OFG Bancorp Reports 4Q19 & 2019 Results; Updates on Scotia PR & USVI Acquisition

OFG Bancorp (NYSE: OFG) today reported results for 4Q19 and 2019, reflecting the previously announced acquisition of the Puerto Rico and U.S. Virgin Islands operations of The Bank of Nova Scotia (Scotiabank).

Due to the acquisition closing occurring at year-end, OFG's 4Q19 and 2019 income statements and credit quality metrics reflect pre-acquisition operations as well as acquisition related expenses, while the December 31, 2019 balance sheet and capital metrics reflect the newly acquired assets and liabilities.

4Q19

• OFG reported a net loss to shareholders of $2.3 million, or ($0.04) per share, which included $21.5 million in acquisition related merger and restructuring charges and $6.6 million in additional provision for non-performing loans the Company decided to sell in 3Q19.
• 4Q19 compares to 3Q19 net income available to shareholders of $5.8 million, or $0.11 per share fully diluted, and 4Q18 net income of $23.1 million, or $0.45 per share.
• 4Q19 core operations were strong, with net interest margin of 5.35% and loan production of $404.9 million. Most credit quality metrics improved.
• During the quarter, OFG obtained all regulatory approvals, developed an integration plan, and closed on the $560.0 million cash acquisition (excluding settlement amounts), adding $2.2 billion in net loans and $3.0 billion in low cost, core deposits.
• Acquisition related merger and restructuring charges, core deposit intangible of $41.5 million, no goodwill, and tangible book value dilution of 6% were all lower than originally assumed. Loan marks were in line at an average of 6.44%.

2019

• OFG for the year ended 2019 reported net income available to shareholders of $47.7 million, or $0.92 per share fully diluted, which included acquisition related merger and restructuring charges and increased provision from the sale of non-performing loans (NPLs).
• On a non-GAAP basis*, adjusted net income available to shareholders was $83.8 million or $1.62 per share, which compares favorably to 2018 net income of $72.4 million, or $1.52 per share.
• OFG ended the year with book value of $18.75 per common share, up 4.8% from a year ago; tangible book value of $15.97 per common share, down 1.1% as a result of the acquisition; total stockholders' equity of $1.05 billion, up 4.6%; and record total assets of $9.3 billion, up 40.9%.

Conference Call

A conference call to discuss 4Q19 results, outlook and related matters will be held today at 10:00 AM Eastern Time. Phone (888) 562-3356 or (973) 582-2700. Use conference ID 827-3089. The call can also be accessed live on www.ofgbancorp.com. Webcast replay will be available shortly thereafter.

CEO Comment

José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman of the Board, said: "We ended 2019 on a high note, closing the Scotiabank acquisition at year-end as originally anticipated. We welcome our new team members and clients in Puerto Rico and U.S. Virgin Islands. We are committed to providing excellent career opportunities to our new employees and excellent service, products, and technology to our new clients. We're excited about the prospects for future growth.

"I also want to thank all our staff for their exceptional work, some despite their own difficult personal circumstances, in assisting earthquake evacuees. As early responders on the ground in affected areas, Oriental teams helped organized shelters and relief centers. In coordination and collaboration with several of our clients, we provided more than 4,000 meals, bottled water, batteries, electric fans and other essentials. We also arranged access to teams of doctors and structural engineers. The quick response would not have been possible without our compassionate staff and clients. We are extremely proud of our commitment to the communities we serve.

"Turning back to business, 4Q19 was a very busy quarter, closing on the acquisition while continuing to build our existing business. Operationally, we had a strong quarter. We effectively managed the transition to slightly lower yields in the commercial loan portfolio, reflecting FRB rate cuts, with our pro-active effort to reduce high cost wholesale funding. Going forward, our funding mix will improve even further with our larger core deposit base.

"We are well positioned for 2020. The acquisition enabled us to more effectively use our excess capital and end 2019 with a record $6.6 billion in loans and a record $7.7 billion in deposits, which increases our ability to generate future growth. We are moving fast, starting the year focused on integration and loan production, and look forward to reporting our progress in the quarters ahead."

Current Expected Credit Losses (CECL)

The following updates the model development process for CECL Day 1 implementation.

• For the originated book (58% of total gross loans): We are estimating an increase in the current allowance of approximately $21 million to $25 million or 25% to 30%.
• For the Scotiabank non-PCD acquired book (12% of total gross loans): Based on the fair market value of the portfolio, we are estimating the non-PCD allowance will be approximately $16 million to $22 million.
• For PCD loans, including BBVA and Eurobank acquired book plus the recently acquired Scotiabank (30% of total gross loans): The adjustment will be made through the allowance and loan balances with no impact in capital.

The final impact of CECL will depend on the circumstances at the date of adoption such as asset quality, macro-economic conditions and economic perspective, and continued refinement in 1Q20.

Income Statement

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

• Total interest Income fell $3.9 million, to $91.2 million, primarily due to sales of mortgage backed securities totaling $350 million in 2Q19 and $322 million in 3Q19 to free up liquidity to fund the Scotiabank acquisition. Interest income from originated loans increased $2.9 million, reflecting loan growth (+4.8%) and lower yield (-6 basis points). Interest income from acquired loans declined $2.3 million due to continued pay downs of loans. Interest income from investment securities declined $5.6 million, while interest income increased $1.1 million from higher cash balances.
• Total interest expense fell $1.1 million, to $12.0 million, primarily reflecting a more favorable change in the funding mix. Core deposit costs increased $1.6 million due to higher rate (+12 basis points) from a shift to longer-term time deposits. Brokered deposit costs fell $1.2 million primarily due to lower average balances (-49.1%). Borrowing costs fell $1.5 million due to lower average balances (-44.0%) and lower rate (-19 basis points).
• Net Interest Margin, excluding cost recoveries, decreased 6 basis points to 5.28%, reflecting effective management of the interest yield and expense mix.
• Total provision for Loan and Lease Losses increased $11.8 million, to $23.1 million, which includes the previously mentioned $6.6 million for additional provision for NPLs sold. 4Q19 provision also included $3.6 million allowance for the remaining balance of an originated commercial loan, pending insurance recoveries, on a property destroyed in a fire.
• Total Banking and Wealth Management Revenues were level at $19.2 million. Higher mortgage banking revenues offset lower wealth management and banking service revenues.
• Total Non-Interest Expenses increased $26.6 million to $78.4 million, which includes the previously mentioned $21.5 million merger and restructuring charges. 4Q19 expenses also included $2.8 million in contingent legal reserves and operational losses, and $1.5 million in incremental health insurance expenses and technology development expenses.
• Effective Tax Rate was 28.5% in 2019 compared to 36.4% in 2018. The decline was primarily due a higher proportion of exempt income and capital gains at lower rates in 2019.

Balance Sheet

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

• Total Loans increased 49.9% or $2.2 billion to $6.6 billion. Originated loans increased 4.2%, or $152.2 million. Acquired BBVA and Eurobank loans declined 21.7%, or $171.6 million. Acquired Scotiabank loans totaled $2.2 billion. Compared to September 30, 2019, originated loans increased 2.4%, or $87.8 million, and acquired BBVA and Eurobank loans declined 7.7%, or $50.3 million. Acquired BBVA and Eurobank loans declined year over year and on a sequential quarter basis due to sales of non-performing loans in 3Q19 and 4Q19 and continued pay downs.
• Loan Production totaled $404.9 million compared to $323.0 million in the year-ago quarter. 4Q19 production was the highest since the post-hurricane comeback quarter in 2Q18. Auto and consumer lending remained strong at $110.2 million and $41.9 million, respectively, while residential mortgage lending totaled $23.7 million. Commercial lending at $229.1 million primarily reflected the closing of large and middle market corporate loans as well as continued growth of small business customers.
• Cash and Cash Equivalents increased 89.5%, or $402.7 million, to $852.8 million, which included $626.9 million from the Scotiabank acquisition. Compared to September 30, 2019, cash declined 11.4%, or $110.1 million.
• Total Investments declined 15.0%, or $191.8 million, to $1.1 billion, which included $576.2 million from the Scotiabank acquisition. Compared to September 30, 2019, investments increased 105.4%, or $558.1 million.
• Customer Deposits (excluding brokered) increased 70.1% or $3.1 billion to $7.5 billion, which included $3.0 billion from the Scotiabank acquisition. Compared to September 30, 2019, deposits increased 62.4% or $2.9 billion.
• Brokered deposits declined 53.6%, or $281.6 million, to $243.5 million. Compared to September 30, 2019, brokered deposits declined 15.6%, or $44.9 million. The declines reflect the maturity of brokered CDs. The acquisition did not add any brokered CDs.
• Borrowings declined 46.4%, or $264.9 million, to $305.6 million. Compared to September 30, 2019, borrowings declined $0.4 million. The declines reflect the repayment of repurchase agreement funding. The acquisition did not add any borrowings.
• Total stockholders' equity increased 4.6% or $45.9 million to $1.05 billion. Compared to September 30, 2019, stockholders' equity declined 0.3%. The year over year increase reflects earnings growth and reduced other comprehensive loss.

Credit Quality

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

• Non-performing loan rate at 2.07% fell 121 basis points. Allowance for loan and lease losses declined 12.3%, to $83.5 million. As a percentage of loans, ALLL at 2.15% fell 39 basis points. The decrease in the NPL rate and ALLL reflects the previously mentioned sales of NPLs.
• Early and total delinquency rates, at 3.69% and 5.31%, were up 35 and down 105 basis points, respectively.
• Net Charge-Offs increased $3.1 million to $14.0 million. As a percentage of loans, the NCOs increased 27 basis points to 1.45%. NCOs reflect increases from auto and consumer loans, partially offset by declines in mortgage and commercial loans.

Capital Position

• Because of the effective use of excess capital in the Scotiabank acquisition, OFG's capital ratios have now become more comparable to similar sized peers while continuing to be significantly above regulatory requirements for a well-capitalized institution.
• At December 31, 2019, the Leverage ratio was 13.99%, Common Equity Tier 1 capital ratio was 10.78%, Tier 1 Risk-Based Capital ratio was 12.50%, and Total Risk-Based Capital ratio was 13.77%. Tangible Common Equity ratio was 8.97%.

Financial Supplement & Conference Call Presentation

OFG's Financial Supplement, with full financial tables for the quarter ended December 31, 2019, and 4Q19 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, 9-2 and 10 in OFG's above-mentioned Financial Supplement for reconciliation of GAAP to non-GAAP Measures and Calculations. OFG has attached to this news release Table 10: "Reconciliation of GAAP to Non-GAAP with adjustments to exclude the impact of significant events" for the year ended December 31, 2019.

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 56^th year in business, OFG Bancorp is a diversified financial holding company that operates under U.S., Puerto Rico and U.S. Virgin Islands 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 and U.S. Virgin Islands. Visit us at www.ofgbancorp.com.

1. During 2Q 2019 and 3Q 2019, the Company sold $350 million and $322 million available-for-sale mortgage-backed securities, respectively, and recognized a gain in the sale of $4.8 million and $3.5 million, respectively.
2. During 2019, the Company sold mostly non-performing loans, increasing the provision by $8.8 million in 2Q2019, $38.9 million in 3Q2019, and $6.6 million in 4Q2019.
3. During 3Q 2019, the Company received $2.4 million proceeds from the sale of fully charged-off originated auto and consumer loans.
4. During 2Q 2019, the Company entered into an agreement with Scotiabank to acquire its Puerto Rico and US Virgin Islands operations, subject to customary closing conditions. On December 31, 2019, the Company completed the acquisition. During 2Q2019, 3Q2019 and 4Q2019, $1.0 million, $1.6 million and $27.2 million, respectively, were incurred in related merger and restructuring charges.     
5. During 3Q 2019, the Company recognized an FDIC insurance assessment credit received amounting to $1.5 million.
6. During 3Q 2019, the Company received an additional $1 million credit from Puerto Rico Treasury on employee retention during hurricane Maria.
7. During 3Q 2019, the Company had a reduction in provision for loan losses of $4.5 million as a result of the adjustment to the qualitative factor related to sustained favorable macroeconomic conditions in Puerto Rico.
8. On December 31, 2019, the Company acquired Scotiabank's Puerto Rico and USVI operations for $560 million (excluding settlement amounts), which approximated the fair value of net assets acquired. The determination of fair value may necessitate the use of one year measurement period to adequately analyze all the factors used as of the acquisition date.