OFG Bancorp (NYSE: OFG) today reported results for the first quarter ended March 31, 2015.
1Q15 Highlights
- Income available to common shareholders was a loss of $6.5 million, or ($0.14) per share, which includes a previously announced provision of ($0.35) per share net of tax.
- Excluding this, income was $9.4 million, or $0.21 per share diluted. Results compare to $17.1 million, or $0.36 per share diluted, in the preceding quarter, and $20.3 million, or $0.42 per share diluted, in the year ago quarter.
- The quarter was adversely affected by:
- $24.0 million provision related to placing on non-accrual status a 7.5%, $200 millionparticipation in a fuel purchase line of credit with the Puerto Rico Electric Power Authority (PREPA), a government utility.
- $7.9 million less in loan interest income, primarily due to lower acquired balances and yields. This includes a $1.7 million decline from fewer days and lower cost recoveries 1Q15 versus 4Q14.
- $4.8 million in provisions for covered loans, increasing the allowance to $70.7 million. The commercial loss share coverage with the FDIC is coming to an end on June 30, 2015.
- However, net interest margin continued strong at 5.42%.
- Continued growth of the Oriental Bank franchise through the opening of 7,670 net new retail deposit accounts, reduction in cost of total deposits, core non-interest fee revenue strength, and major expansion of its ATM network.
- Efficiency ratio in our target range at 51.75%, and improved credit, with declines in net charge offs and total delinquencies.
- Tangible book value and book value per common share declined slightly from December 31, 2014, to $15.12 and $17.25, respectively.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented:
“We’re clearly disappointed at being forced to take a provision against our PREPA credit, especially in light of our analysis that multiple ways exist for the government utility to repay its debts. Likewise, we remain concerned about the challenges businesses are forced to face in Puerto Rico’s heavily taxed, underperforming economy.
“On the plus side, we continued to grow Oriental Bank’s core franchise serving the commercial and consumer sectors. We prudently originated quality loans with strong pricing discipline. Despite normal reductions in our high-yielding acquired loan portfolios, our NIM at 5.42% and efficiency ratio at less than 52% are among the best in the industry. Additionally, Oriental’s retail deposit base and mortgage business are benefiting from successful marketing attracting an influx of new customers.
“Our outlook for 2015 calls for preserving our performance metrics and diligently managing expenses, albeit with a decline in earning assets and NIM. Most of the FDIC indemnification asset amortization will end in the second half, helping to offset reduced interest income from acquired loans.
“Operationally, we remain focused on building the Oriental franchise and further affirming our reputation as the best bank in Puerto Rico. We will continue to expand our customer base, deepen client relationships, and differentiate ourselves in terms of service and innovation.
“Our ultimate goals remain the same: maximize our profitability and capital; preserve our flexibility to pursue strategic alternatives; and deploy our strong capital base to increase shareholder return in a sustainable manner, as we have done before.”
1Q15 Income Statement Highlights
The following compares data for the first quarter 2015 to the fourth quarter 2014 unless otherwise noted.
- Total interest income from loans declined $7.9 million to $97.5 million, reflecting above mentioned factors and the transition in our loan portfolio as originated loans with more normal yields grew at a slower pace than higher-yielding acquired loans fell, due to repayments and maturities.
- Originated loans: Interest income increased modestly to $46.3 million as balances grew 2.4% and yield expanded 4 basis points to 6.63%.
- Acquired non-covered loans: Interest income fell $4.0 million to $35.7 million as balances declined 5.6% and yield compressed 23 basis points to 8.58%.
- Covered loans: Interest income fell $4.3 million to $15.5 million as balances declined 9.3% and yield reduced 306 basis points to 22.89%.
- Investment securities interest income declined $1.0 million to $9.5 million. This primarily reflects higher premium amortization on existing securities.
- Deposit interest expense fell $1.0 million to $7.1 million. We continued to improve the funding profile with increases in lower cost demand and savings deposits and decreases in higher cost time and brokered deposits.
- Borrowing interest expense fell $0.4 million to $10.3 million. This reflects the use of excess cash to pay down $52.8 million in maturing wholesale funding mid-1Q15.
- Provision for loan and lease losses excluding PREPA increased $1.3 million to $18.2 million, primarily due to a $3.5 million increase for covered loans.
- Total core non-interest income declined $1.8 million to $19.2 million. This reflects the absence of approximately $1.0 million in year-end recognition of insurance commissions in 4Q14. In addition, broker dealer commissions were lower due to subdued client trading activity.
- FDIC indemnification asset amortization increased $1.1 million to $13.1 million in line with plans for the year. The indemnification asset was $75.2 million at March 31, 2015 versus $97.4 million at December 31, 2014.
- Non-interest expenses fell $5.6 million, to $56.3 million. This reflects decreased costs in all major categories as well as reduced accruals from 4Q14. In 1Q15, two branches were consolidated as planned.
- The effective income tax rate excluding the PREPA provision was 41.58%. For the year, the rate is expected to be about 36.5%.
1Q15 Business Activity Highlights
The following compares data for the first quarter 2015 to the fourth quarter 2014 unless otherwise noted.
- Total new loan production (excluding renewals) increased slightly to $239.4 million. Growth in the commercial and residential mortgage categories offset declines in auto and consumer.
- Commercial production increased 2.7% to $85.7 million with a good pipeline for the rest of the year.
- Residential mortgage production, most of which is sold into the secondary market, increased 7.8% to $61.7 million. With one less player in the market, Oriental continued to expand its share.
- Auto loan production declined 4.9% to $65.9 million. This reflects increased competition from the captive finance arms of manufacturers, and our own initiative to increase FICO score requirements to improve credit.
- Consumer loan production declined 9.5% to $26.2 million, reflecting seasonal trends.
- Cost of deposits declined 7 basis points to 0.70%, and 22 basis points from 0.92% in 1Q14.
- Core retail deposits (demand and savings) increased 2.2% to $3.4 billion, representing 68.7% of total deposits versus 66.8% in 4Q14 and 63.4% in 1Q14.
- Subsequent to 1Q15, Oriental expanded its ATM network 34% to 332 units, making it the second largest in Puerto Rico with the placement of machines in 72 Walgreens and 13 other retail locations.
March 31, 2015 Balance Sheet Highlights
The following compares data as of March 31, 2015 to December 31, 2014 or for the first quarter 2015 to the fourth quarter 2014 unless otherwise noted.
- Cash and cash equivalents increased 19.3% to $694.3 million, primarily from repayments of loans and investment securities.
- Average interest earning assets of $6.7 billion declined 1.6%. Originated loans increased 2.4%, or $67.1 million. Acquired loans declined 6.1%, or $128.8 million, due to scheduled maturities and a reduction of government loan balances. Investment securities declined 4.7%, or $65.8 million, primarily due to repayments.
- Puerto Rico government related loans and securities contractual balances declined $26.7 million to $626.0 million. This was primarily due to a $25.0 million partial repayment of a contractual obligation by the Puerto Rico Aqueduct and Sewer Authority (PRASA). Year over year, PR government related loans and securities shrunk 19.6% from $778.3 million at March 31, 2014.
- Total stockholders’ equity declined $5.8 million to $936.4 million. This primarily reflects the decrease in retained earnings partially offset by an increase in other comprehensive income.
Credit Quality Highlights
The following compares data for the first quarter 2015 to the fourth quarter 2014 unless otherwise noted. This also excludes acquired loans and the PREPA credit and its provision.
- Net charge offs declined slightly to $8.6 million as we continue to adjust our collection efforts to evolving credit trends.
- Total delinquency declined 39 basis points to 8.60% primarily due to improvements in mortgage and auto portfolios.
- Nonperforming loans increased $4.8 million, primarily due to $7.9 million inflows in the form of repurchases from GSEs, as well as TDRs, in mortgages.
- Allowance for loan and lease losses increased $1.3 million to $52.8 million.
Capital Position
The following compares data for the first quarter 2015 to the fourth quarter 2014.
Regulatory capital ratios continued to be significantly above requirements for a well- capitalized institution.
- Tangible common equity to total tangible assets increased to 9.29% from 9.25% based on a 0.8% decrease in tangible common equity to $675.2 million and a 1.1% decline in tangible assets to $7.3 billion.
- Common Equity Tier 1 Capital Ratio (using Basel III methodology) was 12.63%.
- Total risk-based capital ratio increased to 17.69% from 17.57% based on a 4.2% increase in total risk-based capital to $887.0 million and a 3.5% increase in total risk weighted assets to $5.0 billion.
Conference Call
A conference call to discuss OFG’s results for the first quarter 2015, outlook and related matters will be held today, Friday, April 24, 2015 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, 2015, can be found on the Webcasts, Presentations & Other Files page, on OFG’s Investor Relations website at www.ofgbancorp.com.
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, 2014, 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 51st 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 53 financial centers and 332 ATMs. Investor information can be found at www.ofgbancorp.com.
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Contacts
Puerto Rico: Alexandra López ([email protected]), OFG Bancorp, (787) 522-6970
US: Steven Anreder ([email protected]) and Gary Fishman ([email protected]), Anreder& Company, (212) 532-3232
