OFG Bancorp — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. OFG Bancorp is a Puerto Rico-based financial holding company operating in banking, wealth management and treasury. Comparisons below are with Q1 2014 for income and cash flow, and December 31, 2014 for balance-sheet changes.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $107.0 million | $123.1 million, Q1 2014; down 13.1% |
| Net interest income | $89.6 million | $103.4 million, Q1 2014; down 13.3% |
| Net interest margin | 5.42% | 5.90%, Q1 2014 |
| Provision for loan and lease losses | $42.2 million | $11.7 million, Q1 2014 |
| Net income (loss) | $(3.0) million | $23.7 million, Q1 2014 |
| Net income (loss) available to common shareholders | $(6.5) million; diluted loss per share $(0.14) | $20.3 million; diluted EPS $0.42, Q1 2014 |
| Non-interest income, net | $6.9 million | $5.2 million, Q1 2014 |
| Non-interest expense | $56.3 million | $61.4 million, Q1 2014; down 8.3% |
| Efficiency ratio | 51.75% | 50.12%, Q1 2014 |
| Operating cash flow | $34.2 million provided | $40.6 million provided, Q1 2014 |
| Investing / financing cash flow | $178.9 million provided / $107.5 million used | $291.2 million provided / $328.5 million used, Q1 2014 |
| Total assets | $7.364 billion | $7.449 billion at December 31, 2014; down 1.1% |
| Net loans / investments | $4.725 billion / $1.321 billion | $4.827 billion / $1.402 billion at December 31, 2014 |
| Deposits / total borrowings | $4.894 billion / $1.365 billion | $4.924 billion / $1.420 billion at December 31, 2014 |
| Stockholders’ equity | $936.4 million | $942.2 million at December 31, 2014 |
| Regulatory capital | CET1 12.63%; Tier 1 risk-based 16.14%; total risk-based 17.69%; leverage 11.23% | Company and Bank reported meeting applicable requirements; Bank classified as well capitalized |
Material changes and management commentary
- The principal driver of the quarterly loss was credit provisioning. OFG recorded a $24.0 million provision on its $200 million participation in PREPA’s fuel-purchase credit line, placed the exposure on non-accrual, and classified it as substandard. Management said its cash-flow analysis indicated repayment capacity, but cited PREPA’s reluctance to commit to full repayment in negotiations.
- Total non-performing loans rose to $313.1 million from $108.9 million at year-end, primarily because of the PREPA exposure. Non-performing assets were $377.8 million, versus $178.1 million. Management said it did not expect NPLs to cause significantly higher losses, citing collateral, but the filing provides no assurance of recovery.
- Interest income fell as higher-yielding acquired loans ran off through repayments and maturities; originated loans grew more slowly. Average interest-earning assets declined 5.7%, while asset yield fell to 6.47% from 7.02%. Deposit interest expense declined, but the cost of borrowings increased.
- The allowance for loan and lease losses increased to $167.0 million from $133.8 million at year-end, including $96.4 million for non-covered loans and $70.7 million for covered loans. The covered-loan provision included additional reserves related to the end of commercial FDIC loss-share coverage on June 30, 2015.
- Core banking and wealth-management revenue was broadly stable at $19.2 million. Lower FDIC shared-loss expense and a $2.6 million securities-sale gain contributed to reported non-interest income; a $1.9 million loss on mortgage servicing rights held for sale partly offset those items.
- Management reported loan production of $239.4 million, up 10.7% year over year, including higher commercial and mortgage production; consumer and auto production declined. Total loans nevertheless fell from year-end, reflecting runoff, repayments and maturities.
- Cash and cash equivalents increased to $678.9 million. Management also reported $176.2 million of unpledged investment securities, $620.0 million of additional FHLB borrowing capacity and $715.8 million of Federal Reserve discount-window capacity. The company remained reliant on wholesale funding, including $925.0 million of repurchase agreements and $567.1 million of brokered deposits.
- OFG reported $614.2 million of Puerto Rico government-related loans and securities, including $593.3 million of credit facilities. Its available-for-sale Puerto Rico government securities had a $20.963 million amortized cost and $16.022 million fair value; management concluded no credit-loss impairment was required, while noting serious fiscal and economic risks.
Outlook, risks and contingencies
- The filing provides no numerical earnings or margin guidance. Management’s stated longer-term priorities include expanding lending, growing fee revenue, improving operating efficiency and managing assets and liabilities.
- Puerto Rico’s recession, fiscal stress, below-investment-grade government debt, potential defaults or restructurings, and reduced access to capital markets are prominent risks. The filing warns that deterioration could affect government borrowers, securities values, deposits, credit losses, liquidity and capital.
- After quarter-end, the PREPA forbearance was extended to June 4, 2015; PREPA was to provide a recovery-plan proposal by June 1. The filing says delivery and agreement on a plan were uncertain. Separately, OFG’s $75 million PRASA participation was subject to an extension through May 29, 2015; repayment was expected from revenue-bond proceeds, which were not assured.
- Other material exposures include reliance on repurchase agreements and brokered deposits, interest-rate and market risk, loan and collateral valuation estimates, FDIC indemnification and true-up estimates, and mortgage repurchase/recourse obligations. Management stated that reasonably possible losses on litigation and regulatory matters were not significant, while noting an adverse outcome could affect results or cash flows in a particular period.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. A new income-statement standard eliminating extraordinary-item presentation was not expected to have a material impact.
Important facts for investors to verify
- PREPA’s repayment terms, recovery plan, forbearance status, and potential effect on allowance, non-accrual loans and capital; also track PRASA’s repayment and bond issuance.
- Whether the sharp rise in non-performing assets and commercial credit losses persists, and whether the reported allowance adequately reflects portfolio risk.
- Deposit stability and funding costs, including the company’s dependence on brokered deposits and repurchase agreements and the availability of stated contingent liquidity.
- The outlook for net interest margin as acquired loans run off, and whether origination growth and cost reductions offset lower yields and higher credit costs.
- Puerto Rico government exposure and the assumptions supporting management’s conclusion that its government-bond holdings have no credit impairment.
- The MD&A states pre-tax, pre-provision operating income was $52.5 million versus $61.4 million and describes the decline as 1.4%; those amounts imply a decline of about 14.4%. Verify the apparent percentage inconsistency in the filing.