OFG Bancorp

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

OFG Bancorp is a financial holding company primarily operating in Puerto Rico, offering a range of banking and financial services including commercial, mortgage, and consumer lending.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

OFG Bancorp (OFG) is a financial holding company offering a comprehensive suite of banking and financial services to retail, commercial, and government clients, primarily in Puerto Rico. The core business segments are:

  • Banking: This segment includes commercial lending, mortgage lending, consumer lending, treasury services, and banking-related services.
  • Wealth Management: Encompasses investment and brokerage services, financial planning, and trust services.
  • Treasury: Manages the company’s investment portfolio, liquidity, and funding activities.

Revenue Distribution & Trends

  • Net interest income is very important for OFG Bancorp.
  • The increase in interest rates is likely to have some effect on the company.
  • OFG Bancorp focuses on high-quality assets and collateral.
  • OFG has a conservative capital and liquidity position.

OFG Bancorp has been emphasizing on higher interest rates, low credit costs and Puerto Rico growth.

  • In the latest earnings call OFG Bancorp mentioned that “The strong momentum from the first half continued in the third quarter as a favorable macro, higher interest rates and our team’s efforts drove robust core revenue generation.”
  • Their revenue growth rate was approximately 12% which is excellent.
  • The company reported very impressive non-performing asset figures. Non-performing loans stand at 0.4%, PCLs/Average loans at 32 basis points, a very small number.
  • The company’s margin was good for this quarter and net income increased to $7.7 Million.

Competitive Landscape

The banking sector in Puerto Rico is a mix of local and U.S.-based institutions. Key players in the market are:

  • Local banks like Popular, Inc.
  • U.S. banks like Banco Santander Puerto Rico.
  • OFG Bancorp competes on service quality, local expertise, and relationship banking. They have been trying to shift to “superior customer experience”
  • Recent controversies in the banking industry are not likely to have any major or material impact on the bank as they are committed to their client, to Puerto Rico.

The industry faces challenges like:

  • Economic cycles in Puerto Rico.
  • Regulatory compliance and oversight.
  • Technological disruption and competition from fintech companies.

Financial Overview

Recent Financials (Q3 2024)

  • Net Income: $7.7 million
  • Non-performing Loans: Stand at 0.4% of total assets. An excellent figure.
  • PCLs/Average loans: Stand at 32 basis points, an excellent figure.
  • Book value per share: 23.01

Income Statement Analysis

  • Net Interest Income (NII): A big portion of the total income with the Bank. Subject to fluctuations based on interest rate environments.
  • Service Fees and other non-interest income contribute to the remaining revenue.
  • The operating costs are quite well controlled and the bank reports solid income.

Balance Sheet Analysis

  • OFG has 7.1 Billion in assets.
  • They have 689 Million in cash and cash equivalents.
  • Investment securities available for sale: $2,095.5 million.
  • They have a decent mix of assets.

Recent Concerns / Controversies / Problems

  • OFG is being investigated by multiple shareholders. As of this date of writing, they have been investigated by 7 different firms.
  • The lawsuites have been filed on behalf of the purchasers of OFG Bancorp’s securities, alleging that the firms made false and/or misleading statements and/or failed to disclose: (1) that the Company maintained deficient internal controls over financial reporting; (2) that the Company’s financial statement for the three months ended March 31, 2023 (the “Q1 2023 10-Q”) and the six months ended June 30, 2023 (the “Q2 2023 10-Q”) contained errors; (3) that, as a result, the Company would need to restate its Q1 2023 10-Q and Q2 2023 10-Q; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.
  • The management has not directly responded to these concerns in the transcripts available.

There are some potential challenges for the company including the lawsuits, the economy of Puerto Rico and interest rate fluctuations.

Moat Analysis

I’d rate OFG’s moat as a 2/5. Here’s the detailed analysis of why I’m giving them that rating:

  • Switching Costs: While OFG has built relationships with its customers in Puerto Rico, they can still very easily switch to another bank in the area, and the difference between banks is not too vast. This provides very little stickiness to their business (unless there are extremely personal service preferences).
  • Network Effects: Does not really have a play on a bank such as OFG as most people can use many of the available banks. OFG doesn’t get any meaningful advantage by being the only one around.
  • Cost Advantages: The bank does not seem to have a big cost advantage due to their locality. They are likely to suffer the same high electricity rates and high costs as others, or maybe even more since they might not be as efficient and streamlined.
  • Intangible assets A well known and trusted brand is always going to be helpful to the financial position, but other than the trusted brand, there is nothing special for OFG. A solid reputation, strong customer relationships are certainly helping them, but they aren’t necessarily an “asset” in the financial sense.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Economic Downturn in Puerto Rico: A downturn in the local Puerto Rican economy could reduce loan demand and increase loan defaults.
  • Interest Rate Fluctuations: A rapid increase or decrease in interest rates could negatively impact net interest margin.
  • Increased Competition: Other banks or new fintech entrants could intensify competition and erode OFG’s market share.

Understandability

I’d rate OFG’s understandability a 3/5. While community banking is not inherently complex, understanding Puerto Rican economics, real estate markets, and regulatory conditions increase the difficulty level. You also need to understand financial metrics and accounting.

Balance Sheet Health

I’d rate OFG’s balance sheet health a 4/5. The bank reports solid liquidity and an increase in value of assets as well as a low rate for non-performing assets. The company’s capital ratios well exceed regulatory requirements.