OFG BANCORP quarterly report, Q3 FY2015

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OFG Bancorp — 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015; unaudited. OFG Bancorp is a Puerto Rico-based financial holding company operating banking, wealth-management, and treasury businesses.

Financial performance and condition

  • Third-quarter earnings: Net income was $4.6 million, down from $19.5 million a year earlier. Income available to common shareholders was $1.1 million, or $0.03 per diluted share, versus $16.1 million, or $0.34, in Q3 2014.
  • Nine-month earnings: Net loss was $1.5 million, compared with net income of $64.6 million in 2014. Loss available to common shareholders was $11.9 million, or $0.27 per share, versus income of $54.2 million, or $1.20 per share.
  • Revenue and margin: Q3 net interest income declined 11.8% to $89.8 million; net interest margin was 5.29%, down from 5.84% a year earlier. Nine-month net interest income fell 15.9% to $261.8 million, and margin was 5.19% versus 5.90%.
  • Credit costs: Provision for loan and lease losses was $51.6 million in Q3 and $109.3 million for nine months, compared with $17.3 million and $43.8 million, respectively, in 2014. The total allowance was $196.1 million at quarter-end, up from $133.8 million at year-end 2014.
  • Other income and expenses: Q3 non-interest income was $36.0 million, versus $2.5 million a year earlier, largely reflecting a $20.0 million FDIC reimbursement and lower FDIC shared-loss expense. Non-interest expense rose 16.0% to $69.1 million. The efficiency ratio increased to 63.66% from 49.30%.
  • Cash flow: For the first nine months, operating cash flow was $66.8 million, investing cash flow was $112.3 million, and financing cash flow was negative $226.3 million. Cash and cash equivalents fell $47.2 million to $526.2 million.
  • Balance sheet and funding: Total assets were $7.20 billion, down 3.3% from December 31, 2014. Net loans were $4.47 billion, down 7.4%; investments were $1.62 billion, up 15.8%. Deposits declined 4.2% to $4.72 billion. Total borrowings were $1.44 billion, including $1.00 billion of repurchase agreements.
  • Capital and shareholder metrics: Stockholders’ equity was $907.9 million, down 3.6%. OFG’s CET1 ratio was 12.05%, Tier 1 risk-based ratio 15.67%, total risk-based ratio 16.96%, and leverage ratio 10.93%; the Bank was categorized as well capitalized. Book value per common share was $16.91. The quarterly common dividend was $0.10 per share.

Material changes and unusual items

  • A September bulk sale of acquired non-performing assets materially affected results. OFG sold Eurobank commercial loans with $197.1 million unpaid principal balance and $100.0 million carrying amount for $36.3 million, and received a $20.0 million FDIC reimbursement. It also sold BBVAPR non-performing loans and real estate, and other foreclosed property. Management cited a combined $20.2 million pre-tax net loss impact from the bulk sale.
  • OFG recorded $32.9 million of provision for acquired Eurobank loans and $5.2 million for acquired BBVAPR loans related to the sale. Foreclosure, repossession, and other real estate expense increased to $16.6 million, including a $9.3 million loss on real estate sold.
  • The $193.9 million PREPA fuel-line participation was placed on non-accrual in Q1 2015; OFG recorded a $24.0 million provision and held a $23.4 million specific allowance at September 30. Interest received was applied to principal. A restructuring support agreement was signed November 5, 2015, subject to milestones and third-party actions.
  • The FDIC loss-share coverage for commercial and other non-single-family Eurobank loans expired June 30, 2015; remaining single-family coverage is scheduled to expire in 2020. The FDIC indemnification asset declined to $22.9 million from $97.4 million at year-end.
  • OFG recognized a $246,000 credit impairment on Puerto Rico government securities. Management reported that most securities in an unrealized loss position were U.S. government or agency-backed; further deterioration in Puerto Rico-related repayment or liquidity conditions could result in additional impairment.
  • Pre-tax, pre-provision operating income, a non-GAAP measure, declined 35.6% to $39.4 million in Q3 from $61.3 million. Management also reported Q3 loan production of $251.0 million and described credit metrics as stable on a linked-quarter basis.

Outlook, risks, and contingencies

  • The filing provides no specific earnings or growth guidance. Management’s stated long-term priorities include growing lending and fee businesses, managing assets and liabilities, and improving operating efficiency.
  • Key exposures include Puerto Rico’s prolonged recession and fiscal challenges, potential government or public-corporation defaults or restructurings, and the resulting effect on credit quality, securities values, liquidity, and capital. Total Puerto Rico government-related loans and securities were reported at $437.5 million; the filing separately identifies $418.5 million in government-related credit facilities.
  • Funding includes wholesale sources: at September 30, OFG had $998.5 million of repurchase agreements and $653.1 million of brokered deposits. Management reported $526.2 million of unrestricted cash, $410.5 million of unpledged investment securities, $600.4 million of FHLB borrowing capacity, and $611.0 million of Federal Reserve discount-window capacity.
  • The PREPA restructuring outcome is uncertain, and failure to meet agreement milestones could require further credit classification or provision. Management stated that an adverse result in certain litigation or regulatory matters could affect results or cash flows in particular periods, although it did not consider reasonably possible losses significant.
  • Other risks include interest-rate and market movements, loan-loss estimate uncertainty, FDIC true-up obligations, and commitments to extend credit. The filing reported $432.0 million of credit commitments at quarter-end.

Important facts for investors to verify

  • Whether the PREPA restructuring milestones were met, how the credit was ultimately treated, and whether its reserve or non-accrual status changed.
  • Subsequent credit quality, non-performing assets, and allowance adequacy, particularly given non-performing assets of $386.7 million and the sharp increase in non-accrual loans.
  • The final economics and FDIC reimbursement of the bulk sale, and the remaining FDIC indemnification and true-up obligations.
  • Trends in net interest margin, acquired-loan runoff, core deposit levels, and wholesale funding dependence.
  • Changes in Puerto Rico government and public-corporation exposures, related securities impairment assessments, and regulatory capital ratios.