OFG Bancorp — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2020. OFG Bancorp provides banking and financial services primarily in Puerto Rico, with operations in the U.S. Virgin Islands and mainland U.S. Comparisons with 2019 are affected by the Scotiabank Puerto Rico and U.S. Virgin Islands acquisition, completed December 31, 2019.
Financial results and position
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $99.5 | $80.7 | $309.7 | $243.6 |
| Provision for credit losses | $13.7 | $43.8 | $78.5 | $73.7 |
| Non-interest income | $31.3 | $22.2 | $89.9 | $62.8 |
| Non-interest expense | $83.4 | $50.7 | $256.2 | $154.3 |
| Net income | $27.4 | $7.4 | $51.0 | $54.8 |
| Diluted EPS | $0.50 | $0.11 | $0.89 | $0.97 |
| Net interest margin | 4.30% | 5.35% | 4.65% | 5.38% |
| Efficiency ratio | 65.69% | 51.11% | 66.30% | 51.83% |
- Balance sheet: Total assets were $10.02 billion, up 7.8% from year-end 2019. Net loans were $6.58 billion, down 0.9%; investments were $434 million, down 60.1%; and cash and restricted cash were $2.28 billion, up 167.7%.
- Funding and liquidity: Deposits rose 12.1% to $8.63 billion, while borrowings fell 66.3% to $103 million; OFG had no repurchase-agreement balance at quarter-end. It reported $2.3 billion of unrestricted cash, $194.8 million of unpledged investment securities, and $992 million of additional FHLB borrowing capacity.
- Cash flow: For the nine months, operating activities used $12.3 million, investing activities provided $747.3 million, and financing activities provided $695.2 million. Cash, cash equivalents and restricted cash increased $1.43 billion.
- Capital: Consolidated CET1 was 12.55%, total risk-based capital 15.50%, and leverage capital 10.00%. The Bank was classified as well capitalized. Tangible book value was $16.51 per share; the common dividend was $0.07 per share for the quarter.
Changes and drivers
- Q3 net income and diluted EPS increased substantially year over year, helped by higher net interest income, greater fee revenue and a lower credit-loss provision. Nine-month net income and EPS declined year over year.
- Net interest income increased with the larger loan base following the Scotiabank acquisition and PPP originations. However, lower market rates reduced asset yields: Q3 net interest margin was 4.30%, down from 4.78% in Q2 2020 and 5.35% in Q3 2019.
- Non-interest revenue growth reflected the expanded customer base, electronic banking and mortgage servicing activity. Q3 included a $3.5 million Scotiabank bargain-purchase gain; the nine-month period included $7.3 million. Prior-year securities-sale gains were higher than 2020 gains.
- Expenses rose with the acquired business, including staffing, facilities, technology integration, insurance and transaction costs. Q3 also included $2.1 million of pandemic expenses and $2.7 million of merger and restructuring charges. Management reported an adjusted Q3 efficiency ratio of 62.2%, excluding merger and COVID-related costs, versus 65.7% reported.
- OFG adopted CECL on January 1, 2020. Adoption increased the allowance by $89.7 million, including a $39.2 million retained-earnings adjustment for non-PCD loans and a $50.5 million gross-up for PCD loans. The company reported a $25.5 million after-tax cumulative reduction to retained earnings. 2020 results use CECL; prior-year figures use the previous accounting method.
Outlook, risks and unusual items
- Management described Q3 as a strong quarter and cited improved economic conditions, customer and deposit growth, loan production, controlled credit quality and Scotiabank integration progressing on schedule. It gave no specific earnings or margin guidance. Management said it did not expect total assets to exceed $10 billion at December 31, 2020.
- COVID-19 effects remain uncertain. At September 30, loans still under payment deferral totaled $136.3 million, or 2% of total loans, compared with 30% in Q2. OFG had approved 5,074 PPP loans totaling $297 million. Management warned that renewed or prolonged economic weakness could increase credit losses, reduce loan demand and revenue, and affect liquidity and capital.
- The allowance for credit losses was $235.3 million, compared with $116.5 million at year-end 2019. Non-performing assets were $215.2 million versus $118.7 million; the filing attributes much of the increase in non-performing loans to acquired PCD loan pools and the CECL accounting change. The filing reports allowance coverage of non-performing loans of 121.4%.
- Puerto Rico concentration, government fiscal and debt-restructuring developments, natural disasters, COVID-19, interest-rate and funding-market changes, and successful integration of the Scotiabank acquisition are key risks. Loans to Puerto Rico government entities were $122.0 million, including a $24.1 million public-corporation loan in non-accrual status with a $20.0 million allowance.
- Legal proceedings are described as incidental to the business. Accrued legal liabilities were $9.0 million; management said reasonably possible losses were not significant, while noting adverse outcomes could affect particular periods. Off-balance-sheet commitments to extend credit totaled $1.05 billion.
Important facts for investors to verify
- How much of reported earnings and revenue reflects the acquired Scotiabank business, acquisition accounting, and bargain-purchase gains rather than recurring operations.
- Whether CECL assumptions and reserves adequately reflect Puerto Rico’s economic outlook, deferred-loan performance, and acquired PCD credit exposure.
- Trends in non-performing loans, charge-offs, delinquencies and loans emerging from COVID-19 deferrals, particularly in commercial and mortgage portfolios.
- Whether deposit growth and excess cash can be deployed profitably as net interest margin remains below prior-year levels, and whether liquidity sources remain available on acceptable terms.
- Progress toward completing Scotiabank integration and related control enhancements, expected by year-end 2020, and the durability of expense savings.
- The filing contains differing non-performing-loan figures in its narrative and tables; verify the applicable definition and reconciliation when assessing asset quality.