OFG Bancorp Reports 4Q17 & 2017 Results

OFG Bancorp OFG today reported results for the fourth quarter and year ended December 31, 2017. 4Q17 results reflected a strong recovery following hurricanes Irma and Maria, which struck the island in September 2017.

4Q17 Summary

• Net income available to shareholders increased to $13.6 million, or $0.30 per share fully diluted, from a net loss of $146 thousand, or $0.00 per share, in 3Q17. OFG reported net income of $12.1 million, or $0.27 per share fully diluted, in 4Q16.
• Return on average assets and average tangible common equity was 1.10% and 7.92%, respectively. Tangible book value per common share was $15.67, and the tangible common equity ratio was 11.29%.
• 4Q17 results included $5.4 million in loan loss provision, pre-tax, based on new data available on the potential impact of the hurricanes. Excluding that additional provision, 4Q17 adjusted net income available to shareholders totaled $16.9 million, or $0.37 per share fully diluted.

2017 Summary

• Net income available to shareholders was $38.8 million, or $0.86 per share fully diluted, compared to $45.3 million, or $1.03 per share, in 2016.
• 2017 results included a $32.4 million loan loss provision, pre-tax, related to the hurricanes. Excluding that special provision, full year adjusted net income available to shareholders totaled $61.0 million, or $1.34 per share fully diluted.

CEO Comment

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

"OFG's fourth quarter results were strong considering the impact of the hurricanes, the slow restoration of electricity, and the resultant uncertainties. EPS before an additional $5.4 million provision for potential hurricane losses was $0.37.

"We are encouraged with how our commercial clients and retail customers have responded. Total net loans increased more than $90 million from 3Q17. December-ended loan payment moratoriums are showing encouraging trends in all portfolios.

"New loan generation increased more than 32% from 3Q17, rivaling our best quarter of the year. All our one-on-one outreach with commercial clients following the hurricanes is building a strong pipeline for new loan business.

"Auto loan production had one of its best quarters. During December, consumer lending returned to approximately 70% of pre-hurricanes production. Mortgage loans demand, however, was understandably down as residential sales slowed.

"At December 31, customer deposits were up $267 million from June 30. Non-interest bearing deposits reached close to $1 billion. During December, average monthly net new customer acquisition returned to pre-hurricanes levels, and bank service revenues began to recover with more retail point of sale terminals back on line. Thus far, we haven't seen any signs that outmigration is affecting our customer base.

"4Q17 results are a testament to our successful effort in restoring operations quickly after the hurricanes. Our clientele and the communities we serve clearly appreciated our efforts as we are starting to see momentum build despite a very challenging environment.

"Puerto Rico is not out of the woods yet, and the island has a long reconstruction road ahead. However, with the expected benefit from an influx of substantial funds from the federal government as well as from insurance recoveries over the next two years, the short-term outlook is hopeful."

Income Statement Highlights

Unless otherwise noted, the following compares data for the fourth quarter 2017 to the third quarter 2017.

• Interest Income
  • Originated Loans: $56.2 million compared to $58.9 million. 3Q17 included $4.1 million from the pay-off before maturity of a commercial loan previously classified as non-accrual. Excluding that item, 4Q17 interest income from Originated Loans increased $1.3 million due to higher balances.
  • Acquired Loans: $18.9 million compared to $23.5 million. 3Q17 included $3.1 million in cost recoveries from the Puerto Rico Housing Finance Authority (PRHFA) canceling a loan. Excluding that item, 4Q17 interest income from Acquired Loans declined $1.5 million, reflecting continued pay downs.
• Interest Expense declined $0.2 million to $9.7 million due to reduced borrowings.
• Total Provision for Loan and Lease Losses declined $19.1 million to $24.9 million. Provision, excluding additional hurricanes related provisions of $5.4 million and $27.0 million in 4Q17 and 3Q17, respectively, was $19.5 million compared to $17.0 million due to the increase in the Originated Loans portfolio.
• Net Interest Margin was 5.08% compared to 5.64%. 3Q17 benefitted from the previously mentioned pay-off of an originated commercial loan as well as cost recoveries. Compared to the year ago quarter, 4Q17 NIM increased 14 basis points.
• Total Banking and Wealth Management Revenues declined $0.5 million to $16.7 million.
  • Banking service revenues declined $1.5 million. This reflected lower banking fee income from reduced activity related to business interruptions due to lack of electricity. 3Q17 benefitted from $0.4 million in prepayment penalties from the previously mentioned loan pay-off before maturity.
  • Wealth Management revenues increased $1.0 million, primarily due to recognition of annual insurance fees.
  • Mortgage banking revenues remained approximately level at $1.2 million.
• Total Non-Interest Expenses declined $3.8 million to $46.7 million, reflecting: (1) settlement of outstanding claims at amounts below those previously reserved ($1.4 million); (2) lower expenses on foreclosed real estate ($1.3 million); and (3) lower electronic banking expenses due to reduced activity ($1.0 million).
• Effective Tax Rate (ETR) was 8.99% due to final year-end tax accounting. For the year, the ETR was 23.73% due to (1) higher proportion than anticipated of exempt income and income subject to preferential rates; and (2) expiration of a $0.7 million tax contingency.

Balance Sheet Highlights

Unless otherwise noted, the following compares data at December 31, 2017 to September 30, 2017.

• Total Loans Net increased $91.8 million to $4.06 billion with the rebound in production, partially offset by normal pay downs of Acquired Loans. New loan generation increased 32.9% to $253.7 million:
  • Commercial lending increased 121.1% to $102.1 million as our bankers developed relationships with businesses participating in Puerto Rico's recovery. The quarter also benefited from finalizing loans unable to close in 3Q17 due to the hurricanes.
  • The new OFG USA program added $25.1 million in commercial and industrial related loan participations. The entity began operations in October 2017 with a capital contribution of $50.0 million.
  • Auto lending increased 11.8% to $87.6 million, its best quarter in 2017, reflecting demand to replace damaged vehicles, pent up demand, and attractive retail pricing on new and used cars.
  • While consumer lending declined 31.7% to $23.1 million, there was an increasing trend in the monthly production. Mortgage lending declined 51.2% to $15.9 million as housing sales had yet to recover.
• Total Investments increased $8.1 million to $1.17 billion, reflecting purchases of new mortgage backed securities to replace pay downs of existing ones.
• Cash and cash equivalents declined $235.5 million to $488.2 million, mainly due to the unwinding of an $80.0 million repurchase agreement and the increase in interest earning assets.
• Customer Deposits (excluding brokered deposits) were approximately level at $4.28 billion as deposit growth offset almost all of the temporary influx of insurance company deposits at the end of 3Q17. Average non-interest bearing deposits increased $102.1 million, to $937.3 million.
• Total Borrowings declined $90.5 million to $328.7 million, primarily due to the unwinding of an $80.0 million repurchase agreement. Due to deposit growth, higher cost borrowings have been reduced by 58.7% or $466.6 million year over year.
• Total Stockholders' Equity increased $7.5 million to $945.1 million, reflecting the increase in retained earnings.

Credit Quality Highlights

Unless otherwise noted, the following compares data on the originated loan portfolio at December 31, 2017 to September 30, 2017.

After Irma, Oriental was the only bank to offer fee waivers for late payments, recognizing the difficulties people faced in Puerto Rico. Following Maria, the bank continued to offer automatic payment deferrals and 90-day extensions for most loan categories.

• Net Charge-Off Rate declined 19 basis points to 1.35% due to lower charge-offs in the consumer loan portfolio as a result of the loan payment moratorium.
• Early Delinquency Rate declined 197 basis points to 1.82% and Total Delinquency Rate declined 223 basis points to 4.61% due to the automatic moratorium on most retail loans and some commercial loans.
• Non-Performing Loan Rate increased 21 basis points to 3.31%. This primarily reflected commercial loans current in their monthly payments being placed in non-accrual due to deterioration of their financial statements.
• Allowance for Loan and Lease Losses for the originated portfolio increased $5.2 million to $92.7 million, primarily due to higher loan balances.

Capital Position

Unless otherwise noted, the following compares data at December 31, 2017 to September 30, 2017.

Capital continued to grow and remains significantly above regulatory requirements for a well-capitalized institution.

Conference Call

A conference call to discuss OFG's results for 4Q17, outlook and related matters will be held today, Tuesday, January 30, 2018, 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 quarter and year ended December 31, 2017, 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 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 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) the credit default by the government of Puerto Rico; (iv) amendments to the fiscal plan approved by the Financial Oversight and Management Board of Puerto Rico; (v) determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and all of its agencies, including some of its public corporations; (vi) the impact of property, credit and other losses in Puerto Rico as a result of hurricanes Irma and Maria; (vii) the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico's critical infrastructure, which suffered catastrophic damages caused by hurricane Maria; (viii) the pace and magnitude of Puerto Rico's economic recovery; (ix) the potential impact of damages from future hurricanes and natural disasters in Puerto Rico; (x) the fiscal and monetary policies of the federal government and its agencies; (xi) changes in federal bank regulatory and supervisory policies, including required levels of capital; (xii) the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico; (xiii) the performance of the stock and bond markets; (xiv) competition in the financial services industry; and (xv) 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, 2016, 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 54^th 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 wide range of retail and commercial banking, lending and wealth management products, services and technology, primarily in Puerto Rico, through 48 financial centers. Investor information can be found at www.ofgbancorp.com.

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