OFG Bancorp

Good morning, and thank you for joining OFG Bancorp's conference call. My name is Christelle, and I will be your operator today. Our speakers are José Rafael Fernández, President, Chief Executive Officer and Vice Chairman, and Maritza Arizmendi, Executive Vice President and Chief Financial Officer. A presentation accompanies today's remarks. It can be found on the Investor Relations website, on the homepage, In the What's New box or on the webcast presentations and other files page, this call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and results may differ materially from those currently anticipated. We disclaim Any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. It is my pleasure to turn the call over to Mr. Fernández.

Good morning. Thank you for joining us. I hope all participants and their families are safe and healthy. I will start on page three talking about COVID-19 pandemic situation and then we'll get to the numbers. The rapid spread around the world of the coronavirus is affecting everyone personally and financially. Our heart goes out to those who lost loved ones, are ill, or are suffering monetarily. In Puerto Rico, the spread of COVID-19 has not hit us as bad as in other areas of the world. Puerto Rico Governor Juan de Alasquez announced a strict curfew early on March 12th, making Puerto Rico the first jurisdiction in the United States to implement such measures. As of Sunday, there were less than 1,400 positive cases and 85 deaths, but these numbers are based on an extremely low level of testing. In fact, the lowest testing per 100,000 habitants of all 50 states. The governor is about to present a plan for slowly reopening the economy. It is critical that such attempt to reopen is done under the strict, knowledgeable advice of scientists and doctors to assure the safety and health of all. Thankfully, so far, everyone at OFG and Oriental are okay. Our priority going into the pandemic was to keep our employees safe, while maintaining our nimble and proactive approach to business. In doing so, we enter the crisis from a position of strength. We remain well capitalized and highly liquid with a CET1 ratio of 11.67% and more than $1.6 billion of cash and unencumbered securities. This is not the first time this management team has faced and successfully dealt with externally created crisis situations. Coming out of this one, as we have done in the past, our goal is to maintain strong capital and liquidity so we may continue to help customers now and throughout the inevitable recovery. Our first quarter performance confirms the strength of our business, balance sheet, and franchise during this critical time. This is the direct result of the proactive and customer-focused culture we have developed, our ongoing investments in technology, and the effective strategies we have put to work. We believe we are in a strong position going forward. In addition to closing the Scotiabank acquisition last year, we significantly reduced higher-cost non-core funding and sold a large amount of non-performing loans. During the first quarter of this year, we significantly increased our allowance for loan losses. In March, For our employees, we implemented a comprehensive program combining workforce safety, technology, and special benefits. For our retail and business customers, we launched payment relief programs, waived charges and fees, and increased amounts that can be withdrawn or transferred electronically. As a result, more than 50% of our employees are working remote. We have achieved uninterrupted and superior levels of service through all channels. 47 branches are open for safe access to ATMs, interactive ATMs, drive-thru, or appointments. The nine branches that are closed are all inside closed shopping centers. We have maintained employee and customer safety and social distancing, and clearly The investments we made early on in digital are helping customers continue to do their banking. Our teams also work quickly to develop new digital tools. More than 43% of retail customers requesting forbearance have done so digitally. Also, 100% of small business requesting SBA PPP loans have applied digitally. All of this has facilitated close communication with our customers. This has enabled us to provide the financial advice and resources they need to navigate this challenging time. For example, in the first round of PPP, we helped 900 small businesses with more than 25,000 employees access more than $140 million in loans. Our deepest appreciation goes to frontline first responders and healthcare professionals dealing with the coronavirus. We also want to thank our teams at OFG and Oriental on the other frontline. They have done an outstanding job helping customers and businesses manage the financial challenges during this crisis. Please turn to page four. We immediately experienced a pickup in technology usage by both retail and business customers starting in March, and it has continued. For example, as of the first quarter, active mobile banking users and people-paid transactions increased 43% from the first quarter of 2017. And as of the first quarter of this year, 57% of all loan and credit card payments we received went through digital channels. As I mentioned, we enhanced this effort by quickly developing unique and first-to-market digital tools to help consumers apply for forbearance and businesses for PPP loans. Along those same lines, since mid-March, more than 1,000 clients have used our existing online appointment tool to conveniently schedule meetings in branches Under COVID-19 Safe Conditions. Looking at the first round of SBA PPP program, we originated 32% of the loans in Puerto Rico and disbursed 21% of the total amount granted to Puerto Rico businesses. Our average cycle time was only five days. We're very pleased to see these trends. Technology is a core part of our overall corporate strategy, and we continue to look for new and innovative ways to use it to help our customers. Now let's turn to our results on pages five through seven of our presentation. Let's start with our financial highlights on page six. Net core revenues increased 33%. That mainly reflects the significant increase in interest earning assets from the Scotiabank acquisition J.D. J.D. J.D. J.D. We decided to postpone most of the plan's cost savings until there is more clarity on how the coronavirus pandemic plays out. Partially offsetting these added costs was a gain on sale from mortgage-backed securities. The bottom line was a breakeven quarter. Tangible book value declined slightly, primarily due to day one effect of CISO, which I'll get to in a few minutes. The key performance ratio we look at, efficiency, return on assets, and return on equity, all improved sequentially from the fourth quarter when we had large merger and restructuring charges associated with the end-of-the-year acquisition of Scotiabank Puerto Rico. Looking at our operational highlights on page 7, average loan balances increased 48% year-over-year, contributing to the increase in net interest incomes. This was mainly due to the acquisition. Average core deposits, excluding brokered, increased 71% year-over-year. This was similarly a result of the acquisition, but also due to an organic increase in deposits. The overall increase in lower-cost core deposits has enabled us to reduce higher-cost broker CDs and borrowing balances by more than 47% year-over-year. Loan generation was slightly ahead of the year ago. It should be noted The first quarter of this year was affected by a slow start because of the earthquakes. Volume picked up nicely later in January and February, mainly due to the increased customer base and added capabilities from the Scotiabank acquisition. And as expected, production fell in March because of the impact of COVID-19. Loan yield at 7.01% held up well. The year-over-year decline reflected two factors. The first is our new loan mix. which includes a larger proportion of 30-year fixed rate residential mortgages from the Scotiabank acquisition. The approximate yield on this loan portfolio is in the 5% range. The second factor was our variable rate commercial loan portfolio. On a year-over-year basis, this portfolio experienced the full effect of the Federal Reserve's 2019 second half rate cuts and the partial effect The cost of core deposits increased 14 basis points year-over-year before the fair value amortization for the Scotiabank deposits. As a result, net interest margin declined to 4.94%. I would like to point out that this decline includes lower yield on our cash balances as a result of the Fed's rate cut that I previously mentioned. Please turn to page eight to review credit quality. There was little effect in the first quarter of the coronavirus. The net charge of rate was up eight basis points from a year ago as a result of the previously reserved commercial loans. The non-performing loan rate was down 131 basis points from a year ago due to the NPLs we sold in 2019. Please turn to page 9. This page provides detail on the impact of CECL Day 1 and our March 31 reserve bill. CECL Day 1 added $39 million in allowance for non-purchase deteriorated loans. It resulted in a charge against retained earnings and capital of about $25.5 million net of taxes. For purchase credit deteriorated loans, We made a $51 million adjustment. It is important to note that this was made through the allowance and loan balances with no impact on capital. At the end of the quarter, we added a $34 million provision incorporating changes in our macroeconomic outlook and qualitative adjustments as a result of COVID-19. We use Moody's economic scenario for Puerto Rico that incorporates COVID-19 for our CECL modeling. The continued uncertainty regarding the severity and duration of the pandemic and its related economic effects remains, and it is unclear to what extent various governmental initiatives will be able to mitigate future credit losses. This resulted in a year-over-year increase in our allowance of $68 million, and a sequential quarter increase of $114 million. Please turn to page 10. Starting mid-March, we have been communicating even more closely with customers over what effect the COVID-19 pandemic will have on their personal and business situation. To date, approximately 30,000 customers accounting for $721 million or 16.9% of our retail loan balances have been granted moratoriums. Moratoriums are available for up to three months on interest and principal, but each one is reviewed on a case-by-case basis. This is as opposed to Hurricane Maria when three months deferrals were automatically granted to all retail loans. On the commercial side, $204 million or 8.8% The total of $2.3 billion of commercial loans have been granted deferrals and received deferral of principal and interest payments. We have also escalated the monitoring of industrial sectors in our commercial portfolio, now considered to be more economically sensitive. That mainly consists of hotel and restaurant chain clients, which account for about $224 million, or 9.7% of commercial loans. Hospital clients which account for $103 million or 4.5% of commercial loans and retail shopping center clients which account for about $74 million or 3.2% of commercial loans. Please turn to page 11 to review our capital position. As I mentioned earlier, we believe we have entered this pandemic with a strong capital position. All our regulatory capital ratios increased from December 31st and continue to be significantly above requirements for well-capitalized institutions. Please turn to page 12. To conclude, we think we have operated well so far in this very challenging environment. Operationally, we were the first and only bank in Puerto Rico to provide COVID-19-related digital solutions to help consumers bank online. We have provided uninterrupted and superior levels of service through all channels while maintaining both employee and customer safety. This has enabled us to keep in close communication with our clients in order to understand well their needs and provide them with the advice and resources required to navigate this challenging time. Our digital capabilities are helping customers do their banking with ever greater ease and convenience. We are in a strong capital, liquidity, and reserve position. Looking ahead, our priority is to protect our employees, help our customers, and thereby support the communities we serve. I'd like to add that the Scotiabank operations and technology integration has continued on track. We anticipate completing it over the course of this year as originally planned. Based on our success, We anticipate continuing to invest in technology to digitize our business at a faster pace than originally planned. Ultimately, our goal is to continue to demonstrate our financial strength, operating agility and resiliency with strong risk management, and build an ever stronger company for all our stakeholders. For more than half a century, we have been there to help customers manage their finances Thank you for listening. Operator, let's start the Q&A. At this time, if you would like to ask an audio question, please press star 1 on your touchtone phones.

Once again, that is Star 1 to ask an audio question. Your first question comes from the line of Alex Tortle with Piper Sandler.