OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Lori 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 home page, 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 uncertainties outlined in the Risk Factors section of OFG's SEC filings. Actual 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. I would now like to turn the call over to Mr. Fernández.

Good morning. Thank you for joining us. Please turn to page three. First, I would like to thank all our team members for their dedication and commitment during these very challenging times. Like other banks, we faced a number of COVID-19 related challenges during the second quarter. But for us at OFG, the pandemic also followed the earthquakes we experienced in January and occurred while we were in the process of integrating the Scotiabank acquisition. Certainly no small challenge. But by acting quickly and with foresight, we produced excellent results for our customers, communities, and people, and continue to help them build better financial futures. In March, governments in Puerto Rico and U.S. Virgin Islands shut down businesses and personal activities. Restrictions were eased in late May, but recent spikes in new cases have forced Puerto Rico to reduce some of the flexibility. The Federal Reserve Bank cut rates 150 basis points in March, following the 75 basis points reduction in the second half of 2019. Our commitment and preparation enable us to successfully manage these challenges fácil, rápido, hecho, easy, fast, done, as we say at OFG. All our branches operated safely throughout the quarter, enhanced by our technology platform. Our full-service ATMs and ITMs, mobile apps, and online bill-paying tools facilitated routine transactions in a contactless manner. Online and mobile appointment scheduling helped make COVID-safe customer meetings possible at branches. We deployed a 100% digital, client-friendly application and funds disbursement process for PPP loans. About half of our team members are still working remote. We also implemented extensive new safety protocols for our customers and people onsite. And we continue to offer new benefits for our people, such as free COVID onsite testing and daily online health check-ins, as well as incentives. The results speak for themselves. We provided high levels of customer service, safety, and knowledge throughout all channels. Loan production in the second quarter totaled more than $500 million. Customer deposits increased $760 million. Our online loan deferral tool and call centers processed relief for more than 44,000 retail customers. We reduced higher-cost wholesale funding, maintained a strong level of net interest margin, and continued to build liquidity and capital. And we secured $100,000 in Federal Home Loan Bank of New York grants to support local, nonprofit, and small businesses in Puerto Rico and the U.S. Virgin Islands. Please turn to page 4. We have continued to see Strong technology utilization trends among both our retail and business customers since the beginning of the year, and in particular since March. Online bill pay enrollments were up 12% as of March and 24% as of June. Mobile banking users jumped 17% by the end of the second quarter from the beginning of the first. The number of remote deposit capture users are up 68% from the end of March. In another area of success for us, during the second quarter, we scheduled more than 18,000 COVID-safe appointments with our customers through our online and mobile tool. We are very pleased to see these trends. Technology is a core part of our overall corporate strategy. We continue to look into new ways and innovative ways to use it to help our customers. Please turn to page five. Looking at our SBA PPP program, we continue to exceed our market share in Puerto Rico. We generated a total of $286 million in new loans. This enabled us to help more than 4,000 small businesses save more than 50,000 jobs. It also enabled us to attract new accounts in this strategically important customer base. And we were able to distribute these funds electronically within five days of application approval. This is a great example of our ability to act quickly in response to changing conditions to the benefit of both existing and new customers and the communities we serve. Let's talk about our results on page six. We reported EPS of 39 cents and 37 cents on a non-GAAP basis. Total core revenues were $128 million Most of that was due to a large increase in interest-earning assets, chiefly loans and cash. This was partially offset by a decline in yield due to significantly lower rates on cash and lower yields on variable rate commercial loans. In addition, we had lower investment security balances. As a result, we generated net interest income of $105 million with a net interest margin of 4.78%. Banking and wealth management revenues totaled $23 million. Non-interest expenses were $86 million, primarily due to the addition of the Scotiabank acquisition. Second quarter results included several items. $9.5 million in revenues from Scotiabank interest recoveries and bargain purchase gain. We added $5 million in provision for the pandemic. And within non-interest expenses, We had a five million dollar emergent and restructuring charges and COVID related operating costs. Please turn to page seven. The effects of these results is that we're building tangible book value and our return on asset and return on equity continue to improve sequentially from the fourth quarter. Please turn to page eight for operational highlights. Average loan balances increased 52% year-over-year and 2% quarter-over-quarter. Average core deposits, excluding brokerage, increased 76% year-over-year and 5% quarter-over-quarter. Loan generation was strong. Increased production from PPP and other commercial loans was partially offset by reduced production in our retail categories, primarily due to the economic shutdown. We ended the quarter with good momentum and good pipelines in the mortgages, and other businesses. Loan yield at 697% continued to hold up well despite the recent Federal Reserve cuts. The cost of core deposits declined 4 basis points year-over-year. Net interest margin declined to 4.78%. Please turn to page 9 to review credit quality. The net charge-off and non-performing loan rates declined year-over-year and quarter-over-quarter, reflecting loan pay downs and the effects of deferrals. Provision for credit losses of $18 million was level with last year. I'd like to note the year-ago provision included an extra $9 million related to loans transferred to Health for Sale. Please turn to page 10 to review our loan deferrals. After disruptions in economic conditions caused by COVID-19, we offered several loan payment deferral programs ranging from one to four months. As I've mentioned, we've enhanced this effort by quickly developing unique and first-to-market digital tools to help consumers apply for forbearance on an individual basis. Our online loan deferral tool and call centers process relief for more than 44,000 retail customers. In total, we have about $1.4 billion or 32% of our retail loans on deferral. The pace of retail requests is significantly slowing. In addition, we have about $685 million or 26% of our commercial loans on deferral. Please turn to page 11. The allowance for loan and lease losses of $233 million increased $70 million year-over-year. and we have almost doubled the level of reserves from December 31, 2019. Compared to March 31, 2020, the allowance increased $2 million. Excluding SBA-guaranteed PPP loans, second quarter 2020 allowance was 3.49% of loans, eight basis points higher than the first quarter. Please turn to page 12. We are in a strong capital position. Our CET capital ratio, as you see on that slide, at 12.03%, is up 112 basis points since last year. Please turn to page 13. While we still face much uncertainty regarding COVID and the economy, we are in a strong financial position, ready to help our customers during these trying times. Once we get through this, Puerto Rico stands to benefit significantly from COVID stimulus and still unspent and undistributed Maria and earthquake related stimulus programs. At ORG, we believe our results and our history demonstrate our ability to quickly respond and adapt to changing economic environments. During the second quarter, we continue to build momentum in our core businesses and develop a good pipeline of new loans. From a liquidity, capital and balance sheet point of view, We are well positioned both financially and strategically. Our agenda going forward is clear. We plan to continue integrating the former Scotiabank operations and finish by the end of this year. At the same time, we must achieve the full benefits of the acquisition by the end of 2021. We also plan to continue to invest in the future to further simplify our operations and enhance our ability to serve customers. and ultimately we intend to continue to play a significant role in the recovery in Puerto Rico and the U.S. Virgin Islands. Again, I want to thank all our team members for our excellent results and for their dedication and commitment throughout these trying months. Crises bring out the best in people to help others. Our people demonstrate that with purpose every single day. With this, we end our formal presentation. Thank you for listening. Operator, please open the call for the Q&A session.

Thank you. At this time, I would like to inform everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Once again, to ask a question, please press star 1. Your first question comes from the line of Alex Tordahl of Piper Sandler.