OFG Bancorp(OFG) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents OFG Bancorp's unaudited consolidated financial statements, detailing the impact of CECL adoption and initial COVID-19 effects Consolidated Statements of Financial Condition (Abridged) | (In thousands) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $9,238,571 | $9,297,661 | | Cash and cash equivalents | $1,324,891 | $851,307 | | Loans, net of allowance | $6,535,359 | $6,622,256 | | Allowance for credit losses | $230,755 | $116,539 | | Goodwill | $86,069 | $86,069 | | Total Liabilities | $8,215,977 | $8,252,183 | | Deposits | $7,819,271 | $7,698,610 | | Borrowings | $163,787 | $305,561 | | Total Stockholders' Equity | $1,022,594 | $1,045,478 | Consolidated Statements of Operations (Abridged) | (In thousands, except per share data) | Quarter Ended Mar 31, 2020 | Quarter Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net interest income | $105,168 | $81,789 | | Provision for credit losses | $47,131 | $12,249 | | Non-interest income, net | $31,383 | $17,656 | | Non-interest expense | $87,322 | $52,152 | | Net income | $1,801 | $23,470 | | Income available to common shareholders | $173 | $21,842 | | Diluted EPS | $0.00 | $0.42 | Consolidated Statements of Cash Flows (Abridged) | (In thousands) | Quarter Ended Mar 31, 2020 | Quarter Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,055 | $20,678 | | Net cash provided by investing activities | $457,617 | $51,033 | | Net cash (used in) financing activities | ($3,488) | ($12,751) | | Net change in cash, cash equivalents and restricted cash | $473,184 | $58,960 | Note 1 – Significant Accounting Policies - On January 1, 2020, the company adopted ASU 2016-13 (CECL), resulting in an after-tax cumulative reduction to retained earnings of $25.5 million[36][37] Impact of CECL Adoption on Jan 1, 2020 | (In thousands) | Pre-Adoption | Impact of Adoption | Post-Adoption | | :--- | :--- | :--- | :--- | | Allowance for credit losses on loans | ($116,539) | ($89,720) | ($206,259) | | Deferred tax asset | $176,740 | $13,874 | $190,614 | | Cumulative Effect on Retained Earnings | | ($25,494) | | - In response to the COVID-19 pandemic, the company made payment deferral programs available for commercial and consumer loan customers not more than 29 days past due as of March 12, 2020[28] Note 2 – Business Combinations - Remeasurement adjustments to the Scotiabank acquisition's preliminary fair values resulted in a $409 thousand increase to the bargain purchase gain in Q1 2020[82][83] - Merger and restructuring charges related to the Scotiabank acquisition totaled $304 thousand for Q1 2020, with a remaining restructuring reserve balance of $14.9 million[86][87] Note 5 – Loans Loan Portfolio Composition (Amortized Cost Basis) | Loan Segment (In thousands) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Commercial | $2,301,350 | $2,222,085 | | Mortgage | $2,449,538 | $2,489,230 | | Consumer | $485,060 | $504,507 | | Auto | $1,530,166 | $1,522,973 | | Total Loans (Gross) | $6,766,114 | $6,738,795 | - Total non-accrual loans were $93.1 million as of March 31, 2020, including $63.0 million of Non-PCD loans and $83.8 million of PCD loans[120][394] Note 6 – Allowance for Credit Losses - Upon CECL adoption, the allowance for credit losses (ACL) increased by $89.7 million, with an additional $34.1 million provision in Q1 2020 due to the COVID-19 pandemic's economic outlook[165][167] Allowance for Credit Losses Roll-Forward (Q1 2020) | (In thousands) | Amount | | :--- | :--- | | Balance at Dec 31, 2019 | $116,539 | | Impact of ASC 326 (CECL) adoption | $89,720 | | Provision for credit losses | $48,530 | | Charge-offs | ($31,563) | | Recoveries | $7,529 | | Balance at Mar 31, 2020 | $230,755 | Note 16 – Regulatory Capital Requirements - As of March 31, 2020, OFG Bancorp and its bank subsidiary met all capital adequacy requirements and were considered "well capitalized"[234] - The company adopted an interim final rule to delay the regulatory capital impact of CECL adoption for two years, allowing 100% of the initial CECL impact to be added back to CET1 capital during the delay[233] OFG Bancorp Capital Ratios | Ratio | March 31, 2020 | December 31, 2019 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 11.69% | 10.91% | 4.50% | | Tier 1 Capital | 13.36% | 12.64% | 6.00% | | Total Capital | 14.62% | 13.91% | 8.00% | | Leverage Ratio | 10.14% | 9.24% | 4.00% | Note 25 – Business Segments Segment Performance (Q1 2020 vs Q1 2019) | (In thousands) | Banking | Wealth Management | Treasury | | :--- | :--- | :--- | :--- | | Q1 2020 Net Income (Loss) | ($3,866) | $2,197 | $3,470 | | Q1 2019 Net Income | $17,750 | $938 | $4,782 | | Q1 2020 Total Assets | $9,207,848 | $34,014 | $1,069,334 | | Q1 2019 Total Assets | $5,862,487 | $25,425 | $1,742,557 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial results, highlighting the impact of the Scotiabank acquisition, COVID-19, and CECL adoption - Q1 2020 was significantly impacted by the COVID-19 pandemic, leading to business continuity plans with over 50% of employees working from home and the launch of customer relief programs[326][331] - As of April 27, 2020, the company processed payment deferrals for 30,226 loans totaling $925 million and approved over 900 Paycheck Protection Program (PPP) loans totaling more than $140 million[329][330] - Net interest income for Q1 2020 increased 28.6% YoY to $105.2 million due to the Scotiabank acquisition, though net interest margin decreased by 45 basis points to 4.94%[346][356][359] - The provision for credit losses surged to $47.1 million in Q1 2020 from $12.2 million in Q1 2019, including a $34.1 million provision for COVID-19's macroeconomic impact[367] Quantitative and Qualitative Disclosures about Market Risk This section details the company's market risk management, focusing on interest rate sensitivity, credit risk in Puerto Rico, and strong liquidity Net Interest Income Sensitivity Analysis (1-Year Projection) | Change in Interest Rate | Static Balance Sheet (% Change) | Growing Simulation (% Change) | | :--- | :--- | :--- | | +200 Basis points | +7.08% | +6.01% | | +100 Basis points | +3.33% | +2.79% | | -100 Basis points | -2.16% | -1.47% | | -200 Basis points | -2.49% | -1.58% | - Credit risk is primarily concentrated in Puerto Rico, which faces challenging economic conditions, a protracted recession, and susceptibility to natural disasters, further increased by the COVID-19 pandemic[450][467] - As of March 31, 2020, the company maintained a strong liquidity position with approximately $1.325 billion in unrestricted cash, $404.1 million in unpledged investment securities, and $951.0 million in FHLB-NY borrowing capacity[460] Controls and Procedures Management concluded disclosure controls were effective, noting significant changes to internal controls due to CECL adoption and Scotiabank integration - The CEO and CFO concluded that the company's disclosure controls and procedures provided reasonable assurance of effectiveness as of the end of the period[468] - Significant changes to internal control over financial reporting occurred due to CECL adoption and the Scotiabank PR & USVI acquisition, with ongoing integration of related policies and controls[469][470] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, with management believing the ultimate liability will not materially affect financial condition - Management believes the ultimate aggregate liability from ongoing legal proceedings will not have a material adverse effect on Oriental's financial condition or results of operations[471] Risk Factors This section supplements 2019 Form 10-K risk factors with a new, significant risk related to the COVID-19 pandemic and its potential material adverse impacts - A new significant risk factor has been added regarding the COVID-19 pandemic, which has adversely impacted the macroeconomic environment and the company's business and financial results[472][473] - Potential adverse impacts from the pandemic include reduced demand, higher credit losses, asset impairments, liquidity/capital constraints, and increased operational risks from modified business practices[475][476] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company repurchased 175,000 shares of common stock for $2.2 million under its stock repurchase program Stock Repurchase Activity (Q1 2020) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (In thousands) | | :--- | :--- | :--- | :--- | | March 1-31, 2020 | 175,000 | $12.69 | $2,221 | | Total Q1 2020 | 175,000 | $12.69 | $2,221 | - As of March 31, 2020, approximately $5.5 million remained available for future repurchases under the current program[480] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and financial statements in Inline XBRL format - The exhibits filed with this report include CEO and CFO certifications as required by the Sarbanes-Oxley Act (Exhibits 31.1, 31.2, 32.1, 32.2) and financial data in Inline XBRL format (Exhibit 101)[485]