OFG Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. OFG Bancorp is a Puerto Rico-based financial holding company operating in banking, wealth management and treasury. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $101.9 | $99.1 | $311.3 | $299.0 |
| Provision for loan losses | $17.3 | $13.0 | $43.8 | $60.3 |
| Net non-interest income | $2.5 | $3.3 | $8.2 | $20.0 |
| Non-interest expense | $59.6 | $63.2 | $180.8 | $198.5 |
| Net income | $19.5 | $19.6 | $64.6 | $78.4 |
| Income available to common shareholders | $16.1 | $16.2 | $54.2 | $68.0 |
| Diluted EPS | $0.34 | $0.34 | $1.14 | $1.39 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $160.6 | $126.5 |
- Q3 net interest margin was 5.84%, up from 5.28%; the filing attributes the improvement mainly to higher earning-asset yields and lower deposit costs. Q3 return on average assets was 1.02% versus 0.93%; return on average equity was 8.52% versus 9.20%.
- The efficiency ratio improved to 49.30% from 52.27% in Q3. Management also reported non-GAAP pre-tax, pre-provision operating income of $61.3 million, up 2.1% year over year.
- For the nine-month period, net income declined 17.6%. The prior-year period included a $38.6 million deferred-tax benefit from an enacted tax-rate change; 2014 also reflected higher income tax expense.
Financial condition, funding and capital
- At September 30, total assets were $7.67 billion, down 5.9% from December 31, 2013. Net loans were $4.86 billion, down 3.2%; total investments were $1.44 billion, down 10.8%.
- Deposits were $5.07 billion, down 5.8%, while total borrowings were $1.45 billion, down 15.0%. Repurchase-agreement borrowings declined to $1.01 billion from $1.27 billion. Brokered deposits were $669.6 million.
- Cash and cash equivalents were $671.2 million. Management cited additional liquidity capacity of $653.5 million at the FHLB-NY and $748.9 million at the Federal Reserve discount window, plus $196.0 million of unpledged investment securities.
- Stockholders’ equity was $930.0 million, up 5.1% from year-end. The company’s total risk-based capital ratio was 17.50%, Tier 1 risk-based ratio 15.96%, and leverage ratio 10.51%. The Bank was classified as “well capitalized.”
- For the nine months, cash increased by $50.0 million to $671.2 million. Financing activities used $592.9 million, including deposit and repurchase-agreement reductions, dividends and $10.4 million of share repurchases.
Material changes and credit developments
- Q3 provision for loan losses rose 33.0% year over year, driven by higher non-covered loan provisions, partly offset by lower covered-loan provisions. In the first nine months, total provision fell 27.4%, in part because 2013 included an additional $21.0 million provision related to mortgage loans reclassified as held for sale.
- Non-performing loans were $103.7 million, up 20.4% from year-end; non-performing assets were $176.1 million, up 13.4%. Management cited higher non-performing mortgage and auto loans, and attributed worsening mortgage delinquencies in part to Puerto Rico’s prolonged recession. Foreclosure, repossession and other real estate expenses rose 64.9% year to date to $20.8 million.
- The total allowance for loan and lease losses was $127.1 million, versus $107.0 million at year-end. Allowance increases included auto, consumer and acquired-loan reserves; the company changed certain loss look-back periods and environmental factors prospectively as changes in estimates.
- OFG reported $647.7 million in Puerto Rico government-related loans and securities, including $626.8 million outstanding. Of this, $382.1 million was credit facilities to public corporations potentially eligible for relief under Puerto Rico’s Recovery Act. The $200 million PREPA fuel line was extended to March 31, 2015, classified as substandard and a troubled-debt restructuring, but remained on accrual with no impairment recorded. PREPA committed to a business plan by December 15, 2014 and a debt restructuring plan by March 2, 2015.
- The investment portfolio included $20.9 million of Puerto Rico government and political-subdivision securities, with $5.5 million of gross unrealized losses. Management’s discounted-cash-flow analysis concluded no credit loss or other-than-temporary impairment was required at September 30; the filing notes estimates could change.
- The FDIC indemnification asset declined to $120.6 million from $189.2 million, including $51.2 million of expense/amortization in the first nine months as expected claimable losses declined. The FDIC true-up obligation was $21.1 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or balance-sheet guidance. Management stated it expected the company to continue meeting the “well capitalized” category after new capital rules take effect in 2015.
- Management highlighted Puerto Rico’s recession, fiscal challenges, high unemployment and population decline, public-sector debt and possible defaults or restructurings, including uncertainty surrounding the Recovery Act. These conditions could affect credit quality, collateral values, securities prices, deposits and capital.
- Liquidity relies partly on wholesale funding: at quarter-end OFG had $1.01 billion of repurchase agreements and $669.6 million of brokered deposits. Management cautioned that funding availability and cost could deteriorate and that brokered deposits may be less stable than core deposits.
- Other risks include interest-rate and market movements, FDIC assessments and shared-loss estimates, loan-loss assumptions, litigation and regulatory matters, and reliance on third-party technology, telecommunications and mortgage-servicing providers. Management said reasonably possible litigation losses were not significant, while noting adverse outcomes could affect results or cash flows in particular periods.
- Common dividends were $0.08 per share in Q3, versus $0.06 a year earlier. The filing does not promise continuation of this dividend. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Track PREPA’s business and debt restructuring milestones, the March 31, 2015 credit extension, and the collectability and impairment assumptions for OFG’s $200 million exposure.
- Monitor the broader $647.7 million Puerto Rico government-related exposure, including Recovery Act developments, ratings changes, collateral and near-term maturities.
- Check whether rising non-performing loans, auto and consumer charge-offs, foreclosure costs and reserve levels continue to pressure credit costs.
- Assess deposit trends and the cost and availability of brokered deposits, repurchase funding and FHLB capacity against stated liquidity resources.
- Reconcile reported earnings to recurring performance, including FDIC asset amortization, the prior-year tax benefit, securities gains, and the absence of prior-year merger and restructuring charges.