OFG Bancorp Reports 4Q18 & 2018 Results

OFG Bancorp (NYSE: OFG) reported results for the fourth quarter and year ended December 31, 2018.

4Q18 Summary

• Net income available to shareholders of $23.1 million or $0.45 per fully diluted share compared to 3Q18’s $19.6 million or $0.42 per share and 4Q17’s $13.6 million or $0.30 per share.
• Originated loan growth of 3.0% from the preceding quarter to $3.66 billion, with new loan production of $323.0 million, continuing to exceed $300 million for the fourth consecutive quarter.
• Strong performance metrics, with net interest margin of 5.26%, return on average assets of 1.50%, return on average tangible common stockholders’ equity of 11.67%, and efficiency ratio of 51.06%.
• Record total stockholders’ equity of approximately $1 billion, with book value per common share of $17.90, tangible book value per common share of $16.15, and capital metrics at multi-year highs.
• Common equity increased $84.0 million and preferred dividend payments dropped 53.0% from the preceding quarter with the conversion into common stock of the Series C 8.750% Non-Cumulative Convertible Perpetual Preferred Stock.
• 16.7% increase in the regular quarterly cash dividend per common share to $0.07, resulting in an annualized rate of $0.28 per share.

2018 Summary

Net income available to shareholders of $72.4 million or $1.52 per fully diluted share compared to 2017’s $38.8 million or $0.88 per share. 2017 included a $32.4 million pre-tax loan loss provision related to the hurricanes.

CEO Comment

“OFG achieved strong core growth in 4Q18 and 2018 based on the continued success of our strategy of differentiation – providing superior customer service, convenience and technology – coupled with Puerto Rico’s emerging economic rebound,” said José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board.

“Our plan is working. For the year as a whole, we generated impressive results across the board, with originated loans up 17.3%, average deposits up 6.4%, customer count up 4.6%, and stockholders’ equity up 5.8%, as well as achieving improved credit quality, converting our Series C preferred, and increasing our quarterly dividend.

“Thanks go to our entire OFG team for their commitment and dedication and to all our retail and commercial customers for their support and loyalty. We plan to continue to focus on our growth strategies in 2019, capitalizing on our momentum, continuing to make our services better – fácil, rápido, hecho (easy, fast, done) – and developing fresh ways to employ digital technology to the benefit of customers.”

Conference Call

A conference call to discuss OFG’s 4Q18 results, outlook and related matters will be held today at 10:00 AM Eastern Time. The call can be accessed live by dialing (888) 562-3356 or (973) 582-2700. Use conference ID 378-7416. The call can also be accessed live on OFG’s website at www.ofgbancorp.com. Access the webcast link in advance to download any necessary software. A webcast replay will be available shortly thereafter.

Income Statement

Unless otherwise noted, the following compares data for the fourth quarter 2018 to the third quarter 2018.

• Interest Income: Increased 1.0% or $1.0 million to $95.1 million. Originated Loans increased $2.4 million due to higher average balances and a 7 basis point yield increase. Acquired Loans declined $2.1 million due to pay downs and $1.2 million in lower cost recoveries. Investment Securities increased $0.7 million due to higher average balances and yields on cash and cash equivalents.
• Interest Expense: Increased 10.2% or $1.2 million to $13.1 million, reflecting higher average deposit and borrowing balances and rates. The rate on customer deposits increased only 4 basis points.
• Total Provision for Loan and Lease Losses: Decreased 22.6% or $3.3 million to $11.3 million. Provision for originated loans declined $2.6 million. This reflected $1.8 million cash recovery on the sale of previously charged-off loans and reduced need for provisioning on the existing portfolio. Provision for acquired loans declined $0.7 million due to improved performance in the former BBVA PR portfolio.
• Net Interest Margin: Excluding cost recoveries, core NIM was 5.21% compared to 5.25%. OFG’s continued high NIM reflected higher yield on originated commercial loans and cash balances due to the effect of the September Federal Reserve Board rate hike. It also reflected higher proportion of higher yielding commercial and auto loans in the originated portfolio.
• Total Banking and Wealth Management Revenues: Increased 4.4% or $0.8 million to $19.3 million. Banking service revenues increased $0.4 million due to higher transaction volume from continued strength of the local economy and year-end holiday shopping. Wealth Management increased $0.8 million due to $1.3 million from the receipt of seasonal insurance commissions, partially offset by lower broker-dealer commissions. Mortgage banking declined $0.4 million due to lower MSR valuation.
• Other Non-Interest Income: Totaled $5.0 million due to a cash payment from OFG’s insurance company covering Hurricane Maria’s impact on operations.
• Total Non-Interest Expenses: Increased 1.5% or $0.8 million to $51.7 million. This reflected a variety of items, such as one additional payroll date and year-end accrual for performance related compensation, lower appraisal of foreclosed real estate, lower rent and occupancy costs, and the absence of municipal tax payments made in 3Q18.
• Effective Tax Rate: 4Q18 included a non-cash expense of $4.1 million reflecting the net impact of changes required as a consequence of the new Puerto Rico tax reform legislation. The tax reform reduces the corporate tax rate by 1.5% in 2019 which necessitated a Deferred Tax Asset write-down. Due to other provisions in the tax reform OFG does not expect significant changes on its 2019 ETR. The 2018 ETR was 33.6%.

Balance Sheet

Unless otherwise noted, the following compares data at December 31, 2018 to September 30, 2018.

• Total Loans Net: Increased 1.8% or $78.6 million to $4.43 billion. Originated loans increased 3.0% or $107.7 million. Acquired loans declined $30.5 million. New loan production totaled $323.0 million, with auto lending at $123.8 million, commercial lending at $92.1 million, consumer lending at $42.1 million, residential mortgage lending at $33.4 million, and OFG USA loan participations at $31.7 million.
• Total Investments: Declined 2.0% or $26.5 million to $1.28 billion due to repayments of mortgage backed securities.
• Cash and Cash Equivalents: Average balances increased 33.7% or $109.6 million to $434.7 million, while quarter-end cash declined 17.7% or $96.7 million to $450.1 million.
• Customer Deposits (excluding brokered): Average balances increased 1.0% or $45.8 million to $4.46 billion, while quarter-end deposits decreased 3.8% or $175.1 million to $4.38 billion, mainly related to fluctuations in insurance companies’ deposits.
• Total Borrowings: Average balances increased 8.1% or $40.7 million to $543.9 million, while quarter-end borrowings increased 16.9% or $82.4 million to $570.4 million.
• Total Stockholders’ Equity: Increased $30.0 million or 3.1% to $999.9 million, reflecting increased retained earnings and legal surplus and reduced accumulated other comprehensive loss.

Credit Quality

Unless otherwise noted, the following compares data on the originated loan portfolio at December 31, 2018 to September 30, 2018.

• Credit quality: Remained strong with minor variations in key metrics. Non-performing loan rate, at 3.28%, was down 17 basis points. Allowance for loan losses remained level at $95.2 million. As a percentage of loans, the allowance, at 2.54%, was down 8 basis points. Early and total delinquency rates, at 3.34% and 6.36%, respectively, were up 2 and 17 basis points.
• Net Charge-Offs: The rate fell 20 basis points to 1.19% and actual net charge-offs dropped 12.2% or $1.5 million. Both metrics reflected the $1.8 million recovery on the sale of previously charged-off loans.

Capital Position

Unless otherwise noted, the following compares data at December 31, 2018 to September 30, 2018.

• Capital continued to be significantly above regulatory requirements for a well-capitalized institution: This reflected earnings growth as well as the conversion of Series C into common stock.
• Capital Ratios: Metrics improved across the board, with Leverage at 14.22%, Common Equity Tier 1 at 16.78%, Tier 1 Risk-based at 19.20%, and Total Risk-based Capital at 20.48%, and Tangible Common Equity at 12.76%.

Financial Supplement

OFG’s Financial Supplement, with full financial tables for the quarter and year ended December 31, 2018, 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 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, 2017, 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 55th 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. Investor information can be found at www.ofgbancorp.com.

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