OFG Bancorp

NYSE:OFG

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and thank you for joining OFG Bancorp’s Conference Call. My name is Crystal, 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 & 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 background noise. After the speakers’ remarks, there will be a question-and-answer session. It is my pleasure to turn the call over to Mr. Fernández.

[José Rafael Fernández]

Good morning. Thank you for joining us. I hope all participants and their families are safe and healthy. I will start on Page 3, 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 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 Velasquez announced a strict curfew early on March 12, 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 or maintaining our nimble and proactive approach to business. In doing so, we entered 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’re 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 on interrupted and superior levels of service through all channels. 47 branches are open for safe access to ATMs, interactive ATMs, drive through 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 investment 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. These have 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 held 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 4. We immediately experienced that 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 on people pay 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 opposed to customer mailing them or coming to branches to pay. As I mentioned, we enhance 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 on the 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 5 through 7 of our presentation. Let’s start with our financial highlights on Page 6. Net core revenues increased 33%. That mainly reflects the significant increase in interest earning assets from the Scotiabank acquisition on net interest income, net of the effects of lower interest rates on cash and variable commercial loans. It also reflects the much larger customer base on our banking and wealth management revenues. Due to the coronavirus pandemic, we increased provision based on the change microeconomics scenario we see ahead. Non-interest expenses were also much higher primarily due to the Scotiabank acquisition. During this critical time, in order to ensure full service, we decided to postpone most of the plans of Scotiabank 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 the breakeven quarter. Tangible book value declined slightly primarily due to day 1 effect of CECL, 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 income. This was mainly due to the acquisition. Average core deposits excluding broker increased 71% year-over-year. This was similarly a result of the acquisition, but also due to an organic increase in deposits. The overall increasing lower-cost core deposits has enabled us to reduce higher cost brokered 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 eight 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 residential – fixed rate residential mortgages from the Scotiabank acquisition. The approximately – 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 experience the full effect of the federal reserve 2019 second half rate cuts and the partial effect of the March 2020 rate cuts of 150 basis points. Approximately, 60% of our commercial loans are variable rate. 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 cuts that I previously mentioned. Please turn to page 8 to review credit quality. There was little effect in the first quarter coronavirus. The net charge off rate was up 8 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 on 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 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 under 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 principle, but each one is reviewed on a case-by-case basis. This is as opposed to Hurricane Maria when three-month deferrals were automatically granted to all retail loans. On the commercial side, $204 million or 8.8% of a 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 a 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 31 and continued to be significantly above requirements for well-capitalized institution. 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 customer do their banking with ever greater ease and convenience. Financially, 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 strengths, 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, own homes, buy cars, build businesses, protect themselves with insurance, and save and invest for retirement. We are ready to continue to help them now and we will be there for them for decades ahead. With this, we end our formal presentation. Thank you for listening. Operator, let’s start the Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Alex Twerdahl with Piper Sandler.

[Alex Twerdahl, Piper Sandler]

Thanks. Good morning.

[José Rafael Fernández]

Good morning, Alex.

[Alex Twerdahl, Piper Sandler]

Just first off, I was hoping you could maybe just talk a little bit more about what’s actually happening in Puerto Rico with COVID and you touched on it a little bit in your prepared remarks, but what kinds of stuff are open right now, and you kind of alluded to a plan that the governor’s working on. Do we have any sort of projected timeframe for the non-essential businesses to start reopening down there? Is it too early at this point?

[José Rafael Fernández]

So, Alex, we’ve been on a very strict lockdown for the better part of six weeks, where the Governor started, as I mentioned earlier, very early on, I think it was March 12 or 13. And he was very strict, people were not allowed outside of their homes after seven o’clock at night, and the only businesses that were allowed to operate were essential services as they were defining the executive order that she put into place. Those services were hospitals, pharmacies, supermarkets and financial services only for payments and deposit transactions, not allowing financial institutions to originate loans or do other type of transactions or businesses. So, I think, again, from the ground and I’m not a scientist, but I think, the fact that she started with this early on has been very good. And now, it’s the point in time, where she needs to start considering an opening of the economy and it’s a tricky issue, right, because it’s very contagious, the COVID-19. So, she has a medical task force and the medical task force published on Sunday, I think he was a paper, where they basically delineate how should be open and there’s three phases, where they started opening a little bit. She has not yet decided on how to proceed. The business sector is, also there is a task force and they are also engaged with the governor, and I think they’re also pushing for an opening of the economy, as you can imagine and it’s happening everywhere in the United States, but unfortunately, here in Puerto Rico, I would say the only thing that I will be very cautious about is the testing side of it. We are really the jurisdiction in the United States with the lowest testing per capita and it doesn’t give enough visibility on how the contagion is moving along. So, I would be very cautious and we, at Oriental, will be very cautious on a reopening of everything, simply because, for us, our people come first and by then coming first, our customers are going to be well-served. So that’s a little bit of a peak on how I see things from the ground. And I am hopeful that, with the early on lockdown and with a discipline process of reopening stage-by-stage. And I think as presented by the medical task force, I think we will be coming out on the – at the other end of the road in very good shape.

[Alex Twerdahl, Piper Sandler]

That’s helpful. And then just kind of a – sort of a similar question, just macro related, does Puerto Rico get the same equal treatment as anyone else in the United States in some of these federal stimulus programs, including the $1,200 stimulus check, the extra $600 per week on unemployment and things like that. And then if I’m not mistaken, Puerto Rico also has kind of a separate stimulus program. Can you give us some sort of details on kind of what that includes and entails?

[José Rafael Fernández]

So, yes, as opposed to the prior crises that, we’d been honored to serve under like Maria or the earthquakes.COVID-19 is a global crisis and I mean, hitting the United States completely. So, for the first time, in one of the crises that we’re operating here in Puerto Rico, we are receiving the same benefits that applied to all the States in the United States. So, we’re going to be receiving the federal funds. As a matter of fact, we already received around $2 billion of funds that need to be deployed. And there’s the $1,200 checks it’s also – they haven’t yet dispersed them, but they’re in the process. And so Puerto Rico will probably receive between $4 billion to $5 billion in federal funds from the COVID-19 as of now. the governor and the Fiscal Supervisory Board also teamed up, and they put up around $700 million to $1 billion that they had for emergency, in the budget and they’re also deploying it out slowly, but surely. And that is also being included as part of the incentives or the cash that is being added to the economy while we’re managing the lockdown and the pandemic.

[Alex Twerdahl, Piper Sandler]

And is that $700 million to $1 billion, is that for small businesses or for individuals or for healthcare workers or kind of what’s the general sense for what the money will be spent on?

[José Rafael Fernández]

Mostly for individuals, I would say healthcare workers, individuals, people, that remember Puerto Rico has a high level of poverty compared to the States in the United States. So, it’s a supplemental to help out, certainly unemployment benefits are applied to Puerto Rico and then the governor – the government is adding to those in some way, shape or fashion. Certainly, the healthcare providers are being held and some small businesses also that are being affected primarily on the healthcare side.

[Alex Twerdahl, Piper Sandler]

Great. And then just as I think about the reserve methodology, you guys have obviously been through crisis before with hurricane Maria. Were you able to draw on some of that playbook for kind of – obviously CECL is in different can of worms here, but we’re able to draw on that same sort of playbook for coming up with the reserve, under the scenarios that you were given from Moody’s or are there some major differences that we should be considering?

[José Rafael Fernández]

So, I’ll answer that high level, but certainly, the experiences we’ve gone through with Maria and the earthquakes, they’ve put us in a – in good shape in terms of addressing the crisis from old aspects, not only provisioning, but from a financial perspective, from a people perspective and certainly, from a customer perspective. So, the experiences of the two prior crises has helped us be ready for this one. Now, regarding the deep provisioning, there are some big picture, there are some similarities in the sense that there are forbearances being given and people are locked out. So, when we were hearing with Maria, the decision was to give automatic moratoriums. this time around, we decided to go on a case-by-case basis and use technology to allow clients to request for those forbearances. And I think, the reasoning behind it is because not all the industries are furloughing or letting go of their employees, they’re paying out salaries, particularly, the central government and the municipality, they’re all paying their salary. So, we took the experience from Maria, but it also adapted to the realities that we have today in terms of how to approach it.

[Alex Twerdahl, Piper Sandler]

Great. That’s – and then just final question for me and I’ll get back in the queue is just, you alluded to the Moody’s forecast for Puerto Rico. Can you share with us what the – what that suggests GDP on the island goes to in the second quarter and kind of what shape of recovery, expects to sue afterwards?

[José Rafael Fernández]

Yes, I’ll let Maritza to answer that one, Alex.

[Maritza Arizmendi]

Hi, Alex. Good morning. how are you?

[Alex Twerdahl, Piper Sandler]

Yes.

[Maritza Arizmendi]

Well, Alex probably before getting into their updated – probably, I should go back to day 1 and I think, when would – when we make Day 1 allowance under CECL, we used a mixed macroeconomic outlook as an idol that predicted a moderate GDP growth with a steady unemployment in the near-term. When we updated for the day 2 provision, we obviously updated the microeconomic scenarios and applied a negative GDP growth in the near-term with an immediate increase in the unemployment to about 13.5. So, what we see is an immediate reaction, an immediate negative reaction in the short-term. And probably, we will continue monitoring now we have more information to see what type of recovery we will have if it will be a B type of shape or a U type of shape. So, but right now, initially, we have an immediate negative impact in the GDP and unemployment rises.

[Alex Twerdahl, Piper Sandler]

Can you help us quantify a little bit of that immediate negative impact in GDP? Is it in the range of 10%?

[Maritza Arizmendi]

Yes. Now, it is about negative 2.5%.

[Alex Twerdahl, Piper Sandler]

Okay. All right. Thank you for taking my questions. I’ll get back in the queue.

[José Rafael Fernández]

Thank you.

[Operator]

Your next question comes from the line of Joe Gladue with Alden Securities.

[Joe Gladue, Alden Securities]

Good morning.

[José Rafael Fernández]

Hi, Joe. How are you? Good morning.

[Joe Gladue, Alden Securities]

Good morning. I guess, just want to, I guess first touch on a little bit of, yes, some help on the net interest margin. I guess there’s a lot going on there. I guess I’ll just start with, it looks like, after the – some of the security sales and everything balance sheet had a fairly sizable cash balance on there at the end of the quarter. do you think in the current environment there will be opportunities to deploy that more profitably?

[José Rafael Fernández]

So, this is the way, I see the net interest margin and what are the effects of, let’s say, having a lower net interest margin than anticipated and first, wholesale funding, it seems we have excess core deposits from the Scotiabank acquisition. We have an opportunity to continue to, let go the wholesale funding. So, we need to wait for the maturity of those in order for us to cancel them, right? So that’s kind of putting sales out this year. number two, certainly, the drop in interest rates has affected the margin, particularly, the effects on the variable-rate commercial loans. And that is something that we’re a very much focused on. And then you mentioned it, the high cash balances, that cash balance was yielding one on a quarter, one on 30, now it’s yielding around 10 basis points. So that has created a different scenario than what we had anticipated prior to the crisis. Now, having said that, we think that, at this point in time, there’s no, not necessarily opportunities for us to deploy that cash above and beyond the great job we’re doing with the SBA PPP program. And that’s on the short end. But as Maritza mentioned on our scenarios, once the economy starts to reopen a U or a V shape scenario will give us ample dry powder to, as we always do, very prudently, deploy that cash and put it to work. So, I think we’re in very good shape in spite of the external challenges. We’re in very good shape for a – for the expected, knows when recovery and deploy the cash that we have in higher yielding assets and held the community and the clients.

[Joe Gladue, Alden Securities]

Okay. Thank you. You mentioned that of course, the PPP program. what are you expecting in terms of how the fee income from that comes into income over the course of the year?

[José Rafael Fernández]

So, I’m not a – I’m not an accounting expert, but I suspect that the fee is going to be a part of the yield and it’s going to be accounted as part of the net interest income. So, yes, it’s a 1% loan – 1% yielding with, I think the size of the loans that – the average size of the loans is relatively small. So, we probably get the higher end of the range in terms of the fees on the PPP program. And we’re in the middle of the second round and early indications show that we’re doing more loans than what we did on the first round, although they probably have a lower balance per loan, but we’re very encouraged with the fee generation that we will get from there as well as the ability to be able to help our customers in a very expeditious way. I mean, we’re dispersing this money in five days after it’s been approved or less, actually. So, we’re very excited and happy to help our clients and that’s kind of our perspective from the SBA program that just launched.

[Joe Gladue, Alden Securities]

Okay. Thank you. Just wondering if you could give us a little outlook on the loan production, sort of by segment, you just – in the current environment, clearly, there’s probably not a lot of mortgage transactions going on. I believe most of the auto dealerships are not doing any business. And yes, just wanting, is there any loan segments, still maintaining some volumes. So, apart from the SBA PPP loans, of course, we’re doing a little bit of nothing to write home about for sure of personal loans and a little bit of auto loans that were in the pipeline before the lockdown, but nothing in particular to be significant. So if you think of it, the second quarter will have a very depressed loan production, given the lockdown and during that full month of April and parts of March that you already saw the effects and then the full month of April. And we’re still – we’re still expectant them on how is he going to open and how would that – it play out in terms of business generation, nobody knows. So, we are – we rather play it conservatively and I think mentioning that in the remarks, we’re in very good strategic position right now, making sure that, first and foremost, because we closed our transaction in December 31, we’re in very good position in terms of core funding and other clients and other opportunities, liquidity for sure. But we’re also very excited with the digital adoption and how our clients, because they are in a lockdown, they’re incrementally utilizing our digital platforms and services, and also how we immediately adapted to the forbearance and also, the SBA program providing them digital tools for them to also apply and in the case of the SBA program, run the whole program without printing a piece of paper. So, it was all digitally done and disbursed, and that is a differentiating factor and I’m really proud of the work that our teams have done.

[Joe Gladue, Alden Securities]

All right. Well, thank you. That’s all for me.

[José Rafael Fernández]

Thank you, Joe. Have a good day.

[Operator]

[Operator Instructions] Your next question comes from the line of Glen Manna with Keefe, Bruyette & Woods.

[Glen Manna, Keefe, Bruyette & Woods]

Hi, good morning, José and Maritza.

[José Rafael Fernández]

Hi, Glen. how are you?

[Glen Manna, Keefe, Bruyette & Woods]

I’m doing well. I hope you guys are doing well. I just have a couple of questions on net interest income. In the past, you would put a schedule that had accretable yield in the press release, but I need to see it. How much accretion was still in that number that, that you booked today?

[José Rafael Fernández]

Glen, could you repeat the question? We could not hear you well.

[Glen Manna, Keefe, Bruyette & Woods]

Sure. In the past, you had included a schedule of accretable yield in the press release. How much accretion was booked in the number in the first quarter?

[José Rafael Fernández]

Okay. Glen, that is way, way above my IQ level, I’ll let Maritza answer that one.

[Maritza Arizmendi]

Yes. Hi Glen, how are you? At the end, Glen, remember that we changed the accounting, because SOP accounting disappear and accretion was part of the – of that type of counting. So, what we have right now is a deal adjustment to the interest income. I don’t have the precise figures of how much was the deal adjustment that we did for all the acquired books, but in general, if it’s part of the – of that bears the each type of loans, it’s not like before though we have that different type of segmentation in the interest income.

[Glen Manna, Keefe, Bruyette & Woods]

Okay, thank you. And I got on the call late, I had some technology problems, but could you discuss where deposit pricing was at the end of the quarter kind of relative to where it was to the average?

[José Rafael Fernández]

Yes. So that’s a good point, Glen. Thank you for bringing it up. Throughout the latter parts of the quarter, we were very proactive in re-pricing some large commercial relationships and now we’re in the process of looking at the whole retail side. But I think, when you look at our core deposits and remember the acquisition that we closed in December 31 added to that. What we’re seeing is not only good traction from the Scotia – former Scotia clients that they’re adding deposits to their accounts, but we also see the ability to also look at those buckets and be a more proactive in re-pricing them. So, we’re looking now at that side of the equation. But we have at the end of the March quarter, pretty much looked at most of the commercial – large commercial deposits and we priced them to market.

[Glen Manna, Keefe, Bruyette & Woods]

Okay. And on the fee income, I guess it’s always difficult to kind of estimate the fee income line after an acquisition. But it looked like the street and I was like, we’re expecting about $31 million on that line ex any security gains or anything like that and the run rate looks like it came in a little bit lower. Was there anything special in other income that weighed that down or is this kind of the run rate that we should be using going forward, noting any variability in mortgage banking?

[José Rafael Fernández]

Yes. Maritza will give you some details on that.

[Maritza Arizmendi]

Yes. Glen, I think in general, the last two weeks of March, there were lower fees, because of lower transactionality. Probably, banking service fee revenues probably we know was impacted because of that, also mortgage banking activity as the impact of the MSR valuation that came up $2 million, negative adjustment. So, probably that’s why you see these figures a little bit off of your estimates. So, at this point, we need to see how the lockdown, – how would we get back to a normal level of activity so we can – we can see that space in a more normalized figures. And in the MSR it depends on the market. Right. So that’s why you see that levels not necessarily in line with what will you work with this.

[Glen Manna, Keefe, Bruyette & Woods]

Right. And just to confirm, you said that was a $2 million MSR, right? That includes this?

[Maritza Arizmendi]

The MSR valuation.

[Glen Manna, Keefe, Bruyette & Woods]

Valuation, right. Okay. And on the tax rate, is that 26% that you noted in the press release a good effective rate to use going forward given the level of securities and cash that you have now and the tax exempt income?

[Maritza Arizmendi]

Yes.

[Glen Manna, Keefe, Bruyette & Woods]

Okay. All right. Well, thank you for your time. Have a great day.

[José Rafael Fernández]

Yes. You too, Glen.

[Operator]

Your next question comes from the line of Alex Twerdahl with Piper Sandler.

[Alex Twerdahl, Piper Sandler]

Hey, good morning. Thanks for taking my follow-ups. Just, first one to go back to what you said about the assumptions in the reserve rates of the decline of 2.5% on GDP is that – I assume that’s specific to Puerto Rico. Is that because the economy is not expected to go down or I guess the pullbacks are not expected to be as bad in Puerto Rico or is that just because Puerto Rico is already 13 years into a recession and there’s not much more to go down or I can just kind of put that into context for us.

[José Rafael Fernández]

So, if I understand your question correctly, Alex, you’re saying on the Moody’s, Puerto Rico scenario, when we’re saying a contraction of 2.5%, that is a 2.5% annualized, but the impact on a quarterly basis for the next couple of quarters. So, it’s like a real drop from plus 2.5% to – I’m just using numbers here from plus 2.5% to minus 2.5%. So, it’s a drop of 5% annualized immediately due to the COVID-19.

[Alex Twerdahl, Piper Sandler]

Okay. I was just, because we have some banks in the mainlands that are reporting or I guess using scenarios that are like down like 10% to 20%. And so just kind of want to make sure I understand the context properly. And then as you kind of look at some of the higher risk portfolios that you disclosed in the presentation, are you able to give us some characteristics on, like the hospitality and restaurants in terms of LTVs, things like that?

[José Rafael Fernández]

You want details on the LTVs on those?

[Alex Twerdahl, Piper Sandler]

And on the hotels and the restaurants, debt service coverage, anything that can get us a little bit more comfortable with the standings of those high risk categories.

[José Rafael Fernández]

On average, I would say hospitality is around the 70% LTV.

[Alex Twerdahl, Piper Sandler]

Okay. And what about shopping centers.

[José Rafael Fernández]

Shopping centers more or less the same. There’s some that are lower LTVs, but because they’ve been longer in the books, but on average, I would say around the 70% candle.

[Alex Twerdahl, Piper Sandler]

Okay. And hospitals the same?

[José Rafael Fernández]

Say that again?

[Alex Twerdahl, Piper Sandler]

Hospitals the same?

[José Rafael Fernández]

I don’t have right here. The hospitals, so Maritza can bring that number to you later.

[Alex Twerdahl, Piper Sandler]

Okay. Sounds good. And then in the OFG USA, the growth this quarter that we saw, can you just remind us kind of what kinds of loans those are and sort of how the underwriting works and everything just because it’s been a few quarters since we’ve seen that participation’s there and just obviously, the world has changed a lot in the last couple of weeks.

[José Rafael Fernández]

Yes. Well, these are small. Some of them are SBA loans, some of them have proportional of the origination is a small commercial loans, SBA guaranteed. Some of them are straight SBA loans that we participate on and we feel that these are not necessarily high risk industries given the COVID-19, and again, the production that you see there is prior to all the pandemic.

[Alex Twerdahl, Piper Sandler]

Right. So I mean, what percentage would be SBA guaranteed?

[José Rafael Fernández]

I don’t have it off the top of my head, but we can give you the details offline.

[Alex Twerdahl, Piper Sandler]

Okay. But it would be at a high enough percentage to get you a little more comfortable in SBA, I believe is making payments on a lot of those launches the next six months if I’m not mistaken.

[José Rafael Fernández]

Yes, yes.

[Alex Twerdahl, Piper Sandler]

Okay. And then, just back to the question on the margin, kind of two parts, one, you kind of talked about the higher cash balances and there’s going to say elevated for a little bit of time until long or picks back up and until you have some of the borrowings to come do. One, can you give us the schedule on when those borrowings are going to come due? So, we can kind of think about, funding costs coming down later in the year. And then two, just kind of, with all the moving parts, what’s the right starting point to think about for the margin, going into the second quarter, considering what’s happened to the LIBOR and prime and everything during the first quarter.

[José Rafael Fernández]

So, we’re not giving any guidance on the margin, Alex, but I’ll let Maritza talk to you about the maturity of the wholesale funding and all of that.

[Maritza Arizmendi]

I think Alex, it’s important to notice that we have to reduce our wholesale barrels, including brokered deposits by about 50% year-over-year. And at this point, what we’ve seen is that about three quarters of what we have at this point we matured in this year and the remaining balance about $100 million something would be maturing during the next two years. So that’s the perspective we – that’s the maturing that we have for the year around $300 million.

[Alex Twerdahl, Piper Sandler]

And these – they’re yielding two on a quarter or so?

[Maritza Arizmendi]

Two on a quarter or something. Yes.

[Alex Twerdahl, Piper Sandler]

Okay. And that includes the broker deposits as well as of FHLB advances?

[Maritza Arizmendi]

Yes. Yes.

[Alex Twerdahl, Piper Sandler]

Okay. And the PPP program, is it a fair presumption to assume that you’re only doing that for existing customers?

[José Rafael Fernández]

We’re doing it to a primarily existing customers, but we’re also receiving requests from non- clients and we are certainly serving them and hopefully, we can expand relationships of their’s too.

[Alex Twerdahl, Piper Sandler]

Okay. And then just as we think about the cost savings that you’ve mentioned your prepared remarks at the plan, you plan to postpone some of the cost savings from the Scotia transaction. One, what was the impact of postponing those in the first quarter on expenses? And then how should we be thinking about sort of how expenses shape out for the next couple quarters and when those cost savings potentially, could start coming back online?

[José Rafael Fernández]

Yes. So, expenses is an area where you guys, who have known us for a while, know that we’re pretty focused on efficiency and we tried to act on expenses pretty quickly. This time around because of the COVID pandemic, we postpone the efficiencies from the Scotia transaction just to, until further notice really, because we want to know how this plays out. First, people come first and we don’t – we don’t want to affect lives of individuals, but also because we need to service our customers well also. So, we are keeping it on the hold handle right now, but certainly, that does not mean that we’re not going to execute on our plan as we designed it originally. As a matter of fact, we’re probably with this experience, what we have seen is that we have been able to break down barriers, break down silos, break down bureaucracies and get things done faster. So, I’m actually getting – I don’t want to – I don’t want to get myself ahead of the curve here, but I think there are opportunities for us to change processes above and beyond the acquisition, change processes, be more efficient in many, many things that we do. But as of now, we haven’t done anything on occupancy. We haven’t done anything on payroll. We haven’t done anything on contracts. And there are several redundancies that we still have not even act on. And so for the time being, I would model a relatively similar expense level as you’re seeing this quarter just to until we find out how the COVID pandemic plays out. But as you know, we’re very cognizant on that.

[Alex Twerdahl, Piper Sandler]

Great. So, I mean if I kind of interpret what you’re saying correctly, that over the last couple of weeks you guys have maybe learned something, so new things about the operating environment and kind of rethink about how the branch and how some of these processes can work going forward, not necessarily under a new normal but just kind of, maybe an acceleration towards what you guys are trying to get to – if you backed up a couple of months.

[José Rafael Fernández]

Correct. You said it better than I did.

[Alex Twerdahl, Piper Sandler]

Great. Well, thanks for taking all my follow-ups. I really appreciate it.

[José Rafael Fernández]

Yes, Alex. great talking to you.

[Operator]

[Operator Instructions] At this time, there are no further questions. I will now turn the call back to management for closing remarks.

[José Rafael Fernández]

Thank you, operator, and thank you to all for listening in. Our hope goes out to all that we will end up this pandemic soon and we’d all stay safe. Thank you, again. Have a nice day and thank you for listening in.

[Operator]

This concludes today’s conference call. You may now disconnect.