OFG Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. OFG is a Puerto Rico-based financial holding company operating in Banking, Wealth Management and Treasury, with operations in Puerto Rico, the U.S. Virgin Islands and the mainland United States.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / date |
|---|---|---|
| Net interest income | $98.2 million | $105.1 million in Q1 2020 |
| Net interest margin | 4.26% | 4.94% in Q1 2020 |
| Non-interest income | $30.4 million | $31.5 million in Q1 2020 |
| Non-interest expense | $77.7 million; efficiency ratio 60.84% | $87.3 million; 66.49% in Q1 2020 |
| Provision for credit losses | $6.3 million | $47.1 million in Q1 2020 |
| Net income / diluted EPS | $30.4 million / $0.56 | $1.8 million / $0.00 in Q1 2020 |
| Net charge-offs | $9.1 million; 0.55% of average loans | $24.0 million; 1.44% in Q1 2020 |
| Total assets | $10.15 billion | $9.83 billion at December 31, 2020 |
| Loans, net | $6.43 billion | $6.50 billion at December 31, 2020 |
| Deposits / borrowings | $8.76 billion / $101.1 million | $8.42 billion / $102.4 million at December 31, 2020 |
| Cash and cash equivalents | $2.41 billion; restricted cash was an additional $1.1 million | $2.15 billion cash and cash equivalents at December 31, 2020 |
| Capital | OFG CET1 13.56%; total risk-based capital 16.54%; tangible book value per share $17.39 | CET1 13.08%; total risk-based capital 16.04%; tangible book value $16.97 at December 31, 2020 |
Operating cash flow was $36.4 million, investing cash flow was negative $86.7 million, and financing cash flow was positive $304.1 million. Cash, cash equivalents and restricted cash increased $253.8 million during the quarter. OFG reported approximately $297 million in unpledged investment securities and $785.5 million of additional FHLB borrowing capacity.
Material changes and management commentary
- Net income improved substantially year over year, primarily reflecting a much lower credit-loss provision and lower operating expenses. Q1 2020 included a $34.1 million pandemic-related provision component and a $4.7 million gain on securities sales; Q1 2021 included no securities-sale gain.
- Net interest income declined 6.6% year over year as lower yields reduced asset income. Lower deposit and borrowing costs partly offset that decline. Management cited $1.6 million of interest income from unamortized yield on forgiven PPP loans.
- Management said Q1 2021 provision included a $3.7 million release of prior-year COVID-related reserves and a $3.5 million provision for a commercial loan already in workout before the pandemic. The allowance for credit losses was $202.0 million, or 3.06% of loans held for investment.
- Non-interest expense fell 11.1% year over year, which management attributed in part to lower employee count and other cost reductions. Pandemic-related expenses increased to $1.8 million from $0.2 million.
- Deposits rose 4.1% from year-end, led by core deposit growth, while loans declined 1.1%, mainly from portfolio runoff. First-quarter originations were $527.6 million, including $126.3 million of PPP loans.
- Credit indicators improved in several comparisons: net charge-offs and total delinquencies declined year over year, and management reported nonperforming assets of $162.7 million, down 1.8% from year-end. Nonperforming loans were $144.3 million, approximately 2.2% of loans.
Outlook, risks and contingencies
- Management described Puerto Rico’s economy as improving alongside vaccination, eased restrictions and government stimulus, but gave no specific earnings or financial guidance. It warned that the pandemic’s duration and economic effects remain uncertain.
- Key exposures include Puerto Rico’s economy and government fiscal/debt restructuring, borrower credit quality, natural disasters, interest-rate movements, competition, regulatory changes and the potential effects of COVID-19. OFG’s business and credit exposure are concentrated in Puerto Rico.
- COVID-19 payment deferrals were approximately $81.7 million, about 1% of the loan population, at March 31, 2021, compared with 30% of loans at June 30, 2020. The company had processed deferrals for more than 47,000 retail customers and relief on $642.6 million of commercial loans.
- LIBOR-linked contracts were concentrated mainly in commercial lending and represented 8% of loans held for investment. OFG was identifying affected contracts and developing fallback terms ahead of U.S. dollar LIBOR cessation dates.
- Credit commitments were $1.11 billion. Legal and regulatory matters had an accrued liability of $7.8 million; management said the eventual aggregate outcome was not expected to materially adversely affect financial condition, while acknowledging possible effects on particular periods.
- OFG announced redemption of all outstanding preferred stock: Series A and B were redeemed April 30, 2021, and Series D was scheduled for redemption July 15, 2021. These are announced post-quarter capital actions.
Most important facts for investors to verify
- Whether lower credit provisions and reserve releases, rather than recurring revenue growth, explain most of the year-over-year earnings improvement.
- Subsequent credit performance, especially commercial exposures, mortgage delinquencies, loan deferrals and the adequacy of the $202.0 million allowance.
- Whether strong deposit inflows persist and how excess liquidity is deployed without further pressure on net interest margin.
- The effects of preferred-stock redemptions on capital, funding costs and earnings available to common shareholders.
- Developments in Puerto Rico’s fiscal and economic outlook, COVID-related relief programs, and LIBOR contract transition.