OFG Bancorp — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020; unaudited consolidated results. OFG operates primarily in Puerto Rico through banking and financial-services businesses. The December 31, 2019 Scotiabank Puerto Rico and U.S. Virgin Islands acquisition materially affects year-over-year comparisons.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Interest income | $123.8 million | $94.7 million |
| Net interest income | $105.2 million | $81.8 million |
| Net interest margin | 4.94% | 5.39% |
| Provision for credit losses in operations statement | $47.1 million | $12.2 million |
| Non-interest income | $31.4 million | $17.7 million |
| Non-interest expense | $87.3 million | $52.2 million |
| Net income | $1.8 million | $23.5 million |
| Income available to common shareholders | $0.2 million; reported EPS rounded to $0.00 | $21.8 million; diluted EPS $0.42 |
| Operating cash flow | $19.1 million | $20.7 million |
Net interest income rose primarily with the acquired business, but net interest margin declined as lower rates and a greater share of fixed-rate residential mortgages weighed on yields. Non-interest income included a $4.7 million securities-sale gain and a $0.4 million acquisition-related bargain-purchase gain. The company reported a $34.1 million COVID-related provision increase; its allowance for credit losses was $230.8 million, or 3.41% of loans, at quarter-end. The allowance roll-forward reports $48.5 million of provision, a broader figure than the $47.1 million shown in the operations statement.
Financial condition, liquidity and capital
- Total assets were $9.24 billion, down 0.6% from December 31, 2019. Net loans were $6.54 billion, down 1.5%; deposits were $7.82 billion, up 1.6%.
- Cash, cash equivalents and restricted cash rose to $1.33 billion from $852.8 million. Investing activities provided $457.6 million, primarily reflecting $321.0 million in securities-sale proceeds and security maturities. Financing activities used $3.5 million.
- Total borrowings fell 46% to $163.8 million, mainly after $140 million of repurchase agreements matured without renewal. The company reported $951 million of additional FHLB borrowing capacity and approximately $404 million of unpledged securities.
- Stockholders’ equity was $1.02 billion, down 2.2%; retained earnings included a $25.5 million after-tax reduction from adopting CECL. CET1 was 11.69%, and the company and bank met applicable capital requirements; the bank remained “well capitalized.”
- Common dividend was $0.07 per share. OFG repurchased 175,000 shares for $2.2 million during the quarter.
Material changes and management commentary
- On January 1, 2020, OFG adopted CECL. Adoption increased the loan allowance by $89.7 million and the off-balance-sheet allowance by $0.2 million; the after-tax cumulative adjustment reduced retained earnings by $25.5 million. The quarter-end allowance increase also reflected a substantially more adverse economic outlook.
- Nonperforming assets rose to $212.7 million from $118.7 million at year-end; nonperforming loans increased to $182.3 million from $85.5 million. Management attributed much of the increase to acquired Scotiabank purchased-credit-deteriorated loan pools. Allowance coverage of nonperforming loans was 126.6%.
- Management said COVID-19 effects were uncertain and could weigh on demand, revenues, asset values, and borrower repayment, while increasing credit losses, provisions, expenses, and liquidity or capital pressures. The company offered loan payment deferrals and other customer relief, and continued operating through remote and modified service arrangements.
- At March 31, 2,226 loans totaling $132.7 million had received deferrals. Through April 27, the count had risen to 30,226 loans totaling $925 million. Through that date, OFG had approved more than 900 PPP loans exceeding $140 million.
- Management reported more than $1.6 billion of available liquidity and no impairment of goodwill or other intangibles as of March 31. It gave no formal earnings or financial guidance in the provided filing text.
Risks, contingencies and unusual items
- OFG’s business and credit exposure are substantially concentrated in Puerto Rico, which faces longstanding economic and fiscal challenges and exposure to natural disasters; COVID-19 adds significant uncertainty.
- Loan commitments were $847.1 million. Mortgage loans sold with recourse had an unpaid principal balance of $140.5 million; the filing also describes repurchase and representation-and-warranty exposure. Management considered pending legal matters not likely to have a material adverse effect on financial condition, while noting an adverse result could affect particular periods.
- Integration of the Scotiabank acquisition remained underway. Q1 included $0.3 million of merger and restructuring charges; the remaining restructuring reserve was $14.9 million.
- The filing’s MD&A contains inconsistent expense and efficiency-ratio figures: the financial statements report non-interest expense of $87.3 million and selected data gives a 66.49% efficiency ratio, while MD&A narrative cites $85.9 million and 65.42%. Verify the intended figures against the filing’s detailed calculations.
Important facts for investors to verify
- How COVID-19 conditions, deferral performance and PPP exposures affect subsequent credit losses, charge-offs and the adequacy of the $230.8 million allowance.
- How much of the increase in nonperforming loans reflects acquired PCD pools versus deterioration in OFG’s existing portfolios.
- Whether reported profitability, expenses and efficiency metrics reconcile across the financial statements and MD&A, including the stated provision amounts.
- Whether liquidity, deposit stability, capital and FHLB capacity remain adequate as pandemic-related funding and credit needs evolve.
- Whether Scotiabank integration produces expected revenue and cost benefits, and whether acquisition accounting estimates or goodwill valuations change.