OFG Bancorp (NYSE: OFG) reported results for the second quarter ended June 30, 2016.
2Q16 Highlights
- Net income available to shareholders was in line with the preceding quarter and surpassed the year ago quarter. OFG generated $10.9 million, or $0.25 per share fully diluted, in 2Q16 compared to $10.7 million, or $0.24, in 1Q16. In the year ago quarter, OFG reported a net loss of $6.6 million, or ($0.15) per share, primarily due to non-recurring charges.
- Oriental Bank’s overall performance continued strong. New loan generation at $237.8 million grew 5.1% from the preceding quarter, with increased activity in auto, mortgage, and consumer loans. Banking and wealth management fee revenues increased 6.8% from 1Q16.
- Credit quality continued its positive trajectory. Net charge-offs (excluding acquired loans) declined to 1.21% from 1.30% in 1Q16. Early and total delinquency rates dropped from the previous and year-ago quarters. Non-performing loan rates fell to the lowest level in the last five quarters.
- Costs remained under control. The efficiency ratio improved to 58.76%, the best level in last five quarters.
- Total Puerto Rico government related exposure continued to decline. Balances fell approximately 1.0%, to $405.3 million from the end of 1Q16. In addition, Puerto Rico Electric Power Authority (PREPA) continued to make progress toward final implementation of its Restructuring Support Agreement by the end of 2016.
- Net Interest Margin (NIM) remained relatively level, at 4.65% compared to 4.67%
in 1Q16. - Capital continued to build. Tangible book value per common share increased to
$14.96 from $14.68 in 1Q16. Tangible common equity (TCE) ratio increased to 9.92%
from 9.50%.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented:
“OFG delivered another good quarter, demonstrating strong consistency in our financial results. Diluted EPS of $0.25 was slightly better than 1Q16 as we continued to focus on building our franchise while continuously adapting to our environment.
“New loan generation remained robust, underscoring our growing retail franchise. NIM remained in line. Credit quality continued to be solid as a result of maintaining our prudent lending standards and proactive collection program. Our Puerto Rico government related loan exposure continued to decrease. Expenses are being well contained, with the efficiency ratio the best it has been in more than a year. As a result, tangible book value has increased.
“We are continuing to build franchise value by differentiating Oriental from others with technology that makes banking easier and more accessible, with superior levels of service. During 2Q16, we introduced the Oriental Biz mobile app, adding mobile check capture for small business customers. We were the first to introduce this feature for retail customers in Puerto Rico in 2013, and now we are the first to introduce this feature to small commercial clients on the island. During 2Q16, we also introduced Cardless Cash, another first for Puerto Rico, for making ATM withdrawals quickly without using an ATM/debit card. All of these are attracting a steady influx of new customers.
“Enactment of the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, provides a clearer path to address Puerto Rico’s fiscal challenges and more importantly creates a congressional committee to focus on Puerto Rico’s economic development. As it is, the economy continues to fare reasonably well, despite some headlines to the contrary. We are also pleased the PREPA restructuring continues to move ahead for the benefit of its customers, Puerto Rico, and creditors alike.”
2Q16 Income Statement Highlights
The following compares data for the second quarter 2016 to the first quarter 2016 unless otherwise noted.
- Interest Income from Loans declined $1.5 million to $79.7 million. This was due to lower balances, yields and cost recoveries from acquired loans as they continue to run off, partially offset by portfolio growth in originated loans.
- Interest Income from Securities declined $1.9 million to $8.2 million. This was primarily due to the previously disclosed 1Q16 sale of mortgage backed securities, which was done in conjunction with the partial unwinding of a high-rate repurchase funding agreement.
- Interest Expense declined $1.7 million to $14.6 million. This was due to lower balances and costs after the above mentioned 1Q16 transaction.
- Total Provision for Loan and Lease Losses increased $0.7 million to $14.4 million.
Provision for originated loans fell $1.6 million primarily due to lower net charge-offs and delinquency ratios. Provision for acquired loans increased $2.3 million primarily due to one former BBVA institutional commercial loan. - Net Interest Margin was 4.65% compared to 4.67%, reflecting the reasons mentioned above. Excluding cost recoveries, NIM was 4.59% compared to 4.55%.
- Total Banking and Wealth Management Revenues increased $1.2 million to $18.3 million due to increases in all major operations, but primarily in wealth management. This was due to seasonal commercial insurance fees, higher volume in the sale ofannuities, and higher commissions from broker dealer operations. Mortgage banking revenues increased 19.8% due to higher volumes of originated and sold loans.
- FDIC Shared-Loss Expense, Net decreased $0.6 million to $3.4 million due to lower valuation changes in the covered mortgage portfolio.
- Total Non-Interest Expenses declined $1.0 million to $53.8 million. Compensation decreased $1.8 million primarily due to reaching maximum Federal Insurance Contributions Act (FICA) contributions. General and administrative expenses declined
$1.7 million due to lower professional and other service fees, reflecting continuing expense management. Net losses on the sale of foreclosed assets increased $2.2 million compared to 1Q16, which saw net gains on sales. - Effective Income Tax Rate was estimated at approximately 29% for the near-term, including this quarter.
June 30, 2016 Balance Sheet Highlights
The following compares data as of June 30, 2016 to March 31, 2016 unless otherwise noted.
- Total Loans increased to $4.37 billion from $4.36 billion, as inflows of originated loans outpaced outflows in acquired loans.
- Total Investments declined to $1.32 billion from $1.33 billion, mainly due to prepayments of mortgage-backed securities.
- Puerto Rico Central Government and Public Corporation Loan Balances fell 1.9% to $194.4 million. Loans to Puerto Rico municipalities and Puerto Rico investment securities balances remained approximately level at $204.3 million and $6.7 million, respectively.
- Total Deposits declined to $4.64 billion from $4.78 billion primarily due to a reduction of brokered deposit balances.
- Total Borrowings declined to $1.04 billion from $1.07 billion primarily due to lower balances from FHLB advances and other borrowings.
- Total Stockholders’ Equity increased $12.1 million to $915.9 million, reflecting an increase in retained earnings and in accumulated other comprehensive income, net.
Credit Quality Highlights
The following compares data for the second quarter 2016 to the first quarter 2016 unless otherwise noted.
- Net Charge-Off (NCO) Rate at 1.21% fell 9 basis points, due to declines in the auto, commercial, and mortgage lending categories, partially offset by an increase in consumer lending charge-offs.
- Early Delinquency Rate was at 1.86% and total delinquency 4.83%. Starting 2Q16 auto and consumer early delinquencies are being tracked to be consistent across all retail loan categories. Regardless of the change, early and total delinquency has been falling due to proactive measures to manage the effects of the economic environment.
- Non-Performing Loan Rate at 9.08% declined 50 basis points with favorable experiences in commercial, auto and mortgage lending, partially offset by a small increase from consumer lending.
- Allowance for Loan and Lease Losses fell $0.4 million to $112.8 million due to generally improved credit metrics. Loan loss reserve ratio to total loans (excluding acquired loans) decreased to 3.53% from 3.63%.
Capital Position
The following compares data for the second quarter 2016 to the first quarter 2016.
Regulatory capital ratios continued to be significantly above requirements for a well- capitalized institution.
- Tangible Common Equity to Total Tangible Assets at 9.92% increased 42 basis points to the highest level in five quarters.
- Common Equity Tier 1 Capital Ratio (using Basel III methodology) increased to
12.64% from 12.33% - Total Risk-Based Capital Ratio increased to 18.00% from 17.67%.
Conference Call
A conference call to discuss OFG’s results for the second quarter 2016, outlook and related matters will be held today, Friday, July 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 second quarter ended June 30, 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 anduncertainties 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.
