OFG Bancorp — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results for the quarter ended March 31, 2018, compared with Q1 2017 unless otherwise noted. OFG is a Puerto Rico-focused financial holding company operating banking, wealth-management and treasury businesses. Its lending and broader operations are substantially concentrated in Puerto Rico.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior date |
|---|---|---|
| Net interest income | $74.0 | $74.6 in Q1 2017 |
| Provision for loan and lease losses | $15.5 | $17.7 in Q1 2017 |
| Non-interest income | $18.5 | $19.1 in Q1 2017 |
| Non-interest expense | $52.1 | $51.7 in Q1 2017 |
| Net income | $16.9 | $15.2 in Q1 2017 |
| Income available to common shareholders | $13.5 | $11.7 in Q1 2017 |
| Diluted earnings per common share | $0.30 | $0.26 in Q1 2017 |
| Net interest margin | 5.22% | 5.10% in Q1 2017 |
| Operating cash flow | $35.4 | $25.0 in Q1 2017 |
| Cash, cash equivalents and restricted cash | $365.4 | $488.2 at start of quarter |
| Total assets | $6,247.1 | $6,189.1 at Dec. 31, 2017 |
| Loans, net | $4,133.4 | $4,056.3 at Dec. 31, 2017 |
| Deposits | $4,833.4 | $4,799.5 at Dec. 31, 2017 |
| Total borrowings | $354.3 | $328.7 at Dec. 31, 2017 |
| Stockholders’ equity | $946.8 | $945.1 at Dec. 31, 2017 |
Material changes and management commentary
- Net income rose 11.7% year over year; diluted EPS increased to $0.30 from $0.26. Lower loan-loss provision and income-tax expense supported earnings, while net interest income declined slightly.
- Net interest margin expanded 12 basis points. Interest income fell 3.5%, partly reflecting runoff in acquired loan portfolios; interest expense fell 20.6%, including lower repurchase-agreement costs.
- Loan balances grew 1.9% from year-end. Management reported $309.4 million of Q1 loan production, up 41.4% year over year, with growth led by auto and commercial lending. Acquired loan portfolios continued to run off.
- Non-interest income declined 2.9%, primarily because Q1 2017 included a $1.4 million FDIC shared-loss benefit; mortgage-banking activities improved by $1.2 million year over year. Expenses increased 0.8%, including higher occupancy and other costs.
- Cash and cash equivalents fell $122.8 million during the quarter. Cash-flow statement totals were $35.4 million provided by operating activities, $218.1 million used in investing, and $59.9 million provided by financing.
- Available-for-sale securities had an unrealized loss of $11.3 million before tax, contributing to a $9.2 million after-tax comprehensive loss for the quarter. Accumulated other comprehensive loss increased to $12.2 million.
- Management said most hurricane-related loan moratoriums had expired and credit measures were generally better than, or returning to, pre-hurricane levels. It also described continued recovery activity in Puerto Rico, while emphasizing that the economic outlook remained uncertain.
Credit, capital, liquidity and risks
- Total allowance for loan and lease losses was $168.6 million at March 31, 2018. The quarter included an $8.6 million hurricane-related provision to replenish allowance for $8.2 million of hurricane-related charge-offs.
- Non-accrual loans increased to $120.3 million from $99.7 million at year-end; non-performing assets rose to $173.7 million from $156.7 million. Management attributed part of the increase to commercial and auto credit deterioration, including a $10.5 million commercial loan placed on non-accrual despite being current on payments.
- OFG’s regulatory capital ratios remained well above stated minimums: CET1 14.52%, Tier 1 risk-based 19.00%, total risk-based 20.29%, and leverage 14.07%. The Bank was categorized as well capitalized.
- Deposits increased modestly, while repurchase-agreement balances rose to $273.9 million and FHLB advances declined to $43.9 million. Brokered deposits were $474.6 million. Management reported $362.4 million of unrestricted cash, $953.3 million of unpledged investment securities and $925.2 million of available FHLB borrowing capacity.
- Key disclosed risks include Puerto Rico’s fiscal and debt-restructuring process, local economic and real-estate conditions, hurricane and other disaster exposure, credit quality, interest-rate changes, and continued access to wholesale funding. The company reported no material change to previously disclosed risk factors.
- Legal proceedings are ongoing. Management said the reasonably possible loss estimate was not significant and that the matters were not expected to materially affect financial condition; it cautioned that an adverse outcome could affect results or cash flows in a particular period.
Outlook, contingencies and unusual items
The filing provides no formal earnings or numerical financial guidance. Management expressed confidence in positive momentum but remained cautious about Puerto Rico’s uncertain economic environment. The company recorded no additional hurricane-related disaster-response losses in Q1; it received a $0.7 million insurance payment during the quarter and reported a $0.5 million receivable for expected recovery at March 31. Management reported no goodwill impairment trigger in Q1, although the Banking reporting unit had failed the first step of its 2017 annual impairment test and passed the subsequent analysis. Adoption of the new revenue standard in January 2018 had no material impact; the company expects CECL adoption in 2020 to increase the allowance, with the amount not yet determined.
Investor facts to verify
- Whether the improvement in loan delinquencies after expiration of hurricane moratoriums persists, particularly in commercial and auto portfolios.
- Whether the $168.6 million allowance adequately reflects hurricane-related and broader Puerto Rico credit risks, and how charge-offs and non-accrual balances trend.
- How loan growth and acquired-loan runoff affect net interest income and margin as funding costs and market rates change.
- Whether liquidity remains sufficient if brokered deposits or wholesale funding become less available or more costly; review near-term repurchase and FHLB maturities.
- How unrealized securities losses, Puerto Rico government exposure and the Banking unit’s goodwill valuation evolve.
- Potential costs or cash-flow effects from litigation, mortgage repurchase obligations, lending commitments and other contingencies.