OFG Bancorp(US:OFG)2024-02-26 21:53PART I Business OFG Bancorp is a financial holding company operating through its subsidiary Oriental Bank in Puerto Rico and the U.S. Virgin Islands, with a focus on a "Digital First" strategy - OFG Bancorp is a financial holding company with its principal subsidiary, Oriental Bank, providing comprehensive banking and financial services in Puerto Rico and the U.S. Virgin Islands1516 - The company operates through three major business segments: Banking, Wealth Management, and Treasury1620 - OFG is deploying a "Digital First" strategy focused on digital channel convenience, transforming branches into advisory hubs, achieving operational excellence, and leveraging customer insights1718 - As of December 31, 2023, OFG had 2,248 employees and emphasizes talent development and diversity, with a 68.7% female workforce424653 - The company will become subject to the Durbin Amendment on July 1, 2024, which is expected to reduce annual interchange fee income by approximately $10 to $11 million6172125 Risk Factors The company faces significant risks from its concentration in Puerto Rico's economy, interest rate changes, credit defaults, operational vulnerabilities, and regulatory impacts - A substantial portion of the business is in Puerto Rico, making the company vulnerable to local economic conditions, government fiscal challenges, and natural disasters like hurricanes and earthquakes130131133 - Changes in interest rates could adversely affect net interest income by altering funding costs and income from variable-rate loans138 - Heightened credit risk from potential loan defaults could require increased provisions for credit losses, materially affecting operating results140141146 - Operational risks include losses from fraud, theft, and cybersecurity attacks, with reliance on third-party service providers154155160 - The Durbin Amendment is expected to reduce annual debit card interchange fee income by approximately $10 to $11 million starting July 1, 2024166 - Liquidity risk exists due to reliance on core deposits, and the holding company's funds are subject to regulatory limits on dividends from its subsidiary bank170172 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None188 Cybersecurity The company maintains a comprehensive cybersecurity risk management framework and has experienced no material incidents in the last three fiscal years - OFG has a comprehensive framework to assess, identify, and manage material risks from cybersecurity threats, overseen by the Information Security Officer (ISO) and approved by the Board189 - Governance includes oversight from the Board's Risk and Compliance Committee, which receives quarterly reports from the ISO195196197 - The company has experienced no material cybersecurity incidents in the last three fiscal years, and related expenses have been immaterial199 Properties OFG owns its headquarters and five branch premises and leases thirty-nine branches, with a total gross investment in premises and equipment of $160.8 million - OFG owns its headquarters, the "Oriental Center" in San Juan, Puerto Rico, and operates a full-service branch there199 - As of December 31, 2023, the Bank owns five branch premises and leases thirty-nine branch locations across Puerto Rico and the USVI200 - The gross investment in premises and equipment was $160.8 million at year-end 2023201 Legal Proceedings The company is involved in various legal proceedings incidental to its business, which are not expected to have a material adverse effect on its financial condition - The company is a defendant in a number of legal proceedings incidental to its business203 - Management does not expect the ultimate liability from these proceedings to have a material adverse effect on OFG's financial condition or results of operations203 Mine Safety Disclosures This item is not applicable to the company - Not applicable204 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities OFG's common stock (NYSE: OFG) has significantly outperformed key banking indices over five years, and no shares were repurchased in Q4 2023 - OFG's common stock is traded on the NYSE under the symbol "OFG"206 5-Year Cumulative Total Return Comparison | Index | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | OFG Bancorp | 100.00 | 145.34 | 116.58 | 169.77 | 180.87 | 253.63 | | Russell 2000 | 100.00 | 125.53 | 150.58 | 172.90 | 137.56 | 160.85 | | S&P US BMI Banks Index | 100.00 | 137.36 | 119.83 | 162.92 | 135.13 | 147.41 | - OFG did not repurchase any shares of its common stock during the quarter ended December 31, 2023214 Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved record financial results in 2023, driven by strong loan growth and an improved net interest margin, while maintaining solid credit quality and capital ratios 2023 vs 2022 Performance Highlights | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Diluted EPS | $3.83 | $3.44 | | Net Income | $181.9M | $166.2M | | Total Core Revenues | $682.7M | $607.8M | | Net Interest Income | $560.9M | $482.1M | | Provision for Credit Losses | $60.6M | $24.1M | | Total Assets (Year-End) | $11.34B | $9.82B | | Loans Held for Investment (Year-End) | $7.53B | $6.84B | | Customer Deposits (Year-End) | $9.60B | $8.56B | - Capital actions included a dividend increase to $0.25 per share for 2024 and a new $50.0 million stock repurchase program217218219 - The most critical accounting estimate is the Allowance for Credit Losses (ACL), which involves significant management judgment regarding future economic forecasts222223226 - Total assets increased by $1.526 billion to $11.344 billion, driven by a $1.191 billion increase in deposits276323 - The net loan portfolio grew 10.1% to $7.402 billion, led by increases in commercial, auto, and consumer loans284286 - Capital ratios strengthened, with the CET1 ratio increasing to 14.12% and tangible book value per share rising to $23.13329330 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through an asset-sensitive balance sheet, alongside significant concentration risk in Puerto Rico - The company's primary risk exposures include market, interest rate, credit, liquidity, operational, and concentration risks337338 Net Interest Income Sensitivity Analysis (One-Year Projection) | Change in Interest Rate | Instantaneous Change (%) | Gradual Change (%) | | :--- | :--- | :--- | | +200 Basis points | +5.01% | +2.61% | | +100 Basis points | +2.50% | +1.30% | | -100 Basis points | -2.81% | -1.38% | | -200 Basis points | -5.41% | -2.87% | - OFG has completed the transition of all its financial instruments from LIBOR to alternative benchmark rates, primarily SOFR, as of December 31, 2023348 - Liquidity risk is managed through a stable deposit base and access to wholesale funding, including $446.0 million in FHLB borrowing capacity and access to the Federal Reserve's Bank Term Funding Program (BTFP)353363 - A significant concentration risk exists as most business activities and credit exposure are in Puerto Rico369 Financial Statements and Supplementary Data This section includes the consolidated financial statements, an unqualified audit opinion from KPMG LLP, and the identification of the Allowance for Credit Losses as a critical audit matter - Management concluded that OFG maintained effective internal control over financial reporting as of December 31, 2023378 - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements381 - The auditor identified the Allowance for Credit Losses (ACL) for loans as a critical audit matter due to significant measurement uncertainty and subjective judgments387388 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable800 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of year-end 2023, with no material changes in the fourth quarter - Management, including the CEO and CFO, concluded that OFG's disclosure controls and procedures were effective as of December 31, 2023801 - No material changes were made to the internal control over financial reporting during the fourth quarter of 2023804 Other Information The company reports no other information under this item - None805 PART III Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's equity compensation plans, with 1,685,920 securities available for future issuance under the Omnibus Plan as of year-end 2023 Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Omnibus Plan | 427,597 | $0.66 | 1,685,920 | - Stock-based compensation expense was $5.0 million in 2023, compared to $4.2 million in 2022 and $6.2 million in 2021811 PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - This item lists the financial statements filed under Item 8 and all exhibits, including corporate governance documents, material contracts, and certifications813818 Form 10-K Summary This item is not applicable to the company - Not applicable815