SAN JUAN, Puerto Rico--(BUSINESS WIRE)--OFG Bancorp (NYSE: OFG) today reported results for the third quarter ended September 30, 2019.
Highlights 3Q19 vs. 3Q18
- Net income available to shareholders of $5.8 million, or $0.11 per share fully diluted, reflects the impact of several strategic transactions, compared to $19.6 million, or $0.42 per share fully diluted, in 3Q18. Book value per common share grew 3.1% to $18.84. Tangible Book Value per common share expanded 5.4% to $17.11.
- 3Q19 included $40.5 million pre-tax from items that negatively affected results, primarily due to the decision to sell mostly non-performing loans, partially offset by $13.0 million pre-tax from items that benefited results, such as the sale of available-for-sale mortgage-backed securities (MBS) and of fully charged-off loans, and the adjustment to the qualitative factors of the allowance for loan and lease losses.
- Excluding the above items, 3Q19 adjusted net income available to shareholders was $24.9 million, or $0.48 per share fully diluted.*
- Loans at September 30, 2019 increased 1.2% to $4.41 billion. Average core deposits rose 3.4% to $4.56 billion, while non-core funding was reduced 41.7% by quarter end. New loan origination of $291.4 million reflected Oriental Bank’s success in targeting small business customers and our growing consumer banking business. Net Interest Margin remained strong at 5.35%, total delinquency rate improved, and capital metrics continued to climb to new multi-year highs.
Conference Call
A conference call to discuss 3Q19 results, outlook and related matters will be held today at 10:00 AM Eastern Time. Phone (888) 562-3356 or (973) 582-2700. Use conference ID 619-9357. The call can also be accessed live on www.ofgbancorp.com. Webcast replay will be available shortly thereafter.
CEO Comment
“Our core operations continue to deliver excellent results,” said José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board.
“During the quarter, we took advantage of market conditions and sold MBS and fully charged off loans at a profit, and we also decided to sell a good portion of our remaining non-performing loans. This further strengthens our liquidity and balance sheet to continue our growth strategy and prefunds our $560 million acquisition of Scotiabank’s operations in PR and USVI.
“Our strategies are proving highly effective in capturing the positive economic shift taking place in Puerto Rico. Small business, auto and consumer loan production; core deposit growth, credit quality, and capital; and number of net new clients confirm the success of our customer focused approach to banking – Fácil, Rápido, Hecho. As a result, we generated a 14% year over year increase in adjusted earnings per share.
“With our NPL sales, we reduced 3Q19 non-performing loans 40% year over year, to 2% of originated loans, which will enable us to free up resources, reduce NPL related expenses, and increase operating flexibility. Combined with the sale of MBS, we have close to $1 billion in cash to fund our growth plans, including our acquisition of Scotiabank’s PR and USVI operations. The MBS sales also enabled us to reduce high cost brokered CDs and borrowings.
“Looking ahead, Oriental will further consolidate its position as the premier retail bank on the island. Upon closing the Scotiabank acquisition, we become the second largest bank in Puerto Rico in core deposits, branches, automated and interactive teller machines, mortgage servicing, and insurance brokerage, and the third largest bank in US Virgin Islands.
“As always, thanks to our team for their commitment and dedication, and to all our retail and commercial customers for their support and loyalty.”
3Q19 Items
-
The following resulted in a net $32.0 million increase in the provision for loan losses:
- Increase of $39.0 million primarily from deciding to sell $95.0 million unpaid principal balance in non-performing commercial and mortgage loans, both acquired and originated. These are expected to be sold in 4Q19.
- Decrease of $2.4 million from the proceeds of the sale of $26.0 million of previously charged off auto and consumer loans.
- Decrease of $4.5 million from the adjustment to qualitative factors of the allowance for loan and lease losses, reflecting sustained favorable macroeconomic conditions in Puerto Rico.
- The sale of $322.0 million of low-yielding MBS resulted in a $3.5 million pre-tax gain in other income, and the continued reduction of higher cost brokered CDs and repurchase agreement funding.
- Non-interest expenses were reduced $1.0 million as a result of three items discussed in the “Income Statement” section below.
Current Expected Credit Losses (CECL)
We have substantially completed the model development process for CECL implementation.
- For the originated book, which accounts for 84% of total gross loans, we are estimating an increase in the current allowance of around 16% to 23%. This will be phased-in through regulatory capital in 2020 through 2022.
- For the acquired book, which represents 16% of total gross loans, we expect its allowance will be enough to cover CECL implementation. Any adjustment will be made through the allowance and loan balances with no impact in capital.
The final impact of CECL will depend on the circumstances at the date of adoption such as asset quality, macro-economic conditions and economic perspective, and continued refinement in 4Q19.
Income Statement
Unless otherwise noted, the following compares data for the third quarter 2019 to the third quarter 2018.
- Interest Income fell $0.5 million, to $93.7 million. Continued originated loan growth (+7.2%) and higher yield (+11 basis points) was mostly offset by continued pay downs of acquired loans and 2Q19 and 3Q19 MBS sales. Interest income increased $5.9 million from originated loans and $2.4 million from cash equivalents, and declined $4.2 million from acquired loans and $4.6 million from investment securities.
- Interest expense increased 9.1% or $1.1 million to $12.9 million. Core deposit costs increased $2.4 million due to higher average balances excluding non-interest bearing deposits (+4.0%) and rate (+25 basis points). Brokered deposit costs fell $0.4 million due to lower average balances (-31.1%) and higher rate (+47 basis points). Borrowing costs fell $0.9 million due to lower average balances (-32.4%) and higher rate (+22 basis points).
- Net Interest Margin, excluding cost recoveries, increased 7 basis points to 5.33% from 5.26%. The increase reflected higher yield on originated loans (+11 basis points) and cash balances (+18 basis points); a higher proportion of originated loans and cash in interest-earning assets (76.8% compared to 64.9%); and the reduction in higher cost brokered CDs and borrowings, partially offset by the higher cost of core deposits.
- Total provision for Loan and Lease Losses increased $29.2 million, to $43.8 million, which includes the previously mentioned net $32.0 million increase in provision, and a decline of $2.8 million, reflecting improved asset quality.
- Total Banking and Wealth Management Revenues increased $0.1 million to $18.5 million due to higher wealth management and banking service revenues, partly offset by lower mortgage banking revenues.
- Total Non-Interest Expenses declined $0.2 million to $50.7 million, primarily reflecting three items: $1.5 million credit for FDIC insurance assessment, $1.0 million credit from Puerto Rico Treasury for employee retention after hurricane Maria, and $1.6 million in Scotiabank acquisition related expenses.
- Due to a higher proportion of exempt income, the Effective Tax Rate for the quarter was 12.0% compared to 34.7%. Estimated Effective Tax Rate for the year is 30.15%.
- Dividends on Preferred Stock declined 53.0% to $1.6 million from $3.5 million due to the 4Q18 conversion of Series C Preferred to common.
Balance Sheet
Unless otherwise noted, the following compares data at September 30, 2019 to September 30, 2018.
- Total Loans increased 1.2% or $54.2 million to $4.41 billion as originated loans increased 4.8%, or $172.1 million, and acquired loans declined 18.2%, or $144.4 million. Compared to June 30, 2019, total loans declined 1.5% or $67.3 million with originated loans down 0.6%, or $24.1 million, and acquired loans down 9.0%, or $64.1 million, both reflecting 2Q19 and 3Q19 loan sales.
- Loan Production totaled $291.4 million compared to $347.0 million in the year-ago quarter. Auto and consumer lending remained strong at $141.5 million and $48.3 million, respectively, while residential mortgage lending totaled $23.8 million. Commercial lending at $65.6 million reflected continued growth of small business customers, while OFG USA added $12.2 million in commercial lending.
- Cash and Cash Equivalents increased 76.1%, or $416.1 million, to $962.9 million. Compared to June 30, 2019, cash increased 42.1%, or $285.5 million. The increases reflect the sale of MBS, NPLs and fully charged off loans.
- Total Investments declined 59.4%, or $776.4 million, to $529.7 million. Compared to June 30, 2019, investments declined 39.2%, or $341.0 million. The decreases reflect sales of MBS in 2Q19 and 3Q19.
- Customer Deposits (excluding brokered) increased 0.7% or $31.6 million to $4.59 million. Compared to June 30, 2019, deposits increased 0.7% or $33.0 million. The increases reflect Oriental’s larger retail customer and funding base.
- Borrowings declined 37.3%, or $182.1 million, to $305.9 million. Compared to June 30, 2019, borrowings declined 14.3%, or $50.9 million. Brokered deposits declined 45.7%, or $242.5 million, to $288.4 million. Compared to June 30, 2019, brokered deposits declined 25.8%, or $100.0 million. The declines reflect the maturity of brokered CDs and repayment of repurchase agreement funding.
- Total stockholders’ equity increased 8.2% or $79.2 million to $1.05 billion. Compared to June 30, 2019, stockholders’ equity increased $4.2 million. The increases reflect growth of retained earnings and legal surplus and reduced other comprehensive loss.
Credit Quality
Unless otherwise noted, the following compares data on the originated loan portfolio at September 30, 2019 to September 30, 2018.
- Most credit quality metrics improved. Non-performing loan rate at 2.00% fell 145 basis points. Allowance for loan and lease losses declined 17.00%, to $79.1 million. As a percentage of loans, ALLL at 2.09% fell 53 basis points. The decrease in the NPL rate and ALLL reflects the previously mentioned sale and transfer to held-for-sale of NPLs.
- Early and total delinquency rates, at 3.64% and 5.39% were up 32 and down 80 basis points, respectively.
- Net Charge-Offs increased $22.0 million to $34.4 million. As a percentage of loans, the NCO rate increased to 3.57% from 1.38%. NCOs were affected by $15.9 million from the previously mentioned increase in provision attributable the decision to sell certain non-performing loans. As a result, NCOs are expected to decline in 4Q19.
Capital Position
Capital continued to be significantly above regulatory requirements for a well-capitalized institution, with September 30, 2019 ratios improving across the board.
Financial Supplement & Conference Call Presentation
OFG’s Financial Supplement, with full financial tables for the quarter ended September 30, 2019, and 3Q19 Conference Call Presentation, can be found on the Webcasts, Presentations & Other Files page, on OFG’s Investor Relations website at www.ofgbancorp.com.
*Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. See Tables 9-1, 9-2 and 10 in OFG’s above-mentioned Financial Supplement for reconciliation of GAAP to non-GAAP Measures and Calculations. OFG has attached to this news release Table 10: “Reconciliation of GAAP to Non-GAAP with adjustments to exclude the impact of significant events” for the quarters ended September 30, 2019 and June 30, 2019.
Forward Looking Statements
The information included in this document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and involve certain risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to (i) the rate of growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) changes to the financial condition of the government of Puerto Rico; (iv) amendments to the fiscal plan approved by the Financial Oversight and Management Board of Puerto Rico; (v) determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and all of its agencies, including some of its public corporations; (vi) the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical infrastructure, which suffered catastrophic damages caused by hurricane Maria; (vii) the pace and magnitude of Puerto Rico’s economic recovery; (viii) the potential impact of damages from future hurricanes and natural disasters in Puerto Rico; (ix) the fiscal and monetary policies of the federal government and its agencies; (x) changes in federal bank regulatory and supervisory policies, including required levels of capital; (xi) the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico; (xii) the performance of the stock and bond markets; (xiii) competition in the financial services industry; and (xiv) possible legislative, tax or regulatory changes.
For a discussion of such factors and certain risks and uncertainties to which OFG is subject, see OFG’s annual report on Form 10-K for the year ended December 31, 2018, as well as its other filings with the U.S. Securities and Exchange Commission. Other than to the extent required by applicable law, including the requirements of applicable securities laws, OFG assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
About OFG Bancorp
Now in its 55th year in business, OFG Bancorp is a diversified financial holding company that operates under U.S. and Puerto Rico banking laws and regulations. Its three principal subsidiaries, Oriental Bank, Oriental Financial Services and Oriental Insurance, provide a wide range of retail and commercial banking, lending and wealth management products, services and technology, primarily in Puerto Rico. Visit us at www.ofgbancorp.com.
OFG Bancorp (NYSE: OFG)
Table 10: Reconciliation of GAAP to Non-GAAP with adjustments to exclude the impact of significant events.
The Company prepared its Consolidated Financial Statement using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Company’s results on the reported basis, management monitors the “Adjusted net income” of the Company and excludes the impact of certain transactions on the results of its operations. Management believes that “Adjusted net income” provides meaningful information to investors about the underlying performance of the Company’s ongoing operations. “Adjusted net income” is a non-GAAP financial measure.
The table below describes adjustments to net income for the quarter ended September 31, 2019 and June 30, 2019.
| Quarter ended September 30, 2019 | Quarter ended June 30, 2019 | ||||||||||||||||||
| Income Tax | Impact on | Income Tax | Impact on | ||||||||||||||||
| (Dollars in thousands) (unaudited) | Pre-tax | Effect (i) | Net Income | Pre-tax | Effect (i) | Net Income | |||||||||||||
| U.S. GAAP net income | $ |
7,383 |
$ |
23,979 |
|||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||
| Sale of mortgage-backed securities available-for-sale | (a) | $ |
(3,498) |
$ |
1,067 |
(2,431) |
$ |
(4,769) |
$ |
1,532 |
(3,237) |
||||||||
| Non-performing loans transferred to held-for-sale or sold | (b)(c) | 38,958 |
(11,886) |
27,072 |
8,803 |
(2,828) |
5,975 |
||||||||||||
| Sale of fully charged-off loans | (d) | (2,382) |
727 |
(1,655) |
- |
- |
- |
||||||||||||
| Merger expenses | (e) | 1,556 |
(475) |
1,081 |
1,000 |
(321) |
679 |
||||||||||||
| FDIC insurance assessment credit | (f) | (1,534) |
468 |
(1,066) |
- |
- |
- |
||||||||||||
| Hacienda credit for hurricane Maria | (g) | (1,010) |
308 |
(702) |
- |
- |
- |
||||||||||||
| Environmental factors adjustment | (h) | (4,541) |
1,385 |
(3,156) |
- |
- |
- |
||||||||||||
| Adjusted net income (Non-GAAP) | $ |
26,527 |
$ |
27,396 |
|||||||||||||||
| Less: dividends on preferred stock | (1,628) |
(1,628) |
|||||||||||||||||
| Adjusted net income available to common shareholders (Non-GAAP) | $ |
24,899 |
$ |
25,768 |
|||||||||||||||
| U.S. GAAP earnings per common share - diluted | $ |
0.11 |
$ |
0.43 |
|||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||
| Sale of mortgage-backed securities available-for-sale | (a) | $ |
(0.07) |
$ |
0.02 |
(0.05) |
$ |
(0.09) |
$ |
0.03 |
(0.06) |
||||||||
| Non-performing loans transferred to held-for-sale or sold | (b)(c) | 0.75 |
(0.23) |
0.52 |
0.17 |
(0.05) |
0.12 |
||||||||||||
| Sale of fully charged-off loans | (d) | (0.04) |
0.01 |
(0.03) |
- |
- |
- |
||||||||||||
| Merger expenses | (e) | 0.03 |
(0.01) |
0.02 |
0.02 |
(0.01) |
0.01 |
||||||||||||
| FDIC insurance assessment credit | (f) | (0.03) |
0.01 |
(0.02) |
- |
- |
- |
||||||||||||
| Hacienda credit for hurricane Maria | (g) | (0.02) |
0.01 |
(0.01) |
- |
- |
- |
||||||||||||
| Environmental factors adjustment | (h) | (0.09) |
0.03 |
(0.06) |
- |
- |
- |
||||||||||||
| Adjusted earnings per common share - diluted (Non-GAAP) | $ |
0.48 |
$ |
0.50 |
|||||||||||||||
| Adjusted Performance Metrics - Reconciliation to GAAP Financial Measures: | Quarter ended September 30, 2019 |
Quarter ended June 30, 2019 |
|||||||||||||||||
| Net income | $ |
7,383 |
$ |
23,979 |
|||||||||||||||
| Non-GAAP adjustments | (a)(b)(c)(d)(e)(f)(g)(h) | 19,144 |
3,417 |
||||||||||||||||
| Adjusted net income (Non-GAAP) | 26,527 |
27,396 |
|||||||||||||||||
| Average assets | $ |
6,433,658 |
$ |
6,496,423 |
|||||||||||||||
| Return on average assets | 0.46% |
1.48% |
|||||||||||||||||
| Adjusted return on average assets (Non-GAAP) | 1.65% |
1.69% |
|||||||||||||||||
| Net income available to common shareholders | $ |
5,755 |
$ |
22,351 |
|||||||||||||||
| Non-GAAP adjustments | (a)(b)(c)(d)(e)(f)(g)(h) | 19,144 |
3,417 |
||||||||||||||||
| Adjusted net income available to common shareholders (Non-GAAP) | 24,899 |
25,768 |
|||||||||||||||||
| Average tangible common equity | $ |
890,970 |
$ |
866,192 |
|||||||||||||||
| Return on average tangible common stockholders' equity | 2.58% |
10.32% |
|||||||||||||||||
| Adjusted return on average tangible common stockholders' equity (Non-GAAP) | 11.18% |
11.90% |
|||||||||||||||||
| Total non-interest expense | $ |
50,727 |
$ |
51,452 |
|||||||||||||||
| Non-GAAP adjustments, pre-tax | (e)(f)(g) | 988 |
(1,000) |
||||||||||||||||
| Adjusted total non-interest expense (Non-GAAP) | 51,715 |
50,452 |
|||||||||||||||||
| Net interest income | $ |
80,710 |
$ |
81,085 |
|||||||||||||||
| Total banking and financial service revenues | 18,542 |
18,074 |
|||||||||||||||||
$ |
99,252 |
$ |
99,159 |
||||||||||||||||
| Efficiency ratio | 51.11% |
51.89% |
|||||||||||||||||
| Adjusted efficiency ratio (Non-GAAP) | 52.10% |
50.88% |
|||||||||||||||||
| (a) During 2Q 2019 and 3Q 2019, the Company sold $350 million and $322 million available-for-sale mortgage-backed securities, respectively, and recognized a gain in the sale of $4.8 million and $3.5 million, respectively. | ||||||||||||||||||
| (b) During 3Q 2019, the Company decided to sell mostly non-performing loans, which are expected to be sold during 4Q 2019, increasing the provision by $37.4 million. Originated loans that were transferred to held-for-sale amounted to $25.3 million at September 30, 2019, the remaining were purchased credit impaired loans. | ||||||||||||||||||
| (c) During 2Q 2019, the Company decided to sell mostly non-performing mortgage loans increasing the provision by $8.8 million. Most of these loans were sold in 3Q 2019, increasing the provision by an additional $2.3 million. | ||||||||||||||||||
| (d) During 3Q 2019, the Company received $2.4 million proceeds from the sale of fully charged-off originated auto and consumer loans. | ||||||||||||||||||
| (e) During 2Q 2019, the Company entered into an agreement with Scotiabank to acquire its Puerto Rico and US Virgin Islands operations, subject to customary closing conditions. During 2Q2019 and 3Q2019, $1.0 million and $1.6 million, respectively, were incurred in related expenses. | ||||||||||||||||||
| (f) During 3Q 2019, the Company recognized an FDIC insurance assessment credit received amounting to $1.5 million. | ||||||||||||||||||
| (g) During 3Q 2019, the Company received an additional $1 million credit from Puerto Rico Treasury on employee retention during hurricane Maria. | ||||||||||||||||||
| (h) During 3Q 2019, the Company had a reduction in provision for loan losses of $4.5 million as a result of the adjustment to the qualitative factor related to sustained favorable macroeconomic conditions in Puerto Rico. | ||||||||||||||||||
| (i) Income tax effect reflects estimated income tax annual rate at September 30, 2019 and June 30, 2019 of 30.51% and 32.12%, respectively. | ||||||||||||||||||
