OFG Bancorp (NYSE: OFG) reported results for the fourth quarter and year ended December 31, 2016.
4Q16 Highlights
- Net income available to shareholders increased to $12.1 million, or $0.27 per share fully diluted, from $11.7 million, or $0.26 per share fully diluted, in 3Q16 and a loss of $4.4 million, or ($0.10) per share, in the year ago 4Q15.
- Compared to 3Q16, results included increases of 13.8% in net interest income after provision and 11.7% in banking and wealth management revenues, while non-interest expenses fell 4.6%.
- The Oriental Bank franchise continued to deliver strong performance with loan production of $258.0 million, the highest quarterly level during 2016; a 3.9% year over year increase in customer deposits; and a 5% annual account growth.
- Credit quality remained strong as the non-performing loan rate at 3.46% fell to its lowest level in five quarters, and early and total delinquency rates declined from 3Q16 and 4Q15 to 3.31% and 6.49%, respectively.
- Major performance ratios improved from both 3Q16 and 4Q15, including return on average assets of 0.96%, return on average tangible common equity of 7.31%, efficiency ratio of 55.36%, and tangible common equity ratio of 10.33%.
2016 Highlights
- Net income available to shareholders was $45.3 million, or $1.03 per share fully diluted, compared to a loss of $16.4 million, or ($0.37) per share, in 2015.
- 2016 results reflected:
- 8.4% increase in interest income from originated loans to $199.2 million as average balances expanded to $3.1 billion or a 5.4% increase, due to growth in higher yielding retail loans.
- 17.4% decrease in total interest expense to $57.2 million on a 32.0% decline in average borrowings.
- Sale of Oriental Bank’s last major Puerto Rico government related loan, a participation in a Puerto Rico Electric Power Authority (PREPA) line of credit, eliminating $183.0 million of non-performing assets and requiring an additional provision of only $2.9 million.
- A $5.0 million recovery in a Bear Stearns claim from losses suffered from an investment in a private label collateralized mortgage obligation.
- Capital continued to grow as tangible book value per common share expanded 3.8% to $15.08 and book value per common share grew 3.1% to $17.18.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented:
“OFG Bancorp generated another quarter of consistent, stellar performance in the fourth quarter and throughout 2016 despite the challenging operating environment.
“Fully diluted EPS grew to $0.27 in 4Q16 and to $1.03 for the year, a notable turnaround from prior periods. We accomplished this by growing interest income from originated loans and non-interest income, while reducing both interest and non-interest expenses.
“Thanks to our management team and associates, our uncompromising customer focus, excellence in service, and our broad and growing utilization of customer facing technology, we are clearly differentiating Oriental in the Puerto Rico marketplace.
“We have attracted a steady influx of new business, enabling us to expand or maintain our market share in key areas.
“In 2016, we introduced the Oriental Biz mobile app, adding mobile check capture for small business customers, and cardless cash, for making retail ATM withdrawals even faster.
“Our proactive credit monitoring systems have significantly improved asset quality, reducing the early and total delinquency rates, allowance for loan and lease losses, and the non-performing loan rate.
“We ended the year growing our tangible book value per common share to $15.08, underscoring our determination to enhance our already solid capital position.
“We have established Oriental as a uniquely service oriented banking institution. We are committed to continuing to consolidate our strategic position in Puerto Rico and further grow our customer base in a consistent and profitable way.”
4Q16 Income Statement Highlights
The following compares data for the fourth quarter 2016 to the third quarter 2016, unless otherwise noted.
- Interest Income:
- Originated Loans: Increased $1.0 million to $51.6 million, primarily due to higher yields from a larger proportion of retail loans.
- Acquired Loans: Declined $5.1 million to $26.9 million due to continued pay downs and lower cost recoveries. 3Q16 included $2.2 million in former Eurobank loan recoveries.
- Securities: Increased $0.3 million to $8.3 million due to lower premium amortization and higher investment portfolio balances.
- Interest Expense declined $1.1 million to $12.6 million due to lower borrowings. In 3Q16, $200.5 million in FHLB advances and $67.0 million in subordinated capital notes were paid down.
- Total Provision for Loan and Lease Losses declined $10.1 million to $13.4 million. In 3Q16, there was an additional $10.2 million provision for two Puerto Rico government related loans and one commercial loan.
- Net Interest Margin (NIM) remained essentially level at 4.94%. NIM, excluding recoveries, expanded to 4.89% compared to 4.70%.
- Total Banking and Wealth Management Revenues increased $2.1 million to $20.4 million. Wealth management rose $1.2 million, reflecting recognition of annual insurance revenues. Banking services grew $0.7 million due to holiday shopping related electronic transaction volume. Mortgage banking gained $0.3 million as a result of higher mortgage servicing rights (MSR) valuation.
- FDIC Shared-Loss Expense, Net decreased $0.5 million to $2.8 million, reflecting levels from prior quarters in 2016.
- Total Non-Interest Expenses declined $2.5 million to $52.4 million as most major cost areas were reduced. Credit expenses fell $1.6 million as 4Q16 is an off-quarter for property tax payments.
- Effective Tax Rate (ETR) increased to 41.1% due to final year-end tax accounting. For the year, the ETR was 30.5%.
December 31, 2016 Balance Sheet Highlights
The following compares data at December 31, 2016 to September 30, 2016, unless otherwise noted.
- Total Loans Net declined $151.3 million to $4.15 billion. This primarily reflected the exclusion of the PREPA loan, the sale of which settled in October 2016.
- Total Investments increased $64.8 million to $1.36 billion. This reflected new purchases of treasury securities and the retention of a portion of residential mortgage production as securities, partially offset by prepayments in the Mortgage Backed Securities portfolio.
- Customer Deposits declined $85.5 million to $4.09 billion due to cyclic fluctuations in our large commercial account balances. On a year over year basis, customer deposits increased $153.3 million primarily reflecting growth of our client base.
- Total Borrowings declined $4.9 million to $795.4 million due to slightly lower balances in repurchase agreement funding. On a year over year basis, borrowings declined $576.2 million with large reductions in all categories.
- Total Stockholders’ Equity declined $4.5 million to $920.4 million. On a year over year basis, stockholders’ equity increased $23.3 million. Retained earnings grew $28.9 million, or 19.4%, to $177.8 million, which was partially offset by a 4Q16 decline in the market value of investment securities.
Credit Quality Highlights
The following compares data at December 31, 2016 to September 30, 2016, unless otherwise noted.
- Net Charge-Off Rate was 1.80% compared to 1.15% (ex-PREPA) due to increases in the mortgage and commercial lending categories. Total charge offs for 4Q16 included a $3.0 million loan that was provisioned for in 3Q16.
- Early and Total Delinquency rates improved to 3.31% and 6.49%, compared to 3.70% and 6.92%, respectively.
- Non-Performing Loan Rate was lower at 3.46% compared to 3.68%. It was 9.74% a year ago, which included the PREPA loan.
- Allowance for Loan and Lease Losses fell to $59.3 million from $62.2 million, and the loan loss reserve ratio to total loans (excluding acquired loans) decreased to 1.95% from 2.06%.
Capital Position
The following compares data at December 31, 2016 to September 30, 2016, unless otherwise noted.
Regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution.
- Tangible Common Equity to Total Tangible Assets at 10.33% increased 8 basis points to the highest level in five quarters.
- Tangible Book Value per Common Share at $15.08 increased 3.8% year over year.
- Common Equity Tier 1 Capital Ratio (using Basel III methodology) at 14.05% increased 71 basis points to the highest level in five quarters.
- Total Risk-Based Capital Ratio at 19.62% increased 89 basis points to the highest level in five quarters.
Conference Call
A conference call to discuss OFG’s results for the fourth quarter 2016, outlook and related matters will be held today, Tuesday, January 31, 2017 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 fourth quarter and year ended December 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. See Tables 9-1 and 9-2 in OFG’s above-mentioned Financial Supplement for reconciliation of GAAP to non-GAAP Measures and Calculations.
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 6 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 53rd 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.
