Q2 2020 OFG Bancorp Earnings Call
Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily until that time you were lying full again be placed on music called. Thank you for your patience.
Dead dead. Good morning. Thank you for joining ofg Bancorp conference call. My name is Laurie and I'm your operator today. Our speakers are Jose Rafael Fernandez President Chief Executive Officer and vice chairman and Maritza Arizmendi Executive Vice President's 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 presentation other files page this call May feature certain forward-looking statements about management goals plans and expectations. These statements are subject to risks off on certainties outlined in the risk factors section of of 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 occurred afterwards all lines have been placed on mute to prevent any background noise after the speakers remarks. There will be a question-and-answer session. I would now like to turn a call over to mister Fernandez. Good morning. Thank you for joining us. Please turn to page three.
First I would like to thank all our team members for the dedication and commitment during this very challenging times like other Banks. We Face the number of covid-19 related challenges in the second quarter, but for us at ofg that pandemic also follow the earthquakes we experience in January and occurred while we were in the process of integrating the Scotiabank application certainly no small challenge, but by acting quickly and with foresight, we produce excellent results for our customers communities and people I continue to help them build better Financial futures.
In March government in Puerto, Rico and US Virgin Islands shut down businesses and personal activities restrictions were eased in late may but recent spikes new cases have forced Puerto Rico to reduce some of the flexibility.
The Federal Reserve Bank rates a hundred and fifty basis point in March following the 75 basis points reduction in the second half of 2019.
our commitment
In preparation enable us to successfully manage these challenges fast easy fast done as we say at OLG all our branches wage operated safely throughout the quarter enhanced by our technology platform our full service ATMs an IPM mobile app and online bill-paying tools facilitate the routine transactions in a contact contact list manner.
Online and mobile appointment scheduling help make coverage safe customer meetings possible at branches. We deployed 100% digital client friendly application wage dispersion and 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 on site and we continue to offer new benefits for people such as free copy on-site testing and daily online health check ins as well as centers.
The results speak for themselves. We provided high level of customer service Safety and knowledge throughout all channels Loan Production in the wage order total more than $500.
Customer deposits increased 760 million dollars are online loan deferral tool and call centers process relief for more than 44,000 retail customers. We reduced higher-cost wholesale funding maintain a strong level of Interest margin and continue to build liquidity and capital and we secured $5,000 in federal Home Loan Bank of New York grants to support local nonprofit and small businesses in Puerto Rico and the US Virgin Islands, please turn off age for
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 enrollment bill pay enrollment 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 doing a second quarter. We schedule more than 18,000 covered save appointments with our customers through our own our own line and mobile tools. We are very pleased with this to see these girlfriends 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 r s b a p p p program we continue to exceed our market share in Puerto Rico. We generated a total of $286 in New Orleans is in a place to help more than four thousand small businesses save more than 50,000 jobs. It also enabled us to attract new accounts in this strategically important customer base and Thursday. 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 page 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 $0.39 and $0.37 on a non-gaap total core revenues were a hundred twenty-eight million dollars. Most of that was due to a large increase in interest earning assets chiefly loans and cash. This was partially offset by a declining you do to significantly lower rates on cash and lower yields and variable-rate Commercial loans. In addition. We have lower investment Sakura balances.
I said we sold we generated net interest income of $105 with a net interest margin of 4.78% banking and wealth management Revenue loss total 23 million dollars not interest expenses were eighty six million primarily due to the addition of the Scotiabank acquisition second-quarter results included said license 9.5 million dollars in revenues from Scotiabank interest recoveries, and bargain purchase games. We added five million dollars in provision for the pandemic and we may not interest expenses. We have a $5 million-dollar emergent and restructuring charges and covered related operating costs.
Please turn to page seven. The facts of these results is that we're building tangible value on our return on asset and return on Equity improved sequentially from the fourth quarter.
Please turn to page eight for operational highlights.
I'm rich loan balances increased 52% you over a year and 2% order of a quarter average core deposits excluding broker increased 76% year-over-year and 5% off her recorder loan generation was strong increased production from PPP and other commercial loans was partially offset by reduced production in a retail category primarily due to the fact make sure the shutdown we ended the quarter with good momentum and good pipelines in the mortgages and auto businesses loan yields at six ninety seven percent continue to hold up. Well despite the recent Federal Reserve cuts the cost of core deposits declined 4% 4 basis points year-over-year net interest margin declined to 4.78%
Please turn.
to page nine to review credit quality
the net charge-off and non-performing loan rates Decline year-over-year and quarter-over-quarter reflecting low-paid downs and the effects of the ferals provision for credit losses of $18 was level with last year. I'd like to note the year-ago provision include an extra nine million dollars related to loans transferred to help for sale. Please turn to page them to review our loan deferrals.
After disruptions in economic condition caused by caused by covid-19. We offered several loan payment deferral programs ranging for 1 to 4 months. As I mentioned that we've enhanced his effort by quickly developing unique and first-to-market digital tools to help consumers apply for forbearance on an individual basis are online loan deferral tool and call center of process we leave for more than 44,000 retail customers in total we have about one point four billion dollars or 32% of our retail loans on the Pharaoh. The pace of retail request is significantly slower. In addition. We have about $685 million dollars or 26% of our commercial loans on the pharaoh.
Please turn to page eleven the allowance for loan and Lease losses of 233 million increase $17 a year over a year and we have almost double the level of a game from December 31st, 2019 compared to March 31st, 2020 the allowance increase two million dollars, excluding sba-guaranteed PPP lower second-quarter 2020 allowance was 3.49 per cent of loans 8 basis points higher than the first quarter.
Please turn to page twelve.
We're in a strong Capital position or CT Capital ratio as you see on that slide at 12.03% is up 112 basis points since last year.
Please turn to page 13.
Well, we still face and much uncertainty regarding covered 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 college stimulus and still on spent on distributed Maria and earthquake-related stimulus programs.
I've ordered G we believe our results on our history demonstrate our ability to quickly respond and adapt to changing economic environments during the second quarter. We continue to build momentum, you know 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 am gender going forward is clear. We plan to continue integrating the former Scotiabank operations and finished 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 US Virgin Islands again, I want to thank all our team members numbers for our excellent results on for the dedication and commitment throughout these trying months crisis bring out the best in people to help others are people. They don't 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 the number one 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 you a question, please press * 1. Your first question comes from the line of Alex Toradol a piper Sandler.
Good morning.
Good morning, Alex. How are you? Well, thanks just to start off on the on the reserve and the provision maybe you could help us kind of just break down the provision for this quarter of the five million that you put aside for covid-19. Was that related mostly to a change in the Moody's S3 scenario, or was it related to internal downgrades of credits related to age or how should we think about that? I'll give you a high level. I'll let my Tita answer you in more detail, but we we actually have the s33 scenario. We we have kept that S3 only scenario and we feel that a lot of the comedy 19 has proven to be extremely uncertain across the globe and and we feel that here in Puerto. Rico is no exception. So we decided to keep the
Yes, three movies as a scenario where we drive our provisioning. So that's the big side of it the big picture of it. I'll let me give you the details on the web app. Hi, Alex regarding the additional $5. We keep the S3 a scenario. And we also have already all of adjustment that we did during the last order we update them and as a result for that, we are 5:15 to read the portfolio multi based on most recent information. And and that's the does the 5G network does not for the public life provision. Okay, so it was retail oriented mostly but I'm just I'm just kind of curious if there was a specific factor in Rome.
so that you're looking at just kind of
Thinking about the amount of stimulus money that's flowing down to the island and seeing the deposits really balloon at you and and some of your peers, you know, it seems like the retail might be in better shape today than I normally would without the stimulus it kind of how should we think about you know, how you're expecting the retail portfolio is to perform. I think I think the assumptions that you that you posed are correct, there's certainly stimulus flowing down from covered and until from the hurricane Maria and the earthquakes and and that's going to play out. I think there's no there's a portion of it that will play out on the short-term and we would like to see the deferral Pro the deferral program end of it ended in June 30th and see how the retail portfolio behaved forward to feel more comfortable on on the scenarios. But I agree with you a longer-term. We just think that the economy in the it's hard for us to age.
Pinpoint how the economy is going to be doing the next six months, but we do agree that the economy with the stimulus and and all the items that I mentioned should have good momentum on the I mean more longer-term scenario. So we will update as we see and feel more comfortable with the data on the credit card.
Right and you guys have done the full reviews at this point on all your commercial customers and gone through and and of course if you know if there's something that you saw you would have added to the reserve this quarter. Yep. Yep on the commercial side. I can tell you that we we we are keeping a close eye on different Industries, but particularly on the hospitality. That's the industry that that we are most focused on in terms of the effects of the covid-19 pandemic right now most all of the referrals on the large and middle-market Commercial portfolios ended on June 30th, and we should have 12 loans on the hospitality that ask for three additional months. So so if you positive about our commercial portfolio on the middle and and large commercial for
We also feel good about our efforts on the small business side and how we're monitoring those. So again, we should be okay on on the on that side and we're happy to see commercial clients coming back as as they are. But again when we look at the provisioning, we we found that uh on the retail side the effects of the pandemic are still quite uncertain and we we don't know how how the wage garment is going to react to the recent fight understood and then just to switch gears a little bit and and looking at expenses. If you kind of back out the Cove it adjustment wage as well as some merger expenses. He gets kind of like an eighty eight point five million dollar run rate for expenses. Is that the right run rate to use going into the third quarter or yep.
I guess I guess where's the starting point?
And then kind of as you near the end of the integration of Scotia, where do you expect expenses to kind of end the year and start 2021. So so on the expense side remember the second quarter has lower activity. So so we were showing lower cost of of transaction ality over of the lower class that we received from the customer. So the economy picks up we expect those expenses to to come back up but on the other hand, we we started off the the efforts on extracting the savings from the Scotia acquisition in the in this third quarter and we're we're very very cautious simply because of the the environment in terms of recovery, but but we we are going to see some beige
It's from from those efforts and with you more comfortable giving you a comfort on extracting the 25% cost savings from the off position by the end of 2021 because again it we're we're operating in a different environment than normal. So that kind of thing best. I can give you Alex on the expenses. I really think that we are in in good shape there as we are executing on our our efficiencies. I'll beat our a slower Pace than we anticipated given the the covid-19. Thanks for taking my questions.
You're welcome, Alex. Thank you for your your questions.
We're next question, Small line of Glen Mana of KBW.
Hi, good morning. Good morning Glen. I just want to discuss the the name for a minute. Maybe we could could talk about what portion of the the cross over to Klein came from excess liquidity and what portion came from rates and PPP and if you could discuss it in the context, excluding the interest rate recovery may be helpful.
Including the interest rate recovery. You said one right the the file as it's booting, right? Excellent job transfer that one that uh, hey, I told you you question in general the 44 basis point reduction, excluding the recovery, you know, we we have done wrong assumptions you guys being you know what, you know, it depends on how much cash we will will keep going forward but in general our assessment it's about one-third about 15 basis-point relates to the cash balances that we hold during the quarter and balances that we already The Loan program about 15 basis-point.
so that would
Be 1/3 from excess liquidity and two-thirds of the drop was was just on rate was on rates. Yes, because it does balances as you know, where impacted because of the month reports and also the the portion of the commercial portfolio that is indexed variable rates that we have around 52% of our portfolio home of the commercial portfolio is viable, but we are expecting that this quarter already have the full effect of the FED cuts off or were we expecting a more stable type of name as we will see during the third quarter the full effect of the PPP Loan program in the back wheels, but also, we will experience lower cost on borrowings as they continue to mature during the Safe Water right? I was looking at the Dead
Repo balances and it look like on an average basis. They were still in there. But on a spot basis you you've paid off. You've got you've taken off all the Repose. Yes, and and make sure we still have so much Rupees coming in the next several quarters. I need to 20 21 that that will certainly will use the extra security to cancel them off. Okay, and on the PPP loans, what was the average yield you used in the quarter? And what's your expectation on forgiveness for those loans going forward? I'll tell you I'll talk to you about the expectations of forgiveness and Marita talk about the U and on on the Forgiveness. We're still expecting the federal government to give give more guidelines on on on the Forgiveness. But but we feel that there is a large proportion more than 80% of those loans that will be forgiven. It's hard for us to pinpoint dead.
When that will occur, but but we are more and more of the opinion that there's going to be a larger percentage of our of our people that will be forgiven.
On the rate D. Yeah, the only the only during the amortisation of the 5th. We are expected to be around to 95.3% considering the Life along but also remember that also mention it is they are repaid before maturity will be able to recognize the normal sized person of that. Okay, and you're using the level method?
Yes.
Okay, and on on the deferrals, you know with with some of them beginning to roll off have you got an idea of what I read? The federal rates are or reading a request rates too early to tell we are not seeing that much activity on the on as I mentioned the large middle commercial so far. We're what we're focusing a month or more on the hospitality industries on the retail side. It's too early. It's been three weeks into the into the quarter and on the third quarter. So we'll we'll be able to talk later in the in the next quarter's call. But the first indications are are possible for sure. But at the end of the day depends on on how it plays out at the end of the of the third quarter when you have the full effect of the end of the day how many ask for an additional deferral program or process or how many dead
I'll come back today. Okay. Thank you for taking my questions.
Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of joke off of Old insecurities. Good morning. Hi, Joe. Good morning. Just one quick question. Just wondering if you could give us a choice. Yeah, the economy started opening up a little bit more late in the quarter. Just wondering if you could you know, sort of walk us through some of the the trends you're seeing. In fact in in the, you know, different lending markets mortgage and auto and whatever so that's
We're we're seeing we're seeing the momentum on the mortgage lending business. We got a good pipeline there same with auto it also sing with pipelines here. Obviously, that's a reflection on the one side. We're doing around 50% on the mortgage side. We're doing 50% is v v there's 50% off that eats purchase in terms of buying a home. So that's actually encouraging for us. We're seeing some more residential activity log and and that's extracting the benefits of of the Scotia acquisition which they had a uh, important uh servicing portfolio as well as a more significant Residential Mortgage operation. So we're we're happy with that and we're seeing that pipeline coming through on the other side. We we are seeing yep.
A new car sales and we're that's translating into more volume for for us also as as I'm sure for the rest of the market. So those are the two main ones but you're not seeing much yet in on the consumer lending side and meaning on the installment lending side and on the commercial side. We are having we're building a pipeline but it's just a below the the trends that we've had before the pandemic. There's still some cautiousness from different people and there's still the the uncertainty still a can can be felt across the different Industries and and we're seeing that in our commercial side a commercial inside.
All right. Well, thank you. That's that's for me. Thank you Joel. Have a good weekend.
Once again, if you would like to ask a question, please press * 1.
I'm showing no further questions at this time. Oh now we're trying to call to management for any closing. I'm sorry. You now have a follow-up question from Alex of Piper Sandler. Hey, you almost home to make it Alex. Yeah, you know, I press the star one. I don't know. I didn't register the first time but that's okay. Wanted to I was just looking at Slide Five here on the PPP and just specific took the bullet where it talks about attracting new clients and strategically important small business segments, you know, if you can maybe expand a little bit on that if that's you know, if that's obviously meaningful enough to put it as a dog here, but you know, it kind of what the opportunity could be how big that is that kind of stuff for us that's always been a a focus on the small business side, and we've been the last three or four years incrementally doing more business in that segment was a great opportunity to to act quickly to dead.
B Agile
To deploy our technology and deploy our our a process has to be there for our customers and we we got great reviews from our customers throughout the PDP process and and the fast and agile way that we disburse the funds particularly in the middle of the month knock down that we were operating in which no other state of the or any other jurisdiction in the United States had a a a situation like that so often I have to tell you the the results from from that program has given us quite good momentum in that segment and I am excellent credibility by being close to our customers, but also reputation Ali and I'm working we're benefiting from that slowly, but surely it's not going to move the needle.
from your perspective in terms of the results of the end of the day, but but for us it's important because to the communities and our our our team on the retail Channel, they they just put their heart out and and they they demonstrated what living in life with purpose at Oriental me and and and I'm really proud of that and that's why I wanted to highlight that if
great. Thanks for taking my follow-up. You're welcome. Have a good weekend.
Once again, if you'd like to ask a question, please press star one. You have a follow-up from Glen Mana of KBW.
Hi, I just wanted to ask a a question on the ACL. I think when when we look at, you know, your competitor that report yesterday and and and you guys we've seen some stability in a in a cl to two loans versus last quarter. So could you talk about what what kind of giving you comfort with that level and you know, some of the the banks on the mainland have talked about whether or not they expect continued Reserve building in forward quarters, and maybe if you could just discuss that a little bit too. So so, you know again then what I can tell you is that we're we're we're looking at this from a longer-term perspective. We we're not trying to figure out what's going to happen next quarter or next half of the year. It's very hard to predict. We're living in different times and and it requires a lot of other patients we require
Lot of flexibility and from our operation. We we are ready to tackle those uncertainties and those challenges but but going back I'm trying to predict how how is life going to be in the next 3 months. It's it's really difficult. So I say this page in terms of your question because when we look at the different scenarios that we review to determine the wage earning. We we really we want we want to be cautious and and and that's kind of why we feel more comfortable with maintained at the movies S3. And and the good thing is that we are we have a
and the psyllium
Bank 1/4 + balance sheet that gives us the opportunity to build for the long-term in a market that it's a three Bank Market wage and and we have a great opportunity here to to do the right thing one more time. So we're not interested in trying to figure out how close are we to to ping pong the next floor or the following quarter? We're we're here to to to do the longer-term and and to make sure that we win this long long road. So so I took my long-winded answer but but I can't give you specific on on any any of the numbers of your your life going to get
No, no, I I I appreciate what you did give and just I wanted to follow up on Alex's question a little bit. You know, you guys have been considered a challenger Bank on the island, you know. Hi. Did you know when you look at some of the numbers of of your your customers that are moving into to using more digital platforms? I mean, it's it's it's no secret that that Puerto Rico has lagged the mainland in some of the adoption a digital is covid-19 kind of pushing down that wall, you know, there's a feeling that once once customers, you know, start depositing a check online. They don't go back and is is really an opportunity for Puerto Rico to push past that that kind of resistance that may have been there before. You're you're hitting on the mail. We've been in for the last ten years and actually more than that, We've always said technology technology technology. And you know now now it depend emack is forcing the speed of adoption at Birth.
I mean higher speed and um, and I think that's that place completely into our into the strategy that we have deployed in the last several years. So again, we we are showing you those charts particularly because of what you mentioned which is yes. The pandemic is accelerating adoption here in Puerto. Rico having said that though, we we do have a great opportunity. But we also have to do what we need to do in terms of continuing to invest in technology continuing to finding ways to do things more fast agile and practically for our customers because at the end of the day, we have great competitors here in the island with great resources, and and we need to do what we need to age.
So it's exciting for us. And again, our our teams are all focused on how to achieve that pull out the benefits of having a strong balance sheet resilient bank with a culture that is proactive that it's a July is looking to do simple more simple things for customers off and and again the journey continues and that's what what gets up get up every morning to to come to the bank home or to stay at home remotely footwork for the bank and I can I can repeat how how exciting times we have ahead of us in spite of the short-term Panthers operating him and I can underestimate the tremendous amount of work and dedication. Our teammates are putting doing this pandemic and also log
the last three or four years for particular
Nico four months. So again, I'm optimistic of the future and and uh a copy sent of the uncertainties of the short-term and I'm looking forward to to continue in that path.
Okay. Thank you.
And your name?
At this time, there are no further questions Mister Fernandez. Are there any closing remarks? Thank you operator. Thank you. Also to all our stakeholders who have listed in our concern goes out who have suffered from this pandemic our hope is that it ends as soon as possible and that everybody stays safe and healthy. Thank you again, and have a nice day and a great weekend. Thank you that does conclude The ofg Bancorp second quarter 2020 earnings conference call you may now disconnect your lines and have a wonderful day.
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