OFG Bancorp — Q3 2018 Form 10-Q Summary
Business context and reporting period
OFG Bancorp is a Puerto Rico-focused financial holding company operating banking, wealth management and treasury businesses, with commercial, consumer, auto and mortgage lending alongside fee-based financial services. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $82.3 million | $80.5 million | $233.9 million | $230.7 million |
| Provision for loan and lease losses | $14.6 million | $44.0 million | $44.8 million | $88.2 million |
| Non-interest income | $18.6 million | $17.9 million | $55.8 million | $61.9 million |
| Non-interest expense | $50.9 million | $50.5 million | $155.4 million | $155.0 million |
| Net income | $23.1 million | $3.3 million | $59.7 million | $35.6 million |
| Diluted EPS | $0.42 | $0.00 reported | $1.07 | $0.56 |
| Net interest margin | 5.38% | 5.64% | 5.28% | 5.25% |
- Q3 return on average assets was 1.42%, return on average common equity was 9.72%, and the efficiency ratio was 50.58%. For the nine months, these were 1.25%, 8.25% and 53.77%, respectively.
- At September 30, total assets were $6.66 billion, up 7.6% from year-end 2017. Net loans were $4.35 billion, up 7.3%; investments were $1.31 billion, up 12.0%.
- Deposits were $5.09 billion, up 6.0%. Total borrowings were $488.0 million, up 48.5%, mainly reflecting a $185.3 million increase in repurchase agreements; repurchase-agreement balances were $378.2 million. Subordinated notes were $36.1 million.
- Cash and cash equivalents were $543.8 million, plus $3.0 million of restricted cash. For the nine months, operating cash flow was $73.6 million, investing cash flow was negative $457.8 million, and financing cash flow was $442.7 million; cash, cash equivalents and restricted cash ended at $546.8 million.
- Stockholders’ equity was $969.9 million. Common equity Tier 1 was 14.38%, total risk-based capital was 19.84%, and the leverage ratio was 13.93%; the company and bank met applicable requirements, and the bank was classified as well capitalized.
- Book value per common share was $18.27 and tangible book value was $16.23. A $0.06 common dividend per share was declared for the quarter.
Material changes versus comparable periods
- Q3 net income rose sharply from $3.3 million to $23.1 million, principally because the prior-year quarter included $27 million of hurricane-related loan-loss provision. The lower current-period provision drove much of the year-over-year earnings improvement; Q3 net interest income increased 2.2% while the net interest margin declined 26 basis points.
- For the first nine months, net income increased 67.7%. Provision expense fell 49.2%, partly reflecting the 2017 hurricane provisions and municipal-credit charges. Net interest income rose 1.4%, while margin increased slightly by 3 basis points.
- Nine-month non-interest income declined 9.8%, largely because 2017 included a $6.9 million securities-sale gain and a $1.4 million FDIC shared-loss benefit, neither repeated in 2018. Banking and financial-service revenue itself grew 4.8%.
- Originated commercial loans grew 17.8% and auto and leasing loans 22.7% from year-end; acquired BBVAPR and Eurobank loan balances continued to run off. Total loan production reached $1.09 billion for the nine months, versus $664.1 million a year earlier.
- Non-performing assets increased 7.9% to $169.0 million, although the ratio to total assets, excluding acquired credit-impaired loans, improved to 2.65% from 2.95%. Non-accrual loans rose to $120.8 million from $99.7 million. Auto non-performing loans rose to $12.2 million from $4.2 million, and commercial non-performing loans increased to $42.8 million from $35.3 million.
- The allowance for loan and lease losses was $165.7 million, down from $167.5 million at year-end. Allowance coverage of originated non-performing loans declined to 75.98% from 87.35%. The hurricane-related component of the allowance declined to $17.5 million from $32.4 million.
- Accumulated other comprehensive loss widened to $20.8 million from $2.9 million, primarily reflecting unrealized losses on available-for-sale securities amid market-rate changes. Available-for-sale securities had $24.7 million of gross unrealized losses at quarter-end; management attributed these to market conditions, not issuer credit concerns.
Outlook, commentary, risks and unusual items
- Management said customer count rose 4% year over year and described growth prospects positively, citing digital-channel adoption, loan production and a belief that businesses were beginning to gain confidence to invest. The filing provides no specific numerical earnings or financial guidance.
- Management reported that hurricane-related loan moratoriums had expired and delinquency levels had returned to pre-hurricane levels, with some improvement. It said no additional hurricane-related operating losses had been incurred since 2017; $0.5 million of expected insurance recovery remained receivable at September 30, 2018.
- Credit conditions remain exposed to Puerto Rico’s prolonged economic and fiscal challenges, government debt restructuring, and natural disasters. Substantially all business activities and significant credit exposure are concentrated in Puerto Rico. Management identified $91.4 million of originated loans to Puerto Rico government entities and $44.0 million of acquired BBVAPR municipal loans; public-fund deposits were $285.0 million.
- Liquidity sources included $543.8 million of unrestricted cash, $745.3 million of unpledged investment securities, and $830.7 million of additional FHLB borrowing capacity. The company cautioned that wholesale funding availability and cost could deteriorate; brokered deposits totaled $530.9 million and may be less stable than core deposits.
- Interest-rate simulations estimated that a 200-basis-point increase would raise one-year net interest income by 4.01% on a static balance sheet and 4.19% under a growing-balance-sheet scenario; a 200-basis-point decrease would reduce it by 3.80% and 3.98%, respectively. These are model estimates, not forecasts.
- On October 22, 2018, after quarter-end, all 84,000 Series C preferred shares were mandatorily converted at 86.4225 common shares each—approximately 7.26 million common shares. Management said regulatory capital was expected to benefit by $84.0 million. The filing identifies legal proceedings but says management did not consider reasonably possible losses significant and did not expect an aggregate material adverse effect on financial condition or results.
- OFG adopted the revenue-recognition standard in 2018 with no material financial-statement impact. It plans to adopt the lease standard on January 1, 2019 and preliminarily expects recognized right-of-use assets and liabilities to be less than 1% of total assets. CECL adoption is planned for January 1, 2020; management expects an increase in the credit-loss allowance, but the amount was not yet determined.
Important facts for investors to verify
- Whether the marked reduction in loan-loss provision is sustainable, and how the rising non-accrual balances—particularly auto and commercial—affect future credit costs and allowance adequacy.
- Underlying loan growth, yields and credit quality, including the extent to which growth depends on Puerto Rico’s recovery and on auto and commercial lending.
- Funding mix and cost: growth in repurchase agreements and brokered deposits, deposit pricing, collateral requirements, and continued access to FHLB and other wholesale funding.
- The realized effect of higher rates on net interest margin and funding costs versus the filing’s sensitivity-model estimates; also monitor unrealized securities losses and tangible capital.
- The actual common-share count and capital ratios following the October Series C conversion, including the expected $84 million regulatory-capital benefit and resulting dilution.
- Progress and eventual balance-sheet impact from lease-standard and CECL implementation, and changes in the Puerto Rico economic, fiscal, disaster and legal-risk environment.