OFG Bancorp — Q1 2019 Form 10-Q
Business context and reporting period
OFG Bancorp is a Puerto Rico-focused financial holding company, with banking, wealth management and treasury businesses. This unaudited filing covers the quarter ended March 31, 2019; income-statement comparisons are against Q1 2018 and balance-sheet comparisons are against December 31, 2018. Dollar amounts below are in millions unless noted.
Financial results and position
- Earnings: Net income was $23.5 million, up 38.7%; income available to common shareholders was $21.8 million, up 62.4%. Diluted EPS rose to $0.42 from $0.30. The increase in common earnings also reflects the conversion of Series C preferred stock in 2018 and the resulting absence of its dividends in Q1 2019.
- Revenue and margins: Net interest income increased 10.5% to $81.8 million. Net interest margin improved to 5.37% from 5.22%, as asset yields rose more than funding costs. Banking and financial service revenue declined 3.8% to $17.6 million; total non-interest income fell 4.6% to $17.7 million. Lower mortgage servicing asset valuation and lower wealth-management fees weighed on fee income.
- Credit costs and expenses: Provision for loan losses declined 20.8% to $12.2 million. Non-interest expense was essentially flat at $52.2 million, while the efficiency ratio improved to 52.50% from 56.51%.
- Cash flow: Operating activities provided $20.7 million, versus $35.4 million in Q1 2018. Investing activities provided $51.0 million, compared with $218.1 million used in the prior-year quarter; financing activities used $12.8 million, versus $59.9 million provided. Cash, cash equivalents and restricted cash increased $59.0 million to $509.0 million.
- Balance sheet and funding: Total assets were $6.60 billion. Loans, net, were $4.40 billion, down 0.7% from year-end; deposits were $4.90 billion, down 0.2%. Borrowings totaled $549.0 million, down 3.7%, including $431.6 million of repurchase agreements and $81.1 million of FHLB advances. Management reported $638.3 million of unpledged investment securities and $790.3 million of additional FHLB borrowing capacity.
- Capital: Stockholders’ equity was $1.02 billion. OFG’s CET1, Tier 1, total risk-based and leverage ratios were 17.09%, 19.49%, 20.77% and 14.64%, respectively. The Bank was classified as well capitalized.
Changes, outlook and risks
- Management reported $276.4 million in new loan originations. It cited stronger commercial production from its small-business strategy, while total loan production was down 10.7% year over year, mainly due to lower originations in the U.S. loan program. Period-end loans declined slightly from year-end as acquired portfolios continued to run off.
- OFG reclassified $424.7 million of held-to-maturity mortgage-backed securities to available-for-sale on January 1, 2019 under new hedge-accounting guidance. This increased reported available-for-sale securities and moved unrealized losses into accumulated other comprehensive income; management said the adoption did not materially affect operating results or cash flows.
- OFG adopted lease accounting in 2019, recognizing $20.9 million of right-of-use assets and $22.6 million of lease liabilities. The adoption reduced opening retained earnings by $0.7 million and did not materially affect operating results or cash flows.
- Credit indicators were mixed: non-performing assets were $162.1 million, or 2.50% of assets excluding acquired credit-impaired loans, versus $161.3 million and 2.76% at year-end. Non-performing loans increased 2.5% to $127.6 million. Originated commercial non-performing loans rose to $50.4 million, including an $8.6 million loan placed on non-accrual despite being current. Net charge-offs on originated loans were $12.5 million, up from $10.8 million; auto net charge-offs increased 42%.
- Puerto Rico economic, fiscal and disaster-related conditions remain central risks because a substantial portion of lending and business activity is concentrated there. Other stated risks include interest-rate changes, credit deterioration, reliance on wholesale funding and brokered deposits, regulatory matters, and litigation. Management described reasonably possible legal losses as not significant, but noted an adverse outcome could affect results or cash flows in a particular period.
- No specific earnings or financial guidance was provided in the supplied filing text. OFG expected to adopt CECL on January 1, 2020 and said the standard is expected to affect its credit-loss reserve; the amount was not yet clear. Management cited ongoing loan-growth, revenue-diversification and efficiency objectives.
Important facts for investors to verify
- Whether improving net interest margin can persist as deposit and wholesale funding costs rise and acquired-loan income runs off.
- Trends in commercial and auto delinquencies, charge-offs, non-performing loans and allowance adequacy, including the effect of CECL adoption.
- Stability and cost of funding, particularly brokered deposits ($451.2 million) and repurchase agreements, and continued access to FHLB capacity.
- Exposure to Puerto Rico municipal borrowers and public-fund deposits: the filing reports $135.5 million of municipal loans and securities and $228.8 million of government-related deposits.
- The effect of the securities reclassification and market-rate changes on accumulated other comprehensive income, capital and liquidity, and whether fee income and loan production recover.