OFG Bancorp (NYSE: OFG) today reported results for the second quarter ended June 30, 2020.
2Q20 Financial Highlights
- Net income available to common shareholders totaled $20.2 million or $0.39 per share fully diluted. This compares to 1Q20 net income available to common shareholders of $173 thousand or break-even per share and 2Q19 net income available to shareholders of $22.4 million or $0.43 per share fully diluted.
- Total core revenues were $128.2 million compared to $131.3 million in 1Q20 and $99.2 million in 2Q19. 2Q20 revenues included $6.0 million in one-time interest recoveries from acquired SOP Scotiabank loans.
- Provision of $17.7 million included a $5.0 million increase to 1Q20’s $34.1 million provision based on additional data available to forecast the effects of the Covid-19 pandemic.
- Net interest margin was 4.78%. Loan production totaled $503.4 million, including $286.4 million in Payroll Protection Plan (PPP) commercial loans.
- Total assets of $9.93 billion increased 7.5% from 1Q20 primarily due to a $574.1 million increase in cash and a $198.1 million increase in loans. Customer deposits of $8.32 billion increased $760.0 million or 10.0% from 1Q20.
- All regulatory capital ratios increased and continue to be significantly above requirements for a well-capitalized institution with the CET1 ratio at 12.03% on June 30, 2020.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, said:
“As other banks did, we faced a number of Covid-19 pandemic related challenges during the second quarter, but acting promptly and with foresight, we generated excellent results. We are extremely proud and thankful of our team’s accomplishments.
“Governments in Puerto Rico and U.S. Virgin Islands shut down their respective economies in mid-March. Restrictions eased in late May, but recent spikes in contagiousness have forced Puerto Rico to scale down the flexibility. Results were also impacted by the Federal Reserve Bank 150 bps rate cut in March. All of this followed the Puerto Rico earthquakes in January and occurred while we are in the process of integrating the Scotiabank acquisition.
“Our commitment and preparation enabled us to successfully manage these challenges fácil, rápido, hecho. During the quarter, our team worked mostly remotely. Branches operated safely assisted by our enhanced technology platform. Full-service ATMs and ITMs, mobile app, and online bill paying tools facilitated routine transactions in a contactless manner. Online/mobile appointment scheduling helped make possible Covid-19 safe meetings with customers at branches.
“The results speak for themselves. Loan production totaled more than $500 million, including $286 million in PPP loans, exceeding our Puerto Rico market share. We deployed a 100% digital, client-friendly application and funds disbursement process for PPP loans. Our PPP results enabled us to help more than 4,000 small businesses save more than 50,000 jobs. It also enabled us to attract new accounts in this strategically important customer base. Our online loan deferral tool and call centers processed relief for more than 44,000 retail customers. During the quarter, we also maintained a strong level of net interest margin, added to our Covid-19 related provisioning, reduced higher-cost wholesale funding, and increased liquidity and capital.
“Looking ahead, we expect to complete the integration of Scotiabank operations as planned by the end of the year, improve efficiencies, and continue to invest for the future to further simplify our operations and enhance our ability to serve customers. While we still face much uncertainty regarding Covid-19 and its impact on the economy, we are in a strong financial position, ready to assist our customers during these trying times.”
Income Statement
Unless otherwise noted, the following compares data for the second quarter 2020 to the second quarter 2019. Balances are quarterly averages. The Scotiabank acquisition closed on December 31, 2019.
- Total interest income of $121.7 million increased $27.4 million. This was primarily due to a 46.6% increase in interest earning assets partially offset by a 73 bps decline in yield. The increase in interest income from loans more than offset declines from increased cash due to significantly lower rates and lower investment securities balances. 2Q20 also included the previously-mentioned $6.0 million in interest recoveries.
- Total interest expense of $16.6 million increased $3.5 million. This was primarily due to a 54.4% increase in interest bearing liabilities and an 18 bps decline in rate. Rate declined due to the increase in lower-cost core deposits and the reduction in higher-cost balances of brokered CDs and borrowings.
- Provision for credit losses of $17.7 million was level with last year. 2Q20 included $5.0 million to incorporate the expected economic effects of the Covid-19 pandemic, while 2Q19 included $8.8 million for loans transferred to held for sale.
- Total banking and financial service revenues of $23.1 million increased $5.0 million. This was primarily due to our increased customer base and our larger mortgage servicing portfolio.
- All other non-interest income of $4.0 million declined $0.8 million. 2Q20 included a $3.5 million bargain purchase gain from the Scotiabank acquisition, while 2Q19 included a $4.8 million gain on sales of mortgage backed securities (MBS).
- Total non-interest expense of $85.5 million increased $34.0 million primarily due to the Scotiabank acquisition. 2Q20 also included $3.0 million in merger and restructuring charges, $2.4 million in legal claims, and $2.0 million in expenses necessary to deal with Covid-19’s impact on operations.
- The effective tax rate (ETR) was 25.0% compared to 31.2%. 2Q20 reflected a 24.2% full year ETR based on the mix of exempt income and income taxed at preferential rates.
Balance Sheet
Unless otherwise noted, the following compares data at June 30, 2020 to June 30, 2019. Balances are end-of-period. The purchase of Scotiabank closed on December 31, 2019.
- Net loans of $6.7 billion increased $2.3 billion primarily due to the Scotiabank acquisition. Compared to March 31, 2020, loans increased $198.1 million. This reflected increases from PPP and other commercial loans partially offset by paydown of retail loans.
- Loan production of $503.4 million increased $176.9 million. This reflected increases from PPP and other commercial loans and declines in the mortgage, auto and consumer categories due to the Covid-19 pandemic. Compared to 1Q20, production increased $222.9 million.
- Cash and cash equivalents of $1.9 billion increased $1.2 billion. Compared to March 31, 2020, they increased $574.1 million primarily because of the influx of both commercial and retail deposits.
- Total investments of $549.7 million declined $321.0 million. Compared to March 31, 2020, they declined $119.1 million, reflecting Treasury maturities and MBS repayments.
- Customer deposits, excluding brokered, of $8.3 billion increased $3.8 billion. Compared to March 31, 2020, customer deposits increased $760.0 million, reflecting commercial deposits from existing and new clients, and in retail accounts from increased liquidity in the economy.
- Brokered deposits of $218.2 million declined $170.2 million year-over-year and $37.3 million quarter-over-quarter. Borrowings of $104.4 million declined $252.4 million year-over-year and $59.4 million quarter-over-quarter.
- Total stockholder’s equity of $1.04 billion declined $3.6 million. Compared to March 31, 2020, it was $18.7 million higher due to the increase in retained earnings.
- Book value per common share of $18.69 declined $0.07 from a year-ago and increased $0.36 from March 31, 2020. Tangible book value per share of $16.01 declined $1.02 year-over-year and increased $0.41 from March 31, 2020.
Credit Quality
Unless otherwise noted, the following compares data at June 30, 2020 to June 30, 2019.
- Loans under 1-4 month deferral programs totaled $2.1 billion or 30% of total loans. Retail loans under deferral totaled $1.4 billion or 32% of such loans. Commercial loans under deferral totaled $685 million or 27% of such loans.
- The allowance for loan and lease losses of $232.7 million increased $70.1 million and as a percentage of loans held for investment was 3.35%, a decline of 17 bps. Compared to March 31, 2020, the allowance increased $1.9 million and as a percentage of loans declined 6 bps.
- Net charge offs of $15.8 million increased $2.8 million due to higher loan balances. The NCO rate of 0.92% declined 23 bps. Compared to March 31, 2020, NCOs declined $8.3 million and the NCO rate declined 52 bps.
- The early delinquency loan rate of 2.64% was down 86 bps year-over-year and 52 bps quarter-over-quarter. The total delinquency rate of 5.56% was down 51 bps year-over-year and 82 bps quarter-over-quarter. The declines reflect increased payments from customers and deferral programs.
- Total non-performing loans of $90.2 million declined $23.4 million year-over-year and $8.4 million quarter-over-quarter. The NPL rate of 1.81% declined 113 bps year-over-year and 26 bps quarter-over-quarter. The sequential decline in NPLs and rate reflects loan paydowns and deferrals.
Capital Position
June 30, 2020 regulatory capital ratios increased from March 31, 2020 and continue to be significantly above requirements for a well-capitalized institution: Leverage ratio was 10.16%, up 2 bps; common equity Tier 1 capital ratio (CET1) was 12.03%, up 34 bps; Tier 1 risk-based capital ratio was 13.71%, up 35 bps; and total risk-based capital ratio was 14.96%, up 34 bps.
Financial Supplement & Conference Call Presentation
OFG’s Financial Supplement, with full financial tables for the quarter ended June 30, 2020, and the 2Q20 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. Please refer to Tables 8-1, 8-2 and 8-3 in OFG’s above-mentioned Financial Supplement for a reconciliation of GAAP to non-GAAP measures and calculations.
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, earthquakes and other 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; (xiv) possible legislative, tax or regulatory changes; and (xv) the severity, magnitude and duration of the Covid-19 pandemic, including impacts of the pandemic and of responses of federal, state and local governments on our branches, operations and personnel, and on our customers and their businesses.
For a discussion of such factors and certain risks and uncertainties to which OFG is subject, please refer to OFG’s annual report on Form 10-K for the year ended December 31, 2019, 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.
