OFG Bancorp — 2013 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. OFG is a Puerto Rico-focused financial holding company operating banking, financial services, and treasury businesses. Its 55-branch bank offers commercial, consumer, mortgage, auto and leasing products, alongside brokerage, trust, insurance and retirement services. Comparisons with 2012 are materially affected by the December 2012 acquisition of BBVAPR, whose operations contributed for most of 2013 but only briefly in 2012.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue (net interest income plus non-interest income) | $427.2 million | $183.6 million |
| Net interest income | $409.7 million | $157.3 million |
| Net interest margin | 5.46% | 2.67% |
| Provision for loan and lease losses | $72.9 million | $23.7 million |
| Non-interest expense | $264.6 million | $132.0 million |
| Net income | $98.4 million | $24.6 million |
| Income available to common shareholders | $84.6 million | $14.6 million |
| Diluted EPS | $1.73 | $0.35 |
| Efficiency ratio | 53.45% | 64.05% |
Fourth-quarter 2013 net income was $20.1 million and diluted EPS was $0.35. Full-year earnings included an $8.7 million income tax benefit, including a $38.1 million deferred-tax benefit from Puerto Rico’s increase in the corporate tax rate to 39%, partly offset by the higher effective tax rate.
Financial position, liquidity and cash flow
- Balance sheet at year-end: total assets were $8.16 billion, down 11.4% from 2012. Net loans were $5.02 billion, down 2.7%; investment securities were $1.61 billion, down 27.7%.
- Funding and debt: deposits were $5.38 billion, down 5.4%, and borrowings were $1.71 billion, down 31.3%. Repurchase agreements remained a significant funding source at $1.27 billion. Higher-priced time deposits declined 21.4%; average deposit cost fell to 0.73% from 1.24%.
- Liquidity: cash and cash equivalents were $703.5 million, including $82.2 million of restricted cash. Management reported $621.3 million in unrestricted cash, $137 million of unpledged investment securities, $714 million of FHLB borrowing capacity and $850 million of Federal Reserve discount-window capacity.
- Cash flow: operating activities provided $173.8 million; investing activities provided $787.3 million; financing activities used $1.13 billion. Cash and cash equivalents decreased $165.2 million to $703.5 million.
- Capital: stockholders’ equity was $884.9 million. The company reported a 9.11% Tier 1 leverage ratio, 14.35% Tier 1 risk-based capital ratio and 16.14% total risk-based capital ratio. Oriental Bank was classified as well capitalized.
Material changes versus 2012
- Net interest income rose 160.5%, chiefly as the BBVAPR acquisition expanded the loan base and the company reduced funding costs. Loan interest income increased, while investment interest income fell 47.9% following the prior-year balance-sheet deleveraging.
- Core banking and financial services revenue increased to $85.3 million from $48.9 million, reflecting the larger customer base and acquired businesses. Reported total non-interest income fell to $17.5 million from $26.3 million, including higher FDIC shared-loss expense and the absence of 2012’s $74.2 million securities-sale gain.
- Non-interest expense doubled, largely with expanded operations and integration. The company recorded $17.7 million of merger and restructuring charges and consolidated nine branches.
- Credit costs increased: non-covered loan-loss provision rose to $67.6 million from $13.9 million. Net credit losses on originated and other loans, excluding ASC 310-30 loans, rose to $46.4 million from $10.9 million; this included a $27 million charge-off associated with residential loans transferred to held-for-sale and later sold.
- Non-performing loans fell to $86.2 million from $146.6 million, but the decline largely reflected reclassification and sale of non-performing residential mortgages, not solely improved borrower performance. Total non-performing assets declined to $155.3 million from $204.8 million.
- Other comprehensive income declined sharply, with a $52.7 million after-tax loss, primarily reflecting lower unrealized gains on available-for-sale securities.
Outlook, risks and unusual items
- Management’s stated long-term priorities are to grow lending and fee businesses, deepen customer relationships, maintain asset-liability management and improve operating efficiency. The filing provides no quantified earnings or revenue guidance.
- Puerto Rico’s prolonged recession, weak property market and government fiscal pressures expose the company to credit and valuation risk. At year-end, government-related loans and securities totaled about $859.4 million; separate disclosure reported $696.0 million outstanding on government credit facilities and $146.3 million of government-related investment securities. These figures use different scopes and should be reconciled. About 43% of government loans and obligations were scheduled to mature within 12 months or less.
- Funding risk remains relevant: management identified wholesale funding dependence, including repurchase agreements and brokered deposits, which are less stable than core retail deposits. The filing also describes interest-rate, mortgage repurchase and representation-and-warranty, acquired-loan, FDIC shared-loss, regulatory, cyber-security and operational risks.
- The $189.2 million FDIC shared-loss indemnification asset fell 37.4%; the company received $47.1 million in reimbursements and recorded $66.3 million of amortization. Coverage depends on eligible losses, claim compliance and contractual terms; the company also carried an $18.5 million estimated FDIC true-up obligation.
- The company repurchased $21.4 million of loans from GNMA and FNMA during 2013. Its mortgage repurchase exposure, reserve adequacy and ability to retain agency eligibility warrant monitoring.
- Management and KPMG reported effective internal control over financial reporting. KPMG issued unqualified opinions on the consolidated financial statements and internal controls. Management said pending legal matters were not expected to have a material aggregate effect, while noting an adverse outcome could affect results or cash flows in particular periods.
Most important facts for investors to verify
- How much of the earnings and margin increase is sustainable after separating BBVAPR acquisition effects, acquired-loan accretion, tax benefits and other nonrecurring items.
- Whether credit quality is improving on an underlying basis: reconcile the NPL decline with the $55.2 million mortgage reclassification and sale, and track charge-offs, delinquencies, foreclosed assets and allowance adequacy.
- The quality, repayment sources, ratings, collateral and near-term maturities of Puerto Rico government exposures, including reconciliation of the filing’s differently scoped exposure figures.
- Deposit stability and the cost and maturity profile of repurchase agreements, brokered deposits, FHLB advances and other borrowings; confirm that reported borrowing capacity remains available under stress.
- Performance of FDIC-covered loan pools, future shared-loss reimbursements, the indemnification asset and the estimated true-up obligation as loss-sharing periods approach expiration.
- The full-year and fourth-quarter results in the audited statements, including the tax reconciliation, cash-flow statement and footnotes on acquired loans, mortgage recourse and commitments.