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spk03: If you need assistance during the conference today, please press star zero. Good morning.
spk06: Thank you for joining the OFG's Bancorp's conference call. My name is Katie, and I will be your conference operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors, and Maritza Erezmendi, 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 quarterly results page. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risk and uncertainties, outlined in the risk factors section of the 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. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez. Please go ahead.
spk01: Good morning and thank you for joining us. We are proud of this quarter's performance. It is a direct result of our focus on helping customers achieve progress and financial well-being. As always, thanks to our team members for their excellent work, commitment, and dedication. So let us turn to page three of our conference call presentation. Looking at our second quarter income statement, earnings per share diluted was 84 cents. Core revenues totaled $146 million. That included a $4.7 million gain from the sale of a legacy branch building. Net interest margin was 4.8%. Provision was $6.7 million. Non-interest expenses were $85 million. And pre-provision net revenues totaled $66 million. Looking at our balance sheet, When we compared to the prior quarter, total assets amounted to $10.2 billion. Customer deposits increased both from retail and commercial accounts and totaled approximately $9 billion. Our liquid balance sheet enabled us to continue to deploy cash into higher-yielding loans and investment securities, which improved our asset mix. Total loans held for investment increased 2.4%. We saw continued loan balance increases in all three of our KEY BUSINESSES, 4.7% INCREASE IN COMMERCIAL LOANS, 9.7% INCREASE IN CONSUMER LOANS, AND 3.2% INCREASE IN AUTO LOANS. NEW LOAN ORIGINATION REMAINED HIGH AT $587 MILLION. INVESTMENT SECURITIES INCREASED TO $1.7 BILLION. CASH BALANCES DECLINED TO $1.3 BILLION. LOOKING AT OUR CAPITAL AND CAPITAL ACTIONS, We completed an additional $30.6 million of our $100 million share buyback program. Year to date, we have bought back a total of $64.1 million of shares. We ended the quarter with high levels of capital. Overall, we had another great quarter in all our core businesses. This reflects our three main key drivers, consistently increasing recurring net income driven primarily by loan growth, Number two, our larger scale and investment in our people. And three, our focus on increasing digital utilization and customer service differentiation. During the second quarter, we continued to improve the customer experience. We expanded our number of self-service banking kiosks. We introduced digital commercial account opening. Enhancements like these make it fast, easy, and convenient for retail customers and commercial clients to do their banking with us. On a macro level, consumer and business liquidity and credit trends continue to show good momentum. This has positioned OFG well to benefit from further anticipated rate increases by the Fed. Despite global headwinds, the Puerto Rico economic environment also continues to trend positively. This is due in part to the ongoing benefit from the flow of both federal stimulus and reconstruction funds. Now here's Marisa to go over the financials in more detail. Thank you.
spk04: This is the operator one moment while we reconnect with our speakers. Thank you, Jose.
spk00: Thank you, Jose. Please turn to page four to review our financial highlights. Looking at total core revenues, they increased $13 million year over year and $10 million quarter over quarter. As part of that, interest income totaled $122 million. This was $9 million higher than the first quarter. Interest income benefited from increased yields on higher balances of loans and investment securities. It also benefited from improved yields on cash. Non-interest income was $36 million. This increased $5 million from the first quarter. Core non-interest income at $31.2 million reflected higher banking service and wealth management revenues and lower mortgage banking revenues. Non-core non-interest income benefited from the $4.7 million gain on sale of a legacy branch building. Looking at the efficiency ratio, it was 58.27% in the second quarter. That's an improvement from both previous and year-ago quarters and reflects revenues growing at a greater rate than expenses. Expenses total $85 million. That's $4 million higher than the first quarter. The increase primarily reflected higher compliance-related professional expenses due to greater levels of business activity. It also reflected higher technology expenses due to our ongoing investment in our digital capabilities. Looking at our return metrics, they improved year-over-year and quarter-over-quarter. They also continue to be in line with our target range. Return on average asset was 1.58%. That is up 10 basis points from the previous quarter. Return on average tangible common equity was 17.70%. That is up more than 180 basis points from the first quarter. Looking at tangible book value per share, that was $18.86. That is a decrease of four basis points from the first quarter. This reflects three factors. One, the repurchase of common stock to the reduction in other comprehensive income. And in turn, this was partially offset by the increase in return . Please turn to page 5 to review our operational highlights. Looking at average loan balances, they total $6.64 billion. That is an increase of $121 million from the first quarter End of period loans held for investment increased $155 million. We have now had two consecutive quarters where loans have grown at almost a 10% analyzed rate. The second quarter increase reflected new Puerto Rico and U.S. commercial loans and new auto and consumer loans. This was partially offset by a decline in mortgages and PPP loans. Looking at loan yield, that was 6.73%. That's four basis point increase from the first quarter. As we have mentioned in the past, it takes a while for Fed rate increases to work their way into our portfolio through new and variable rate loans. Looking at average core deposits, they total $8.95 billion. That is an increase of $138 million from the first quarter. And end of period deposit grew $50 million. Looking at core deposit costs, it was 24 basis points. That is a reduction of one basis point from the first quarter. To date, we have seen virtually no deposit data. Looking at new loan originations. Origination continued at high levels at $587 million. This reflects continued high levels of auto and consumer lending. Auto loan origination at $193 million reached a historical high level. Now looking at net interest margin. That was 4.80%. That is an increase of 33 basis points from last quarter it is also an increase of 58 basis points year over year. The higher net interest margins reflected three key factors. One, growth of the loan portfolio at a slightly higher yield. This accounted for 38% of the increase in net interest income. Two, the increase in investment securities at higher yields. This accounted for 35% of the increase During the second quarter, we continued to opportunistically increase our investment portfolio. And three, higher yield on a lower volume of cash. This accounted for 21% of the increase. Please turn to page six to review our credit quality and capital strength. Looking at net charts off. They totaled $4.5 million in the second quarter and $577,000 in the first quarter. The second quarter included $2.5 million in net charges from a previously reserved commercial loan sold during this second quarter. The second quarter also reflected significantly lower net charges in the auto loan portfolio and a nice recovery in the mortgage portfolio. First quarter net charge-off benefited from $3.9 million in recoveries from an acquired PCD loan and the final settlement of the sale of non-performing loans in the fourth quarter of 2021. Looking at the provision for credit losses, total provision for credit losses was $6.7 million. Let me break it down into its components to facilitate the analysis. Two main factors affected the non-PCD portfolio. One was the increase in volume, in loan volume. This added $6.7 million to the provision. The other was two commercial loan entries into MPLs. They added $6 million. There were also two main factors that affected the PCV loan portfolio. One was a reduction in loan volume. This reduced provision by $1.6 million. And the other was a $3 million reduction in qualitative adjustment and loss factors as credit continued as credit quality continues to trend positively. Economic model adjustment of $1.7 million. This primarily accounts for higher probability of recession in the U.S., adding reserve to the U.S. loan portfolio. In the end, second quarter allowance coverage was 2.37%, relatively flat with the first quarter. Looking at non-performing loans, total non-performing loan rate was 1.61%. That is up 12 basis points from the first quarter and down 50 basis points from a year ago. Looking at CET1 ratio, that was 12.80%. That compares to 13.24% in the first quarter. This reflects three factors. One, the repurchase of common stock. Two, the increase in risk-weighted assets. And three, it turns, this was partially offset by the increase in retained earnings. Now, here is Jose.
spk01: Thank you, Maritza. Let's turn to page seven for our outlook. Starting first with OFG, we see continued increased levels of business activity and loan growth. Credit metrics remain under control and significantly better than pre-pandemic. With our higher levels of revenue, we are now targeting our efficiency ratio to be in the mid-50s range for the rest of the year and 2023. We will continue to invest in our people, technology, and infrastructure with an even greater focus on improving the customer experience. As seen during the past several quarters, We continue to expect core revenues to grow primarily driven by loan growth and interest rates. Our capital metrics will continue to remain high compared to our U.S. peers. Looking at the Puerto Rico macro environment, consumer and businesses in Puerto Rico continue to demonstrate good levels of liquidity. Having said that, We are keeping a watchful eye on inflation and its economic repercussions in Puerto Rico, particularly on consumers. As I mentioned earlier, we believe the significant amount of federal stimulus and reconstruction spending in Puerto Rico should help mitigate the impact of potential headwinds. We at OFG are more than ready. I want to thank all our resilient team members for their dedication and commitment. They've done a great job. Thanks. And that ends our formal presentation. Operator, let's start the Q&A.
spk06: Thank you. If you have questions at this time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press pound key. We will pause for a moment to allow questions to queue. Our first question will come from Brett Rabaton with Hove Group. Your line is open.
spk08: Hey, good morning, everyone.
spk01: Hi, Brett.
spk08: I wanted to first just talk about the credit backdrop a little bit. It seems like with the qualitative adjustment that things continue to get better from a macro perspective in Puerto Rico, which did have two credits, migration and non-accrual. Can you talk one about what you're seeing in terms of migration overall and then maybe specifically about those two credits and give us any color on those two particular ones.
spk01: Sure. So as I said on the on the remarks earlier, we see credit in Puerto Rico continue to trend very positively and consumers continue to to have high levels of liquidity and so do businesses. So so we we are not feeling any change in how the Puerto Rico credit situation is behaving at this point. Regarding the two credits, these are two isolated commercial loans. One is a small business loan in Puerto Rico. It's a $2 million loan. And really, it's just in a business. It's in the telecommunication business, and they provide services to telecommunication companies, and they've been suffering a bit from the supply chain issues in terms of the importing of all the materials that they need to get things done. So we feel that it's completely isolated regarding the credit. And we're working with it, so it's not a big issue. The other loan is a U.S. loan participation. And this, again, it's in the packaging business. the manufacturing and the supply chain also have caused some disruptions and that's why we are provisioning for it. But we do not see at all any change on the credit profile here in the island. And frankly, I think the global inflation and disruption that has occurred certainly we do have some of those effects in the island, particularly in the electricity cost and the gasoline. But as I travel through the island and I do that quite often visiting the different businesses and as well as our branches and employees, there's a lot of business activity in the island and I definitely will probably cannot keep up with the same level of growth we've had in the first part of the year in Puerto Rico. But I think Puerto Rico is in a pretty good position right now economically.
spk08: Okay. And you mentioned inflation, Jose Rafael. I guess one of the pushbacks I get when I talk about Puerto Rico is that, well, the inflationary pressures will have a disproportionate impact on the population. in Puerto Rico, but with all of the funds flowing to the islands, it certainly seems like things could continue to be strong. Are you seeing anything from a consumer perspective that would tell you that they're starting to not be able to continue their usual expenditures or there's pressure from the inflation?
spk01: So we frankly have not. We continue to see the consumer PRETTY STRONG. WE SAW OUR LEVELS OF AUTO LENDING THIS QUARTER WAS REALLY A RECORD FOR US. SO WE SEE THE CONSUMERS STILL VERY MUCH GOING OUT THERE AND BUYING BIG TICKET ITEMS TOO. SO WE'RE NOT SEEING ANY DETERIORATION SO FAR. BUT WE ARE COGNIZANT OF WHAT'S GOING ON IN TERMS OF THE COST OF LIVING IN THE ISLAND AS IT HAS AFFECTED THE REST OF THE WORLD. Logically, we should expect a slowdown of that. We are not modeling going forward to remain the level of activity that we're seeing because interest rates are going up and inflation.
spk08: Okay, great. And then maybe just one last one. You know, auto continues to be strong in Puerto Rico. You know, any sense of where auto goes from here? Do you think it trends similar to last year from here, or do you think it continues its current trend?
spk01: My gut tells me that it's hard to keep the pace and breadth, so in terms of the sales of new autos in Puerto Rico in general. So I know that there's been some disruptions in the recent past in terms of inventories and all that, driven by the cheap manufacturers and all that stuff. Surprisingly to us, the dealers continue to have enough inventory to sell cars. And I just feel that it's not going to be able to be sustainable going forward. Having said that, though, the new car sales in Puerto Rico are going to remain at a high level, given what I said earlier in terms of the strength of the consumers and businesses in the island. And I think that you, Brett, you also mentioned the stimulus funds and you mentioned the reconstruction funds. Just want to give you a little bit of additional color there. We're seeing a lot of activity on the reconstruction part, and we're seeing a lot of projects going out there that are more government driven, but are really creating an additional layer of momentum for the island, particularly for the Miguel Contreras- middle class and and low middle class in Puerto Rico and and I think that's really encouraging and and it should be sustainable for the next several years, given the magnitude of those reconstruction funds and in terms of the stimulus fund from COVID. Miguel Contreras- Those those are still coming in, and I want to stress the child tax credit it's something that Puerto Rico has never been. significantly a beneficiary of it in any significant way. And now there's new law allows Puerto Rico to receive child tax credit equal to any and with the same formula as any other state of the union. And that has a significant impact. It has also some qualitative impacts too. And that is in order for you to get that credit, you need to file your tax returns. So Puerto Rico government is seeing higher tax return filings in many, many years where that has not occurred. So it's bringing more people to the economy and coming out of the underground economy. So there are lots of underpinnings going on in Puerto Rico right now, apart from the dollar number, that are building what I think is going to be a good forward outlook for the island in the next several years.
spk08: Yeah, that's helpful, Jose Rafael. I certainly think that Puerto Rico could decouple from the mainland U.S., assuming the U.S. is in a recession at some point. Appreciate all the color and congrats on the quarter. Sure. Thank you.
spk06: Thank you. Our next question will come from Timur Brasilia with Wells Fargo. Your line is now open.
spk07: Hi, good morning. Hi. Hi. Maybe following up on one of the statements you made, Jose, was the loan growth, still expecting good loan growth, but probably can't keep the pace with what you saw in the first half of the year. Can you talk through which line items? Is that mainly a consumer statement, kind of in reference to your gut feeling on auto slowing? Or is there something that you're seeing more broadly that makes you believe that the pace of lending activity is not sustainable at this level?
spk01: Yep. Thank you for your question. Yes, we see loan growth in the second half of the year. And we see still loan growth on the auto portfolio. We also see it on the consumer portfolio. And as you've seen, we've grown the commercial book two quarters in a row at an annualized rate of 10%. So we still see very good opportunities on the commercial side. It might slow down a little bit in the second half, but we still see those three lines being the main drivers of our loan growth in the next second half of the year.
spk07: OK, that's helpful. Thank you for that. And then as you're looking to fund that loan growth, deposit growth slowed a little bit here in the second quarter, utilized some unbalanced sheet liquidity. As you look to fund the loan growth for the rest of the year and into 23, is the expectation that that'll be funded through deposits? Is there still some unbalanced sheet liquidity you plan on using? Maybe just talk about the funding strategy going forward.
spk01: Sure. You know, we are beneficiaries for the first time in many, many decades in Puerto Rico. The banking sector has excess core funding. So we certainly are going to take advantage of that opportunity. And as you saw this quarter, we also grew deposits even further this quarter. We feel that loan growth is going to be funded by those core deposits that we have, that excess deposits. And so... You know, at the end of the day, when you look at the Puerto Rico banking market today, it's very different than it was 20 years ago, and it's very different from the same dynamics that you see in the banking market in the States. But I think in a way that it's benefiting us at OFG, and that is we only have three players, three main players. I think we all have excess deposits and we are all being very rational in our deposit strategies. So I feel that as we grow further our loan book, it will be done through our core deposit balances.
spk07: Okay. Thank you for that caller. Next for me on the bond purchases this quarter. Can you just talk through what some of those reinvestment yields were during the quarter, where you're seeing yields today, and what the appetite there is for additional securities purchases here in the back end of the year?
spk01: Yeah, I would say in the three-handle, you know, 3% or so kind of a handle for both for the mortgage-backed securities as well as for the treasuries. There's not that much... Availability to buy mortgage-backed securities in the U.S. market, as interest rates have shifted up quite dramatically, the supply of the securities has been quite slow. But anyway, the purchases we've done, it's around 3%, north of 3%. Okay.
spk07: Okay, then just last for me, again, following up on the credit quality and understanding your comments about the macro trends and how it's going to be much better than where we had seen Puerto Rico in the past, but do you think that we're nearing kind of a bottom of how good credit quality has been and we're starting to inflect whatever this new normal level is? Or do you just see these two credits that popped up this quarter as one-off?
spk01: So, you have a two-part question there. So, I think we're hitting a bottom. We've hit a bottom in terms of credit quality across the island. It's not sustainable having net recoveries as we've had in the last year and part of this year in some of the loan books. So does that mean it's going to deteriorate to what we have been accustomed to in Puerto Rico for the last two decades? The answer is no. We feel that it's a different story now, and we will see trending up some delinquencies on the consumer book, auto and consumer. We see the profile of the consumers a lot better than it was in years past, so we feel confident with that. And in terms of the commercial side, I think we will continue to see the strength of the businesses in Puerto Rico. And we are not seeing any deterioration whatsoever for the commercial side of the loan book. So I split it in two because I feel that the consumer is going to kind of start normalizing a little bit the trends on the credit into the next several quarters. But on the commercial side, there's quite a strength on the businesses in Puerto Rico, and we don't foresee any deterioration forward. Okay.
spk07: Great. Thank you for the call, Eric.
spk01: Yep. Thank you.
spk06: Thank you. Our next question will come from Alex with Piper Sandler. Your line is now open.
spk02: Hey, good morning. Hi. How are you, Alex? I'm well, thanks. I wanted to drill in on a couple more points here. Maybe you can just give us an update on sort of the asset sensitivity expectation, you know, just given that the rate hikes that we've seen in May and June clearly aren't fully reflected in the quarter. Just kind of with what we've gotten so far, what would be the expectation for the NIM and for NII, more importantly, heading into the third quarter?
spk01: Yeah. So, Alex, as you point out, this quarter, does not yet reflect what happened during the quarter in terms of interest rate increases by the Fed. So there's a two or three month lag for us to reflect the full effect of those interest rate increases. So what I would say is that this third quarter, you will see the full effect of the rate increases that you saw in the second quarter. And you'll see partial effect on the forthcoming rate increases by the Fed. So at the end of the day, we can all do the math, and it's pretty straightforward. We have pretty good outlook out there in terms of net interest income and the margin, given the core deposit strength that we have on our balance sheet. And looking at our betas being relatively zero or negative so far this quarter. So we feel very confident about the impact of interest rates into our loan book and how we will be benefiting from it the rest of the year and into 2023. That is why we feel now more comfortable saying, given the investments that we're making in our technology and digital and improving our customer experience, That is why now we're feeling more confident in saying the efficiency ratio should be in the mid-50s for the rest of the year and 2023. I wish I had a little crystal ball two quarters ago to be able to feel as positive as I feel today regarding efficiency ratio, but it is what it is.
spk02: Just as a quick housekeeping item, do you have the PPP fee contribution from the second quarter in the NIMH?
spk01: I don't, but I'm sure Maritza has the number.
spk00: I don't have it with me. It should be much lower than we saw last quarter, but I can give it to you offline, okay?
spk02: Okay, thank you much on that. And then, you know, you mentioned that in the second quarter you're seeing really nothing in the way of deposit beta so far. Is there any inclination that customers are looking for a higher deposit ARE YOU SEEING ANY PRESSURE THUS FAR WITH ALL THE HIKES WE'VE SEEN?
spk01: SO I'LL DO WHAT I DID EARLIER. I'LL SPLIT THE ANSWER IN TWO. CONSUMERS, WE ARE STARTING TO SEE SOME HIGH-BALANCE CONSUMERS STARTING TO MOVE MONIES TO THE WEALTH MANAGEMENT SIDE OF THE BUSINESS. SO YOU SAW A LITTLE BIT OF AN INCREASE IN FEES ON THE BROKER DEALER AND THE TRUST BUSINESS. THAT'S A LITTLE BIT OF WHAT WE'RE SEEING. We don't get all of it, but we certainly are seeing some of it. So on the consumer side, high balances, some of the CDs that are coming due, they were being redeployed into savings accounts at a higher rate earlier in the year. Now they're being deployed to wealth management, and we're seeing that happening. On the commercial side, we're seeing some of the... large commercial balances also putting a little bit of pressure in terms of interest rates. So there are competing forces in the island that we need to be cognizant of. So there might be some pressure for us on the commercial large balance deposits in the next several quarters. But again, we feel that that we are in pretty good shape in Puerto Rico, and Puerto Rico as well, given the competing marketplace we operate in, which has a significant player here with excess deposits, as well as the other two players. So we're, I think, optimistic about deposit betas for us here at OFG going forward.
spk02: Great. And then can you give us some color on the mortgage market in Puerto Rico? Have you seen the slowdown? I mean, it really wasn't reflected anywhere near as much as I expected in mortgage banking this quarter. But just maybe give us a little bit of color on sort of what higher rates have done to mortgage application volume. Yep.
spk01: So two things that I can give you color on. One is certainly interest rate increases have basically brought to zero all the refinancing on the residential mortgage side. So from that point of view, that type of business is pretty much zero. But on the other hand, Puerto Rico's real estate market has improved. We have seen increases in prices across ALL DIFFERENT BUCKETS IN TERMS OF RESIDENTIAL. AND ACTUALLY, WE'VE SEEN THAT COMING FROM A REALLY, REALLY DEPRESSED LEVEL, AS YOU CAN RECALL. SO WHAT WE'RE SEEING IS THAT THERE'S STILL QUITE A BIT OF A PURCHASE MARKET HERE IN THE ISLAND, AND THERE'S QUITE A BIT OF AN ACTIVITY IN SPITE OF THE INCREASE IN INTEREST RATES. AND THAT IS BECAUSE WE STILL HAVE a need for housing in the island. And that's one of some of the things that are being taken care of by the reconstruction fund. So you might not see the residential mortgage market in Puerto Rico be as affected as in the States, given that our residential prices have not gone as, on a relative basis, have not gone as high as pretty much all the states in the United States. And what we're seeing is that there's still some good opportunities for a purchase market here.
spk02: Got it. And then, you know, with the rates going higher, I mean, at some point, does it make sense to put more of that on your balance sheet?
spk01: So that's a good point. And we are starting to do that. As rates have gone up, we've started to do that this summer, in late June, early July. So we're actually retaining some of the residential loans that we originate because they have a better yield. So yeah, we're doing that. So you'll see mortgage banking activities slightly trending down simply because we're retaining and not selling.
spk02: Got it. Perfect. Thanks for taking my questions.
spk06: Thank you. Once again, that is star one. If you would like to ask a question, we are now holding. Please press star one now.
spk03: Once again, that is star one if you would like to ask a question.
spk06: Our next question will come from Brett Rabaton with Hove Group. Your line is open.
spk08: Hi, just a couple of follow-ups here. First, would you happen to have the balances for the U.S. portfolio and then what the appetite might be going forward just kind of given concerns about the U.S. economy and you know, what industries that you're interested in in the U.S.?
spk01: Yep. So just to give you some background, you know, we started back in 2017. So we built around $600 million in loan balances as of June 30. So that's kind of the size. Most of it is small commercial loans. And there is around $130-some million of middle market loans. So that's the composition.
spk08: And then, Jose Rafael, any thoughts on your appetite for new production?
spk01: Oh, yeah, sorry. Yeah, sorry. I think what you've seen so far in the last several quarters, that's what you're going to be seeing going forward. As I said, this is a geographic diversification strategy that we've been pursuing since 2017. And so what you will see from us is continue to be nationally diversified, mostly focused on the small businesses in the states. And building our team here in the island to i'm sorry not in the island building our team for the US business also that's also part of what what we're doing because, again, I think it makes sense for us to a diversified geographically so that's kind of way how we see the US business today.
spk08: Okay, and then your your. mostly through the current authorization on the server purchase plan. Do you have any thoughts on server purchases from here and how you see that playing out in the back half of the year?
spk01: Yep. So we've been pretty opportunistic in the last two years since 2021 when we announced the first repurchase. So we're going to continue to be opportunistic going forward. We also look at the dividend and we will continue to You know, we recognize that we have a very strong position in terms of capital. We have great momentum in the business. So we always look at both, and we will update the market accordingly.
spk08: Okay. And then just lastly, I saw in the news in a publication that there was an estimate for the positive impact of airbnb in puerto rico and the tourism market in puerto rico um you know any thoughts on what you're seeing tourism wise and and just how how that's benefited the economy and what you think the outlook might be for that yeah hospitality in general in puerto rico it is trending very positively uh all our commercial loans that we have on the hospitality business
spk01: ARE PERFORMING SIGNIFICANTLY ARE PERFORMING SIGNIFICANTLY ARE PERFORMING SIGNIFICANTLY BETTER THAN WHAT WE HAD BETTER THAN WHAT WE HAD BETTER THAN WHAT WE HAD PROJECTED WHEN WE ORIGINATED PROJECTED WHEN WE ORIGINATED PROJECTED WHEN WE ORIGINATED THE LOANS. THE LOANS. THE LOANS. WE'RE SEEING VERY LOWER LEVELS WE'RE SEEING VERY LOWER LEVELS WE'RE SEEING VERY LOWER LEVELS OF VACANCY THAN HISTORICALLY. OF VACANCY THAN HISTORICALLY. OF VACANCY THAN HISTORICALLY. WE'RE SEEING A LOT OF BUSINESS WE'RE SEEING A LOT OF BUSINESS WE'RE SEEING A LOT OF BUSINESS ACTIVITY ON THE TRAVEL I think we're seeing the hospitality business as a growth business in the island, and certainly there's a lot of Airbnb, as you pointed out, but there's also, in the last several years, there's been quite a buildup on rooms, hotel rooms in the island, not only in the metropolitan area, but also across the entire island, and all those hotels are performing very well. should continue to serve the tourism business in the island. Okay.
spk08: And then maybe just one last one. I saw the Oversight Board froze the Act 41 here recently. Any update or any thoughts on what's going on with the Oversight Board and their actions and how that's impacted Puerto Rico?
spk01: So I think the oversight board has a mandate, and that mandate is to get balanced budgets and to make sure that they restructure the debt and all that stuff. They've been doing, in my mind, they're doing a good job at keeping discipline, fiscal discipline in the island. And, you know, you see it in the states, you see it here in Puerto Rico, it's hard to keep fiscal discipline FOR GOVERNMENTS ACROSS THE UNITED STATES AS WELL AS ACROSS THE WORLD. SO I THINK THE FISCAL BOARD IS SERVING AS A GOOD VEHICLE WITH ALL ITS DEFICIENCIES, RIGHT? BUT IT IS A GOOD VEHICLE TO KEEP THE FISCAL DISCIPLINE AND, YOU KNOW, IT'S DEFINITELY NOT PERFECT, BUT IT'S SOMETHING THAT IS GOING TO TAKE, I THINK, TWO OR THREE MORE balanced budgets for them to complete their mandate. They have to restructure the PREPA debt, which is still on the works. So I think the dynamics are, after a while, it's kind of, you know, working as it should be.
spk08: Okay. Great. Appreciate all the additional color.
spk01: Yeah. Thank you for your questions, Brett.
spk06: Thank you. Our next question will come from Kelly Moda with KBW. Your line is open.
spk05: Hi, good morning. Thanks so much for the question. I got disconnected a little while ago, so I apologize if this has already been asked, but I noticed your efficiency guidance was taken down to the mid-50% range with this quarter. I was wondering if that's mostly a function of the higher NII outlook versus expense growth. And if you could also talk about whether the higher NII outlook is changing, how you think about maybe further investments into the franchise and a little bit about what you're doing now. to help grow and improve the customer experience on the East Coast line would be excellent. Thank you.
spk01: Yep. So thank you, Kelly, for your questions. On the efficiency ratio, yeah, we're modeling a mid-range 50s, mid-50s range efficiency ratio driven by higher net interest income. We will continue to invest on technology and the digital efforts that we're doing and all that stuff that we've talked about in the other, in the previous quarters. So that's kind of the impetus behind us guiding on a mid-50s efficiency ratio. We also saw on the expense side this quarter that you saw an increase due to business activity primarily on the compliance side. We don't expect those expenses to increase. to be recurring. We do expect some of that expense to flow out. So we are going to be very focused on keeping our expenses in check as we continue to invest on our franchise. But again, efficiency ratio in the mid-50s. Regarding net interest income, I think your question was addressed earlier. And the answer basically is interest rates are driving higher net interest income. And certainly as we grow the loan book, we will have a double benefit, right? We grow the volume and the balances and we improved because of the higher net interest income on the loan side, as well as on the investment side and the cash. So we have the... We are very well positioned for what the Fed is doing in the next several quarters in terms of interest rates. So that's kind of our outlook on the net interest income. Did I miss any of your, oh, you mentioned about the customer experience, I think you did. So we launched this quarter two self-service kiosks, which is a part of our strategy to try to, take out of our flagship branches transactions that can be done on a self-service basis, either digitally, mobile, and we're providing these kiosks as a way for customers to take care of all their issues in a fast and efficient way. Also, that will... provide more time and better ability for our employees at the branches, at our flagship branches to really learn what are the customer needs and be able to help them walk through their financial needs and resolve those issues. So we will be in a better position as we continue to transition our our banking network in that direction. So we will continue to invest in our technology to get our strategic differentiation executed in place.
spk05: Got it. Thank you so much for the help. I appreciate it.
spk01: Thank you for your questions, Kelly.
spk06: Thank you. Next, we have a follow-up with Tamir Braziliar with Wells Fargo. Your line is now open.
spk07: Hi, yes, just two quick follow-ups. The dollar of U.S. participation loans, if you have that on hand.
spk01: I'm sorry, could you repeat the question?
spk07: The dollar amount of participation loans on the mainland.
spk01: I said $600 million split in two, 130 plus or minus on middle market loans and the difference in small commercial businesses.
spk07: And that's all participation, or is participation just the chunk of it?
spk01: Yeah, these are all participations with key partners that we have.
spk07: Okay, understood. Thank you for that. And then just a modeling question, and I'm sorry if I missed this in the document, but the number of shares repurchased this quarter?
spk01: We'll disclose that. I don't have them with me, but we can disclose that it's around 1.1 million shares or so. I don't have that specific number, but it's around there. Perfect. Thank you. Yep, you're welcome.
spk06: Thank you. Next, we have Alex Twirtle with Piper Sandler. Your line is now open.
spk02: Hey, just a couple follow-up questions. You know, on the qualitative reserve release, the $4.9 million during the quarter, was that – kind of because COVID went away, or maybe just walk through sort of the inputs and outputs of that, and does that kind of take into account, you know, some of the negativity that economists are projecting for mainland?
spk01: I'll let Maritza get an answer for that one.
spk00: No, the qualitative adjustment reduction that we disclosed and shared with you does not include the $1.7 million that we also disclosed on the economic model. The $1.7 million is excluded from that qualitative adjustment. That qualitative adjustment is part of the modeling. We have had better trends in recoveries, as we were saying, in the mortgage portfolio, particularly in the PCD loan portfolio. Actually, in page 19 of the presentation, you can see how this release of reserve of this $4.9 million, you can see that PCD is about $3 million of that adjustment, and the non-PCD is about $1.9, and it's because of the positive trends in the portfolios, in the delinquencies and in the charge-offs.
spk02: Okay. Thanks for the color there. And then, you know, Jose, when you talk about the loan growth prospects for later in this year, can you maybe give us some color on line utilizations? And then, you know, it seems like one of the commentary or one of the things I'm hearing from banks here is that higher rates has, you know, kind of put some deals into sort of holding patterns. Are you seeing that as well down there, or is there less rate sensitivity just given that many customers have already been operating with higher interest rates just given the Puerto Rico economy and the characteristics of the loan yields down there.
spk01: Line utilization, Alex, has increased in the last couple of months, yet to reach the levels pre-pandemic, but it has increased. In terms of the impact of interest rates on commercial loan originations, Certainly that has had some effect here and there's been some delays and postponements of some transactions that we might have booked for this quarter and maybe they never get booked. So yes, we're starting to see some of the interest rate effects on the loan origination on the commercial side. But having said that, we still feel that we have a pretty good pipeline and we'll be able to achieve our goals for this year.
spk02: Okay, and then just final follow up, you mentioned some of the expenses, the compliance related expenses being non-recurring. Are you able to break that out for us and maybe explain what they were?
spk01: So as I said, if business activity increased, it has increased for the last four quarters, five, six quarters. And so, you know, we need to catch up and we need to do the things that we need to do to make sure that we are up to date with all the consumer compliance issues and and also in preparation for CFPB. We are above $10 billion. We expect to remain above $10 billion. So all those things are in place. It's part of running a bank.
spk02: Okay, so when you say that they won't recur, it's not like there's one item. It's kind of a little bit of catch-up, a little bit of planning for being able to continue.
spk01: What I try to say when I say it's non-recurring is that, yes, there is a catch-up here, and we don't expect that same level of... of expenses to be deployed into that item, particularly in the next several quarters. That doesn't mean it's eliminated to zero. It's just that the level is not recurring, the level, the amount of.
spk02: Okay. Thank you for clearing that up for me. That's it for me. Thank you.
spk01: Yeah, you're welcome.
spk06: Thank you. We have no further questions at this time. I would now like to turn the program back over to Mr. Fernandez for any additional or closing remarks.
spk01: Thank you, operator. And thanks again to all our team members for their hard work and dedication. And thanks to all our stakeholders who have listened in. Looking forward to our next call at the end of the third quarter.
spk06: Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.
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