans sold during the six-month period endedJune 30, 2022 . Cash and due from banks of$1.302 billion decreased by$712.3 million , reflecting cash used to purchase available for sale agency mortgage-backed securities and held-to-maturityUS Treasury securities, disbursements for loans originated during the six-month period endedJune 30, 2022 , 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 securities
broker-dealer and insurance agency 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
June 30, 2022 , the total assets managed by OFG's trust division and retirement
plan administration subsidiary amounted to $3.365 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 June 30, 2022 , total assets gathered by the securities
broker-dealer and insurance agency subsidiaries from their customers' investment
accounts amounted to $2.078 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 value.
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 ofOctober 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. 82 -------------------------------------------------------------------------------- As ofJune 30, 2022 andDecember 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.
TABLE 4 - ASSETS SUMMARY AND COMPOSITION
June 30, December 31, Variance
2022 2021 %
(In thousands)
Investments:
FNMA and FHLMC certificates $ 1,190,478 $ 550,809 116.1 %
Obligations of US government-sponsored agencies - 1,183 -100.0 %
US Treasury securities 207,549 10,825 1,817.3 %
CMOs issued by US government-sponsored agencies 18,640 24,430 -23.7 %
GNMA certificates 288,357 288,578 -0.1 %
Equity securities 19,848 17,578 12.9 %
Other debt securities 2,378 2,395 -0.7 %
Trading securities 13 20 -35.0 %
Total investments 1,727,263 895,818 92.8 %
Loans, net 6,585,210 6,329,311 4.0 %
Total investments and loans 8,312,473 7,225,129 15.0 %
Other assets:
Cash and due from banks (including restricted cash) 1,302,368 2,014,698 -35.4 % Money market investments 4,913 8,952 -45.1 % Foreclosed real estate 15,061 15,039 0.1 % Accrued interest receivable 58,371 56,560 3.2 % Deferred tax asset, net 76,101 99,063 -23.2 % Premises and equipment, net 101,848 92,124 10.6 % Servicing assets 49,280 48,973 0.6 % Goodwill 86,069 86,069 0.0 % Right of use assets 27,699 28,846 -4.0 % Core deposit, customer relationship and other intangibles 31,800 36,093 -11.9 % Other assets and customers' liability on acceptances 181,791 188,174 -3.4 % Total other assets 1,935,301 2,674,591 -27.6 % Total assets$ 10,247,774 $ 9,899,720 3.5 % Investment portfolio composition: FNMA and FHLMC certificates 68.9 % 61.5 % Obligations of US government-sponsored agencies 0.0 % 0.1 % US Treasury securities 12.0 % 1.2 % CMOs issued by US government-sponsored agencies 1.1 % 2.7 % GNMA certificates 16.7 % 32.2 % Equity securities 1.1 % 2.0 % Other debt securities and trading securities 0.2 % 0.3 % 100.0 % 100.0 % 83
--------------------------------------------------------------------------------
TABLE 5 - LOAN PORTFOLIO COMPOSITION
June 30, December 31, Variance
2022 2021 %
(In thousands)
Loans held for investment:
Commercial $ 2,595,867 $ 2,379,330 9.1 %
Mortgage 1,807,852 1,907,271 (5.2) %
Consumer 499,102 409,675 21.8 %
Auto and leasing 1,799,840 1,706,310 5.5 %
6,702,661 6,402,586 4.7 %
Allowance for credit losses (159,039) (155,937) 2.0 %
Total loans held for investment 6,543,622 6,246,649 4.8 %
Mortgage loans held for sale 26,947 51,096 (47.3) %
Other loans held for sale 14,641 31,566 (53.6) %
Total loans, net $ 6,585,210 $ 6,329,311 4.0 %
OFG's loan portfolio is composed of mortgage, commercial, consumer, and auto
loans. As shown in Table 5 above, total loans, net, amounted to $6.585 billion
at June 30, 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 $2.596 billion (38.7% of the gross loan
portfolio) compared to $2.379 billion (37.2% of the gross loan portfolio) at
December 31, 2021 .
Commercial loan production, excluding PPP loans, decreased 28.4%, or
million
from
During the second quarter and six-month period endedJune 30, 2021 , OFG originated$32.7 million and$159.0 million , respectively, of PPP loans. There were no originations of PPP loans during the quarter and six-month period endedJune 30, 2022 , as the program concluded in 2021.
•Mortgage loan portfolio amounted to
portfolio) compared to
portfolio) at
Mortgage loan production totaled$62.8 million and$126.7 million for the quarter and six-month period endedJune 30, 2022 , respectively, which represents a decrease of 39.5% and 36.5% from$103.8 million and$199.7 million for the same periods in 2021. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to$33.4 million and$14.5 million atJune 30, 2022 andDecember 31, 2021 , respectively. Under the GNMA program, issuers such as OFG have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on our financial statements with an offsetting liability. •Consumer loan portfolio amounted to$499.1 million (7.4% of the gross loan portfolio) compared to$409.7 million (6.4% of the gross loan portfolio) atDecember 31, 2021 . Consumer loan production increased 153.9% and 195.6% to$96.6 million and$193.7 million in the quarter and six-month period endedJune 30, 2022 , respectively, from$38.0 million and$65.5 million for the same periods in 2021. •Auto and leasing portfolio amounted to$1.800 billion (26.9% 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 12.8% and 15.9% to$193.0 million and$371.3 million in the quarter and six-month period endedJune 30, 2022 , respectively, compared to$171.1 million and$320.5 million for the same periods in 2021. 84 --------------------------------------------------------------------------------
TABLE 6 -
June 30, 2022
Maturity
Carrying Value 1 to 3 Years More than 3 Years
Loans: (In thousands)
Municipalities $ 86,272 $ 35,143 $ 51,129
At June 30, 2022 , OFG has $86.3 million of direct credit exposure to the Puerto
Rico government, a $1.0 million decrease from December 31, 2021 . At December 31,
2021 , total loan exposure to the Puerto Rico government included a $1.1 million
PCD loan granted to a public corporation classified as non-accrual, which was
repaid during the six-month period ended June 30, 2022 .
Credit Risk Management
Allowance for Credit Losses
OnJanuary 1, 2020 , OFG adopted an 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 and six-month periods endedJune 30, 2022 and 2021 and as ofJune 30, 2022 andDecember 31, 2021 . In addition, Table 5 sets forth the composition of the loan portfolio. Please refer to the "Provision for Credit Losses" and "Critical Accounting Policies and 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 Quarterly 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, foreclosed real estate, and other repossessed assets (see Tables 10 and 12). AtJune 30, 2022 , OFG had$98.2 million of non-accrual loans, including$10.3 million PCD loans, compared to$101.9 million atDecember 31, 2021 . AtJune 30, 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$150.0 million and$125.9 million , respectively, as they were performing under their modified terms. Delinquent residential mortgage loans insured or guaranteed under applicableFederal Housing Administration ("FHA") andUnited States Department of Veterans Affairs ("VA") 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. AtJune 30, 2022 , OFG's non-performing assets decreased by 2.5% to$125.8 million (1.23% of total assets) from$129.0 million (1.30% of total assets) atDecember 31, 2021 . Foreclosed real estate and other repossessed assets amounting to$15.1 million and$2.5 million , respectively, atJune 30, 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. AtJune 30, 2022 , the allowance coverage ratio to non-performing loans was 147.0% (139.2% atDecember 31, 2021 ). 85 -------------------------------------------------------------------------------- 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 offered adjustable rate mortgage loans with teaser rates.
The following items comprise non-performing loans held for investment, including
Non-PCD and PCDs:
Commercial loans - AtJune 30, 2022 , OFG's non-performing commercial loans amounted to$57.3 million (52.9% of OFG's non-performing loans), an 14.2% increase from$50.1 million atDecember 31, 2021 (44.8% of OFG's non-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 - AtJune 30, 2022 , OFG's non-performing mortgage loans totaled$33.6 million (31.1% of OFG's non-performing loans), a 15.4% 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 - AtJune 30, 2022 , OFG's non-performing consumer loans amounted to$2.0 million (1.8% of OFG's non-performing loans), a 13.7% 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 loans and leasing - AtJune 30, 2022 , OFG's non-performing auto loans and leases amounted to$15.3 million (14.2% of OFG's total non-performing loans), a decrease of 22.7% from$19.8 million atDecember 31, 2021 (17.6% of OFG's total non-performing loans). Non-PCD auto loans and leases 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. 86 -------------------------------------------------------------------------------- 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 credit underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor's financial difficulties. 87 --------------------------------------------------------------------------------
TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN
June 30, December 31, Variance
2022 2021 %
(In thousands)
Allowance for credit losses:
Non-PCD
Commercial $ 42,014 $ 32,262 30.2 %
Mortgage 11,906 15,299 -22.2 %
Consumer 23,109 19,141 20.7 %
Auto and leasing 66,867 65,363 2.3 %
Total allowance for credit losses $ 143,896 $ 132,065 9.0 %
PCD
Commercial $ 2,427 $ 4,508 -46.2 %
Mortgage 12,541 19,018 -34.1 %
Consumer 20 34 -41.2 %
Auto and leasing 155 312 -50.3 %
Total allowance for credit losses $ 15,143 $ 23,872 -36.6 %
Allowance for credit losses summary
Commercial $ 44,441 $ 36,770 20.9 %
Mortgage 24,447 34,317 -28.8 %
Consumer 23,129 19,175 20.6 %
Auto and leasing 67,022 65,675 2.1 %
Total allowance for credit losses $ 159,039 $ 155,937 2.0 %
Allowance composition:
Commercial 27.9 % 23.6 %
Mortgage 15.4 % 22.0 %
Consumer 14.5 % 12.3 %
Auto and leasing 42.2 % 42.1 %
100.0 % 100.0 %
Allowance coverage ratio at end of year:
Commercial 1.7 % 1.6 % 10.3 %
Mortgage 1.4 % 1.8 % -25.0 %
Consumer 4.6 % 4.7 % -1.1 %
Auto and leasing 3.7 % 3.9 % -3.4 %
2.4 % 2.4 % -2.9 %
Allowance coverage ratio to non-performing loans:
Commercial 77.6 % 73.3 % 5.9 %
Mortgage 72.8 % 86.4 % -15.8 %
Consumer 1164.0 % 832.6 % 39.8 %
Auto and leasing 437.2 % 331.2 % 32.0 %
147.0 % 139.2 % 5.6 %
88
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TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY
Quarter Ended June 30, Six-Month Period Ended June 30,
Variance
2022 2021 Variance % 2022 2021 %
(Dollars in thousands) (Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period $ 157,075 $ 201,973 -22.2 % $ 155,937 $ 204,809 -23.9 %
Provision for (recapture of)
credit losses 6,507 (8,138) -180.0 % 8,222 (1,870) -539.7 %
Charge-offs (13,167) (10,962) 20.1 % (25,584) (28,481) -10.2 %
Recoveries 8,624 8,844 -2.5 % 20,464 17,259 18.6 %
Balance at end of period $ 159,039 $ 191,717 -17.0 % $ 159,039 $ 191,717 -17.0 %
89
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TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES
Quarter Ended June 30, Six-Month Period Ended June 30,
Variance
2022 2021 Variance % 2022 2021 %
(Dollars in thousands) (Dollars in thousands)
Non-PCD
Mortgage
Charge-offs $ (259) $ (268) -3.4 % $ (262) $ (1,056) -75.2 %
Recoveries 335 193 73.6 % 2,409 808 198.1 %
Total 76 (75) -201.3 % 2,147 (248) -965.7 %
Commercial
Charge-offs (2,907) (653) 345.2 % (3,451) (720) 379.3 %
Recoveries 456 996 -54.2 % 648 1,425 -54.5 %
Total (2,451) 343 -814.6 % (2,803) 705 -497.6 %
Consumer
Charge-offs (3,307) (2,897) 14.2 % (5,966) (7,366) -19.0 %
Recoveries 795 697 14.1 % 1,450 1,263 14.8 %
Total (2,512) (2,200) 14.2 % (4,516) (6,103) -26.0 %
Auto and leasing
Charge-offs (6,428) (5,170) 24.3 % (14,318) (14,253) 0.5 %
Recoveries 5,565 5,997 -7.2 % 10,456 11,814 -11.5 %
Total (863) 827 -204.4 % (3,862) (2,439) 58.3 %
PCD Loans:
Mortgage
Charge-offs $ (183) $ (1,742) (89.5) % $ (1,317) $ (4,332) (69.6) %
Recoveries 1,026 184 457.6 % 1,871 330 467.0 %
Total 843 (1,558) (154.1) % 554 (4,002) (113.8) %
Commercial
Charge-offs - (6) (100.0) % (34) (50) (32.0) %
Recoveries 249 430 (42.1) % 3,272 867 277.4 %
Total 249 424 (41.3) % 3,238 817 296.3 %
Consumer
Charge-offs (8) - - % (47) (22) 113.6 %
Recoveries 13 33 (60.6) % 36 55 (34.5) %
Total 5 33 (84.8) % (11) 33 (133.3) %
Auto and leasing
Charge-offs (75) (226) (66.8) % (189) (682) (72.3) %
Recoveries 185 314 (41.1) % 322 697 (53.8) %
Total 110 88 25.0 % 133 15 786.7 %
Total charge-offs (13,167) (10,962) 20.1 % (25,584) (28,481) (10.2) %
Total recoveries 8,624 8,844 (2.5) % 20,464 17,259 18.6 %
Net credit losses $ (4,543) $ (2,118) 114.5 % $ (5,120) $ (11,222) (54.4) %
90
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TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES (CONTINUED)
Quarter Ended June 30, Six-Month Period Ended June 30,
2022 2021 Variance % 2022 2021 Variance %
(Dollars in thousands) (Dollars in thousands)
Net credit losses to average
loans outstanding:
Mortgage (0.20) % 0.30 % -166.81 % (0.29) % 0.39 % -175.55 %
Commercial 0.34 % (0.13) % -374.5 % (0.03) % (0.13) % -72.3 %
Consumer 1.98 % 2.17 % -8.6 % 1.87 % 2.98 % -37.4 %
Auto and leasing 0.17 % (0.23) % -174.8 % 0.43 % 0.30 % 40.2 %
Total 0.27 % 0.13 % 113.1 % 0.16 % 0.34 % -54.1 %
Recoveries to charge-offs 65.50 % 80.68 % -18.8 % 79.99 % 60.60 % 32.0 %
Average Loans Held for
Investment
Mortgage $ 1,809,228 $ 2,147,928 -15.8 % $ 1,847,001 $ 2,195,540 -15.9 %
Commercial 2,555,575 2,443,407 4.6 % 2,503,168 2,424,195 3.3 %
Consumer 506,588 400,365 26.5 % 484,363 406,743 19.1 %
Auto and leasing 1,769,049 1,606,869 10.1 % 1,745,583 1,590,524 9.7 %
Total $ 6,640,440 $ 6,598,569 0.6 % $ 6,580,115 $ 6,617,002 -0.6 %
TABLE 10 - NON-PERFORMING ASSETS
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans $ 23,431 $ 24,539 -4.5 %
Other loans 64,469 64,465 - %
Accruing loans
Troubled-Debt Restructuring loans 9,832 9,087 8.2 %
Other loans 134 1,038 -87.1 %
Total $ 97,866 $ 99,129 -1.3 %
PCD 10,318 12,879 -19.9 %
Total non-performing loans $ 108,184 $ 112,008 -3.4 %
Foreclosed real estate 15,061 15,039 0.1 %
Other repossessed assets 2,533 1,945 30.2 %
$ 125,778 $ 128,992 -2.5 %
Non-performing assets to total assets 1.23 % 1.30 % -5.4 %
Non-performing assets to total capital 12.39 % 12.06 % 2.7 %
91
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Quarter Ended June 30, Six-Month Period Ended June 30,
2022 2021 2022 2021
(In thousands) (In thousands)
Interest that would have been recorded in the
period if the
loans had not been classified as non-accruing
loans $ 495 $
694 $ 811
TABLE 11 - NON-ACCRUAL LOANS
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-accrual loans
Non-PCD
Commercial $ 47,206 $ 37,604 25.5 %
Mortgage 23,381 29,268 -20.1 %
Consumer 1,987 2,303 -13.7 %
Auto and leasing 15,329 19,829 -22.7 %
Total $ 87,903 $ 89,004 -1.2 %
PCD
Commercial $ 10,057 $ 12,545 -19.8 %
Mortgage 261 334 -21.9 %
Total $ 10,318 $ 12,879 -19.9 %
Total non-accrual loans $ 98,221 $ 101,883 -3.6 %
Non-accruals loans composition percentages:
Commercial 58.3 % 49.2 %
Mortgage 24.1 % 29.1 %
Consumer 2.0 % 2.3 %
Auto and leasing 15.6 % 19.4 %
100.0 % 100.0 %
Non-accrual loans ratios:
Non-accrual loans to total loans 1.47 % 1.59 % -7.55 %
Allowance for credit losses to non-accrual loans 161.92 % 153.05 % 5.80 %
92
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TABLE 12 - NON-PERFORMING LOANS
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial $ 47,206 $ 37,603 25.5 %
Mortgage 33,344 39,394 -15.4 %
Consumer 1,987 2,303 -13.7 %
Auto and leasing 15,329 19,829 -22.7 %
Total $ 97,866 $ 99,129 -1.3 %
PCD
Commercial $ 10,057 $ 12,545 -19.8 %
Mortgage 261 334 -21.9 %
Total $ 10,318 $ 12,879 -19.9 %
Total non-performing loans $ 108,184 $ 112,008 -3.4 %
Non-performing loans composition percentages:
Commercial 52.9 % 44.8 %
Mortgage 31.1 % 35.5 %
Consumer 1.8 % 2.1 %
Auto and leasing 14.2 % 17.6 %
100.0 % 100.0 %
Non-performing loans to:
Total loans 1.61 % 1.75 % -8.00 %
Total assets 1.06 % 1.13 % -6.2 %
Total capital 10.66 % 10.48 % 1.7 %
Non-performing loans with partial charge-offs to:
Total loans 0.44 % 0.46 % -4.3 %
Non-performing loans 27.25 % 26.53 % 2.7 %
Other non-performing loans ratios:
Charge-off rate on non-performing loans to
non-performing loans on which charge-offs have been 97.72 % 170.31 % -42.6 %
taken
Allowance for credit losses to non-performing loans on 202.08 %
189.49 % 6.6 %
which no charge-offs have been taken
93 --------------------------------------------------------------------------------
TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Deposits:
Non-interest bearing deposits $ 2,707,504 $ 2,501,644 8.2 %
NOW accounts 2,751,556 2,702,636 1.8 %
Savings and money market accounts 2,433,816 2,177,779 11.8 %
Time deposits 1,136,066 1,220,262 -6.9 %
Total deposits 9,028,942 8,602,321 5.0 %
Accrued interest payable 628 797 -21.2 %
Total deposits and accrued interest payable 9,029,570 8,603,118 5.0 %
Borrowings:
Advances from FHLB 27,586 28,488 -3.2 %
Subordinated capital notes - 36,083 -100.0 %
Other borrowings 32 - - %
Total borrowings 27,618 64,571 -57.2 %
Total deposits and borrowings 9,057,188 8,667,689 4.5 %
Other Liabilities:
Derivative liabilities 21 804 -97.4 %
Acceptances outstanding 27,150 35,329 -23.2 %
Lease liability 29,538 30,498 -3.1 %
Other liabilities 119,065 96,240 23.7 %
Total liabilities $ 9,232,962 $ 8,830,560 4.6 %
Deposits portfolio composition percentages:
Non-interest bearing deposits 30.0 % 29.1 %
NOW accounts 30.5 % 31.4 %
Savings and money market accounts 27.0 % 25.3 %
Time deposits 12.5 % 14.2 %
100.0 % 100.0 %
Borrowings portfolio composition percentages:
Advances from FHLB 99.9 % 44.1 %
Subordinated capital notes 0.0 % 55.9 %
Other borrowings 0.1 % - %
100.0 % 100.0 %
Liabilities and Funding Sources
As shown in Table 13 above, atJune 30, 2022 , OFG's total liabilities were$9.233 billion , 4.6% higher than the$8.831 billion reported atDecember 31, 2021 . Deposits and borrowings, OFG's funding sources, amounted to$9.057 billion atJune 30, 2022 compared to$8.668 billion atDecember 31, 2021 . Deposits, excluding accrued interest payable, increased 5.0% mainly from higher commercial and retail deposits by$510.8 million , offset by a decrease of$84.4 million in time deposits from maturities, with the majority of them transferred into demand deposit and savings accounts. As ofJune 30, 2022 borrowings consist of FHLB advances amounting to$27.6 million . Borrowings decreased by$37.0 million , when compared to$64.6 million atDecember 31, 2021 , reflecting the redemption of all$36.1 million variable rate subordinated capital notes before maturity during the six-month period endedJune 30, 2022 . 94 --------------------------------------------------------------------------------
Stockholders' Equity
AtJune 30, 2022 , OFG's total stockholders' equity was$1.015 billion , a 5% decrease when compared to$1.069 billion atDecember 31, 2021 . This reduction in stockholders' equity reflects a decrease of$60.6 million from additional treasury stock and a decrease in additional paid-in capital of$2.4 million , as a result of repurchases of common stock in the aggregate amount of$64.1 million in connection with the$100 million stock buyback program adopted during the first quarter of 2022. It also reflects a decrease in accumulated other comprehensive income, net of tax, of$54.7 million from changes in the market value of available-for-sale securities. The decrease was offset by an increase in retained earnings of$55.6 million and legal surplus of$7.7 million , mainly due to$78.0 million in net income, partially offset by$14.6 million common stock dividends issued during the six-month period endedJune 30, 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") are based on the final capital framework for strengthening international capital standards, known as Basel III, of theBasel Committee on Banking Supervision . As ofJune 30, 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 , OFG 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 OFG 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 six-month period endedJune 30, 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 ofJune 30, 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. 95 --------------------------------------------------------------------------------
The following are OFG's consolidated capital ratios under the Basel III capital
rules at
TABLE 14 - CAPITAL, DIVIDENDS AND STOCK DATA
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands, except per share data)
Capital data:
Stockholders' equity $ 1,014,812 $ 1,069,160 (5.1) %
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio 12.80 % 13.77 % (7.0) %
Minimum common equity tier 1 capital ratio required 4.50 % 4.50 % 0.0 %
Actual common equity tier 1 capital $ 960,015 964,284 (0.4) %
Minimum common equity tier 1 capital required $ 337,463 315,219 7.1 %
Minimum capital conservation buffer required (2.5%) $ 187,479 175,122 7.1 %
Excess over regulatory requirement $ 435,073 473,943 (8.2) %
Risk-weighted assets $ 7,499,171 7,004,876 7.1 %
Tier 1 risk-based capital ratio 12.80 % 14.27 % (10.3) %
Minimum tier 1 risk-based capital ratio required 6.00 % 6.00 % 0.0 %
Actual tier 1 risk-based capital $ 960,015 $ 999,284 (3.9) %
Minimum tier 1 risk-based capital required $ 449,950 $ 420,293 7.1 %
Minimum capital conservation buffer required (2.5%) $ 187,479 175,122 7.1 %
Excess over regulatory requirement $ 322,585 $ 403,869 (20.1) %
Risk-weighted assets $ 7,499,171 $ 7,004,876 7.1 %
Total risk-based capital ratio 14.05 % 15.52 % (9.5) %
Minimum total risk-based capital ratio required 8.00 % 8.00 % 0.0 %
Actual total risk-based capital $ 1,053,766 $ 1,086,897 (3.0) %
Minimum total risk-based capital required $ 599,934 $ 560,390 7.1 %
Minimum capital conservation buffer required (2.5%) $ 187,479 175,122 7.1 %
Excess over regulatory requirement $ 266,353 $ 351,385 (24.2) %
Risk-weighted assets $ 7,499,171 $ 7,004,876 7.1 %
Leverage capital ratio 9.46 % 9.69 % (2.4) %
Minimum leverage capital ratio required 4.00 % 4.00 % 0.0 %
Actual tier 1 capital $ 960,015 $ 999,284 (3.9) %
Minimum tier 1 capital required $ 405,805 $ 412,359 (1.6) %
Excess over regulatory requirement $ 554,209 $ 586,925 (5.6) %
Tangible common equity to total assets 8.75 % 9.57 % (8.6) %
Tangible common equity to risk-weighted assets 11.96 % 13.52 % (11.5) %
Total equity to total assets 9.90 % 10.80 % -8.3 %
Total equity to risk-weighted assets 13.53 % 15.26 % (11.3) %
Stock data:
Outstanding common shares 47,553,723 49,636,352 (4.2) %
Book value per common share $ 21.34 $ 21.54 (0.9) %
Tangible book value per common share $ 18.86 $ 19.08 (1.2) %
Market price at end of year $ 25.40 $ 26.56 -4.4 %
Market capitalization at end of year $ 1,207,865 $ 1,318,342 -8.4 %
96
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From December 31, 2021 to June 30, 2022 , leverage capital ratio decreased from
9.69% to 9.46%, tier 1 risk-based capital ratio decreased from 14.27% to 12.80%,
total risk-based capital ratio decreased from 15.52% to 14.05%, common equity
tier 1 capital ratio decreased from 13.77% to 12.80%, and tangible common equity
to tangible total assets decreased from 9.69% to 8.85%. The decreases in capital
ratios reflected common stock repurchases of $64.1 million during the six-month
period ended June 30, 2022 and an increase in risk-weighted assets, partially
offset by increase in retained earnings. Risk-weighted assets increased, mainly
from the increase in loan and investment portfolios during the six-month period
ended June 30, 2022 . Also, during the six-month period ended June 30, 2022 , OFG
completed the redemption and cancellation of subordinated capital notes, further
reducing tier 1 risk-based capital and total risk-based capital by $35.0
million . Tangible common equity was also affected by a $54.7 million other
comprehensive loss during the six-month period ended June 30, 2022 from
available for sale securities as a result of changes in market interest rates
from recent developments in the U.S. economy.
The following table presents a reconciliation of OFG's total stockholders'
equity to tangible common equity and total assets to tangible assets at
2022
June 30 , December 31,
2022 2021
(In
thousands, except share or per share
information)
Total stockholders' equity $ 1,014,812 $ 1,069,160 Goodwill (86,069) $ (86,069) Core deposit intangible (24,354) $ (27,630) Customer relationship intangible (7,399) $ (8,368) Other intangibles (47) $ (95) Total tangible common equity (non-GAAP) $ 896,943 $ 946,998 Total assets$ 10,247,774 9,899,720 Goodwill (86,069) (86,069) Core deposit intangible (24,354) (27,630) Customer relationship intangible (7,399) (8,368) Other intangibles (47) (95) Total tangible assets$ 10,129,905 $ 9,777,558 Tangible common equity to tangible assets 8.85 % 9.69 % Common shares outstanding at end of period 47,553,723 49,636,352 Tangible book value per common share $ 18.86 $ 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. 97 -------------------------------------------------------------------------------- The following table presents OFG's capital adequacy information under the Basel III capital rules: June 30, December 31, Variance 2022 2021 % (Dollars in thousands) Risk-based capital: Common equity tier 1 capital $ 960,015 $ 964,284 (0.4) % Additional tier 1 capital - 35,000 (100.0) % Tier 1 capital 960,015 999,284 (3.9) % Additional Tier 2 capital 93,751 87,613 7.0 % Total risk-based capital$ 1,053,766 $ 1,086,897 (3.0) % Risk-weighted assets: Balance sheet items$ 6,893,863 $ 6,406,115 7.6 % Off-balance sheet items 605,308 598,761 1.1 % Total risk-weighted assets$ 7,499,171 $ 7,004,876 7.1 % Ratios: Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%) 12.80 % 13.77 % (7.0) %
Tier 1 capital (minimum required, including capital
conservation buffer - 8.5%)
12.80 % 14.27 % (10.3) %
Total capital (minimum required, including capital
conservation buffer - 10.5%)
14.05 % 15.52 % (9.5) %
Leverage ratio (minimum required - 4%) 9.46 % 9.69 % (2.4) %
Equity to assets 9.90 % 10.80 % -8.3 %
Tangible common equity to assets 8.75 % 9.57 % (8.6) %
98
--------------------------------------------------------------------------------
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 June 30, 2022 and December 31, 2021 :
June 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets 12.16% 13.09% (7.10) %
Actual common equity tier 1 capital $ 906,739 $ 908,717 (0.2) %
Minimum capital requirement (4.5%) $ 335,568 $ 312,371 7.4 %
Minimum capital conservation buffer requirement
(2.5%) $ 186,427 $ 173,540 7.4 %
Minimum to be well capitalized (6.5%) $ 484,709 $ 451,203 7.4 %
Tier 1 Capital to Risk-Weighted Assets 12.16% 13.09% (7.1) %
Actual tier 1 risk-based capital $ 906,739 $ 908,717 (0.2) %
Minimum capital requirement (6%) $ 447,424 $ 416,495 7.4 %
Minimum capital conservation buffer requirement
(2.5%) $ 186,427 $ 173,540 7.4 %
Minimum to be well capitalized (8%) $ 596,565 $ 555,327 7.4 %
Total Capital to Risk-Weighted Assets 13.41% 14.34% (6.5) %
Actual total risk-based capital $ 999,970 $ 995,549 0.4 %
Minimum capital requirement (8%) $ 596,565 $ 555,327 7.4 %
Minimum capital conservation buffer requirement
(2.5%) $ 186,427 $ 173,540 7.4 %
Minimum to be well capitalized (10%) $ 745,707 $ 694,159 7.4 %
Total Tier 1 Capital to Average Total Assets 8.98% 8.87% 1.2 %
Actual tier 1 capital $ 906,739 $ 908,717 (0.2) %
Minimum capital requirement (4%) $ 403,697 $ 409,855 (1.5) %
Minimum to be well capitalized (5%) $ 504,621 $ 512,319 (1.5) %
OFG's common stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "OFG." At June 30, 2022 and December 31, 2021 , OFG's market
capitalization for its outstanding common stock was $1.208 billion ($25.40 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
June 30, 2022 $ 29.22 $ 25.40 $ 0.15
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
99
-------------------------------------------------------------------------------- InJanuary 2022 , OFG announced the approval by the Board of Directors of a stock repurchase program to purchase$100 million of its outstanding shares of common stock. The shares of common stock repurchased are held by OFG as treasury shares. During the six-month period endedJune 30, 2022 , OFG repurchased 2,351,868 shares for a total of$64.1 million at an average price of$27.04 per share. OFG did not repurchase any shares of its common stock during the six-month period endedJune 30, 2022 , other than through its publicly announced stock repurchase program. During the six-month period endedJune 30, 2021 , OFG did not repurchase any shares. AtJune 30, 2022 the number of shares that may yet be purchased under the$100 million stock buyback program is estimated at 1,412,984 and was calculated by dividing the remaining balance of$35.9 million by$25.40 (closing price of OFG's common stock atJune 30, 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.
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