OFG Bancorp — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. OFG provides banking and financial services primarily in Puerto Rico. Results reflect the December 2012 BBVAPR acquisition, which expanded the loan, deposit, branch and employee bases; year-over-year comparisons are therefore not fully like-for-like. The company completed conversion of former BBVAPR operations and technology to its platform on October 10, 2013.
Financial performance and position
Unless noted, amounts are in millions of dollars.
| Metric | Q3 2013 | Comparable period |
|---|---|---|
| Net interest income | $98.6 | $40.7 in Q3 2012 |
| Net interest margin | 5.31% | 2.82% in Q3 2012 |
| Net income | $19.6 | $17.8 in Q3 2012 |
| Income available to common shareholders | $16.2; diluted EPS $0.34 | $14.7; diluted EPS $0.35 in Q3 2012 |
| Operating revenue | $102.5 | $55.1 in Q3 2012 |
| Non-interest expense | $63.3 | $31.6 in Q3 2012 |
| Efficiency ratio | 52.39% | 60.87% in Q3 2012 |
For the first nine months, net income was $78.4 million versus $43.4 million; diluted EPS was $1.39 versus $0.92. Net interest income was $297.5 million versus $113.9 million, and net interest margin was 5.24% versus 2.60%. Non-interest income was $21.8 million versus $44.3 million, while non-interest expense was $198.9 million versus $90.8 million. Nine-month provision for loan and lease losses rose to $60.3 million from $19.2 million.
- Drivers and unusual items: Higher loan income following BBVAPR and lower funding costs lifted net interest income. Lower investment balances reduced investment income. Non-interest income included $48.8 million of FDIC shared-loss expense for the nine months, compared with $18.5 million, and did not include the prior-year $55.7 million securities-sale gain. Merger and restructuring charges were $13.1 million for the nine months.
- Tax: The nine-month income tax benefit was $18.2 million, chiefly reflecting a $38.6 million deferred-tax benefit from Puerto Rico’s increase in the corporate tax rate from 30% to 39%. Q3 tax expense was $6.6 million. The company also reversed $1.5 million of a tax contingency in Q3.
- Cash flow: Nine-month operating cash flow was $126.5 million, investing cash flow was $541.1 million, and financing cash flow was negative $878.7 million. Cash and cash equivalents declined $211.2 million to $657.5 million.
- Balance sheet and funding: Total assets were $8.38 billion, down 8.9% from year-end 2012. Net loans were $5.13 billion, nearly unchanged, and investments were $1.70 billion, down 23.7%. Deposits were $5.61 billion, down 1.4%; total borrowings were $1.72 billion, down 30.8%, including $1.27 billion in repurchase agreements. Core deposits rose 1.1%, while brokered deposits fell 14.4%.
- Liquidity and capital: In addition to $657.5 million cash, management reported $178 million of unpledged investment securities, $681 million of FHLB borrowing capacity and $873 million of Federal Reserve discount-window capacity. Company capital ratios were 8.74% leverage, 14.24% Tier 1 risk-based and 16.03% total risk-based. The Bank was categorized as well capitalized.
- Credit quality: Reported non-performing assets were $176.6 million, down 22.7% from year-end; non-performing loans were $82.5 million, down 43.8%. The decline was substantially influenced by reclassifying and selling non-performing residential mortgages. Nine-month non-covered net credit losses rose to $41.0 million from $8.3 million, including a $27 million charge-off associated with the mortgage reclassification. The allowance for non-covered loans was $49.6 million. Covered loan allowance was $56.6 million.
Outlook, commentary, and risks
No quantified earnings or financial guidance is provided. Management’s stated priorities include expanding lending, growing fee revenue, improving integration and operating efficiency, and maintaining asset-liability discipline. Management said the BBVAPR integration was substantially complete and expected the platform conversion to support new technology-enabled products and services.
- OFG’s business and credit exposure are concentrated in Puerto Rico, whose economy and real estate market remain challenging. Management highlighted the possibility that economic weakness could raise defaults, foreclosures and credit costs.
- At September 30, the company had about $810.4 million outstanding under approximately $839.2 million of Puerto Rico government-related credit facilities, and about $146.3 million of Puerto Rico government-related securities. It also held approximately $491.7 million in government-related deposits. Ratings downgrades, fiscal stress or default could adversely affect loan and securities values.
- Funding risk remains: management noted significant reliance on repurchase agreements and that brokered deposits may be less stable than core deposits. Funding availability or cost could worsen in market disruption.
- FDIC loss-share asset amortization may continue if expected covered-asset losses decline. The estimated FDIC true-up liability was $17.7 million. The principal non-single-family loss-share period was expected to end by Q2 2015, with recovery sharing continuing longer.
- Management stated that pending legal and regulatory matters were not expected to have a material adverse effect on financial condition, though adverse outcomes could affect results or cash flows in particular periods.
Most important facts for investors to verify
- Whether loan-loss provisions, charge-offs and delinquency trends remain elevated after excluding the mortgage-loan sale and acquisition-related accounting effects.
- The quality and valuation of Puerto Rico government exposures, including the $810.4 million outstanding credit exposure and $146.3 million securities position.
- Whether earnings and margins are sustainable as acquisition-related benefits, FDIC shared-loss accounting and one-time tax effects change.
- Liquidity and refinancing exposure from repurchase agreements, brokered deposits and maturing borrowings, including the collateral and availability of stated borrowing capacity.
- Progress in realizing integration savings and controlling expenses after the platform conversion and merger-related charges.