OFG Bancorp(US:OFG)2020-11-06 16:55PART I – FINANCIAL INFORMATION Financial Statements This section presents OFG Bancorp's unaudited consolidated financial statements, including key financial positions, operational results, and cash flows, along with notes on significant accounting policies and recent acquisitions Unaudited Consolidated Statements of Financial Condition Total assets increased to $10.02 billion by September 30, 2020, driven by a significant rise in cash and cash equivalents, while total deposits grew by 12.1% to $8.63 billion and stockholders' equity modestly increased to $1.06 billion Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $10,018,991 | $9,297,661 | | Cash and cash equivalents | $2,282,000 | $851,307 | | Total investments | $434,364 | $1,087,814 | | Total loans, net | $6,579,140 | $6,641,847 | | Goodwill | $86,069 | $86,069 | | Total Liabilities | $8,954,669 | $8,252,183 | | Total deposits | $8,632,457 | $7,698,610 | | Total borrowings | $102,864 | $305,561 | | Total Stockholders' Equity | $1,064,322 | $1,045,478 | Unaudited Consolidated Statements of Operations Net income for Q3 2020 significantly increased to $25.8 million or $0.50 per diluted share, primarily driven by a 23.3% rise in net interest income and a 68.8% decrease in the provision for credit losses Quarterly Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Net Interest Income | $99,533 | $80,710 | | Provision for Credit Losses | $13,669 | $43,770 | | Non-interest Income, net | $31,326 | $22,178 | | Non-interest Expense | $83,444 | $50,727 | | Net Income | $27,438 | $7,383 | | Diluted EPS | $0.50 | $0.11 | Unaudited Consolidated Statements of Cash Flows Cash, cash equivalents, and restricted cash increased by $1.43 billion for the nine months ended September 30, 2020, primarily driven by a $915.1 million net increase in deposits and $747.3 million from investing activities, partially offset by operating cash usage Nine-Month Cash Flow Summary (in thousands) | Cash Flow Category | Nine-Month Period Ended Sep 30, 2020 | | :--- | :--- | | Net cash (used in) provided by operating activities | $(12,266) | | Net cash provided by investing activities | $747,339 | | Net cash provided by (used in) financing activities | $695,220 | | Net change in cash, cash equivalents and restricted cash | $1,430,293 | Notes to Unaudited Consolidated Financial Statements These notes provide critical details on accounting policies, business combinations, and financial statement items, highlighting the adoption of the CECL standard and the financial impact of the Scotiabank acquisition - The company adopted the new CECL credit loss standard (ASU 2016-13) on January 1, 2020, using a modified retrospective method, resulting in an after-tax cumulative effect reduction to retained earnings of $25.5 million4647 - In response to the COVID-19 pandemic, the company offered payment deferral programs for its loan portfolios, with most not being classified as Troubled Debt Restructurings (TDRs) as guided by the CARES Act and interagency statements4180 - During the nine-month period ended September 30, 2020, the company recorded remeasurement adjustments related to the Scotiabank acquisition, resulting in a bargain purchase gain of $7.3 million8586 - As of September 30, 2020, the company and its bank subsidiary met all capital adequacy requirements and were categorized as "well capitalized" under the regulatory framework195 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, highlighting a strong third quarter driven by an improved macroeconomic environment and successful integration of the Scotiabank acquisition, alongside analysis of key financial metrics and the impact of the COVID-19 pandemic Financial Highlights of the Third Quarter of 2020 Q3 2020 showed strong performance with diluted EPS increasing to $0.50, driven by lower provision for credit losses and reduced non-interest expenses, alongside robust customer deposit growth and loan production - Diluted EPS for Q3 2020 was $0.50, a 28% increase from Q2 2020 and a 355% increase from Q3 2019312 - Provision for credit losses decreased 23% from Q2 2020 to $13.7 million, with loan payment deferrals related to COVID-19 dropping significantly to 2.0% of total loans from 30.0% in the previous quarter312 - Customer deposits grew by $212.6 million during the quarter to $8.5 billion, leading to a $383.0 million increase in cash312 - All regulatory capital ratios remained significantly above requirements for a well-capitalized institution, with the CET1 ratio at 12.55%314 Analysis of Results of Operations Q3 2020 net interest income increased by $18.8 million YoY to $99.5 million, driven by higher loan balances despite a lower net interest margin, while non-interest income and expenses also rose significantly due to the Scotiabank acquisition, and provision for credit losses decreased substantially - Q3 2020 net interest income increased 23.3% YoY to $99.5 million, primarily due to higher loan volumes from the Scotiabank acquisition, which offset a decline in net interest margin from 5.35% to 4.30%324326 - Q3 2020 non-interest income increased by $9.1 million (41.2%) YoY, driven by a $5.5 million increase in banking service revenues and a $2.8 million increase in mortgage-banking activities, both benefiting from the larger customer base post-acquisition331332 - Q3 2020 non-interest expense increased by $32.7 million (64.5%) YoY, with significant increases in compensation, occupancy, and technology costs directly related to the integration of Scotiabank's operations338340 - The provision for credit losses in Q3 2020 was $13.7 million, a sharp decrease from $43.8 million in Q3 2019, as the prior-year quarter included a large provision related to a sale of non-performing loans342 Analysis of Financial Condition As of September 30, 2020, total assets grew 7.8% to $10.0 billion, driven by increased cash and deposits, while the loan portfolio remained stable, and non-performing assets increased due to the new CECL methodology - Total assets grew by 7.8% to $10.0 billion from year-end 2019, driven by a 168% increase in cash and due from banks, funded by a 12.2% growth in total deposits362373407 - The loan portfolio composition at September 30, 2020 was 35.9% commercial, 34.8% mortgage, 22.8% auto, and 6.5% consumer375 - Non-performing assets increased to $215.2 million (2.15% of total assets) from $118.7 million (1.28% of total assets) at year-end 2019, mainly as a result of the new CECL methodology for PCD loans387 - Tangible book value per common share increased to $16.51 from $15.96 at year-end 2019, with all regulatory capital ratios improving and remaining well above 'well-capitalized' minimums412413 Quantitative and Qualitative Disclosures about Market Risk The company primarily manages interest rate risk, with simulations showing a 100 basis point rate increase could boost net interest income by $11.7 million, while also addressing significant credit risk concentrated in Puerto Rico and maintaining strong liquidity through diverse funding sources Net Interest Income Sensitivity (One-Year Projection, in millions) | Change in Interest Rate | Static Balance Sheet Change | Dynamic Balance Sheet Change | | :--- | :--- | :--- | | +200 Basis points | +$24.9M (+6.39%) | +$20.6M (+5.28%) | | +100 Basis points | +$13.9M (+3.57%) | +$11.7M (+2.98%) | | -50 Basis points | -$4.4M (-1.13%) | -$3.8M (-0.98%) | - Credit risk is a primary concern due to the concentration of business in Puerto Rico, which faces a protracted economic recession, government fiscal crisis, and the impacts of natural disasters and the COVID-19 pandemic442 - As of September 30, 2020, the company maintained a strong liquidity position with approximately $2.3 billion in unrestricted cash and cash equivalents and $992.2 million in additional borrowing capacity at the FHLB-NY453 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, while actively integrating internal controls from the Scotiabank acquisition and implementing new controls for the CECL accounting standard - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period461 - The company is actively integrating the policies, processes, and internal controls from the Scotiabank PR & USVI Acquisition, with completion expected by December 31, 2020, and new controls were implemented for the adoption of the CECL accounting standard462 PART II – OTHER INFORMATION Legal Proceedings The company and its subsidiaries are involved in various legal proceedings, but management believes the ultimate liability will not materially affect financial condition or results of operations - Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business, but management does not expect the outcomes to have a material adverse effect on the company's financial condition464 Risk Factors This section supplements existing risk factors, focusing on the significant and uncertain impacts of the COVID-19 pandemic, including potential adverse effects on business results, financial condition, liquidity, and capital, as well as operational challenges - The COVID-19 pandemic has adversely impacted the business, and the full extent of future impacts on financial condition, liquidity, and results of operations remains highly uncertain and difficult to predict466 - The pandemic could lead to higher credit losses and increases in the allowance for credit losses, with a substantial build in the allowance already recorded for the nine months ended September 30, 2020, due to economic uncertainty468 - The company has modified business practices, including implementing work-from-home policies for approximately 50% of employees, which could impair the ability to perform critical functions469 Unregistered Sales of Equity Securities and Use of Proceeds Under its stock repurchase program, the company purchased 175,000 shares of common stock for $2.2 million during the nine-month period ended September 30, 2020, with approximately $5.5 million remaining available for future repurchases Stock Repurchase Activity (Nine-Month Period Ended Sep 30, 2020) | Period | Total Shares Purchased | Average Price Paid | Value of Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | March 1-31, 2020 | 175,000 | $12.69 | $5,510,000 |