OFG Bancorp Reports 4Q15 and 2015 Results

SAN JUAN, Puerto Rico--(BUSINESS WIRE)--

OFG Bancorp OFG today reported results for the fourth quarter and the year ended December 31, 2015.

4Q15 Results

• A loss of ($4.4) million, or ($0.10) per share fully diluted. This compares to net income of $1.1 million, or $0.03 per share diluted, in the preceding quarter, and $17.1 million, or $0.36 per share diluted, in the same quarter a year ago.
• Results included:
  • An additional $30.4 million provision on the $200 million participation in a syndicated fuel line of credit to the Puerto Rico Electric Power Authority (PREPA), reflecting continued hurdles in restructuring the credit. Currently in non-accrual status, interest payments are being credited to the payment of principal. The unpaid principal balance, net of allowances, was $135.9 million, or 68.5% of the total outstanding credit, at December 31, 2015.
  • $9.2 million in other quarter-specific charges or expenses, consisting of $4.9 million impairment during the annual recasting of a BBVA PR loan pool, $1.5 million in additional legal fees related to PREPA negotiations, $1.6 million in final adjustments to the 2Q15 settlement of the Eurobank commercial shared loss agreement with the FDIC, and $1.2 million in an Other Than Temporary Impairment (OTTI) related to a $11.0 million Puerto Rico Industrial Development Company (PRIDCO) bond.
  • $19.9 million in tax benefits primarily resulting from the 4Q15 loss.
• Adjusted for the above listed factors, OFG earned $9.1 million, or $0.21 per share fully diluted, assuming an effective tax rate of 33%.*

4Q15 Highlights

• All components of our business continued strong as in previous quarters:
  • Pre-Provision Net Revenues of $36.4 million compared to an average of $38.3 million the last two quarters.
  • New loan production at $236.8 million compared to an average of $254.0 million the last four quarters.
  • Banking and wealth management fee revenues at $19.3 million compared to an average of $19.6 million the last four quarters.
  • Tangible book value per common share of $14.53 and tangible common equity (TCE) ratio of 9.10% at December 31, 2015.
• OFG's focus on cost control brought non-interest expenses down 5.4% from 4Q14, largely due to proactive rightsizing.
• Asset quality trends were encouraging. Early and total delinquency rates fell to 3.70% and 6.94% of loans, respectively, from 4.91% and 8.99% in 4Q14. The non-performing loan rate (excluding PREPA) at 3.63% was the lowest it has been in five quarters.

2015 Summary

• A loss of ($16.4) million, or ($0.37) per share, compared to net income of $71.3 million, or $1.50 per share diluted, for 2014.
• Results reflected significant de-risking steps, including the following:
  • Puerto Rico central government and public corporation loan balances fell 47.8% to $211.9 million at December 31, 2015, from $406.1 million a year ago. Loans to Puerto Rico municipalities declined 4.4% to $203.5 million, and Puerto Rico securities balance came down 15.0% to $17.8 million.
  • Successful negotiation and termination of the FDIC commercial shared loss agreement. This resulted in a $10.2 million increase in share loss amortization in 2Q15, but a reduction of approximately $10 million a quarter going forward.
  • Successful bulk sale of $235.2 million in unpaid principal balances of acquired NPAs. This resulted in a charge of $20.2 million pre-tax in 3Q15.
  • In all, the de-risking resulted in normalization of net interest margin to 5.03% from 5.84%, primarily reflecting contraction from the steep reduction in tax exempt, high yield, government related loans.
• Growth of the Oriental retail franchise through new customers, products and services.
  • Oriental Bank furthered its innovative edge in 3Q15 with the launch of MyStatus. The industry-first mobile app updates home buyers on every step of their mortgage application from origination through closing.
  • MyStatus followed the introduction of FOTOdepósito, People Pay, and Cuenta Libre (Freedom Account). With Cuenta Libre, customers who access their accounts via mobile phone, tablet, web, debit / credit card, or ATMs, do not have to pay ATM fees.
  • New products and services like these helped Oriental Bank add 15,400 net new retail customers, increasing its total customer base by 4.40%. New customers added approximately $67 million in deposits, $115 million in loans, and $15 million in wealth management assets.
  • In total, new loan production of $1.0 billion increased 10.3% year over year, with commercial up 38.9%, residential mortgage up 14.8%, and consumer up 17.3%, more than offsetting a decline in auto.

CEO Comment

José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, commented:

"Our core business performed well this past quarter and year, given the challenging economy and Puerto Rico's fiscal situation. We maintained good levels of interest and non-interest revenues and loan production, while retaining a solid capital position. This enabled us to take decisive de-risking actions to further strengthen our balance sheet. Non-interest expenses declined, most credit metrics improved, and we continued to expand the Oriental franchise.

"Clearly, market valuations and sentiment regarding OFG outside of Puerto Rico appear to be incongruent to our core performance and asset quality trends and positions.

"We are cognizant of the high level of uncertainty regarding Puerto Rico's future. While lower fuel prices have significantly enhanced personal disposable income and reduced operating costs for businesses, the Government lost an opportunity to take a major step in solving the fiscal situation when the Legislature, for a second time, delayed voting on the PREPA Revitalization Act.

"Despite the difficult environment in which we operate, we remain steadfast in our long standing management strategies: maintaining discipline in underwriting, pricing, operations and expenses. Furthermore, we have shifted our capital management strategy toward preserving and continuing to build excess capital. We believe this is the prudent thing to do until we can get a better read on the future.

"Looking forward to 2016 and beyond, we expect to continue to perform well, although somewhat affected by lower interest income from a smaller balance of acquired loans. Ultimately, we look forward to putting our PREPA exposure behind us, to better highlight our solid core business performance.

"As for Puerto Rico itself, a comprehensive solution is needed to overcome the fiscal challenges and to improve the island's competitiveness. We are encouraged by the attention Puerto Rico has received in Washington, but the time for talk is over. Leadership needs to take tangible actions."

4Q15 Income Statement Highlights

The following compares GAAP and Non-GAAP Adjusted Results for the fourth quarter 2015 to the third quarter 2015.

		Quarter ended September 30, 2015														Quarter ended December 31, 2015
					Loss on Bulk Sale
		Actual Results			of Non-Performing				Quarter Specific		Adjusted Results					Actual Results			Quarter Specific			Adjusted Results
(Dollars in thousands) (unaudited)		(US GAAP)			Loans and OREOs(1)				Items(2)		(Non-GAAP)					(US GAAP)			Items(3)			(Non-GAAP)
Interest income		$	107,247			7,058			3,180			97,009				$	92,907			-			92,907
Interest expense			(17,423)			-			-			(17,423)					(17,285)			-			(17,285)
Net interest income			89,824			7,058			3,180			79,586					75,622			-			75,622
Provision for loan and lease losses, excluding acquired loans			(10,459)			-			-			(10,459)					(45,012)			(30,345)			(14,667)
Provision for acquired BBVAPR loan and lease losses			(7,630)			(5,175)			-			(2,455)					(7,332)			(4,900)			(2,432)
(Recapture) provision for acquired Eurobank loan and lease losses			(33,490)			(32,855)						(635)					154			-			154
Total provision for loan and lease losses, net			(51,579)			(38,030)			-			(13,549)					(52,190)			(35,245)			(16,945)
Net interest income after provision for loan and lease losses			38,245			(30,972)			3,180			66,037					23,432			(35,245)			58,677
Banking and wealth management revenues			18,703			-			778			17,925					19,349			-			19,349
Other-than-temporary impairment losses on investment securities			(246)			-			(246)			-					(1,244)			(1,244)			-
FDIC shared-loss expense, net			(2,079)			-			-			(2,079)					(4,400)			(1,589)			(2,811)
Gain on FDIC shared-loss coverage in sale of loans			20,000			20,000			-			-					-			-			-
Other (losses) gains, net			(401)			-			-			(401)					565			-			565
Total non-interest income			35,977			20,000			532			15,445					14,270			(2,833)			17,103
Compensation and employee benefits			(21,015)			-			(917)			(20,098)					(18,717)			-			(18,717)
Rent and occupancy costs			(8,556)			-			-			(8,556)					(8,111)			-			(8,111)
General and administrative expenses			(39,519)			(9,260)			180			(30,439)					(31,714)			(1,462)			(30,252)
Total non-interest expense			(69,090)			(9,260)			(737)			(59,093)					(58,542)			(1,462)			(57,080)
Income before taxes			5,132			(20,232)			2,975			22,389					(20,840)			(39,540)			18,700
Income tax expense (benefit)			562									7,388					(19,863)						6,171
Net income			4,570									15,001					(977)						12,529
Preferred stock dividends			(3,465)									(3,465)					(3,466)						(3,466)
Net income (loss) available to common shareholders		$	1,105								$	11,535				$	(4,443)					$	9,063
Earnings (loss) per common share - basic		$	0.03								$	0.26				$	(0.10)					$	0.21
Earnings (loss) per common share - diluted		$	0.03								$	0.26				$	(0.10)					$	0.21
Performance Metrics
Net interest margin			5.29%									4.68%					4.55%						4.55%
Return on average assets			0.25%									0.82%					-0.05%						0.70%
Return on average tangible common stockholders' equity			0.68%									7.08%					-2.75%						5.62%
Efficiency ratio			63.66%									60.60%					61.64%						60.10%

(1)		3Q15 results included ($20.2) million pre-tax impact from the bulk sale of acquired NPAs, reflecting: (i) $7.0 million cost recoveries, (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.
(2)		3Q15 results also included other quarter specific items, consisting of: (i) $3.2 million cost recovery in interest income due to a prepayment, (ii) $778,000 fee revenue from a prepayment penalty, (iii) ($246,000) in an OTTI charge, (iv) ($917,000) additional severance accrual, and (v) $180,000 from a onetime vendor credit.
(3)		4Q15 results included the following quarter specific items, as previously mentioned: ($30.4) million provision related to the PREPA line, ($4.9) million impairment during the annual recasting of a BBVA PR loan pool, ($1.5) million in legal fees related to PREPA's restructuring, ($1.6) million in a final settlement with the FDIC related to the expiration of the commercial loss sharing agreement, ($1.2) million in OTTI, and a $19.9 million tax benefit.

Adjusted for the above listed factors:

• Interest Income declined $4.1 million to $92.9 million due to lower balances and yields in the BBVA PR acquired portfolio, partially offset by higher interest income from a greater volume of originated loans.
• Interest Expense declined slightly to $17.3 million with the repayment of repurchase agreements used for temporary funding in 3Q15.
• Total Provision for Loan and Lease Losses increased $3.4 million to $16.9 million. This included $2.5 million for originated loans due to increased net charge offs and $1.0 million in re-yielding from the annual evaluation of certain acquired loan pools.
• Net Interest Margin was 4.55% compared to 4.68%, primarily due to lower yields on acquired loans.
• Total banking and wealth management revenues increased $1.4 million to $19.3 million, primarily due to certain annual fees in wealth management and an increase in fees arising from mortgage banking activities.
• Total Non-Interest Expenses declined $2.0 million to $57.1 million, primarily due to reduced compensation and employee benefits.

December 31, 2015 Balance Sheet Highlights

The following compares data as of December 31, 2015 to September 30, 2015 unless otherwise noted.

• Total loans declined to $4.43 billion from $4.47 billion, as originated loans partially offset outflows in acquired loans.
• Total investments were approximately level at $1.62 billion as mark to market and prepayments of mortgage backed securities were mostly offset by purchases.
• Total deposits remained approximately level at $4.72 billion with slightly lower savings and slightly higher short-term brokered balances.
• Total borrowings declined to $1.37 billion from $1.44 billion due to the previously mentioned repayment of short-term repurchase agreements.
• Total stockholders' equity declined to $897.1 million from $907.9 million, reflecting a reduction in retained earnings and in accumulated other comprehensive income, net.

Credit Quality Highlights

The following compares data for the fourth quarter 2015 to the third quarter 2015 unless otherwise noted.

• Net charge-off (NCO) rate at 1.67% increased 44 basis points. The increase in commercial NCOs was primarily due to one loan, while the increase in auto NCOs was from a year end push to reduce repo inventory.
• Early delinquency rate continued to fall to 3.70%, its lowest level in the last five quarters, due to measures taken to proactively manage the environment in Puerto Rico.
• Non-performing loan rate at 9.74% declined 58 basis points most notably due to commercial, auto and consumer, while holding nearly flat in mortgage.
• Allowance for loan and lease losses increased $32.3 million to $112.6 million primarily due to the increased PREPA provision. Coverage of loans held for investment increased to 3.62% from 2.65%.

Capital Position

The following compares data for the fourth quarter 2015 to the third quarter 2015.

Regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution.

• Tangible common equity to total tangible assets at 9.10% declined one basis point.
• Common Equity Tier 1 Capital Ratio (using Basel III methodology) increased to 12.15% from 12.03%.
• Total risk-based capital ratio increased to 17.30% from 16.93%.

Conference Call

A conference call to discuss OFG's results for the fourth quarter 2015, outlook and related matters will be held today, Monday, February 1, 2016 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 fourth quarter ended December 31, 2015, 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 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 52^nd 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.

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