OFG Bancorp Reports 3Q13 Results

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

OFG Bancorp OFG reported today results for the third quarter ended September 30, 2013.

3Q13 Financial Summary

• Continued strong core performance in the third quarter of 2013, with income available to common shareholders of $16.2 million, equal to $0.34 per share diluted; net interest margin (NIM) of 5.31%; and tangible book value per common share increased $0.20, to $13.47.
• In the second quarter of 2013, income available to common shareholders was $34.1 million, or $0.68 per share diluted, which included a net positive impact of $0.43 per share from a $37.0 million tax benefit due to an increase in deferred tax assets, and a $21.0 million increase in loan loss provision due to reclassification of non-performing loans to held-for-sale.
• In the year ago third quarter, income available to common shareholders was $14.7 million, or $0.35 per share diluted, which included a significantly lower tax rate and a $10.3 million net gain on the sale of securities in connection with OFG's deleveraging in anticipation of its acquisition of Banco Bilbao Vizcaya Argentaria's Puerto Rico (BBVA PR) operations.
• For the nine months ended September 30, 2013, income available to common shareholders increased to $68.0 million, or $1.39 per share diluted, compared to $37.9 million, or $0.92 per share, in the year ago period.

CEO's Comment

“We are pleased to report that we continued to produce strong core results in the third quarter,” said José Rafael Fernández, President, Chief Executive Officer and Vice Chairman of the Board. “Growing recognition of our solid track record for consistent, quality service in retail and commercial banking and financial services is resulting in our gaining an important and strong market position in Puerto Rico.

“During the quarter, we saw high levels of loan income and production, along with continued strength in retail deposits and fee business. Our NIM is among the best in the industry, and we significantly enhanced credit quality, selling virtually all non-performing residential mortgage loans originated prior to 2010.

“As we announced recently, we completed the conversion of all former BBVA PR businesses to our state-of-the-art technology platform in line with our original integration plan. This will enable us to roll out new, technology-enhanced products and services to our current and target customer base, such as the recently introduced Cuenta Libre (‘Freedom Account') for online and mobile customers.

“Puerto Rico economic conditions continue to be challenging, as they have been for the last few years. However, given our earnings trajectory, we are confident we'll exceed our 2013 guidance of $1.55 GAAP EPS.”

3Q13 Income Statement Analysis

Net Interest Income

• Total interest income of $120.6 million declined $5.2 million from the preceding quarter, which benefitted from the prepayment of a large acquired loan; other purchase accounting adjustments; and cost recovery of a large covered loan.
• Total interest expense of $22.0 million increased $2.0 million from the preceding quarter, which included higher deposit premium amortization from acquired certificates of deposit that matured earlier this year. Excluding this, cost of deposits declined to 0.94% from 0.96%.
• Provision for non-covered loan losses of $9.9 million declined $27.6 million from the preceding quarter, which included the previously mentioned $21.0 million for reclassifying NPLs to held-for-sale. Provision for covered loan losses of $3.1 million increased $1.9 million, reflecting adjustments from our annual comprehensive cash flow reforecasts of all the loan pools.
• As a result of the above, net interest income after provision for loan losses of $85.7 million increased 27.7% from the preceding quarter, and NIM was 5.31% compared to 5.62%.

Non-Interest Income

• Total bank and wealth management revenues of $22.1 million declined $1.8 million from the preceding quarter, which benefitted from early repayment fees from the previously mentioned acquired loan.
• Trust assets managed of $2.7 billion at September 30, 2013 increased 1.25% from $2.6 billion at June 30, 2013 and broker dealer assets gathered of $2.5 billion decreased 11.1% from $2.8 billion. Changes in trust and BD related assets primarily reflect differences in market values.
• Net amortization of the shared-loss indemnification asset related to the 2010 FDIC-assisted Eurobank acquisition declined $4.0 million from the preceding quarter due to lower cost recoveries of covered loans, as mentioned above.

Non-Interest Expenses & Taxes

• Operating expenses of $61.0 million declined $2.5 million from the preceding quarter, which included a provision on new taxes, as previously reported. Expenses also benefited from initial cost-savings, primarily from terminating our banking subsidiary's third party loan servicing agreement.
• Merger and restructuring costs totaled $2.3 million compared to $5.3 million in the preceding quarter. Integration expenses are projected to total approximately $13.1 million in 2013, including $3.7 million for terminating the loan servicing agreement mentioned above.
• Income tax expense was $6.6 million compared to a benefit of $31.9 million in the preceding quarter, due to the previously mentioned $37.0 million increase in OFG's deferred tax asset. The applicable rate of 35.0% in the third quarter of 2013 benefitted from one-time items from BBVA PR tax positions and remeasured purchase accounting adjustments.

September 30, 2013 Balance Sheet Analysis

Loans & Deposits

• The non-covered loan portfolio increased $158.3 million, to $4.8 billion, from the preceding quarter primarily due to increases in commercial, residential mortgage, and consumer loans. Auto loan balances remained stable.
• Loan production increased $222.5 million from the preceding quarter, to a record $549.5 million. Production of government, commercial and institutional loans was $263.1 million higher than the preceding quarter. Production of residential mortgage loans declined $40.6 million in line with overall market conditions. Production of auto and consumer loans remained stable.
• Net loans covered under loss share agreements with the FDIC continued to pay down, declining $7.8 million from the second quarter of 2013, to $361.6 million.
• Deposits declined $55.2 million from the preceding quarter, to $5.6 billion, reflecting level retail deposits, a slight increase in brokered deposits, and a decline in institutional deposits.

Investment Securities & Borrowings

• Investment securities totaled $1.7 billion, down $156.8 million from the second quarter of 2013, primarily due to repayments of federally insured, mortgage backed securities. Borrowings of $1.7 billion declined $14.4 million.

Stockholders' Equity

• Total stockholders' equity of $879.7 million increased $8.8 million from the second quarter of 2013 as growth in retained earnings more than offset a $4.9 million reduction in accumulated other comprehensive income from lower unrealized gains primarily on agency MBS.
• On a per common share basis, tangible book value of $13.47 increased $0.20 from $13.27 in the second quarter of 2013.

Other 3Q13 Highlights

• A total of $122.0 million of residential mortgage NPLs were sold, consisting of $62.0 million ($3.0 million more than anticipated last quarter) originated by Oriental Bank, our banking subsidiary, and $60.0 million acquired from BBVA PR. The blended price was 49.2% of unpaid principal balance, in line with previously stated expectations.
• Net credit losses of $5.1 million compare to $5.6 million in the preceding quarter, (excluding the previously reported charge-off of mortgage loans in the second quarter related to the mark-to-market adjustment on the residential NPLs). NPLs of $79.6 million compare to $88.5 million in the preceding quarter.
• The allowance for loan losses as a percentage of loans held for investments (excluding acquired loans) was 2.03% compared to 2.57% in the preceding quarter. The decline reflects a combination of lower NPL balances and higher loan balances. The allowance for loan and lease losses to NPLs (excluding acquired loans) was 59.8% at September 30, 2013.
• Credit quality of the acquired loans remained in line with expectations.
• Regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution. Compared to the preceding quarter, tangible common equity to total tangible assets of 7.43% increased from 7.27%, leverage capital ratio of 8.74% increased from 8.54%, tier 1 risk-based capital ratio increased to 14.24% from 14.12%, and total risk-based capital ratio was 16.03% versus 16.19%.

Conference Call

A conference call to discuss OFG's results for the third quarter of 2013, outlook and related matters will be held Tuesday, October 29, 2013 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.

Full Financial Tables

Full financial tables for 3Q13 can be found on the Webcasts, Presentations & Other Files page, on OFG's Investor Relations website at www.ofgbancorp.com.

About OFG Bancorp

Now in its 49th 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 55 financial centers. Investor information can be found 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) difficulties in integrating BBVA PR into OFG's operations; (ii) the amounts by which our assumptions related to the acquisition fail to approximate actual results; (iii) the rate of growth in the economy and employment levels, as well as general business and economic conditions; (iv) changes in interest rates, as well as the magnitude of such changes; (v) the fiscal and monetary policies of the federal government and its agencies; (vi) changes in federal bank regulatory and supervisory policies, including required levels of capital; (vii) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in Puerto Rico; (viii) the performance of the stock and bond markets; (ix) competition in the financial services industry; (x) possible legislative, tax or regulatory changes; and (xi) difficulties in combining the operations of any other acquired entity.

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, 2012, 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.