OFG Bancorp (NYSE: OFG) reported results for the third quarter ended September 30, 2016.
3Q16 Highlights
- Net income available to shareholders totaled $11.7 million, or $0.26 per share fully diluted, compared to $10.9 million, or $0.25 per share fully diluted, in 2Q16. In the year ago quarter, OFG reported $1.1 million, or $0.03 per share fully diluted.
- Oriental Bank’s overall business performance continued strong. New loan generation totaled $226.8 million. Banking and wealth management fee revenues remained level versus 2Q16. Retail and commercial deposits grew 2.2%. Net new customer accounts continued to increase at a 4% annualized rate.
- Major credit exposure eliminated. As previously announced, Oriental Bank sold its participation in a Puerto Rico Electric Power Authority (PREPA) fuel line of credit, with the transaction settling after the quarter end. The sale eliminated $183.0 million of non-performing assets. As a result of the sale, a number of metrics used in this release reflect the exclusion of the PREPA credit facility.
- Credit quality remained stable, with a meaningful improvement in net charge offs (NCOs), excluding PREPA. NCOs declined to 1.15% from 1.21% in 2Q16 while non-performing loan rates at 3.68% remained nearly level with 2Q16. Separately, early and total delinquencies were below year-ago levels.
- Capital continued to build. Tangible book value per common share increased to $15.18 from $14.96 in 2Q16. Tangible common equity ratio increased to 10.25% from 9.92%.
- Net Interest Margin (NIM) expanded to 4.95% from 4.69% in 2Q16. Excluding cost recoveries, NIM rose to 4.70% from 4.64%.
- Costs remained under control. The operating efficiency ratio improved to 57.69%, the best level in the last five quarters, as a result of continued focus on optimizing the expense base.
CEO Comment
José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented: “OFG delivered another strong quarter. Diluted EPS of $0.26 was slightly better than the two prior quarters, and our Return on Average Assets at 0.91% and Return on Average Tangible Common Stockholders’ Equity at 7.06% were the highest they’ve been in the last five quarters.
“We continue to deliver consistent earnings while being proactive in our business development strategies and prudently managing balance sheet risk. We are particularly pleased to have found an optimal exit point for the PREPA credit facility. This eliminated our single largest credit exposure and significantly reduced our Puerto Rico government related exposures. It also meaningfully increased our capital ratios and contributed to improved credit quality through a major reduction in non-performing loans.
“Oriental Bank’s franchise growth confirms the successful customer differentiation achieved in our business delivery model, emphasizing higher levels of advisory relationships and superior levels of service.
“New loan generation was good, with solid yield expansion. Retail and commercial deposits rose across all categories, due in part to continued growth in net new customers. We have been able to reduce borrowings, with an important reduction in interest expense and positive contribution to NIM. Non-interest revenues and expenses continue to be well managed, while Oriental seamlessly assumed the servicing of its originated residential mortgage loans portfolio.”
3Q16 Income Statement Highlights
The following compares data for the third quarter 2016 to the second quarter 2016, unless otherwise noted.
- Interest Income from Loans rose $2.9 million to $82.6 million. A large portion of the increase came from a $2.2 million recovery from former Eurobank loans. While the non-acquired portfolio grew, acquired loan portfolios continued to run off.
- Interest Income from Securities declined $0.3 million to $8.0 million, mainly due to lower balances in the mortgage-backed securities (MBS) portfolio.
- Interest Expense declined $0.9 million to $13.7 million due to lower borrowings.
- Total Provision for Loan and Lease Losses increased $9.0 million to $23.5 million. Provision for non-acquired loans included $2.9 million towards the sale of the PREPA credit and another $2.9 million for a single commercial loan. Provision for BBVA PR acquired loans included $4.4 million for a Puerto Rico Housing Finance Authority (PRHFA) loan, which now has a carrying amount of $3.5 million or 31% of the unpaid principal balance.
- Total Banking and Wealth Management Revenues remained level at $18.3 million. Banking service fees increased due to higher transaction volume. Mortgage banking revenues grew, reflecting better mark to market on sales. Wealth management remained level, excluding certain annual broker dealer and insurance fees received in 2Q16.
- Other Gains reflected a $5.0 million recovery from a Bear Stearns claim of loss in 2009 from the BALTA private label collateralized mortgage obligation.
- Total Non-Interest Expenses increased $1.1 million to $54.9 million. Total operating expenses were $0.4 million lower despite higher compensation expenses due to the number of business days in the quarter as well as general and administrative expenses for the servicing conversion initiative. OREO related expenses increased $1.2 million as part of normal activities.
- Income Tax Expense benefited from a $0.3 million resolution of a contingent tax position as well as from a reduction of the effective income tax rate, now estimated at 26.0%.
September 30, 2016 Balance Sheet Highlights
The following compares data as of September 30, 2016 to June 30, 2016, unless otherwise noted.
- Total Loans Net Held for Investment at $4.30 billion remained level.
- Total Investments declined $22.2 million to $1.30 billion, mainly due to prepayments in the MBS portfolio.
- Total Puerto Rico Government Related Exposure fell 50.0% to $202.4 million, when taking the sale of PREPA into account. Balances now primarily consist of loans to the five largest municipalities.
- Total Deposits increased $110.7 million to $4.75 billion across all categories, reflecting deposits from new and existing clients. Excluding brokered deposits, deposits increased $91.2 million.
- Total Borrowings declined $237.0 million to $800.3 million primarily due to net pay down of $200.5 million in FHLB advances and the maturity of a subordinated capital note of $67.0 million.
- Total Stockholders’ Equity was up $9.0 million to $924.9 million due to the increase in retained earnings.
Credit Quality Highlights
The following compares data as of September 30, 2016 to June 30, 2016, unless otherwise noted.
- Net Charge-Off Rate (ex-PREPA) at 1.15% fell 6 basis points due to declines in the auto and commercial lending categories.
- Early Delinquency Rate was 3.70% and total delinquency 6.92%, down 7 and 14 basis points, respectively, from year ago levels due to proactive measures implemented to deal with the economic environment.
- Non-Performing Loan Rate at 3.68% declined 541 basis points reflecting the sale of PREPA, but was up only 12 basis points from the prior quarter ex-PREPA.
- Allowance for Loan and Lease Losses fell $50.6 million to $62.2 million, also reflecting the sale of PREPA. As a result, the loan loss reserve ratio to total loans (excluding acquired loans) decreased to 2.06% from 3.53%.
Capital Position
The following compares data as of September 30, 2016 to June 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 10.25% increased 33 basis points to the highest level in five quarters.
- Common Equity Tier 1 Capital Ratio (using Basel III methodology) increased to 13.34% from 12.64%.
- Total Risk-Based Capital Ratio increased to 18.73% from 18.00%.
Financial Supplement
OFG’s Financial Supplement, with full financial tables for the third quarter ended September 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. See Tables 9-1 and 9-2 in OFG’s above-mentioned 3Q16 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 5 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.
