OFG OFG Bancorp

OFG Bancorp (NYSE:OFG) today reported results for the first quarter ended March 31, 2016.

1Q16 Highlights

• Net income available to shareholders amounted to $10.7 million, or $0.24 per share fully diluted. This compares to a loss of $4.4 million, or ($0.10) per share, in the preceding quarter, and a loss of $6.5 million, or ($0.14) per share, in the same quarter a year ago.
• Oriental Bank’s retail franchise continued to grow. New loan generation at $226 million, with commercial lending leading the way, remained at high levels. Total customers increased in excess of a 4.0% annualized rate from December 31, 2015.
• Credit quality continued to improve. Net charge-offs of loans (excluding acquired loans) declined to 1.30% from 1.67% in 4Q15. The provision for loan losses fell 18.6% from 4Q15’s adjusted amount (see Table 1). Early and total delinquency rates declined below both the previous and year-ago quarters.
• Puerto Rico investment securities balance fell 62.2% to $6.7 million, reflecting the sale of $12.8 million (average yield of 6.60%) in securities of the Puerto Rico Industrial Development Company (PRIDCO) and the Puerto Rico Public Buildings Authority (PBA).
• Net Interest Margin (NIM) expanded to 4.67%, reflecting better yields on interest earning assets.
• Tangible book value per common share increased to $14.68 from $14.53, and tangible common equity (TCE) ratio increased to 9.50% from 9.10%.

CEO Comment

José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented:

“We are pleased with our first quarter results. This is particularly so after a tough 2015 in which we had to deal with the termination of our commercial share loss agreement with the FDIC and other de-risking actions.

“During the quarter, Oriental Bank originated $226 million in new loans, while maintaining our traditional discipline in credit and pricing standards. In addition, we continued to introduce innovative features for our retail clients, such as Cardless Cash mobile phone ATM access—another first for Oriental Bank in Puerto Rico.

“The bank capitalized on market conditions to partially unwind a high-rate repurchase agreement, and to sell our PRIDCO and PBA securities and certain of our mortgage-backed securities (MBS). The aggregate gains and losses had no impact on the 1Q16 income statement, but will help to improve NIM going forward.

“Of note was our reduced credit costs and operating expenses. The active management of retail credit has improved results with lower charge-off levels and provisions, and steady enhancement in our credit metrics. We continue to closely monitor these trends given the uncertainty regarding Puerto Rico’s fiscal situation.

“Last year’s rightsizing efforts are evident in our reported non-interest expenses. The efficiency ratio improved from the previous quarter to 59.56%, the lowest since 1Q15, and is approaching our high 50s% target.”

1Q16 Income Statement Highlights

The following compares GAAP Results for the first quarter 2016 to GAAP and Non-GAAP Adjusted Results the fourth quarter 2015. There are no Non-GAAP Adjustments in 1Q16.

 

Table 1

            Quarter ended December 31, 2015 March 31, 2016   Actual Results Quarter Specific Adjusted Results Actual Results

(Dollars in thousands, except per share data) (unaudited)

(US GAAP) Items(1) (Non-GAAP) (US GAAP)(2)   Interest income $ 92,907 - 92,907 $ 91,306 Interest expense   (17,285)   -   (17,285)   (16,331) Net interest income 75,622 - 75,622 74,975 Provision for loan and lease losses, excluding acquired loans (45,012) (30,345) (14,667) (10,660) Provision for acquired BBVAPR loan and lease losses (7,332) (4,900) (2,432) (2,324) (Recapture) provision for acquired Eurobank loan and lease losses   154   -   154   (805) Total provision for loan and lease losses, net   (52,190)   (35,245)   (16,945)   (13,789)

Net interest income after provision for loan and lease losses

23,432 (35,245) 58,677 61,186 Banking and wealth management revenues 19,349 - 19,349 17,125 Other-than-temporary impairment losses on investment securities (1,244) (1,244) - - FDIC shared-loss expense, net (4,400) (1,589) (2,811) (4,029) Gain on FDIC shared-loss coverage in sale of loans - - - - Other (losses) gains, net     565   -   565     407 Total non-interest income 14,270 (2,833) 17,103 13,503 Compensation and employee benefits (18,717) - (18,717) (20,284) Rent and occupancy costs (8,111) - (8,111) (7,822) General and administrative expenses   (31,714)   (1,462)   (30,252)   (26,751) Total non-interest expense   (58,542)   (1,462)   (57,080)   (54,857) Income before taxes (20,840) (39,540) 18,700 19,832 Income tax expense (benefit)   (19,863)   6,171   5,661 Net income (977) 12,529 14,171 Preferred stock dividends   (3,466)   (3,466)   (3,465) Net income (loss) available to common shareholders $ (4,443) $ 9,064 $ 10,706   Earnings (loss) per common share - basic $ (0.10) $ 0.21 $ 0.24 Earnings (loss) per common share - diluted $ (0.10) $ 0.21 $ 0.24

(1) 4Q15 results included the following quarter specific items: ($30.4) million provision related to the PREPA line, ($4.9) million impairment during the annual recasting of a BBVA PR loan pool, ($1.5) million in legal fees related to PREPA’s restructuring, ($1.6) million in a final settlement with the FDIC related to the expiration of the commercial loss sharing agreement, ($1.2) million in OTTI, and a $19.9 million tax benefit.

(2) 1Q16 Other Gains (Losses) included the effect of the following transactions: (i) $16.1 million gain on the sale of $272.1 million (average yield of 3.00%) of MBS; (ii) $12.0 million cost of unwinding $268.0 million (average rate of 4.78%) in repurchase agreements; and (iii) loss of $4.1 million on the sale of $12.8 million (average yield of 6.60%) of PRIDCO and PBA securities. The aggregate gains and losses had no impact on the 1Q16 income statement.

Adjusted for the above-listed factors:

• Interest Income declined $1.6 million to $91.3 million. This was due to lower balances in BBVA PR acquired loans and in the investment securities portfolio, partially offset by higher interest income from a greater volume of originated loans, higher yields on cash equivalents due to higher market rates, and higher yields on some BBVA PR loans due to better cash flows experienced in recent quarters.
• Interest Expense declined $1.0 million to $16.3 million. This reflected the previously mentioned unwinding of repurchase agreements, partially offset by higher balances and costs for brokered CDs.
• Total Provision for Loan and Lease Losses declined $3.2 million on an adjusted basis to $13.8 million. This was primarily due to lower net charge-off levels.
• Net Interest Margin increased to 4.67% from 4.55% reflecting the reasons mentioned above.
• Total Banking and Wealth Management Revenues declined $2.2 million on an adjusted basis to $17.1 million. Client trading volumes in our broker-dealer continued to fall due to the uncertainty in the Puerto Rico market.
• FDIC Shared-Loss Expense, Net increase of $1.2 million on an adjusted basis to reflect prior valuation changes in the covered mortgage portfolio.
• Total Non-Interest Expenses declined $2.2 million on an adjusted basis to $54.9 million. This was primarily due to lower general and administrative expenses, partially offset by investments in customer technology.
• Effective Income Tax Rate was forecasted at approximately 29% for the near-term, including this quarter.

March 31, 2016 Balance Sheet Highlights

The following compares data as of March 31, 2016 to December 31, 2015 unless otherwise noted.

• Total loans declined to $4.36 billion from $4.43 billion, as originated loans partially offset outflows in acquired loans.
• Total investments declined to $1.33 billion from $1.62 billion due to the previously mentioned sale of MBS and prepayments of mortgage-backed securities.
• Puerto Rico central government and public corporation loan balances fell 6.5% to $198.2 million. Loans to Puerto Rico municipalities remained nearly level at $203.6 million. As previously mentioned, Puerto Rico investment securities balances came down 62.2% to $6.7 million.
• Total deposits increased to $4.78 billion from $4.72 billion due to higher demand deposits partially offset by lower short-term brokered balances.
• Total borrowings declined to $1.1 billion from $1.37 billion due to the previously mentioned unwinding of a repurchase agreement.
• Total stockholders’ equity increased to $903.8 million from $897.1 million, reflecting an increase in retained earnings, partially offset by a decline in accumulated other comprehensive income, net.

Credit Quality Highlights

The following compares data for the first quarter 2016 to the fourth quarter 2015 unless otherwise noted.

• Net charge-off (NCO) rate at 1.30% fell 37 basis points, chiefly due to a large decline in the commercial lending category as compared to 4Q15 when commercial lending NCOs increased due to one loan.
• Early delinquency rate continued to fall to 3.51%, its lowest level in the last five quarters, due to measures taken to proactively manage the effects of the economic environment.
• Non-performing loan rate at 9.58% declined 16 basis points with our favorable experience in commercial, auto and mortgage lending offsetting a small increase from consumer lending.
• Allowance for loan and lease losses increased $0.6 million to $113.2 million. Coverage of loans (excluding acquired loans) increased to 3.63% from 3.62%.

Capital Position

The following compares data for the first quarter 2016 to the fourth quarter 2015.

Regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution.

• Tangible common equity to total tangible assets at 9.50% increased 40 basis points.
• Common Equity Tier 1 Capital Ratio (using Basel III methodology) increased to 12.33% from 12.15%.
• Total risk-based capital ratio increased to 17.67% from 17.30%.

Conference Call

A conference call to discuss OFG’s results for the first quarter 2016, outlook and related matters will be held today, Friday, April 22, at 10:00 AM Eastern Time. The call will be accessible live via a webcast on OFG’s Investor Relations website at www.ofgbancorp.com. A webcast replay will be available shortly thereafter. Access the webcast link in advance to download any necessary software.

Financial Supplement

OFG’s Financial Supplement, with full financial tables for the first quarter ended March 31, 2016, can be found on the Webcasts, Presentations & Other Files page, on OFG’s Investor Relations website at www.ofgbancorp.com.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future.

Forward Looking Statements

The information included in this document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and involve certain risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements.

Factors that might cause such a difference include, but are not limited to (i) the rate of growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) a credit default by the government of Puerto Rico; (iv) the fiscal and monetary policies of the federal government and its agencies; (v) changes in federal bank regulatory and supervisory policies, including required levels of capital; (vi) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in Puerto Rico; (vii) the performance of the stock and bond markets; (viii) competition in the financial services industry; and (ix) possible legislative, tax or regulatory changes.

For a discussion of such factors and certain risks and uncertainties to which OFG is subject, see OFG’s annual report on Form 10-K for the year ended December 31, 2015, as well as its other filings with the U.S. Securities and Exchange Commission. Other than to the extent required by applicable law, including the requirements of applicable securities laws, OFG assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

About OFG Bancorp

Now in its 52nd year in business, OFG Bancorp is a diversified financial holding company that operates under U.S. and Puerto Rico banking laws and regulations. Its three principal subsidiaries, Oriental Bank, Oriental Financial Services and Oriental Insurance, provide a full range of commercial, consumer and mortgage banking services, as well as financial planning, trust, insurance, investment brokerage and investment banking services, primarily in Puerto Rico, through 48 financial centers. Investor information can be found at www.ofgbancorp.com.

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Puerto Rico:Alexandra López, 787-522-6970allopez@orientalbank.comorUS:Steven Anreder and Gary Fishman, 212-532-3232sanreder@ofgbancorp.comorgfishman@ofgbancorp.com