OFG Bancorp Reports 1Q19 Results

OFG Bancorp OFG reported results for the first quarter ended March 31, 2019.

Highlights 1Q19 vs. 1Q18

• Net revenues increased 7.7% to $99.3 million from $92.2 million. Increased interest income from Originated Loans and Investment Securities and Cash more than offset pay downs of Acquired Loans.
• Net income available to shareholders increased 62.4% to $21.8 million from $13.5 million. Results reflect increased operating leverage, reduced provision and elimination of dividends on Series C preferred stock following its conversion.
• Earnings per share diluted of $0.42 compared to $0.30, a 40% increase.
• Book value per common share increased 3.0% to $18.30. Tangible Book Value per common share expanded 5.4% to $16.56.
• Loans increased 6.5% to $4.40 billion, while deposits grew 1.3% to $4.90 billion.
• New loan origination of $276.4 million included a 41.4% increase in commercial loans due to the success of Oriental's strategic targeting of small business customers.
• Net Interest Margin of 5.37%, a 15 basis points increase, while both credit quality and the efficiency ratio improved.
• Return on Average Assets increased 33 basis points to 1.42%, Return on Average Tangible Common Equity expanded 259 basis points to 10.32%, and capital metrics continued at new multi-year highs.

CEO Comment

"After the rebound we saw in 2018, our first quarter of 2019 reflected strong steady growth," said José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board.

"This was achieved due to the continued effectiveness of our retail and commercial strategies in meeting the economic shift that has occurred in Puerto Rico, as a more positive outlook among both businesses and consumers has taken hold.

"Financially, we generated higher net revenues with stable non-interest expenses, resulting in a 40% year over year increase in earnings per share. Our key performance metrics moved in the right direction as return on assets, return on equity, net interest margin and efficiency ratio came in at levels similar to top performing mainland banks of our size in recent periods.

"Strategically, we continued to advance our retail and commercial channel differentiation through superior service, convenience and technology, where we ask customers to Vive la Diferencia (Live the Difference). We are encouraged by the noticeable increase in small business loan production and another quarter of more than 3% year over year customer growth.

"Thanks to our entire OFG team for their commitment and dedication, and to all our retail and commercial customers for their support and loyalty."

Conference Call

A conference call to discuss OFG's 1Q19 results, outlook and related matters will be held today at 10:00 AM Eastern Time. Dial (888) 562-3356 or (973) 582-2700. Use conference ID 989-5529. The call can also be accessed live on OFG's website at www.ofgbancorp.com. A webcast replay will be available shortly thereafter.

Income Statement

Unless otherwise noted, the following compares data for the first quarter 2019 to the first quarter 2018.

• Interest Income: Increased 13.9% or $11.5 million to $94.7 million. Originated Loans increased $13.0 million due to higher average balances and yield. Investment Securities increased $2.0 million due to higher average balances and higher yields on cash equivalents and investment securities. Acquired Loans declined $3.5 million.
• Interest Expense: Increased 40.8% or $3.8 million to $12.9 million, reflecting higher average deposit and borrowing balances and rates. The cost of customer deposits increased 6 basis points.
• Net Interest Margin: Excluding cost recoveries, core NIM grew to 5.34% from 5.18%. The increase reflected higher yield on originated commercial loans and cash balances and a larger proportion of higher yielding commercial and auto loans in the originated portfolio. This was partially offset by a higher cost of borrowings.
• Net Interest Income: Increased 10.5% or $7.8 million to $81.8 million primarily due to increased earning assets coupled with the 15 basis point increase in NIM.
• Total Provision for Loan and Lease Losses: Decreased 20.8% or $3.2 million to $12.2 million due to a reduction in provision for originated loans partially offset by a small increase in provision for acquired loans. Provision for originated loans was $3.6 million lower than 1Q18, which included $2.0 million for three commercial loans placed in non-accrual.
• Total Banking and Wealth Management Revenues: Declined 3.8% or $0.7 million to $17.6 million primarily due to lower MSR valuations in mortgage banking. Banking service revenues and wealth management remained at similar levels.
• Total Non-Interest Expenses: Remained approximately level at $52.2 million, resulting in a 401 basis point improvement in the Efficiency Ratio to 52.50%. Compared to the previous quarter, total non-interest expenses were marginally higher. This reflected seasonally higher compensation expenses primarily due to FICA payments, higher credit expenses due to the semi-annual payment of local property taxes, and lower losses on the sale of repossessed assets.
• Effective Tax Rate: 33.0% compared to 32.1%.
• Dividends on Preferred Stock: Declined 53.0% to $1.6 million from $3.5 million due to the 4Q18 conversion of Series C Preferred to common.

Balance Sheet

Unless otherwise noted, the following compares data at March 31, 2019 to March 31, 2018.

• Total Loans: Increased 6.5% or $268.0 million to $4.40 billion as originated loans increased 13.1% or $421.9 million, while acquired loans declined $151.1 million. Compared to the year ended December 31, 2018, loans remained relatively flat, reflecting seasonal pay down of commercial lines of credit and loan prepayments.
• Loan Production: 1Q19 new loan production totaled $276.4 million compared to $309.4 million. Auto and consumer lending remained high at $120.2 million and $40.8 million, respectively; commercial lending at $60.5 million had a strong performance due to new or expanded business with small business customers; OFG USA loan participations of $31.7 million were similar to the last two trailing quarters; and residential mortgage lending totaled $23.1 million.
• Total Investments and Cash and Cash Equivalents: Increased 5.9% or $97.7 million to $1.76 billion, with Cash and Cash Equivalents up 39.3% or $143.6 million and Total Investments down 3.5% or $45.9 million. Compared to December 31, 2018, investments and cash increased 1.9% or $32.0 million. On January 1, 2019, OFG adopted ASU 2017-12, reclassifying all of its MBS from held-to-maturity to available-for-sale.
• Customer Deposits (excluding brokered): Increased 2.0% or $87.0 million to $4.45 billion. Demand deposits increased 4.7% or $100.3 million and savings accounts remained approximately level, while time deposits declined 1.6% or $15.8 million. Compared to December 31, 2018, customer deposits increased 1.4% or $62.9 million.
• Total Borrowings and Brokered Deposits: Increased 20.7% or $171.3 million to $1.00 billion. Repurchase agreement funding increased 57.5% or $157.6 million, FHLB advances and other borrowings increased 83.6% or $37.1 million, while brokered deposits declined 4.9% or $23.4 million. Compared to December 31, 2018, borrowings and brokered deposits declined 8.7% or $95.3 million.
• Total Stockholders' Equity: Increased 7.8% or $74.3 million to $1.02 billion, reflecting increased retained earnings and legal surplus and reduced accumulated other comprehensive loss. Compared to December 31, 2018, stockholders' equity increased 2.1% or $21.3 million.

Credit Quality

Unless otherwise noted, the following compares data on the originated loan portfolio at March 31, 2019 to March 31, 2018.

Credit quality remained strong with minor variations in key metrics. Non-performing loan rate at 3.37% fell 45 basis points. Allowance for loan losses declined 2.9% to $94.0 million, and as a percentage of loans, the allowance at 2.51% was down 41 basis points. Early and total delinquency rates, at 3.61% and 6.33% were up 41 and 8 basis points, respectively. Net Charge-Offs increased 15.1% to $12.5 million, but as a percentage of loans, the net charge off rate remained at 1.32%.

Capital Position

Capital continued to be significantly above regulatory requirements for a well-capitalized institution. March 31, 2019 ratios improved across the board: Leverage at 14.64% increased 57 bps year over year and 42 bps from the year ended December 31, 2018, Common Equity Tier 1 at 17.09% increased 257 and 31, Tier 1 Risk-based at 19.49% increased 49 and 29, Total Risk-based Capital at 20.77% increased 48 and 29, and Tangible Common Equity at 13.05% increased 183 and 29.

Financial Supplement & Conference Call Presentation

OFG's Financial Supplement, with full financial tables for the quarter ended March 31, 2019, and its 1Q19 Conference Call Presentation 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) changes to the financial condition of 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 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; (vii) the pace and magnitude of Puerto Rico's economic recovery; (viii) the potential impact of damages from future hurricanes and natural disasters in Puerto Rico; (ix) the fiscal and monetary policies of the federal government and its agencies; (x) changes in federal bank regulatory and supervisory policies, including required levels of capital; (xi) the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico; (xii) the performance of the stock and bond markets; (xiii) competition in the financial services industry; and (xiv) 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, 2018, 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 55^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. Visit us at www.ofgbancorp.com.

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