OFG Bancorp (NYSE: OFG) today reported results for the third quarter ended September 30, 2015.
3Q15 Results
- Income available to common shareholders was $1.1 million or $0.03 per share fully diluted. This compares to a loss of $6.6 million or ($0.15) per share in the preceding quarter and a profit of $16.1 million, or $0.34 per share diluted, in the year ago quarter.
- Results included:
- The previously announced ($20.2) million pre-tax net impact of the bulk sale of commercial non-performing assets (NPAs) from the 2010 FDIC-assisted Eurobank and the 2012 BBVA PR acquisitions.
- Other items, the largest of which was a combined $3.2 million pre-tax benefit from a cost recovery and prepayment penalty from full repayment of a 3.75%, tax free $77.6 million loan to Puerto Rico State Insurance Fund (CFSE).
- Adjusted for these factors, OFG earned $12.2 million, or $0.28 per share fully diluted, assuming an effective tax rate of 30%.
3Q15 Business Highlights
- Tangible book value and book value per common share increased to $14.76 and $16.91 at September 30, 2015, from $14.67 and $16.81 at June 30, 2015, respectively, while Tangible Common Equity ratio expanded to 9.11% from 8.91%.
- Puerto Rico (PR) central government and public corporation loan balances declined 28.4% to $215.6 million at September 30, 2015, from $301.3 million at June 30, 2015. Loans to PR municipalities fell 5.2% to $202.9 million from $214.0 million.
- The Oriental Bank franchise continued to grow in part through:
- Strong loan production at $251.0 million in line with previous quarters. OFG retained securitized GNMA pools totaling $27.8 million at a yield of 3.06% from its own originations.
- Introduction of the new My Status mobile app for tracking the progress of residential mortgage loan applications. This feature, combined with shorter closing cycles, is part of Oriental’s strategy to differentiate itself through customer service.
- Credit metrics for loans were stable on a linked quarter basis, with no apparent deterioration from Puerto Rico’s economic challenges.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman, commented: “The third quarter demonstrates the resiliency of our core business and unwavering customer focus, and our proactive approach to risk management.
“Regarding the core business, new loan production continued strong. Whereas 2Q15 saw higher levels of commercial loan closings, in 3Q15 we continued to build positive momentum in retail lending, picking up market share in conforming mortgage originations as well as growing consumer and auto volumes.
“While total deposits declined largely due to lower balances in government accounts and fluctuations in commercial accounts, we had another quarter of growth in net new customers. We are encouraged that our efforts to distinguish Oriental through superior customer experience, rather than competing solely based on pricing, is starting to realize its potential.
“To that end, we raised the bar again in technology innovation with the launch of our industry first My Status residential mortgage app. To bring this to market, we undertook a major effort to streamline our underlying mortgage operations, which will result in other benefits.
“Fee income levels performed well, adjusting for our decision to hold some of our mortgage production. Lower non-interest expenses reflect the control we maintain over core operations, as we have always done.
“On the credit side, the sale of NPAs showed how we can move expeditiously to further limit our exposure to deteriorating collateral values and significantly reduce adversely classified assets.
“Regarding Puerto Rico Electric Power Authority (PREPA), agreements have been reached with the Ad Hoc Group of bondholders and fuel line banks, which includes Oriental. Based on what we have seen in the media, there appears to be increased confidence on the part of the public utility to come to an agreement soon with the monolines.
“With respect to our loans to certain PR municipalities, we are comfortable with their debt service capabilities and confident that the legal dispute between the Municipal Revenue Collections Center (CRIM), various municipalities, and the Government Development Bank, regarding the deposit of tax revenues used to service municipal debt will be satisfactorily settled, retaining our security interest on deposits serving as collateral to our loans.
“Looking forward to 4Q15 and beyond, we expect our core business to continue to perform well, although somewhat affected by lower interest income from the Eurobank loan portfolio and the reduction in PR government loans. Ultimately, we look forward to putting our PR government exposure behind us to better highlight our core business successes.
“As for Puerto Rico itself, we believe a comprehensive solution is needed to overcome the fiscal challenges and to improve its competitiveness. We are encouraged by the attention it has received from the federal government in recent weeks.”
3Q15 Income Statement Highlights
As mentioned above, results included the following quarter specific items:
- The bulk sale of acquired NPAs, resulting in: (i) $7.0 million cost recoveries from acquired loans, (ii) $38.0 million impairment provisions, (iii) $20.0 million FDIC receivable for its share of the loss, and (iv) $9.3 million loss on other real estate owned (OREO).
- Other non-recurring items, consisting of: (i) $3.2 million cost recovery in interest income due to a prepayment, (ii) $778,000 fee revenue from an associated prepayment penalty, (iii) $246,000 in an Other Than Temporary Impairment (OTTI) charge, based on a quarterly assessment, related to a $1.5 million PR security that is part of our U.S. Community Reinvestment Act obligation, (iv) $917,000 additional severance accrual, and (v) $180,000 benefit from a onetime credit from a vendor.
2Q15 results included the following quarter specific items: (i) $21.0 million charge associated with expiry of the FDIC Commercial Loss Share Agreement, and (ii) $2.5 million in a FINRA restitution settlement and legal expenses associated with concluding the FDIC agreement.
The following compares Adjusted Results (non-GAAP) for the third quarter 2015 to the second quarter 2015 based on the table above unless otherwise noted.
- Total Interest Income declined to $97.0 million from $99.4 million due to lower balances in acquired portfolios, reflecting repayments and sales. Interest income from originated loans continued to increase, compensating to a large extent for the reduction in income from the acquired BBVA PR portfolio.
- Total Interest Expense increased slightly to $17.4 million compared to $17.1 million. This was primarily due to an increase in borrowing expense as OFG used a higher average balance of short-term repurchase agreements for temporary funding purposes.
- Provision for loan and lease losses declined to $13.6 million from $15.5 million due to significantly lower impairments on acquired BBVA PR loans.
- Net Interest Margin was 4.68%, reflecting reduced cost recoveries as seen in the prior quarters, partially offset by expanded volumes of originated loans at average yields of 6.17% coupled with deposit costs staying level at 0.65%.
- Total banking and wealth management revenues were $17.9 million compared to $19.4 million. This reflected a decrease in mortgage banking activity due to foregone gains on sales as a result of retaining securitized GNMA pools, as previously mentioned.
- FDIC shared loss indemnification asset amortization was $2.1 million compared to $2.3 million. The loss share agreement now covers remaining Eurobank residential mortgages.
- Total Non-Interest Expenses declined to $59.1 million compared to $61.9 million, primarily reflecting lower losses and markdowns in OREO and repossessed autos, respectively.
September 30, 2015 Balance Sheet Highlights
The following compares data as of September 30, 2015 to June 30, 2015 unless otherwise noted.
- Total loans declined to $4.47 billion from $4.64 billion primarily due to the bulk sale and repayment of the CFSE loan.
- Total investments were almost flat with prepayments of mortgage backed securities (MBS) compensated by new purchases and retention of our GNMA securitized pools.
- Total deposits declined $32.6 million to $4.72 billion due to previously mentioned factors.
- Total borrowings reduced sharply to $1.44 billion from $1.60 billion.
- Total stockholders’ equity declined $3.7 million to $907.9 million, largely reflecting the decline in retained earnings.
Credit Quality Highlights
The following compares data for the third quarter 2015 to the second quarter 2015 unless otherwise noted.
- Net charge-off rate at 1.23% increased 17 basis points from 2Q15, but declined 11 bps from the year ago quarter, and was generally in line with its quarterly level. Auto NCOs were higher due to stepped up efforts to reduce repo lot inventory.
- Non-performing loan rate at 10.32% declined 12 basis points from 2Q15, but was up 667 bps from the year ago quarter due to the PREPA loan going on non-accrual status in 1Q15.
- Allowance for loan and lease losses increased $1.4 million to $80.4 million. Coverage of loans held for investment remained steady at 2.65% compared to 2.67%.
Capital Position
Regulatory capital ratios continued to be significantly above requirements for a well- capitalized institution.
The following compares data for the third quarter 2015 to the second quarter 2015.
- Tangible common equity to total tangible assets at 9.11% increased 20 basis points from 2Q15 and 29 basis points from the year ago quarter.
- Common Equity Tier 1 Capital Ratio (using Basel III methodology) was 12.03% compared to 12.26%.
- Total risk-based capital ratio was 16.93% compared to 17.41%.
Other Matters
During 3Q15, Oriental Bank entered into a Consent Order with the FDIC to address certain matters related to its Bank Secrecy Act / anti-money laundering (BSA/AML) compliance program. The Consent Order requires, among other things, that Oriental implement improved internal controls reasonably designed to ensure full compliance with the BSA. The Consent Order does not include civil money penalties.
Conference Call
A conference call to discuss OFG’s results for the third quarter 2015, outlook and related matters will be held today, Friday, October 23, 2015 at 11:15 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 third quarter ended September 30, 2015, can be found on the Webcasts, Presentations & Other Files page, on OFG’s Investor Relations website at www.ofgbancorp.com.
