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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 endedSeptember 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 endedSeptember 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-three 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
Natural Events
During the quarter endedSeptember 30, 2022 , OFG was impacted by the effects of Hurricane Fiona. It caused power outages, widespread flooding, water and communication services interruptions, property damage in some areas of the island, and disrupted economic activity throughoutPuerto Rico . Although OFG's business operations were temporarily disrupted by the damages toPuerto Rico's critical infrastructure, OFG's digital channels, core banking and electronic funds transfer systems continued to function uninterrupted during and after the hurricane, and within days after the hurricane, OFG was able to open its main offices and many of its branches and ATMs in addition to its digital and phone trade channels. After the quarter endedSeptember 30, 2022 , we believe that business activity has begun to return to pre-hurricane Fiona levels. Banking service revenues for the quarter endedSeptember 30, 2022 were impacted due to Hurricane Fiona's temporary effect on economic activity and OFG's decision to provide relief to our clients by waiving late charges and other fees throughSeptember 30, 2022 . OFG incurred$1.4 million in expenses related to this event. Also, based on current assessments of information available for the impact of the hurricane on our credit portfolio, third quarter 2022 results included higher qualitative reserves mainly from$6.9 million in loan loss provision, pre-tax. As OFG acquires additional 65 -------------------------------------------------------------------------------- information on overall economic prospects in the affected areas, together with further assessments of the impact on individual borrowers, the loss estimate will be further revised as needed.
Capital Actions
InJanuary 2022 , OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend 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 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. AtSeptember 30, 2022 , OFG has repurchased 2.4 million shares of common stock for$64.1 million . OFG expects to continue to execute this repurchase program to the extent favorable market opportunities exist at the relevant point in time.
Economic Conditions
SinceMarch 2020 , the Covid-19 pandemic has affected our communities and the way we do business, as well as economic activity globally, nationally and locally. 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 six times during fiscal year 2022, with the latest increases of 75 basis points each made onJune 15, 2022 ,July 27, 2022 ,September 21, 2022 andNovember 2, 2022 . The current federal funds target rate range is 3.75% to 4.00% but FRB officials forecast the federal funds target rate will end 2022 at a range of 4.25% to 4.50%. 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, even with the effects of Hurricane Fiona. 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.
LIBOR and Other Benchmark Rates
InJuly 2017 , the Chief Executive of theFinancial Conduct Authority ("FCA") announced that theFCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.However, the administrator of LIBOR has proposed to extend publication of the most commonly usedU.S. Dollar LIBOR settings untilJune 30, 2023 and has ceased publishing other LIBOR settings onDecember 31, 2021 . Although OFG believes that its exposure to LIBOR is not material, as it represents only 3.7% of total assets, LIBOR-based contracts that will be impacted by the cessation of LIBOR have been under review to ensure they contain adequate fallback language. OFG has also been proactively working to transition to alternative reference rates ("ARR") and/or fallback language in both existing as well as new contracts to prepare for the cessation of LIBOR. Furthermore, management has established a LIBOR transition team to lead OFG in the execution of its project plan and is monitoring the development 66 -------------------------------------------------------------------------------- and adoption of Secured Overnight Financing Rate ("SOFR") alternatives as well as other credit sensitive ARR and their liquidity in the market. OFG is also working towards business and system readiness to originate SOFR based loans.
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.
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FINANCIAL HIGHLIGHTS
During the quarter endedSeptember 30, 2022 , OFG had its strongest quarter to date this fiscal year, driven by total core revenue growth of 7.2% quarter-over-quarter. All our key performance metrics improved compared to the second quarter of 2022 and the third quarter of 2021, with return on average assets of 1.65%, return on average tangible common stockholders' equity of 18.05%, and an efficiency ratio of 55.80%. Earnings per share diluted was$0.87 compared to$0.84 in the second quarter of 2022 and$0.81 in the third quarter of 2021. Total core revenues were$156.8 million compared to$146.3 million in the second quarter of 2022 and$134.7 million in the third quarter of 2021. The regular quarterly cash dividend was increased to$0.20 per common share in the third quarter of 2022 from$0.15 in the second quarter of 2022 and$0.12 in the third quarter of 2021. Net interest income of$126.5 million compared to$115.1 million in the second quarter of 2022 and$102.7 million in the third quarter of 2021. Net interest margin expanded to 5.23% from 4.80% in the second quarter of 2022 due to increased volume of loans and investments and FRB rate hikes. Interest income of$134.7 million compared to$122.2 million in the second quarter of 2022 and$112.1 million in the third quarter of 2021. Compared to the second quarter of 2022, the third quarter of 2022 interest income benefited from higher yields on higher average balances of loans and of investment securities, and higher average yields on lower cash balances. Total interest expense of$8.2 million compared to$7.1 million in the second quarter of 2022 and$9.4 million in the third quarter of 2021. Compared to the second quarter of 2022, the third quarter of 2022 interest expense primarily reflected a 4 basis point cost increase. Non-interest income of$30.6 million compared to$36.2 million in the second quarter of 2022 and$32.5 million in the third quarter of 2021. Compared to the second quarter of 2022, the third quarter of 2022 banking service revenues declined$0.9 million due to Hurricane Fiona's effect on economic activity and OFG's decision to provide fee waivers to customers following the hurricane. The second quarter of 2022 included a$4.7 million gain on sale of a legacy branch building.
Net revenues before provision for credit losses were
quarter of 2021.
Provision for credit losses of$7.1 million compared to$6.7 million in the second quarter of 2022 and a recapture of$5.0 million in the third quarter of 2021. The third quarter of 2022 non-PCD provision included$8.0 million for higher auto and consumer loan balances and a$1.3 million increase in qualitative adjustment, including anticipated Fiona-related losses. The third quarter of 2022 PCD recapture of$2.8 million was due to reduced balances and improved performance of residential mortgage loans. Net charge offs were$11.3 million compared to$4.5 million in the second quarter of 2022 and$6.1 million in the third quarter of 2021. The third quarter of 2022 charge-offs included$6.6 million , of which$5.5 million was previously reserved for two commercial loans, and$5.5 million related to auto and consumer loans. Non-interest expenses were$87.5 million compared to$85.3 million in the second quarter of 2022 and$78.9 million in the third quarter of 2021. The third quarter of 2022 included$1.4 million of Hurricane Fiona related expenses and$0.6 million of expenses for real estate owned versus$1.4 million in income for the second quarter of 2022. Loans held for investment were$6.68 billion atSeptember 30, 2022 compared to$6.70 billion atJune 30, 2022 and$6.41 billion atSeptember 30, 2021 . Loans declined 0.3% or$17.7 million fromJune 30, 2022 , reflecting paydowns of residential mortgages and seasonal commercial lines of credit as well as PPP loan forgiveness, mostly offset by increases in auto and consumer loans. Year over year, loans increased 4.3% or$274.1 million . 68 --------------------------------------------------------------------------------
New loan origination was
quarter of 2022 and
quarter of 2022 included a record level of auto loan originations at
Total investments of
billion
grew
short-term
environment.
Customer deposits of
billion
declined by
Total assets of
at
CET1 ratio atSeptember 30, 2022 was 13.38% compared to 12.80% atJune 30, 2022 and 13.52% atSeptember 30, 2021 . Tangible book value per share was$18.46 atSeptember 30, 2022 compared to$18.86 atJune 30, 2022 and$18.59 atSeptember 30, 2021 . The decline fromJune 30, 2022 reflected a reduction in other comprehensive income, partially offset by an increase in retained earnings.
Selected income statement and balance sheet data and key performance indicators
are presented in the tables below:
Quarter Ended September 30, Nine-Month Period Ended September 30,
2022 2021 Variance % 2022 2021 Variance %
EARNINGS DATA: (In thousands, except per share data)
Interest income $ 134,675 $ 112,135 20.1% $ 369,846 $ 336,568 9.9%
Interest expense 8,165 9,434 (13.5)% 23,048 33,418 (31.0)%
Net interest income 126,510 102,701 23.2% 346,798 303,150 14.4%
Provision for (recapture of) credit
losses 7,120 (4,997) (242.5)% 15,362 (6,978)
(320.1)%
Net interest income after provision for credit losses 119,390 107,698 10.9% 331,436 310,128 6.9% Non-interest income 30,620 32,521 (5.8)% 98,436 95,131 3.5% Non-interest expenses 87,492 78,924 10.9% 253,905 239,266 6.1% Income before taxes 62,518 61,295 2.0% 175,967 165,993 6.0% Income tax expense 20,599 19,624 5.0% 56,095 53,122 5.6% Net income 41,919 41,671 0.6% 119,872 112,871 6.2% Less: dividends on preferred stock - - -% - (1,255) (100.0)% Income available to common shareholders $ 41,919$ 41,671 0.6%$ 119,872 $ 111,616 7.4% PER SHARE DATA: Basic $ 0.88$ 0.82 7.3%$ 2.49 $ 2.18 14.2% Diluted $ 0.87$ 0.81 7.4%$ 2.47 $ 2.15 14.9% Average common shares outstanding 47,558 51,063 (6.9)% 48,188 51,364
(6.2)%
Average common shares outstanding and equivalents 47,926 51,516 (7.0)% 48,594 51,748
(6.1)%
Cash dividends declared per common share $ 0.20 0.12 66.7%$ 0.50 0.28
78.6%
Cash dividends declared on common shares $ 9,388 6,240 50.4%$ 24,012 14,637 64.1% Dividend payout ratio 22.99 % 14.81 % 55.2% 20.24 % 13.02 % 55.5% PERFORMANCE RATIOS: Return on average assets (ROA) 1.65 % 1.59 % 3.8% 1.57 % 1.46 %
7.5%
Return on average tangible common stockholders' equity 18.05 % 17.72 % 1.9% 17.20 % 16.25 %
5.8%
Return on average common equity (ROE) 16.03 % 15.63 %
2.6% 15.25 % 14.25 % 7.0%
Efficiency ratio 55.80 % 58.59 % (4.8)% 57.77 % 60.47 % (4.5)%
Interest rate spread 5.21 % 4.09 % 27.4% 4.82 % 4.16 % 15.9%
Interest rate margin 5.23 % 4.12 % 26.9% 4.84 % 4.20 % 15.2%
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September 30, December 31, Variance
2022 2021 %
PERIOD END BALANCES AND CAPITAL RATIOS: (In thousands, except per share data)
Investments and loans
Investment securities $ 2,042,566 $ 895,818 128.0%
Loans, net 6,591,028 6,329,311 4.1%
Total investments and loans $ 8,633,594 $ 7,225,129 19.5%
Deposits and borrowings
Deposits $ 8,855,117 $ 8,603,118 2.9%
Other borrowings 27,263 64,571 (57.8)%
Total deposits and borrowings $ 8,882,380 $ 8,667,689 2.5%
Stockholders' equity
Common stock 59,885 59,885 -%
Additional paid-in capital 635,523 637,061 (0.2)%
Legal surplus 129,429 117,677 10.0%
Retained earnings 484,057 399,949 21.0%
Treasury stock, at cost (211,138) (150,572) 40.2%
Accumulated other comprehensive (loss) income (103,889) 5,160 (2113.4)%
Total stockholders' equity $ 993,867 $ 1,069,160 (7.0)%
Per share data
Book value per common share $ 20.90 $ 21.54 (3.0)%
Tangible book value per common share $ 18.46 $ 19.08 (3.2)%
Market price $ 25.13 $ 26.56 (5.4)%
Capital ratios
Leverage capital 9.82 % 9.69 % 1.3%
Common equity Tier 1 capital 13.38 % 13.77 % (2.8)%
Tier 1 risk-based capital 13.38 % 14.27 % (6.2)%
Total risk-based capital 14.63 % 15.52 % (5.7)%
Financial assets managed
Trust assets managed $ 3,091,234 $ 3,758,895 (17.8)%
Broker-dealer assets gathered 2,033,376 2,466,004 (17.5)%
Total assets managed $ 5,124,610 $ 6,224,899 (17.7)%
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 nine-month periods endedSeptember 30, 2022 and 2021. 70 --------------------------------------------------------------------------------
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED
Interest Average rate Average balance
September 2022 September 2021 September 2022 September 2021 September 2022 September 2021
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 134,675 $ 112,135 5.57 % 4.50 % $ 9,597,670 $ 9,879,687
Tax equivalent adjustment 3,980 2,438 0.16 % 0.10 % - -
Interest-earning assets - tax
equivalent 138,655 114,573 5.73 % 4.60 % 9,597,670 9,879,687
Interest-bearing liabilities 8,165 9,434 0.36 % 0.41 % 8,962,730 9,213,530
Tax equivalent net interest
income / spread 130,490 105,139 5.37 % 4.19 % 634,940 666,157
Tax equivalent interest rate
margin 5.53 % 4.30 %
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 12,774 3,216 2.71 % 1.80 % 1,883,209 714,669
Interest bearing cash and
money market investments 5,661 986 2.21 % 0.14 % 1,016,561 2,699,144
Total investments 18,435 4,202 2.52 % 0.49 % 2,899,770 3,413,813
Non-PCD loans
Mortgage 9,253 9,755 5.48 % 5.21 % 675,664 747,942
Commercial 35,695 29,558 5.94 % 5.55 % 2,382,724 2,111,935
Consumer 15,368 11,180 11.33 % 11.12 % 537,883 399,002
Auto and leasing 37,361 34,535 8.09 % 8.35 % 1,832,581 1,640,433
Total Non-PCD loans 97,677 85,028 7.14 % 6.89 % 5,428,852 4,899,312
PCD loans
Mortgage 15,828 18,785 5.85 % 5.78 % 1,082,233 1,299,330
Commercial 2,492 3,609 5.60 % 5.80 % 178,125 248,708
Consumer 34 64 13.44 % 16.16 % 1,015 1,580
Auto and leasing 209 447 10.90 % 10.55 % 7,675 16,944
Total PCD loans 18,563 22,905 5.85 % 5.85 % 1,269,048 1,566,562
Total loans (1) 116,240 107,933 6.89 % 6.62 % 6,697,900 6,465,874
Total interest-earning assets 134,675 112,135 5.57 % 4.50 % 9,597,670 9,879,687
Interest-bearing liabilities:
Deposits:
NOW Accounts 2,927 2,288 0.41 % 0.33 % 2,799,234 2,754,985
Savings and money market 1,733 1,639 0.29 % 0.28 % 2,388,072 2,330,121
Time deposits 1,679 2,916 0.61 % 0.84 % 1,097,470 1,378,505
Total core deposits 6,339 6,843 0.40 % 0.42 % 6,284,776 6,463,611
Brokered deposits 9 10 0.30 % 0.34 % 11,366 11,366
6,348 6,853 0.40 % 0.42 % 6,296,142 6,474,977
Non-interest bearing deposits - - - 0.00 % 2,639,313 2,639,610
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Interest Average rate Average balance
September 2022 September 2021 September 2022 September 2021 September 2022 September 2021
(Dollars in thousands)
Fair value premium and core
deposit intangible
amortizations 1,639 1,838 - % - % - -
Total deposits 7,987 8,691 0.35 % 0.38 % 8,935,455 9,114,587
Borrowings:
Advances from FHLB and other
borrowings 178 450 2.59 % 2.84 % 27,275 62,860
Subordinated capital notes - 293 - % 3.21 % - 36,083
Total borrowings 178 743 2.59 % 2.98 % 27,275 98,943
Total interest-bearing
liabilities 8,165 9,434 0.36 % 0.41 % 8,962,730 9,213,530
Net interest income / spread
5.21 % 4.09 % Interest rate margin 5.23 % 4.12 % Excess of average interest-earning assets over average interest-bearing liabilities $ 634,940 $ 666,157 Average interest-earning assets to average interest-bearing liabilities ratio 107.08 % 107.23 %
(1) Includes loans held for sale and excludes allowance for credit losses. Nonperforming loans are included in the respective average loan balances. Income on these nonperforming
loans is generally recognized on a cost recovery basis
C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investment securities $ 7,612 $ 1,946 $ 9,558
Interest bearing cash and money market investments (971) 5,646 4,675
Loans 3,777 4,530 8,307
Total interest income 10,418 12,122 22,540
Interest Expense:
NOW Accounts 37 602 639
Savings and money market 41 53 94
Time deposits (566) (671) (1,237)
Brokered deposits - (1) (1)
Fair value premium and core deposit intangible
amortizations - (199) (199)
Advances from FHLB and other borrowings (235) (37) (272)
Subordinated capital notes (146) (147) (293)
Total interest expense (869) (400) (1,269)
Net Interest Income $ 11,287 $ 12,522 $ 23,809
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TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIOD ENDED
Interest Average rate Average balance
September 2022 September 2021 September 2022 September 2021 September 2022 September 2021
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 369,846 $ 336,568 5.16 % 4.66 % $ 9,583,964 $ 9,656,838
Tax equivalent adjustment 9,446 6,803 0.13 % 0.09 % - -
Interest-earning assets - tax
equivalent 379,292 343,371 5.29 % 4.75 % 9,583,964 9,656,838
Interest-bearing liabilities 23,048 33,418 0.34 % 0.50 % 8,937,864 8,999,822
Tax equivalent net interest
income / spread 356,244 309,953 4.95 % 4.25 % 646,100 657,016
Tax equivalent interest rate
margin 5.08 % 4.34 %
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 25,110 8,088 2.35 % 1.75 % 1,423,120 614,599
Interest bearing cash and
money market investments 9,574 2,287 0.83 % 0.12 % 1,541,036 2,476,139
Total investments 34,684 10,375 1.56 % 0.45 % 2,964,156 3,090,738
Non-PCD loans
Mortgage 28,192 30,541 5.45 % 5.25 % 690,224 776,225
Commercial 97,371 86,934 5.59 % 5.44 % 2,327,424 2,138,474
Consumer 42,282 34,006 11.27 % 11.28 % 501,574 403,037
Auto and leasing 108,251 101,652 8.19 % 8.53 % 1,767,922 1,592,482
Total Non-PCD loans 276,096 253,133 6.98 % 6.89 % 5,287,144 4,910,218
PCD loans
Mortgage 50,587 59,548 5.99 % 5.80 % 1,126,754 1,369,410
Commercial 7,595 11,716 5.19 % 5.91 % 195,182 264,238
Consumer 123 176 14.00 % 14.39 % 1,167 1,635
Auto and leasing 761 1,620 10.63 % 10.49 % 9,561 20,599
Total PCD loans 59,066 73,060 5.91 % 5.88 % 1,332,664 1,655,882
Total loans (1) 335,162 326,193 6.77 % 6.64 % 6,619,808 6,566,100
Total interest-earning assets 369,846 336,568 5.16 % 4.66 % 9,583,964 9,656,838
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Interest Average rate Average balance
September 2022 September 2021 September 2022 September 2021 September 2022 September 2021
(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts 7,241 6,940 0.34 % 0.36 % 2,807,838 2,566,201
Savings and money market 4,220 5,859 0.24 % 0.36 % 2,311,568 2,191,316
Time deposits 5,570 12,664 0.65 % 1.07 % 1,147,404 1,576,460
Total core deposits 17,031 25,463 0.36 % 0.54 % 6,266,810 6,333,977
Brokered deposits 26 197 0.30 % 0.86 % 11,366 30,482
17,057 25,660 0.36 % 0.54 % 6,278,176 6,364,459
Non-interest bearing deposits - - - % - % 2,626,663 2,535,422
Fair value premium and core
deposit intangible
amortizations 4,915 5,515 - % - % - -
Total deposits 21,972 31,175 0.33 % 0.47 % 8,904,839 8,899,881
Borrowings:
Advances from FHLB and other
borrowings 555 1,361 2.67 % 2.85 % 27,725 63,858
Subordinated capital notes 521 882 13.15 % 3.26 % 5,300 36,083
Total borrowings 1,076 2,243 4.35 % 3.00 % 33,025 99,941
Total interest bearing
liabilities 23,048 33,418 0.34 % 0.50 % 8,937,864 8,999,822
Net interest income / spread$ 346,798 $ 303,150 4.82 % 4.16 % Interest rate margin 4.84 % 4.20 % Excess of average interest-earning assets over average interest-bearing liabilities $ 646,100 $ 657,016 Average interest-earning assets to average interest-bearing liabilities ratio 107.23 % 107.30 %
(1) Includes loans held for sale and excludes allowance for credit losses. Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans
is generally recognized on a cost recovery basis
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C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investment securities $ 13,780 $ 3,242 $ 17,022
Interest bearing cash and money market investments (1,154) 8,441 7,287
Loans 3,562 5,407 8,969
Total interest income 16,188 17,090 33,278
Interest Expense:
NOW Accounts 633 (332) 301
Savings and money market 306 (1,945) (1,639)
Time deposits (3,090) (4,004) (7,094)
Brokered deposits (84) (87) (171)
Fair value premium and core deposit intangible
amortizations - (600) (600)
Advances from FHLB and other borrowings 458 (1,264) (806)
Subordinated capital notes (1,252) 891 (361)
Total interest expense (3,029) (7,341) (10,370)
Net Interest Income $ 19,217 $ 24,431 $ 43,648
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 112 basis points to 5.21% from 4.09% and net interest margin increased 111 basis points to 5.23% from 4.12%. This increase reflects an increase of 107 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 5 basis points. Net interest income was positively impacted by: •An increase of$9.6 million in interest income from investments securities related to purchases of agency securities during 2022. During the third quarter of 2022, OFG effectively redeployed$410 million dollars of cash to purchase short-termUS Treasury securities as part of its strategy of taking advantage of the higher yield environment;
•An increase of
the loan portfolio at a higher yield;
•An increase of$4.7 million in interest income from higher yield in lower balances of 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 third quarter of 2021 to a range of 3.00% to 3.25% for the third quarter of 2022; and
•Lower interest expense by
and a reduced cost of total deposits and borrowings, which resulted in an
increase in net interest income of approximately
75
--------------------------------------------------------------------------------
Comparison of the nine-month periods ended
Net interest income of
million
Interest rate spread increased 66 basis points to 4.82% from 4.16% and net interest margin increased 64 basis points to 4.84% from 4.20%. This increase reflects an increase of 50 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 16 basis points.
Net interest income was positively impacted by:
•A
higher yielding investment securities during 2022;
•Lower interest expense by$10.4 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$7.3 million and$3.0 million , respectively;
•A
yields on new loans originated during the period and upward repricing of
variable rate commercial loans; and
•A$7.3 million increase in interest income from higher yield in lower balances of interest bearing cash and money market related to the increase in federal fund rates during 2022.
TABLE 2 - NON-INTEREST INCOME SUMMARY
Quarter Ended September 30, Nine-Month Period Ended September 30,
2022 2021 Variance % 2022 2021 Variance %
(In thousands) (In thousands)
Banking service revenue $ 17,234 $ 18,200 (5.3) % $ 52,937 $ 52,948 - %
Wealth management revenue 8,173 7,619 7.3 % 24,300 23,270 4.4 %
Mortgage banking activities 4,891 6,197 (21.1) % 15,476 16,310 (5.1) %
Total banking and financial
service revenue 30,298 32,016 (5.4) % 92,713 92,528
0.2 %
Other non-interest income 322 505 (36.2) % 5,723 2,603 119.9 % Total non-interest income, net$ 30,620 $ 32,521 (5.8) %$ 98,436 $ 95,131 3.5 % 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$1.3 million decrease in mortgage banking activities due to lower net gain on sales of loans by$1.9 million from lower sales volume, as higher interest rates have affected home sales; and •A$1.0 million decrease in banking service revenues, primarily related to a decrease in electronic banking fees associated to Hurricane Fiona's effect on economic activity and OFG's decision to provide fee waivers to customers following the hurricane.
The decrease in non-interest income was offset by a
wealth management revenues, which includes income from the new reinsurance
business of
76 --------------------------------------------------------------------------------
partially offset by a decrease of
thousand
management.
Comparison of the nine-month periods ended
OFG recorded non-interest income, net, in the amount of
to
non-interest income was mainly due to:
•An increase of
a
•An increase of$1.0 million in wealth management revenue, which includes income from the new reinsurance business of$2.9 million , partially offset by decreases of$1.2 million in broker-dealer revenues and$590 thousand in trust division fees from lower balances in assets under management. The increase in non-interest income was offset by a decrease of$834 thousand in mortgage-banking activities due to lower net gain on sales of$5.8 million , driven by lower sales volume, partially offset by a$5.0 million increase in servicing income, mostly related to higher gains on repurchased loans. 77 --------------------------------------------------------------------------------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Quarter Ended September 30, Nine-Month Period Ended September 30,
2022 2021 Variance % 2022 2021 Variance %
(In thousands) (In thousands)
Compensation and employee benefits $ 35,332
4.7 %$ 104,830 $ 99,282 5.6 % Occupancy, equipment and infrastructure costs 12,638 12,078 4.6 % 37,415 37,734 -0.8 % Electronic banking charges 9,965 9,615 3.6 % 29,473 27,163 8.5 % Information technology expenses 5,270 3,621 45.5 % 15,602 13,407 16.4 % Professional and service fees 6,441 5,003 28.7 % 19,224 14,938 28.7 % Taxes, other than payroll and income taxes 3,324 3,257 2.1 % 9,897 10,535 -6.1 % Insurance 2,394 2,530 -5.4 % 7,458 7,659 -2.6 % Loan servicing and clearing expenses 2,144 1,908 12.4 % 6,309 5,690 10.9 % Advertising, business promotion, and strategic initiatives 1,926 1,646 17.0 % 5,815 4,783 21.6 % Communication 982 1,327 -26.0 % 3,230 3,332 -3.1 % Printing, postage, stationery and supplies 878 878 - % 2,755 3,037 -9.3 % Director and investor relations 261 243 7.4 % 856 867 -1.3 % Climate event expenses 1,426 - 100.0 % 1,426 - 100.0 % Foreclosed real estate and other repossessed assets expenses (income), net 573 (2,163) 126.5 % (2,313) (1,885) -22.7 % Other 3,938 5,236 -24.8 % 11,928 12,724 -6.3 % Total non-interest expenses $ 87,492$ 78,924 10.9 %$ 253,905 $ 239,266 6.1 % Relevant ratios and data: Efficiency ratio 55.80 % 58.59 % 57.77 % 60.47 % Compensation and benefits to non-interest expense 40.38 % 42.76 % 41.29 % 41.49 % Compensation to average total assets owned (annualized) 1.39 % 1.29 % 1.38 % 1.29 % Average number of employees 2,247 2,251 2,246 2,241 Average compensation per employee (annualized, in thousands)$ 62.90 $ 60.0 $ 62.23 $ 59.1 Average loans per average employee$ 2,981 $ 2,872 $ 2,947 $ 2,931 Non-Interest Expenses
Comparison of quarters ended
Non-interest expense was$87.5 million , representing an increase of 10.9%, or$8.6 million , compared to$78.9 million . The increase in non-interest expense was mainly due to: •Foreclosed real estate and other repossessed assets expense of$573 thousand in current quarter compared to$2.2 million income in prior year quarter, reflecting lower gains on sale of foreclosed real estate and other repossessed assets by$1.6 million and$1.4 million , respectively, partially offset by a$286 thousand decrease in credit-related expenses. OFG has profited from most of its foreclosed real estate, going forward it is more likely to see modest expenses versus large gains;
•Increase of
by higher cloud computing services and cyber security expenses;
•Increase in compensation and employee benefits of
increases in minimum hourly wages, annual salaries and lower deferred loan
origination costs;
78 --------------------------------------------------------------------------------
•Increase in professional and service fees of
compliance related expenses due to greater levels of business activity;
•Increase in climate event expenses of$1.4 million related to expenses incurred by OFG to operate in disaster response mode and provide assistance to employees and the communities it serves after Hurricane Fiona;
•Increase in occupancy, equipment and infrastructure costs of
primarily related to software maintenance and licenses, as part of OFG's
"digital first" model; and
•Increase in electronic banking charges of
credit card billing and processing expenses and POS expenses, from higher
transactions volume.
The increase in non-interest expense was partially offset by a decrease of
million
The efficiency ratio was 55.80% and improved from 58.59%. 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 endedSeptember 30, 2022 and 2021 amounted to$322 thousand and$505 thousand , respectively.
Comparison of the nine-month periods ended
Non-interest expense was$253.9 million , representing an increase of 6.1%, or$14.6 million , compared to$239.3 million . The increase in non-interest expenses was mainly due to: •Increase in compensation and employee benefits of$5.5 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 of
higher compliance related expenses due to greater levels of business activity;
•Increase in electronic banking charges of$2.3 million mainly due an increase in debit and credit card billing fees, ATM-related expenses and merchant fees due to higher transaction volumes; and
•Increase of
cloud computing and cyber security expenses;
•Increase in climate event expenses of$1.4 million related to expenses incurred by OFG to operate in disaster response mode and provide assistance to employees and the communities it serves after Hurricane Fiona; and •Increase of$1.0 million in advertising, business promotion, and strategic initiatives driven by increase marketing campaigns and digital marketing efforts made during the period.
The increase in non-interest expense was partially offset by:
•Decrease in taxes, other than payroll and income taxes of
reflecting lower property and municipal taxes, as a result of changes in tax
law;
•Decrease in claims and settlement accruals of
broker-dealer subsidiary;
•Higher foreclosed real estate and other repossessed assets income of$428 thousand reflecting lower credit-related expenses, partially offset by lower gain on sales of foreclosed other repossessed assets;
•Decrease in occupancy, equipment and infrastructure costs by
reflecting lower rent, building maintenance, utilities and other expenses
related to branch consolidations; and
•Decrease in expenses relating to printing, postage, stationery and supplies of
79 --------------------------------------------------------------------------------
The efficiency ratio was 57.77% and improved from 60.47%. Amounts presented as
part of non-interest income that are excluded from the efficiency ratio
computation for the nine-month periods ended
amounted to
Provision for Credit Losses
Comparison of quarters ended
Provision for credit losses increased by$12.1 million to$7.1 million from a recapture of$5.0 million . The provision for credit losses for the quarter endedSeptember 30, 2022 includes a provision of$7.6 million due to the growth in loan balances and a provision of$1.0 million associated with qualitative adjustments, which include$6.9 million for anticipated Hurricane Fiona-related losses net of the improvement in the performance of the portfolios and inPuerto Rico's labor market, partially offset by recaptures of$865 thousand for changes in the economic and loss rate models and other miscellaneous reserves and$639 thousand related to certain commercial-specific loan reserves due to certain commercial loans placed in non-accrual status. The provision for credit losses for the prior-year quarter included$4.3 million net reserve releases, which reflected continued improvement in asset quality trends.
Comparison of the nine-month periods ended
Provision for credit losses decreased by$22.3 million to$15.4 million from a recapture of$7.0 million . The provision for credit losses for the nine-months period endedSeptember 30, 2022 reflected a provision of$16.7 million related to the growth in loan balances, a provision of$8.9 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, offset by a$8.6 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and inPuerto Rico's labor market, net of the$6.9 million provision for anticipated Hurricane Fiona-related losses, and a$1.6 million release for changes in the economic and loss rate models and other miscellaneous reserves. Prior-year period recapture reflected continued improvement in asset quality trends.
Income Tax Expense
Comparison of quarters ended
OFG's ETR was 32.9% in 2022 compared to 32.0% in 2021. The increase in ETR was mainly related to lower income at the OIB level, which is fully tax exempt, and at theOFG USA level, which is taxed at lower rate.
Comparison of the nine-month periods ended
OFG's ETR was 31.9% in 2022 compared to 32.0% in 2021. The decrease in ETR is related to an increase inUS Treasury securities and other exempt investments and a discrete tax windfall on stock options during the nine-month period endedSeptember 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 nine-month periods endedSeptember 30, 2022 and 2021. 80 --------------------------------------------------------------------------------
Quarter Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 117,939 $ 6 $ 18,829 $ 136,774 $ (2,099) $ 134,675
Interest expense (7,891) - (2,373) (10,264) 2,099 (8,165)
Net interest income 110,048 6 16,456 126,510 - 126,510
Provision for credit
losses 7,059 - 61 7,120 - 7,120
Non-interest income 22,310 8,310 - 30,620 - 30,620
Non-interest expenses (82,026) (4,635) (831) (87,492) - (87,492)
Intersegment revenue 588 - - 588 (588) -
Intersegment expenses - (412) (176) (588) 588 -
Income before income
taxes 43,861 3,269 15,388 62,518 - 62,518
Income tax expense 20,589 1 9 20,599 - 20,599
Net income $ 23,272 $ 3,268 $ 15,379 $ 41,919 $ - $ 41,919
Total assets $ 8,179,384 $ 27,839 $ 2,823,826 $ 11,031,049 $ (972,870) $ 10,058,179
Nine-Month
Period Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 337,017 $ 16 $ 35,787 $ 372,820 $ (2,974) $ 369,846
Interest expense (21,796) - (4,226) (26,022) 2,974 (23,048)
Net interest income 315,221 16 31,561 346,798 - 346,798
Provision for (recapture
of) credit losses 15,403 - (41) 15,362 - 15,362
Non-interest income 73,662 24,724 50 98,436 - 98,436
Non-interest expenses (237,477) (14,015)
(2,413) (253,905) - (253,905) Intersegment revenue 1,645 - - 1,645 (1,645) - Intersegment expenses - (1,131) (514) (1,645) 1,645 - Income before income taxes$ 137,648 $ 9,594 $ 28,725 $ 175,967 $ -$ 175,967 Income tax expense 56,067 1 27 56,095 - 56,095 Net income$ 81,581 $ 9,593 $ 28,698 $ 119,872 $ -$ 119,872 Total assets$ 8,179,384 $ 27,839 $ 2,823,826 $ 11,031,049 $ (972,870) $ 10,058,179 81
--------------------------------------------------------------------------------
Quarter Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 108,475 $ 7 $
3,653
Interest expense
(8,946) - (488) (9,434) - (9,434) Net interest income 99,529 7 3,165 102,701 - 102,701 Recapture of credit losses (4,815) - (182) (4,997) - (4,997) Non-interest income 24,352 8,079 90 32,521 - 32,521 Non-interest expenses (72,463) (5,245) (1,216) (78,924) - (78,924) Intersegment revenue 616 - - 616 (616) - Intersegment expenses - (318) (298) (616) 616 - Income before income taxes 56,849 2,523 1,923 61,295 - 61,295 Income tax expense 19,614 - 10 19,624 - 19,624 Net income$ 37,235 $ 2,523 $ 1,913 $ 41,671 $ -$ 41,671 Total assets$ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865
Nine-Month Period Ended
Wealth Total Major Consolidated
Banking Management Treasury Segments Eliminations Total
(In thousands)
Interest income $ 327,151 $ 25 $
9,392
Interest expense
(31,794) - (1,624) (33,418) - (33,418) Net interest income 295,357 25 7,768 303,150 - 303,150 Recapture of credit losses (5,964) - (1,014) (6,978) - (6,978) Non-interest income 71,440 23,584 107 95,131 - 95,131 Non-interest expenses (222,960) (13,089) (3,217) (239,266) - (239,266) Intersegment revenue 1,714 - - 1,714 (1,714) - Intersegment expenses - (911) (803) (1,714) 1,714 -
Income before income taxes
Income tax expense
53,089 - 33 53,122 - 53,122 Net income$ 98,426 $ 9,609 $ 4,836 $ 112,871 $ -$ 112,871 Total assets$ 8,116,648 $ 24,581 $ 3,558,568 $ 11,699,797 $ (1,092,932) $ 10,606,865 82
--------------------------------------------------------------------------------
Comparison of quarters ended
Banking
OFG's banking segment net income before taxes decreased by
•Increase in provision for credit losses of$11.9 million . The provision for the current quarter reflected increases due to growth of loan balances and qualitative adjustments from anticipated Hurricane Fiona-related losses net of improvement in the performance of the portfolios and inPuerto Rico's labor market, partially offset by releases associated with changes in the economic and loss rate models and other miscellaneous reserves and certain commercial-specific loan reserves when placed in non-accrual status. The provision for the prior-year quarter included a release related to improvements in asset quality; •Decrease of$2.0 million in non-interest income, primarily related to a decrease in mortgage banking activities of$1.3 million due to lower net gain on sales of loans and a$888 thousand decrease in banking service revenues associated to Hurricane Fiona's effect on economic activity and OFG's decision to provide fee waivers to customers following the hurricane; and •Increase in non-interest expenses of$9.6 million , mainly due to: (i) lower gains on sale of foreclosed real estate and other repossessed assets by$1.6 and$1.4 million , respectively; (ii) higher information technology expenses by$1.6 million driven by higher cloud and computing services and cybersecurity expenses; (iii) climate event expenses by$1.4 million related to Hurricane Fiona; (iv) higher professional and service fees by$1.2 million from higher compliance related expenses due to greater levels of business activity; and (v) higher compensation and employee benefits by$1.1 million due to increases in minimum hourly wages, annual salaries and lower deferred loan origination costs.
These variances were partially offset by:
•Increase of
yields on higher balances; and
•Lower interest expense of
average balances of core deposits.
Wealth Management
Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage, and insurance and reinsurance activities. Net income before taxes from this segment increased by$746 thousand . The increase reflected higher non-interest income of$231 thousand , mainly from$1.1 million fees from the reinsurance business which began operations during the last quarter of 2021, partially offset by a decrease of$467 thousand in revenues from the broker-dealer subsidiary and$397 thousand in trust division fees from lower assets under management.
Treasury segment net income before taxes increased by$13.5 million , mainly reflecting an increase in interest income from the purchases of investment securities during the year 2022 and higher yield in lower balances of interest bearing cash and money market investments related to the increase in federal fund rates.
Comparison of nine-month periods ended
Banking
OFG's banking segment net income before taxes decreased by
•Increase in provision for credit losses of$21.4 million . The provision for current period reflected increases related to growth in loan balances and commercial-specific loan reserves from commercial loans placed in non-accrual status, offset by releases associated with qualitative adjustment due to improvement in the performance of the portfolios and inPuerto Rico's labor market, net of estimated Hurricane Fiona losses, and for changes in the economic and loss rate models and other miscellaneous reserves. The provision for the prior-year period included releases related to improvements in asset quality; and 83 -------------------------------------------------------------------------------- •Increase in non-interest expenses of$14.5 million , mainly due to: (i) a$5.5 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$3.6 million increase in compliance related professional expenses due to greater levels of business activity; (iii) a$2.3 million increase in electronic banking charges due to higher transaction volume; (iv) a$2.1 million increase in information technology expenses driven by higher cloud computing and cyber security expenses; and (v) climate event expenses of$1.4 million related to Hurricane Fiona. These increases were partially offset by higher foreclosed real estate and other repossessed assets income by$428 thousand reflecting lower credit-related expenses, partially offset by lower gain on sales of foreclosed other repossessed assets.
The decreases in the banking segment's net income were partially offset by:
•Increase of
yields on higher balances;
•Lower interest expense by
and lower average balances of core deposits;
•Increase of
million
nine-months period 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$15 thousand reflecting an increase in non-interest expenses of$926 thousand , primarily related to higher claims expenses as a result of a$1.2 million reversal from a case settled during the prior year period, and higher intersegment expenses by$220 thousand . The decrease in net income before taxes was partially offset by a$1.1 million increase in non-interest income related to$2.9 million income from the new reinsurance business, partially offset by a decrease of$1.3 million in revenues from the broker-dealer subsidiary and$589 thousand in trust division fees from lower assets under management.
reflecting:
•Increase in interest income by$26.4 million , reflecting the purchase of agency mortgage-backed securities andUS Treasury securities during the current period and higher yield in lower balances of interest bearing cash and money market investments related to the increase in federal fund rates; and •Decrease in interest expense by$2.6 million 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 nine-month period endedSeptember 30, 2022 . 84 --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At
increase of
2021
The investment portfolio increased by$1.147 billion , or 128.0%, primarily related to purchases of available for sale agency mortgage-backed securities andUS Treasury securities amounting to$719.0 million and$401.7 million , respectively, and held-to-maturityUS Treasury securities amounting to$196.7 million during the nine-month period endedSeptember 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. AtSeptember 30, 2022 , OFG's net loan portfolio increased by$261.7 million , or 4.1%, reflecting increases in auto, commercial and consumer loans, partially offset by$75.1 million PPP loans forgiven by theSmall Business Administration and the sale of$21.9 million of past due mortgage loans sold during the nine-month period endedSeptember 30, 2022 .
Cash and due from banks of
reflecting cash used to purchase available for sale agency mortgage-backed
securities and
securities, disbursements for loans originated during the nine-month period
ended
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
September 30, 2022 , the total assets managed by OFG's trust division and
retirement plan administration subsidiary amounted to $3.091 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 September 30, 2022 , total assets gathered by the
securities broker-dealer and insurance agency subsidiaries from their customers'
investment accounts amounted to $2.033 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 resulting
from the increase in interest rates.
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. As ofSeptember 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 10 -Goodwill and Other Intangible Assets to our consolidated financial statements for more information on the annual goodwill impairment test. 85 --------------------------------------------------------------------------------
TABLE 4 - ASSETS SUMMARY AND COMPOSITION
September 30, December 31, Variance
2022 2021 %
(In thousands)
Investments:
FNMA and FHLMC certificates $ 1,111,160 $ 550,809 101.7 %
Obligations of US government-sponsored agencies - 1,183 -100.0 %
US Treasury securities 598,639 10,825 5,430.2 %
CMOs issued by US government-sponsored agencies 16,499 24,430 -32.5 %
GNMA certificates 291,728 288,578 1.1 %
Equity securities 23,372 17,578 33.0 %
Other debt securities 1,157 2,395 -51.7 %
Trading securities 11 20 -45.0 %
Total investments 2,042,566 895,818 128.0 %
Loans, net 6,591,028 6,329,311 4.1 %
Total investments and loans 8,633,594 7,225,129 19.5 %
Other assets:
Cash and due from banks (including restricted cash) 810,445 2,014,698 -59.8 %
Money market investments 4,988 8,952 -44.3 %
Foreclosed real estate 14,561 15,039 -3.2 %
Accrued interest receivable 59,400 56,560 5.0 %
Deferred tax asset, net 66,121 99,063 -33.3 %
Premises and equipment, net 106,025 92,124 15.1 %
Servicing assets 50,061 48,973 2.2 %
Goodwill 86,069 86,069 0.0 %
Other intangible assets 29,662 36,093 -17.8 %
Right of use assets 26,192 28,846 -9.2 %
Other assets and customers' liability on acceptances 171,061 188,174 -9.1 %
Total other assets 1,424,585 2,674,591 -46.7 %
Total assets $ 10,058,179 $ 9,899,720 1.6 %
Investment portfolio composition:
FNMA and FHLMC certificates 54.4 % 61.5 %
Obligations of US government-sponsored agencies 0.0 % 0.1 %
US Treasury securities 29.3 % 1.2 %
CMOs issued by US government-sponsored agencies 0.8 % 2.7 %
GNMA certificates 14.3 % 32.2 %
Equity securities 1.1 % 2.0 %
Other debt securities and trading securities 0.1 % 0.3 %
100.0 % 100.0 %
86
--------------------------------------------------------------------------------
TABLE 5 - LOAN PORTFOLIO COMPOSITION
September 30, December 31, Variance
2022 2021 %
(In thousands)
Loans held for investment:
Commercial $ 2,539,668 $ 2,379,330 6.7 %
Mortgage 1,739,279 1,907,271 (8.8) %
Consumer 520,921 409,675 27.2 %
Auto and leasing 1,885,097 1,706,310 10.5 %
6,684,965 6,402,586 4.4 %
Allowance for credit losses (155,162) (155,937) (0.5) %
Total loans held for investment 6,529,803 6,246,649 4.5 %
Mortgage loans held for sale 43,262 51,096 (15.3) %
Other loans held for sale 17,963 31,566 (43.1) %
Total loans, net $ 6,591,028 $ 6,329,311 4.1 %
OFG's loan portfolio is composed of mortgage, commercial, consumer, and auto
loans and leases. As shown in Table 5 above, total loans, net, amounted to
$6.591 billion at September 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 $2.540 billion (38.0% 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 29.4%, or
million
2022
During the nine-month period ended
million
nine-month period ended
•Mortgage loan portfolio amounted to$1.739 billion (26.0% of the gross loan portfolio) compared to$1.907 billion (29.8% of the gross originated loan portfolio) atDecember 31, 2021 . Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to$29.1 million and$14.5 million atSeptember 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. Mortgage loan production totaled$38.9 million and$165.7 million for the quarter and nine-month period endedSeptember 30, 2022 , respectively, which represents a decrease of 54.5% and 41.9% from$85.5 million and$285.2 million for the same periods in 2021. The housing market inPuerto Rico has been greatly impacted by the FRB interest rate hikes during 2022, in contrast with 2021 where there was a sudden increase in housing originations as a result of higher liquidity from government funds from Hurricane Maria, earthquakes and Covid in thePuerto Rico economy combined with low interest rates. •Consumer loan portfolio amounted to$520.9 million (7.8% of the gross loan portfolio) compared to$409.7 million (6.4% of the gross loan portfolio) atDecember 31, 2021 . Consumer loan production increased 44.3% and 129.6% to$73.0 million and$266.7 million in the quarter and nine-month period endedSeptember 30, 2022 , respectively, from$50.6 million and$116.2 million for the same periods in 2021. •Auto and leasing portfolio amounted to$1,885.1 million (28.2% of the gross loan portfolio) compared to$1,706.3 million (26.7% of the gross originated loan portfolio) atDecember 31, 2021 . Auto loans production increased 32.6% and 21.6% to$219.9 million and$591.2 million in the quarter and nine-month period endedSeptember 30, 2022 , respectively, compared to$165.9 million and$486.3 million for the same periods in 2021. 87 --------------------------------------------------------------------------------
TABLE 6 -
September 30, 2022
Maturity
Carrying Value Less than 1 Year 1 to 3 Years More than 3 Years
Loans: (In thousands)
Municipalities $ 73,430 $ 8,358 $ 24,168 $ 40,904
At September 30, 2022 , OFG has $73.4 million of direct credit exposure to the
Puerto Rico government, a $13.8 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 nine-month period ended September 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 nine-month periods endedSeptember 30, 2022 and 2021 and as ofSeptember 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 6 - 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). AtSeptember 30, 2022 , OFG had$93.6 million of non-accrual loans, including$10.0 million PCD loans, compared to$101.9 million atDecember 31, 2021 , reflecting a decrease of$5.9 million in the mortgage loan portfolio. AtSeptember 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$145.5 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. AtSeptember 30, 2022 , OFG's non-performing assets decreased by 6.0% to$121.3 million (1.21% of total assets) from$129.0 million (1.30% of total assets) atDecember 31, 2021 . Foreclosed real estate decreased from$15.0 million atDecember 31, 2021 to$14.6 million atSeptember 30, 2022 and other reposed assets increased from$1.9 million atDecember 31, 2021 to$3.3 million atSeptember 30, 2022 , both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. AtSeptember 30, 2022 , the allowance coverage ratio to non-performing loans was 150.0% (139.2% atDecember 31, 2021 ). 88 -------------------------------------------------------------------------------- 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 - AtSeptember 30, 2022 , OFG's non-performing commercial loans amounted to$46.4 million (44.8% of OFG's non-performing loans), a 7.6% decrease 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 - AtSeptember 30, 2022 , OFG's non-performing mortgage loans totaled$33.5 million (32.4% of OFG's non-performing loans), a 15.7% decrease from$39.7 million (35.5% of OFG's non-performing loans) atDecember 31, 2021 . During the nine-month period endedSeptember 30, 2022 , OFG sold$21.9 million of past due mortgage loans,$4.0 million were included as non-performing assets 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 - AtSeptember 30, 2022 , OFG's non-performing consumer loans amounted to$2.7 million (2.6% of OFG's non-performing loans), an 18.3% increase from$2.3 million atDecember 31, 2021 (2.1% of OFG's non-performing loans), which reflect higher balances in the portfolio. 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 - AtSeptember 30, 2022 , OFG's non-performing auto loans and leases amounted to$20.9 million (20.2% of OFG's total non-performing loans), an increase of 5.2% from$19.8 million atDecember 31, 2021 (17.6% of OFG's total non-performing loans), which reflect higher balances in the portfolio. 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 ,USDA Rural Development (RURAL),Puerto Rico Housing Finance Authority (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 89 --------------------------------------------------------------------------------
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 credit underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor's financial difficulties. As a result of the effects of Hurricane Fiona andPuerto Rico being declared a disaster zone by local and federal authorities, OFG granted loan payment accommodations to certain qualified borrowers in order to provide them with flexibility to address the hurricane's immediate impact. AtSeptember 30, 2022 , the process of analyzing moratorium requests by OFG was still ongoing. 90 --------------------------------------------------------------------------------
TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN
September 30, December 31, Variance
2022 2021 %
(In thousands)
Allowance for credit losses:
Non-PCD
Commercial $ 38,851 $ 32,262 20.4 %
Mortgage 10,431 15,299 -31.8 %
Consumer 24,233 19,141 26.6 %
Auto and leasing 68,902 65,363 5.4 %
Total allowance for credit losses $ 142,417 $ 132,065 7.8 %
PCD
Commercial $ 1,886 $ 4,508 -58.2 %
Mortgage 10,727 19,018 -43.6 %
Consumer 18 34 -47.1 %
Auto and leasing 114 312 -63.5 %
Total allowance for credit losses $ 12,745 $ 23,872 -46.6 %
Allowance for credit losses summary
Commercial $ 40,737 $ 36,770 10.8 %
Mortgage 21,158 34,317 -38.3 %
Consumer 24,251 19,175 26.5 %
Auto and leasing 69,016 65,675 5.1 %
Total allowance for credit losses $ 155,162 $ 155,937 -0.5 %
Allowance composition:
Commercial 26.3 % 23.6 %
Mortgage 13.6 % 22.0 %
Consumer 15.6 % 12.3 %
Auto and leasing 44.5 % 42.1 %
100.0 % 100.0 %
Allowance coverage ratio at end of period:
Commercial 1.6 % 1.6 % 3.2 %
Mortgage 1.2 % 1.8 % -32.2 %
Consumer 4.7 % 4.7 % -0.4 %
Auto and leasing 3.7 % 3.9 % -4.9 %
2.3 % 2.4 % -4.9 %
Allowance coverage ratio to non-performing loans:
Commercial 87.9 % 73.3 % 19.8 %
Mortgage 63.2 % 86.4 % -26.8 %
Consumer 889.9 % 832.6 % 6.9 %
Auto and leasing 330.7 % 331.2 % -0.2 %
150.0 % 139.2 % 7.7 %
91
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TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY
Quarter Ended September 30, Nine-Month Period Ended September 30,
Variance
2022 2021 Variance % 2022 2021 %
(Dollars in thousands) (Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period $ 159,039 $ 191,717 -17.0 % $ 155,937 $ 204,809
-23.9 %
Provision for (recapture of) credit losses 7,470 (4,794) -255.8 % 15,692 (6,664) -335.5 % Charge-offs (18,984) (16,237) 16.9 % (44,568) (44,718) -0.3 % Recoveries 7,637 10,186 -25.0 % 28,101 27,445 2.4 % Balance at end of period$ 155,162 $ 180,872 -14.2 %$ 155,162 $ 180,872 -14.2 % 92
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TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES
Quarter Ended September 30, Nine-Month Period Ended September 30,
Variance
2022 2021 Variance % 2022 2021 %
(Dollars in thousands) (Dollars in thousands)
Non-PCD
Mortgage
Charge-offs $ (14) $ (160) -91.3 % $ (276) $ (1,216) -77.3 %
Recoveries 280 419 -33.2 % 2,689 1,227 119.2 %
Total 266 259 2.7 % 2,413 11 21,836.4 %
Commercial
Charge-offs (6,485) (7,518) -13.7 % (9,936) (8,238) 20.6 %
Recoveries 214 558 -61.6 % 862 1,983 -56.5 %
Total (6,271) (6,960) -9.9 % (9,074) (6,255) 45.1 %
Consumer
Charge-offs (4,163) (2,370) 75.7 % (10,129) (9,736) 4.0 %
Recoveries 732 894 -18.1 % 2,182 2,157 1.2 %
Total (3,431) (1,476) 132.5 % (7,947) (7,579) 4.9 %
Auto and leasing
Charge-offs (7,964) (4,989) 59.6 % (22,282) (19,242) 15.8 %
Recoveries 5,674 5,874 -3.4 % 16,130 17,688 -8.8 %
Total (2,290) 885 -358.8 % (6,152) (1,554) 295.9 %
PCD Loans:
Mortgage
Charge-offs $ (270) $ (1,008) (73.2) % $ (1,587) $ (5,340) (70.3) %
Recoveries 191 641 (70.2) % 2,062 971 112.4 %
Total (79) (367) (78.5) % 475 (4,369) (110.9) %
Commercial
Charge-offs (23) (68) (66.2) % (57) (118) (51.7) %
Recoveries 268 1,316 (79.6) % 3,540 2,183 62.2 %
Total 245 1,248 (80.4) % 3,483 2,065 68.7 %
Consumer
Charge-offs (9) - - % (56) (22) 154.5 %
Recoveries 47 219 (78.5) % 83 274 (69.7) %
Total 38 219 (82.6) % 27 252 (89.3) %
Auto and leasing
Charge-offs (56) (124) (54.8) % (245) (806) (69.6) %
Recoveries 231 265 (12.8) % 553 962 (42.5) %
Total 175 141 24.1 % 308 156 97.4 %
Total charge-offs (18,984) (16,237) 16.9 % (44,568) (44,718) (0.3) %
Total recoveries 7,637 10,186 (25.0) % 28,101 27,445 2.4 %
Net credit losses $ (11,347) $ (6,051) 87.5 % $ (16,467) $ (17,273) (4.7) %
93
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TABLE 9 - NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES (CONTINUED)
Quarter Ended September 30, Nine-Month Period Ended September 30,
2022 2021 Variance % 2022 2021 Variance %
(Dollars in thousands) (Dollars in thousands)
Net credit losses to average
loans outstanding:
Mortgage (0.04) % 0.02 % -301.65 % (0.21) % 0.27 % -178.26 %
Commercial 0.94 % 0.97 % -2.8 % 0.30 % 0.23 % 27.1 %
Consumer 2.52 % 1.26 % 100.6 % 2.10 % 2.41 % -13.0 %
Auto and leasing 0.46 % (0.25) % -285.7 % 0.44 % 0.12 % 279.3 %
Total 0.68 % 0.37 % 81.0 % 0.33 % 0.35 % -5.4 %
Recoveries to charge-offs 40.23 % 62.73 % -35.9 % 63.05 % 61.37 % 2.7 %
Average Loans Held for Investment
Mortgage $ 1,757,897 $ 2,047,272 -14.1 % $ 1,816,978 $ 2,145,635 -15.3 %
Commercial 2,560,849 2,360,642 8.5 % 2,522,606 2,402,904 5.0 %
Consumer 538,898 400,582 34.5 % 502,741 404,672 24.2 %
Auto and leasing 1,840,256 1,657,378 11.0 % 1,777,483 1,612,889 10.2 %
Total $ 6,697,900 $ 6,465,874 3.6 % $ 6,619,808 $ 6,566,100 0.8 %
Total commercial charge-offs for the quarter and nine-months period ended
September 30, 2022 included $6.6 million charge-offs, of which $5.5 million were
previously reserved for two commercial loans; one was subsequently sold on
October 7th, 2022 . In addition, total commercial charge-offs for the nine-months
period ended September 30, 2022 also included a $2.5 million charge-off from a
previously reserved commercial loan sold during the second quarter of 2022. The
increase in charge-offs from auto and consumer loans was mainly due to higher
loan volumes. Also, late payments as a result of Hurricane Fiona were a factor.
Total recoveries for the nine-months period ended September 30, 2022 included a
$2.8 million recovery from a Puerto Rico government public corporation PCD
commercial loan repaid during the first quarter of 2022 and $1.1 million
recoveries associated with the final settlement of the past due mortgage loans
transferred to held for sale during the fourth quarter of 2021 and subsequently
sold during the first quarter of 2022.
94
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TABLE 10 - NON-PERFORMING ASSETS
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans $ 21,130 $ 24,539 -13.9 %
Other loans 62,482 64,465 -3.1 %
Accruing loans
Troubled-Debt Restructuring loans 9,111 9,087 0.3 %
Other loans 709 1,038 -31.7 %
Total $ 93,432 $ 99,129 -5.7 %
PCD 10,006 12,879 -22.3 %
Total non-performing loans $ 103,438 $ 112,008 -7.7 %
Foreclosed real estate 14,561 15,039 -3.2 %
Other repossessed assets 3,307 1,945 70.0 %
$ 121,306 $ 128,992 -6.0 %
Non-performing assets to total assets 1.21 % 1.30 % -6.9 %
Non-performing assets to total capital 12.21 % 12.06 % 1.2 %
95
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TABLE 11 - NON-ACCRUAL LOANS
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-accrual loans
Non-PCD
Commercial $ 36,612 $ 37,604 -2.6 %
Mortgage 23,406 29,268 -20.0 %
Consumer 2,725 2,303 18.3 %
Auto and leasing 20,870 19,829 5.2 %
Total $ 83,613 $ 89,004 -6.1 %
PCD
Commercial $ 9,746 $ 12,545 -22.3 %
Mortgage 260 334 -22.2 %
Total $ 10,006 $ 12,879 -22.3 %
Total non-accrual loans $ 93,619 $ 101,883 -8.1 %
Non-accruals loans composition percentages:
Commercial 49.5 % 49.2 %
Mortgage 25.3 % 29.1 %
Consumer 2.9 % 2.3 %
Auto and leasing 22.3 % 19.4 %
100.0 % 100.0 %
Non-accrual loans ratios:
Non-accrual loans to total loans 1.40 % 1.59 % -11.95 %
Allowance for credit losses to non-accrual loans 165.74 % 153.05 % 8.29 %
Nine-Month Period Ended
Quarter Ended September 30, September 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 $ 578 $ 634 $ 1,190 $ 1,558
96
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TABLE 12 - NON-PERFORMING LOANS
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial $ 36,612 $ 37,603 -2.6 %
Mortgage 33,225 39,394 -15.7 %
Consumer 2,725 2,303 18.3 %
Auto and leasing 20,870 19,829 5.2 %
Total $ 93,432 $ 99,129 -5.7 %
PCD
Commercial $ 9,746 $ 12,545 -22.3 %
Mortgage 260 334 -22.2 %
Total $ 10,006 $ 12,879 -22.3 %
Total non-performing loans $ 103,438 $ 112,008 -7.7 %
Non-performing loans composition percentages:
Commercial 44.8 % 44.8 %
Mortgage 32.4 % 35.5 %
Consumer 2.6 % 2.1 %
Auto and leasing 20.2 % 17.6 %
100.0 % 100.0 %
Non-performing loans to:
Total loans 1.55 % 1.75 % -11.43 %
Total assets 1.03 % 1.13 % -8.8 %
Total capital 10.41 % 10.48 % -0.7 %
Non-performing loans with partial charge-offs to:
Total loans 0.46 % 0.46 % - %
Non-performing loans 29.67 % 26.53 % 11.8 %
Other non-performing loans ratios:
Charge-off rate on non-performing loans to
non-performing loans on which charge-offs have been 94.21 % 170.31 % -44.7 %
taken
Allowance for credit losses to non-performing loans 213.30 % 189.49 % 12.6 %
on which no charge-offs have been taken
97 --------------------------------------------------------------------------------
TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Deposits:
Non-interest bearing deposits $ 2,672,064 $ 2,501,644 6.8 %
NOW accounts 2,744,200 2,702,636 1.5 %
Savings and money market accounts 2,345,669 2,177,779 7.7 %
Time deposits 1,092,679 1,220,262 -10.5 %
Total deposits 8,854,612 8,602,321 2.9 %
Accrued interest payable 505 797 -36.6 %
Total deposits and accrued interest payable 8,855,117 8,603,118 2.9 %
Borrowings:
Advances from FHLB 27,153 28,488 -4.7 %
Subordinated capital notes - 36,083 -100.0 %
Other borrowings 110 - - %
Total borrowings 27,263 64,571 -57.8 %
Total deposits and borrowings 8,882,380 8,667,689 2.5 %
Other Liabilities:
Derivative liabilities 28 804 -96.5 %
Acceptances outstanding 29,245 35,329 -17.2 %
Lease liability 28,114 30,498 -7.8 %
Other liabilities 124,545 96,240 29.4 %
Total liabilities $ 9,064,312 $ 8,830,560 2.6 %
Deposits portfolio composition percentages:
Non-interest bearing deposits 30.2 % 29.1 %
NOW accounts 31.0 % 31.4 %
Savings and money market accounts 26.5 % 25.3 %
Time deposits 12.3 % 14.2 %
100.0 % 100.0 %
Borrowings portfolio composition percentages:
Advances from FHLB 99.6 % 44.1 %
Subordinated capital notes 0.0 % 55.9 %
Other borrowings 0.4 % - %
100.0 % 100.0 %
Liabilities and Funding Sources
As shown in Table 13 above, atSeptember 30, 2022 , OFG's total liabilities were$9.064 billion , 2.6% higher than the$8.831 billion reported atDecember 31, 2021 . Deposits and borrowings, OFG's funding sources, amounted to$8.882 billion atSeptember 30, 2022 compared to$8.668 billion atDecember 31, 2021 . Deposits, excluding accrued interest payable, increased 2.9% mainly from higher commercial and retail deposits by$379.9 million , offset by a decrease of$127.9 million in time deposits from maturities, with the majority of them transferred into demand deposit and savings accounts. As ofSeptember 30, 2022 borrowings consist of short-term FHLB advances amounting to$27.2 million . Borrowings decreased by$37.3 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 nine-month period endedSeptember 30, 2022 . 98 --------------------------------------------------------------------------------
Stockholders' Equity
AtSeptember 30, 2022 , OFG's total stockholders' equity was$993.9 million , a 7% decrease when compared to$1.069 billion atDecember 31, 2021 . This reduction in stockholders' equity reflects a decrease of$60.6 million from treasury stock and$1.5 million in additional paid-in capital, 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$109.0 million from changes in the market value of available-for-sale securities due to higher interest rates. The decrease was offset by an increase in retained earnings of$84.1 million and legal surplus of$11.8 million , mainly due to$119.9 million in net income, partially offset by$24.0 million common stock dividends issued during the nine-month period endedSeptember 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 ofSeptember 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 nine-month period endedSeptember 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 include common equity tier 1, tier 1 capital, total capital and leverage capital as ofSeptember 30, 2022 andDecember 31, 2021 and are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets. 99 --------------------------------------------------------------------------------
The following are OFG's consolidated capital ratios under the Basel III capital
rules at
TABLE 14 - CAPITAL, DIVIDENDS AND STOCK DATA
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands, except per share data)
Capital data:
Stockholders' equity $ 993,867 $ 1,069,160 (7.0) %
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio 13.38 % 13.77 % (2.8) %
Minimum common equity tier 1 capital ratio required 4.50 % 4.50 % 0.0 %
Actual common equity tier 1 capital $ 995,342 964,284 3.2 %
Minimum common equity tier 1 capital required $ 334,822 315,219 6.2 %
Minimum capital conservation buffer required (2.5%) $ 186,012 175,122 6.2 %
Excess over regulatory requirement $ 474,508 473,943 0.1 %
Risk-weighted assets $ 7,440,482 7,004,876 6.2 %
Tier 1 risk-based capital ratio 13.38 % 14.27 % (6.2) %
Minimum tier 1 risk-based capital ratio required 6.00 % 6.00 % 0.0 %
Actual tier 1 risk-based capital $ 995,342 $ 999,284 (0.4) %
Minimum tier 1 risk-based capital required $ 446,429 $ 420,293 6.2 %
Minimum capital conservation buffer required (2.5%) $ 186,012 175,122 6.2 %
Excess over regulatory requirement $ 362,901 $ 403,869 (10.1) %
Risk-weighted assets $ 7,440,482 $ 7,004,876 6.2 %
Total risk-based capital ratio 14.63 % 15.52 % (5.7) %
Minimum total risk-based capital ratio required 8.00 % 8.00 % 0.0 %
Actual total risk-based capital $ 1,088,584 $ 1,086,897 0.2 %
Minimum total risk-based capital required $ 595,239 $ 560,390 6.2 %
Minimum capital conservation buffer required (2.5%) $ 186,012 175,122 6.2 %
Excess over regulatory requirement $ 307,333 $ 351,385 (12.5) %
Risk-weighted assets $ 7,440,482 $ 7,004,876 6.2 %
Leverage capital ratio 9.82 % 9.69 % 1.3 %
Minimum leverage capital ratio required 4.00 % 4.00 % 0.0 %
Actual tier 1 capital $ 995,342 $ 999,284 (0.4) %
Minimum tier 1 capital required $ 405,324 $ 412,359 (1.7) %
Excess over regulatory requirement $ 590,018 $ 586,925 0.5 %
Tangible common equity to total assets 8.73 % 9.57 % (8.8) %
Tangible common equity to risk-weighted assets 11.80 % 13.52 % (12.7) %
Total equity to total assets 9.88 % 10.80 % -8.5 %
Total equity to risk-weighted assets 13.36 % 15.26 % (12.5) %
Stock data:
Outstanding common shares 47,563,272 49,636,352 (4.2) %
Book value per common share $ 20.90 $ 21.54 (3.0) %
Tangible book value per common share $ 18.46 $ 19.08 (3.2) %
Market price at end of period $ 25.13 $ 26.56 -5.4 %
Market capitalization at end of period $ 1,195,265 $ 1,318,342 -9.3 %
100
--------------------------------------------------------------------------------
From December 31, 2021 to September 30, 2022 , leverage capital ratio increased
from 9.69% to 9.82%, tier 1 risk-based capital ratio decreased from 14.27% to
13.38%, total risk-based capital ratio decreased from 15.52% to 14.63%, common
equity tier 1 capital ratio decreased from 13.77% to 13.38%, and tangible common
equity to tangible total assets decreased from 9.69% to 8.83%. The decreases in
capital ratios reflected common stock repurchases of $64.1 million during the
nine-month period ended September 30, 2022 and an increase in risk-weighted
assets, partially offset by increase in retained earnings. Risk-weighted assets
increased, mainly from higher loan and investment portfolios at September 30,
2022 . Also, during the nine-month period ended September 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 $109.0 million other comprehensive
losses during the nine-month period ended September 30, 2022 in available for
sale securities as a result of increases in market interest rates as a result of
recent developments in the U.S. economy, particularly inflationary pressures.
The following table presents a reconciliation of OFG's total stockholders'
equity to tangible common equity and total assets to tangible assets at
September 30 , December 31,
2022 2021
(In
thousands, except share or per share
information)
Total stockholders' equity $ 993,867 $ 1,069,160 Goodwill (86,069) (86,069) Other intangible assets (29,662) (36,093) Total tangible common equity (non-GAAP) $ 878,136 $ 946,998 Total assets$ 10,058,179 9,899,720 Goodwill (86,069) (86,069) Core deposit intangible (22,715) (27,630) Customer relationship intangible (6,923) (8,368) Other intangibles (24) (95) Total tangible assets $ 9,942,448 $ 9,777,558 Tangible common equity to tangible assets 8.83 % 9.69 % Common shares outstanding at end of period 47,563,272 49,636,352 Tangible book value per common share $ 18.46 $ 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. 101 -------------------------------------------------------------------------------- The following table presents OFG's capital adequacy information under the Basel III capital rules: September 30, December 31, Variance 2022 2021 % (Dollars in thousands) Risk-based capital: Common equity tier 1 capital $ 995,342 $ 964,284 3.2 % Additional tier 1 capital - 35,000 (100.0) % Tier 1 capital 995,342 999,284 (0.4) % Additional Tier 2 capital 93,242 87,613 6.4 % Total risk-based capital $ 1,088,584 $ 1,086,897 0.2 % Risk-weighted assets: Balance sheet items $ 6,844,601 $ 6,406,115 6.8 % Off-balance sheet items 595,881 598,761 (0.5) % Total risk-weighted assets $ 7,440,482 $ 7,004,876 6.2 % Ratios: Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%) 13.38 % 13.77 % (2.8) %
Tier 1 capital (minimum required, including capital
conservation buffer - 8.5%)
13.38 % 14.27 % (6.2) %
Total capital (minimum required, including capital
conservation buffer - 10.5%)
14.63 % 15.52 % (5.7) %
Leverage ratio (minimum required - 4%) 9.82 % 9.69 % 1.3 %
Equity to assets 9.88 % 10.80 % -8.5 %
Tangible common equity to assets 8.73 % 9.57 % (8.8) %
102
--------------------------------------------------------------------------------
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 September 30, 2022 and December 31, 2021 :
September 30, December 31, Variance
2022 2021 %
(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets 12.52% 13.09% (4.35) %
Actual common equity tier 1 capital $ 925,532 $ 908,717 1.9 %
Minimum capital requirement (4.5%) $ 332,782 $ 312,371 6.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 184,879 $ 173,540 6.5 %
Minimum to be well capitalized (6.5%) $ 480,686 $ 451,203 6.5 %
Tier 1 Capital to Risk-Weighted Assets 12.52% 13.09% (4.4) %
Actual tier 1 risk-based capital $ 925,532 $ 908,717 1.9 %
Minimum capital requirement (6%) $ 443,710 $ 416,495 6.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 184,879 $ 173,540 6.5 %
Minimum to be well capitalized (8%) $ 591,613 $ 555,327 6.5 %
Total Capital to Risk-Weighted Assets 13.77% 14.34% (4.0) %
Actual total risk-based capital $ 1,018,214 $ 995,549 2.3 %
Minimum capital requirement (8%) $ 591,613 $ 555,327 6.5 %
Minimum capital conservation buffer requirement
(2.5%) $ 184,879 $ 173,540 6.5 %
Minimum to be well capitalized (10%) $ 739,517 $ 694,159 6.5 %
Total Tier 1 Capital to Average Total Assets 9.19% 8.87% 3.6 %
Actual tier 1 capital $ 925,532 $ 908,717 1.9 %
Minimum capital requirement (4%) $ 402,755 $ 409,855 (1.7) %
Minimum to be well capitalized (5%) $ 503,443 $ 512,319 (1.7) %
OFG's common stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "OFG." At September 30, 2022 and December 31, 2021 , OFG's market
capitalization for its outstanding common stock was $1.195 billion ($25.13 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
September 30, 2022 $ 29.45 $ 24.66 $ 0.20
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
103
-------------------------------------------------------------------------------- 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 nine-month period endedSeptember 30, 2022 , OFG repurchased 2,351,868 shares for a total of$64.1 million at an average price of$27.26 per share. OFG did not repurchase any shares of its common stock during the nine-month period endedSeptember 30, 2022 , other than through its publicly announced stock repurchase program. During the nine-month period endedSeptember 30, 2021 , OFG repurchased 1,684,921 shares under the$50.0 million repurchase program approved at that time for a total of$40.2 million , at an average price of$23.83 per share. AtSeptember 30, 2022 the number of shares that may yet be purchased under the$100 million stock buyback program is estimated at 1,428,166 and was calculated by dividing the remaining balance of$35.9 million by$25.13 (closing price of OFG's common stock atSeptember 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.
CCC INTELLIGENT SOLUTIONS HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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