OFG Bancorp (NYSE: OFG) today reported results for the second quarter ended June 30, 2019.

Highlights 2Q19 vs. 2Q18

• Net revenues increased 3.3% to $99.2 million from $96.0 million. Increased interest income from Originated Loans and Cash more than offset pay downs of Acquired Loans and lower Investment Securities balances.
• Earnings per diluted share of $0.43 compared to $0.35, a 22.9% increase. Book value per common share grew 4.2% to $18.76. Tangible Book Value per common share expanded 6.7% to $17.03.
• Loans increased 3.7% to $4.47 billion, while core deposits rose 3.1% to $4.56 billion. New loan origination of $326.6 million included the continued success of our Oriental Bank’s strategic targeting of small business customers.
• Net Interest Margin increased 14 basis points to 5.37%. Credit quality and the efficiency ratio improved. Return on Average Assets increased 25 basis points to 1.48%. Return on Average Tangible Common Equity expanded 112 basis points to 10.32%. Capital metrics continued at new multi-year highs.

Other 2Q19 Items

• OFG sold $350 million in low-yielding mortgage backed securities (MBS) in May and reduced related high cost non-core funding. The sale resulted in a $4.8 million gain and the reduction of $191 million of repurchase agreements and $63 million of brokered CDs.
• OFG decided to sell $54 million unpaid principal balance of mostly distressed acquired residential mortgages. The sale is expected to close in 3Q19 as we take advantage of improving market conditions in Puerto Rico. This decision resulted in an $8.8 million net increase in provision.
• Oriental Bank entered into an agreement with Scotiabank to acquire its Puerto Rico and US Virgin Islands operations, subject to usual closing conditions. During the quarter, $1.0 million in related expenses were incurred.

Conference Call

A conference call to discuss OFG’s 2Q19 results, outlook and related matters will be held today at 11:00 AM Eastern Time. Phone (888) 562-3356 or (973) 582-2700. Use conference ID 409-9685. The call can also be accessed live on OFG’s website at www.ofgbancorp.com. A webcast replay will be available shortly thereafter.

CEO Comment

“We are extremely pleased with our second quarter results as OFG continues to deliver on all fronts,” said José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board.

“Our strategies are proving highly effective in capturing the positive economic shift taking place in Puerto Rico as OFG builds excellent momentum for growth now and into the future.

“Our levels of small business, auto and consumer loan production; core deposit growth, credit quality, and capital; and number of customers confirm the success of our Vive la Diferencia (Live the Difference) strategy.

“As a result, we generated a 23% increase in earnings per share on a more than 3% increase in net revenue, with return on assets, net interest margin, and efficiency ratios all at levels similar to top performing peer mainland banks.

“Looking ahead, Oriental will further consolidate its position as the premier retail bank on the island when the recently announced Scotiabank Puerto Rico and US Virgin Island acquisition is closed as we become the second largest in core deposits, branches, automated and interactive teller machines, and mortgage servicing in Puerto Rico, and the third largest bank in US Virgin Islands.

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

Income Statement

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

• Interest Income increased 7.1% or $6.2 million to $94.3 million as continued originated loan growth (+10.2%) and higher yield (+41 basis points) more than offset continued pay downs of acquired loans and the MBS sale. Interest income from originated loans increased $10.3 million, more than offsetting declines of $3.6 million from acquired loans and $0.4 million from investment securities.
• Interest expense increased 26.4% or $2.8 million to $13.2 million. Core deposit costs increased $2.0 million due to higher average balances excluding non-interest bearing deposits (+2.2%) and rate (21 basis points). Brokered deposit costs increased $0.4 million due to lower average balances (-12.4%) and higher rate (+64 basis points). Borrowing costs increased $0.4 million due to higher rate (+37 basis points) on slightly lower average balances.
• Net Interest Margin, excluding cost recoveries, increased 17 basis points to 5.34% from 5.17%. The increase reflected higher yield on originated loans (+41 basis points) and cash balances (+70 basis points), plus a higher proportion of originated loans and cash in interest-earning assets (70.6% compared to 62.8%), partially offset by higher cost brokered CDs and borrowings.
• Total provision for Loan and Lease Losses increased 20.1% or $3.0 million to $17.7 million. Excluding the previously mentioned $8.8 million provision primarily related to the transfer to held for sale of distressed acquired mortgages, 2Q19 provision declined $5.8 million reflecting improved asset quality.
• Total Banking and Wealth Management Revenues declined 1.7% or $0.3 million to $18.1 million due to slightly lower banking service and mortgage banking revenues, partly offset by higher wealth management revenues.
• Total Non-Interest Expenses declined 1.6% or $0.9 million to $51.5 million, resulting in a 260 basis point improvement in the Efficiency Ratio to 51.89%. In addition to $1.0 million in expenses related to the Scotiabank PR and USVI acquisition, 2Q19 included $0.4 million in lower losses on sale of foreclosed real estate as general real estate market conditions in Puerto Rico continue to improve.
• Due to higher proportion of exempt income, the Effective Tax Rate was 32.1% compared to 32.4%.
• 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 June 30, 2019 to June 30, 2018.

• Total Loans increased 3.7% or $158.6 million to $4.47 billion as originated loans increased 8.5% or $293.6 million and acquired loans declined 16.3% or $139.5 million. Compared to March 31, 2019, total loans increased 1.7% or $73.1 million with originated loans up 2.5% or $92.9 million and acquired loans down 3.6% or $26.7 million.
• 2Q19 Loan Production totaled $326.6 million compared to $432.1 million in the year-ago quarter and $276.4 million in the previous quarter. Auto and consumer lending remained high at $136.3 million and $47.7 million, respectively, while residential mortgage lending totaled $22.2 million. Commercial lending at $64.1 million reflected continued growth of small business customers, while OFG USA added another $56.4 million in commercial lending.
• Cash and Cash Equivalents increased 79.0% or $299.1 million to $677.4 million. Compared to March 31, 2019, cash increased 33.1% or $168.4 million. Total Investments declined 35.7% or $482.4 million to $870.7 million. Compared to March 31, 2019, investments declined 30.5% or $382.0 million. The increase in cash and decrease in investments reflect the MBS sale.
• Customer Deposits (excluding brokered) increased 3.1% or $138.0 million to $4.56 million. Compared to March 31, 2019, deposits increased 2.5% or $110.9 million. The increases reflect stepped up efforts to build a larger retail funding base.
• Borrowings declined 35.4% or $195.4 million to $356.8 million. Compared to March 31, 2019, borrowings declined 35.0% or $192.2 million. Brokered deposits declined 15.8% or $73.0 million to $388.4 million. Compared to March 31, 2019, brokered deposits declined 13.9% or $62.8 million. The declines reflect the cancellation of brokered CDs and repayment of repurchase agreements.
• Total stockholders’ equity increased 9.1% or $87.1 million to $1.04 billion. Compared to March 31, 2019, equity increased 2.3% or $23.7 million. The increases reflect growth of retained earnings and legal surplus and reduced other comprehensive loss.

Credit Quality

Unless otherwise noted, the following compares data on the originated loan portfolio at June 30, 2019 to June 30, 2018.

Credit quality improved. Non-performing loan rate at 2.94% fell 69 basis points. Allowance for loan losses declined 4.5% to $89.9 million. As a percentage of loans, the allowance at 2.35% fell 31 basis points. Early and total delinquency rates, at 3.51% and 6.07% were up 44 and 12 basis points, respectively. Net Charge-Offs declined 18.7% to $12.6 million. As a percentage of loans, the net charge off rate at 1.32% fell 47 basis points.

Capital Position

Capital continued to be significantly above regulatory requirements for a well-capitalized institution. June 30, 2019 ratios improved across the board. Leverage at 15.20% increased 128 basis points year over year and 56 basis points from March 31, 2019, Common Equity Tier 1 at 17.48% increased 334 and 39 bps, Tier 1 Risk-based at 19.87% increased 149 and 38 bps, Total Risk-based Capital at 21.14% increased 147 and 37 bps, and Tangible Common Equity at 13.71% increased 276 and 66 bps.

Financial Supplement & Conference Call Presentation

OFG’s Financial Supplement, with full financial tables for the quarter ended June 30, 2019, and its 2Q19 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 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. Visit us at www.ofgbancorp.com.

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