OFG Bancorp Reports 2Q15 Results

SAN JUAN, Puerto Rico--(BUSINESS WIRE)--OFG Bancorp (NYSE:OFG) today reported results for the second quarter ended June 30, 2015.

José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented, “While a few quarter specific items caused us to post a loss in 2Q15, our core business performed well and capital continues to be strong.”

2Q15 Highlights

• Loss of $6.6 million, or ($0.15) per share, compared to a loss of $6.5 million, or ($0.14) per share, in the preceding quarter, and a profit of $17.8 million, or $0.38 per share diluted, in the year ago quarter.
• Compared to 1Q15, 2Q15 results were adversely impacted by:
  • Absence of $4.2 million in tax free interest income from loans to the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Aqueduct and Sewer Authority (PRASA).
    • PREPA: Interest payments on the $200 million loan, which is on non-accrual status, are being applied to the principal.
    • PRASA: The $75 million remaining balance was paid-off on June 1, 2015.
  • $10.2 million increase in FDIC commercial loss share amortization (from $13.1 million to $23.2 million) related to the scheduled expiration of the Eurobank commercial loss sharing agreement with the FDIC. Going forward, the loss share amortization for remaining residential mortgages should be significantly lower.
  • $4.5 million of additional loss in Other Real Estate Owned (OREO) due to revised collateral values as part of ongoing and proactive de-risking efforts.
• Partially offsetting the above was:
  • $26.7 million decline in the total provision for loan and lease losses. This reflects no additional PREPA provision ($24.0 million in 1Q15) because the government utility and its creditors are actively working on a repayment agreement. Additionally, no provision was required on FDIC covered commercial loans ($4.8 million in 1Q15).
  • Continued growth of the Oriental Bank franchise through the opening of new retail deposit accounts, reduced cost of total deposits, and strong levels of core non-interest fee revenues and loan production.
  • Improved credit, with declines in net charge-offs, total delinquencies and non-performing loans.
• Puerto Rico central government and public corporation balances declined 20.7% to $301.3 million at June 30, 2015 from $380.1 million at March 31, 2015. This excludes $214.0 million in term loans to five municipal governments that are completely separate entities with their own sources of tax revenues.
• Tangible book value and book value per common share declined to $14.67 and $16.81 from $15.12 and $17.25, respectively, at March 31, 2015. Regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution.

CEO Comment

In commenting on 2Q15 results, Mr. Fernández stated, “This quarter demonstrates our discipline in navigating one of the most difficult operating environments in banking today.

“Our core business performed well as we continued to grow Oriental Bank’s franchise serving the commercial and consumer sectors. We experienced strong generation of quality loans with good pricing discipline, strong fee revenue levels, and good core expense management. Oriental’s retail deposit base and mortgage and consumer loan businesses continued to benefit from successful marketing attracting new customers. In addition, credit continued to improve as evidenced, among other things, by lower provisions and net charge-offs while we maintained provisions at 1.20-1.25% of net charge-offs, increasing the allowance levels.

“However, the absence of tax-free interest income from the PREPA and PRASA loans was a drag on NIM and earnings in general. With the scheduled expiration of our commercial loss share agreement with the FDIC, we incurred a final write down of the remaining amortization asset for covered commercial loans. In addition, we de-risked our non-covered portfolio by updating valuations of certain underlying collaterals and adopted a restitution program in our broker-dealer subsidiary.

“Looking ahead, prevailing economic conditions in Puerto Rico are challenging and uncertain. Our strategy is to be vigilant in managing our risk exposure and the factors under our control. We urge the Central Government to act quickly and in cooperation with the investment community to restart the Puerto Rico economy, which has now been stalled for nearly a decade.

“Our ultimate goals remain the same: build the Oriental franchise, further affirming our reputation as the best bank in Puerto Rico; 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.”

2Q15 Income Statement Highlights

The following compares data for the second quarter 2015 to the first quarter 2015 unless otherwise noted.

• Total interest income declined $7.6 million to $99.4 million. This reflected:

• Lower loan income from PREPA ($3.6 million) and PRASA ($0.6 million), as noted above, and from covered loans ($2.8 million) as balances continued to pay down.
• Growth in loan income from all other originated loans offsetting declines in all other acquired non-covered loans.
• $0.6 million in higher premium amortization on investment securities.

• Total interest expense fell slightly to $17.1 million as we continued to improve the deposit funding profile with decreases in rates.
• Net Interest Margin declined to 4.92% from 5.42%, primarily reflecting the loss of income from the PREPA and PRASA loans.
• Provision for loan and lease losses fell $26.7 million to $15.5 million. This reflected no additional PREPA and covered loan provisioning, as previously mentioned, and $1.3 million decline in provision on other originated and acquired loans.
• Total core non-interest income increased slightly to $19.4 million. This reflected increased or sustained levels of revenue across the board in wealth management, banking services and mortgage banking activity.
• FDIC indemnification asset amortization increased $10.2 million, as mentioned above, to $23.2 million. The indemnification asset was $22.7 million at June 30, 2015 versus $75.2 million at March 31, 2015.
• Non-interest expenses increased $8.1 million, to $64.4 million. This primarily reflected the following non-recurring expenses:

• The aforementioned $4.5 million increased OREO loss and $1.8 million restitution program by our broker-dealer subsidiary.
• $1.1 million to close a branch and other quarter specific expenses.

2Q15 Business Activity Highlights

The following compares data for the second quarter 2015 to the first quarter 2015 unless otherwise noted.

• Total new loan production (excluding renewals) increased 19.7% to $286.7 million.
• Commercial loan production increased 40.7% to $120.5 million, reflecting the pipeline that was starting to build in 1Q15.
• Residential mortgage loan production, most of which is sold into the secondary market, increased 5.0% to $64.8 million as Oriental continued to expand its market share.
• Consumer loan production increased 52.3% to $39.8 million due to improved marketing and a larger client base.
• Auto loan production declined 6.6% to $61.5 million. This reflects increased competition from the captive finance arms of manufacturers, and our own initiative to increase FICO score requirements to improve credit.
• Cost of deposits declined 5 basis points to 0.65% from 1Q15 and 22 basis points from 0.87% in 2Q14, as a result of reductions in demand, savings, time and brokered deposit rates.

June 30, 2015 Balance Sheet Highlights

The following compares data as of June 30, 2015 to March 31, 2015 or for the second quarter 2015 to the first quarter 2015 unless otherwise noted.

• Average interest earning assets increased slightly to $6.71 billion. This reflected an increase in total investments as OFG reinvested excess cash from repayments of loans and investment securities, and increased originated loans, all of which more than offset declines in acquired and covered loans due to normal pay downs.
• Total stockholders’ equity declined $24.8 million to $911.6 million. This primarily reflected a $10.9 million decrease in retained earnings and a $10.0 million decrease in other comprehensive income.

Credit Quality Highlights

The following compares data for the second quarter 2015 to the first quarter 2015 unless otherwise noted.

• Net charge-offs declined 10.1% to $7.7 million as we continued to fine tune our collection efforts to evolving credit trends. Net charge-offs have declined three quarters in a row.
• Total delinquency rate declined 88 basis points to 7.72% primarily due to improvements in the mortgage, consumer and auto loan portfolios. The total delinquency rate has declined three quarters in a row.
• Non-performing loan rate declined 20 basis points to 10.44%.
• Allowance for loan and lease losses increased $2.2 million to $79.0 million. This resulted in coverage of 2.67% of loans held for investment compared to 2.64%.

Capital Position

The following compares data for the second quarter 2015 to the first quarter 2015.

• Tangible common equity to total tangible assets declined to 8.91% from 9.29% based on a 3.6% decrease in tangible common equity to $650.9 million and a 0.5% increase in tangible assets to $7.3 billion.
• Common Equity Tier 1 Capital Ratio (using Basel III methodology) was 12.25% compared to 12.63%.
• Total risk-based capital ratio declined to 17.40% from 17.69% based on a 2.1% decline in total risk-based capital to $868.6 million and a 0.4% decline in total risk weighted assets to $5.0 billion.

Conference Call

A conference call to discuss OFG’s results for the second quarter 2015, outlook and related matters will be held today, Friday, July 24, 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 second quarter ended June 30, 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 51^st 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 52 financial centers and 332 ATMs. Investor information can be found at www.ofgbancorp.com.