OFG Bancorp

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Brittany, and I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors, and Marissa Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks. It can be found on our 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 Factor section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Good morning and thank you for joining us. We are pleased to report our third quarter results. This was our stronger quarter to date this year, driven by total core revenue growth of more than 7% quarter over quarter. As a result, All our key performance metrics improved. Thanks to the resilience of our dedicated staff and our digital first banking model, we performed well. We were able to fully support the needs of our customers in a very challenging environment following Hurricane Fiona on September 18th. Our hearts go out to all those affected. Thankfully, business activity has begun to return to pre-hurricane levels. Let's now turn to page three of our conference call presentation. Looking at our third quarter income statement, earnings per share diluted was 87 cents. Core revenue totaled $157 million. Net interest margin increased to 5.23%. Provision was $7 million. Non-interest expense was $87 million, and pre-provision net revenues totaled $70 million. Looking at our balance sheet, total assets were stable at $10.1 billion. Customer deposits decreased to $8.8 billion. Loans totaled $6.7 billion, and new loan origination remained strong at $511 million. Our liquid balance sheet enabled us to continue to deploy cash into higher yielding investment securities, improving our asset mix. As a result, Investment totaled $2 billion, and cash was $815 million. Capital levels remained strong. We increased our cash dividend 33%. Overall, we had another excellent quarter, despite a brief disruption to business on the island due to Fiona. This reflects our three key drivers, consistently increasing recurring net income driven by loan growth, OUR LARGER SCALE AND INVESTMENT IN OUR PEOPLE AND OUR FOCUS ON INCREASING DIGITAL UTILIZATION AND CUSTOMER DIFFERENTIATION TO ACHIEVE INCREMENTAL EFFICIENCIES AND IMPROVE OUR CUSTOMER EXPERIENCE. FOR EXAMPLE, WE RECENTLY LAUNCHED OUR DIGITAL WALLET FOR ORIENTAL MASTERCARD. IT IMPROVES THE EXPERIENCE ALLOWING CUSTOMERS TO PAY WITH THEIR CELL PHONE OR SMART WATCH IN A SECURE WAY. We now have 22 interactive teller machines and four self-service kiosks expanding our sales, expanding our 24-7 capabilities of sales and service network in the year. On a macro level, we're seeing solid consumer and business liquidity and credit trends continue to be stable. In turn, this has positioned us well to further benefit from additional rate increases by the Federal Reserve. We look forward to seeing Puerto Rico's economy continue its economic growth path. Now, here is Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to page four to review our financial highlights. Let me start with total core revenues. They increased $11 million quarter over quarter and $22 million year over year. Looking at key components of that, interest income was $12 million higher than the second quarter. That reflects the benefit of higher average balances and yields on loans and investment securities. It also reflects improved yields on lower balances of cash. During the quarter, we effectively redeployed $410 million of cash to purchase short-term U.S. Treasury notes. This was part of our strategy of taking advantage of the higher yield environment. Net interest income for the quarter was higher by $11.4 million, or 9.9% from the second quarter, and $23.8 million, or 23%, compared to the same quarter a year ago. Looking at banking and wealth management revenues, They declined by about $1 million from the second quarter. This reflected a decline in banking service revenues due to Fiona's temporary effect on economic activity and relief to our clients by waiving late charges and other fees. Wealth management revenues were up 7% year over year. This partially reflected the shift of some core deposits to investment accounts. Other non-interest income declined about $5 million from the second quarter. That was when we had a large gain on the sale of a legacy branch building. Looking at the efficiency ratio, it was 55.8% in the third quarter. That's another substantial improvement from both the previous and year-ago quarters. Similar to last period, it reflects positive operating leverage. Actual non-interest expense total $87 million. That's $2 million higher than the second quarter. The increase reflects $1.4 million related to Fiona. Non-interest expense also increased due to $600,000 for real estate owned. This compares to $1.4 million of real estate income in the previous quarter. So far, we have profited from most of our REO disposition process. Going forward, we are more likely to see modest expenses versus large gains. Expenses also reflect the impact of our investment in people to align salaries to current market conditions and facilitate our more flexible, employee-friendly hybrid model. As we mentioned before, we will continue investing in our people and technology. Looking at our performance metrics, they improved nicely quarter over quarter and year over year. They also continue to exceed our target ranges. Return on average assets was 1.65%, that is up seven basis points from the previous quarter. Return on average tangible common equity was 18.5%, that is up 35 basis points from the second quarter. Looking at tangible book value per share, that was $18.46, a small decline from the second quarter. This reflects the reduction in the other comprehensive income on government and government-backed securities. In turn, this was mostly offset by the increase in retained earnings. Please turn to page 5 to review our operational highlights. Looking at average loan balances, they increased $57 million from the second quarter. However, end of period Loans held for investment decreased $19 million. That reflected paydowns of residential mortgages and seasonal commercial lines of trade, as well as PPP loan forgiveness. This was offset shiftly by increases in auto and consumer loans. Overall, we are pleased with our performance today, this year. Loans at September 30th increased more than 4%, year over year. Looking at loan yield, it was 6.89%. That is 16 basis point increase from the second quarter. That's largely the effect of Fed rate increases on new and variable rate loans in our portfolio. It is also due to a higher proportion of auto and consumer loans versus residential mortgages. Looking at average core deposits, they decreased $22 million from the second quarter. However, end-of-period deposits declined $174 million. That reflected customers shifting some of their excess funds to oriental wealth management operations and commercial clients using deposits to pay down lines of credit. It also reflected some effect of local retail competition. Looking at core deposit costs, it was 28 basis points. That is an increase of four points from the second quarter. That was mainly due to municipal accounts with specific yield parameters. Deposit costs increased slightly during the quarter. We expect deposit costs to increase in the coming quarter, given the magnitude and speed of Fed Fund recent and expected increases. Given the current competitive landscape in Puerto Rico, the deposit beta should be lower than past experience locally and seen on the U.S. Looking at new loan origination, it totaled $511 million compared to $587 million in the second quarter. Auto lending hit a record high of 20%. $220 million, and we saw a lower production in consumer. Puerto Rico, our U.S. commercial loan production was also lower. Residential mortgage production declined due to higher rates. This has affected home sales and the refugee business. Looking at net interest margin, that was 5.23%, an increase of 43 basis points from last quarter. It is also an increase of 111 basis points year over year. The higher net interest margin reflected four factors. One, growth of the loan portfolio at higher yield. This accounted for 43% of the increase in net interest income. Two, the increase in higher yielding investment securities. This accounted for another 43%. And three, higher yield on lower volume of cash. This accounted for 23%. In turn, all this was slightly offset by the small increase in the cost of interest vision liabilities. Please turn to page six to review our credit quality and capital strength. Looking at net charge-off, they total $11.3 million in the third quarter. About half of that came from two commercial loans we provisioned from in the second quarter. The remaining balance came from auto and consumer loans. In part, that was due to higher loan volumes. Also, late payments as a result of FIONA were a factor. Looking at provision for credit losses, total provision was $7.1 million. Two main factors affected the non-PCD portfolio. One was higher auto and consumer loan balances. This added $8 million. The other was an increase in the qualitative component of the allowance to account for potential funeral-related losses. This added $1.3 million. The PCD portfolio benefited from reduced balances and an improved performance of residential mortgage loans. This led to a recapture of $2.8 million. Third quarter allowance coverage ex-PPP was 2.33%. That's down five basis points from the second quarter. Looking at non-performing loans, the total NPL rate was 1.55%. That's down six basis points from the second quarter and 53 basis points from a year ago. Overall, Crate was stable with a little glitch at the end of the quarter due to the effects of Fiona. Capital remained strong. The CET1 ratio was 13.34%. That's up 12.8% in the second quarter. Total stockholder equity dipped a little below $1 billion. This reflects reduced other comprehensive income partially offset by increase in return earnings. The TCE ratio held fairly steady at 8.83% compared to the second quarter. Now, here's Jose.

Thank you, Maritza. Let's turn to page seven for our outlook. We're finishing the year with good momentum. We plan to continue to expand our digital first solutions to provide customers with an easy-to-use, 24-7 self-service capabilities. We also plan to continue our focus on growing retail and commercial loans and customer relationships, as well as our investments in people, technology, and network infrastructure. Ultimately, we're focused on exceeding our performance metrics, specifically efficiency ratio return on average assets, and return on average tangible common equity. As for the Puerto Rico overall picture, consumer and businesses continue to have high levels of liquidity with excess deposits in their accounts. However, we remain vigilant for any economic repercussions from the worldwide inflation trends and the higher rate environment we operate in. Having said that, we continue to believe that on a relative basis, Puerto Rico will perform better economically than the U.S., given the flow of reconstruction and rebuilding funds coming to the island. Thanks again to our resilient team members for always being more than ready to help our customers achieve their financial goals. This ends our formal presentation. Operator, please start the question and answer session.

If you have a question at this time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2. And we will take our first question from Alex Turdwall with Piper Sandler. Your line is now open.

Hey, good morning. Good morning. First off, I was hoping you could expand a little bit on some of the comments you made about Hurricane Fiona. I think you mentioned credit stability with the exception of some impact from the hurricane. And I was hoping maybe you could sort of expand on that a little bit. And is that what attributed to a slightly higher level of early stage delinquencies that you saw at the end of the quarter?

Sure. So we continue to see credit trends relatively stable. Unfortunately, we had at the end of the quarter, the Hurricane Fiona strike the southern west part of Puerto Rico. So it kind of kind of clouds a little bit the picture. But I can share with you a little bit of what has happened after the quarter end in terms of the delinquency levels or at least the delinquent auto loans. So just to share a little bit of color here, the additional delinquencies that we had at the end of the quarter, so far 30% of that have already put themselves back current. So that's kind of an indication of end of the quarter kind of disruption due to Fiona. Also, just as part of the deferrals that customers have requested, Alex, on the consumer side, we're talking about 600 to 700 of them, a total of 13 to 14 million bucks. So we're really not seeing that significant effect. So we feel that things should you know, normalized after that end-of-the-quarter event. We can also say that on the commercial side, there was no effect whatsoever, and we didn't see any effects from Fiona. So that's from the credit side. So at this point, we continue to see credit stable and encouraged by what we're seeing on the ground in terms of the economy.

Great. That's helpful, Collar. And then, you know, maybe the same point on loan growth and, you know, obviously a hurricane hitting with two weeks of the quarter remaining. And I imagine there was probably some disruption on, you know, everything down there. Did you see loan that maybe would have closed at the end of September get pushed into October? Or maybe just sort of comment on, you know, that piece and then also kind of what you're seeing from the pipelines overall? And then just the third part to the question, just the seasonality that you alluded to on the CNI book, is that going to reverse anytime soon?

Yep. So, you know, we are still seeing loan growth for this year in the mid single digits. End of the quarter, we might have had some closings that were postponed, but I don't want to make too much of a deal out of that. I actually think that the biggest impact on loan growth in the quarter, were a couple of commercial account lines of credits that were fully paid because of excess liquidity that our customers have. And that accounts for in the vicinity of $50 to $60 million. So I'm just giving you a little bit of the detail of what's happening within our commercial book. We do have a very good pipeline coming into the end of the year, and we continue to feel optimistic about, again, our target here of mid-single digits for the end of this year. You know, when we look at loan growth, we're seeing positive origination trends, we're seeing positive strong pipeline, but certainly paydowns and the line utilizations are down. So that's kind of what's having that effect. Hopeful that next year we'll have more line utilization and And frankly, I also need to point out that higher interest rates are also putting a little bit of a dent on loan originations because rates are significantly higher. And as everybody knows in this call, they've gone faster than in the last 100 years. So it's having an effect on our commercial clients thinking about financing projects for the longer term. So I'm not saying that we're... slowing down, but it's certainly going to have an effect.

Got it. And then next question for me, just on the overall size of the balance sheet with some of the deposit outflows, the balance sheet is now saying just over $10 billion. Last year, you guys were able to defer Durban by a year. And I'm just curious how you're thinking about sort of balance sheet management going into the end of the year. especially considering that obviously pushing Durban out another year would be a substantial savings.

Yeah. So we're in a lot better position this year than last year to achieve it. So let's see how the fourth quarter plays out. Deposit trends are stabilized after the end of the quarter, given what I mentioned earlier about some commercial clients using their excess cash to pay down lines and stuff. So... You know, we'll update on what the outcome is about the $10 billion mark by the end of the year, but certainly at this point in time, we're closer than we were last year in terms of total assets. I can say, though, that at the bank level, we're close below $10 billion, so the CFPB gets postponed because it requires four consecutive quarters of compliance, so above $10 billion. So in that end, we are kind of pushing it for four more quarters.

That's great. And roughly how much does that save the CFPB component?

I'm sorry?

Does that CFPB component result in any savings that you can point to?

No, not really, because we already are planning on being above the $10 billion at some point in time in the near future. So we are preparing ourselves to be fully compliant. It just gives us more time. So it doesn't have an effect on that.

Great. And then just one final question for me. I was hoping you could just remind us what the tax treatment for the purchases of U.S. Treasuries are down in Puerto Rico. My understanding is that there are some differences to how a U.S. bank might report taxes on those purchases. I'm just, you know, wondering if you could remind us if that's the case.

Yeah, I'll let Marita answer that one.

Yeah, we do have benefits on the income from the treasury that we invest, so there is a tax effectiveness that we would benefit from that investment.

So on a tax-affected basis, those might even be higher than you might see in a U.S. bank. Does that wind up having a material impact on your tax rate over the next couple quarters?

Yes, that's correct.

Okay, great. Thanks for taking my questions.

You're welcome. Thank you for your questions.

We will take our next question from Kelly Mata with KBW. Your line is now open.

Hi, guys. Good morning and great quarter here. I thought I might start on efficiency. Last quarter, you lowered your efficiency outlook to the mid-50s range, and you're currently there given the strong NII growth you've had. Just wondering if you could maybe update us on your outlook for efficiency and kind of how you're managing expenses to that, whether, you know, stronger NII should maybe allow efficiency to move lower than the mid-50s, or if you're going to continue to invest and have expense pressures that'll kind of keep you there. Just any color on that would be very helpful.

Thank you, Kelly, for your question. So we will, and we are, and we will continue to invest in our In our infrastructure, our network, it's our path towards differentiation in this market, the 24-7 self-service, digital-first kind of perspective, and that requires us to continue to maintain our efficiency targets in the mid-50s. Having said that, we're benefiting from operating leverage, as Maritza mentioned, and we work towards surpassing the goals that we set ourselves on a quarterly basis and on a yearly basis. So we're sticking to our mid-50s efficiency ratio because we want to also have the flexibility to accelerate some of the investments that we might need to make in terms of technology. And that's kind of our view of this from a business strategy perspective. So that's the best I can give you in terms of color.

That's super helpful. Thank you very much. And circling back to the hurricane Fiona impacts, one of the items you called out were fee waivers and the reduction in activity that made fees slightly lower this last quarter. Just wondering if those fee waivers have ended and we should expect a more normalized quarter or if that's something that's going to continue into Q4 and be a consideration?

Yep. So we offered, as you know, when an event like Fiona hits us, we got to be on the lookout first for our people and then for our customers. And we do both. It's kind of our standard operating procedure. And in terms of our customers, we waive the fees and we waive the fees until September 30th. So the fourth quarter should not have an impact on the waiving of the fees. So that's kind of a one-quarter event.

Got it. Thank you. And last question for me on the buyback. It doesn't look like you've repurchased any shares in the quarter. I believe 36 million remain on the authorization. Just wondering about your appetite for buybacks and thoughts about completion. Yeah.

Yep, got you. Kelly, we remain extremely optimistic on our outlook for the fourth quarter and 2023. We also are vigilant for the clouds that are getting closer and closer in terms of inflation and interest rates going up and all the recessionary talk and reality that we will probably be operating in. So when we look at our balance sheet, the key to our long-term success has been operating with a very strong balance sheet and operating with strong capital levels. And that has allowed us to weather all the storms that we've had to deal with in the last 20 years that I've been almost CEO. So when we are looking at buybacks today, yes, we might be able to go out there and and be more aggressive on the buybacks, we will remain opportunistic. But we also want to have the strong balance sheet in the event that there is an economic situation in the world and the repercussions that it might have in Puerto Rico. So that's kind of how we view this. That doesn't mean we're not going to be in the market if there's a good opportunity for us to do so. But we feel at this point in time, we have to operate with a stronger balance sheet than normal and making sure that when the clouds subside, we'll be in a lot better shape and position. So that's kind of how we view this, and that's been our recipe for success and in some instances survival in this market, and that ain't going to change in the near future.

Got it. Thank you so much. I'll step back.

Yep. Thank you, Kelly, for your question.

We will take our next question from Brett Robinson with Humpty Group. Your line is now open.

Hey, good morning, everyone. Good morning, Brett. Wanted to first, Jose, just talk about, you mentioned Fiona and talked about that. Can we talk about maybe just the the reconstruction, so to speak, of Puerto Rico since the last big hurricane. I saw that the GAO warned the subcommittee for the House of Representatives here recently that the reconstruction wasn't advancing as fast as maybe it should be. Can you just talk about what you're seeing besides the hurricane activity in terms of rebuild and what progress has been made in your mind?

Sure. Thank you for your question, Brett. So if there's a silver lining on the Hurricane Fiona hitting the island, it's the awareness and the fact that Washington and Puerto Rico leaders realize and makes it patently clear to them that the reconstruction and rebuilding efforts need to have higher urgency than what they have exhibited in the last several years. So to me, after Hurricane Fiona and the focus on Puerto Rico again and the fragility of the electric grid, I actually think that there is a lot more focus and it's an opportunity for local and federal officials to collaborate and kind of get things going, because at the end of the day, we need to have a more reliable, resilient, low-cost, diversified, well-governed, not only electric grid, but also infrastructure, public services. So to me, That's the silver lining. I can't quantify it, but I certainly see a lot higher level federal officials being involved in this reconstruction process and trying to look at ways to facilitate the flow of funds into the island.

Okay.

That's helpful. So the jury's still out there, though. You know, the proof is in the pudding, right? You know, that's what you see, that's what you hear, but the proof is in the pudding, and hopefully they deliver.

Yeah, let's hope that Wilma uses this as an opportunity to improve the grid and its resiliency and maybe cost as well.

And if I may add, Brett, I also think that It doesn't change the thesis. Actually, it enhances the thesis that Puerto Rico's economy will, on a relative basis, perform better than the state's because simply the size of the economy relative to the amount of funds coming in and hopefully accelerate coming in, it should certainly solidify the thesis. So that's kind of how we see it. Okay.

And one of the other questions I had, you know, I think people were concerned about to some degree, you know, as the Mannheim Index is finally turned lower, that as car prices possibly decline, maybe both new and used, that that might have an impact on your credit quality. Can you just talk about, you know, auto for a second and just how you think about the potential decline in auto values impacting your portfolio?

Yep. So I read the same reports. I just want to point out regarding the auto market in Puerto Rico is first, Puerto Rico is an island without a mass transportation system to rely on. So automobile sales are skewed positively simply because if you don't have a car, you can't go to work. So that's kind of the first differential. The second one is I think there has been pent-up demand for many years. And I think after the pandemic or during the pandemic and all the cash coming in into consumers, allowed them to kind of change their vehicles. So I am surprised at the sales of new auto still at the level they are. I think it was exacerbated because of the inventories, and some brands did not have the inventory levels here in Puerto Rico, so that was affected. And in that sense, I think we will see a little bit of a normalization in terms of the sales. In terms of the prices, I think they're also going to normalize. I think at the end of the day when you're lending to an auto client, you look at the auto collateral as an important component of the credit. But it's all about the consumer, and it's something that we've been focused on for 12 or 11 years now. And what we have done is really increase the credit profile or with a better consumer profile, credit profile originations all throughout the last couple of years. So, you know, at the end of the day, It's a high-yielding asset for us. Our bulk is yielding north of 8.5%. And as you are seeing, charges are significantly lower than what they were in the prior cycles in the island. So we're actually really encouraged and actually gaining market share against our competitors. So it's an area where we see it normalizing and stabilizing. I don't think we're going to keep the same origination levels, but... but we are not seeing any deterioration or significant deterioration in prices of the cars and or the credit profile of the consumers.

Okay. Appreciate that, Collar, as well. And then maybe just last, you know, on the margin, given you only had four basis points of deposit cost increases this quarter, which was really nice, versus the mainland, and I do believe that betas will lag the US. Can you talk about maybe the margin from here? It seemed like it would continue to move a little bit higher, but then as you mentioned, as rates continue to move higher, it gets tougher to originate loans maybe at higher rates. What do you think the outlook is for the margin maybe past the fourth quarter?

Yep. So as you pointed out, our betas are significantly lower than the U.S. peers. And that's given us the ability to, you know, this is the first cycle in many decades where the banking system is operating with excess core deposits. So that's number one. Number two, we only have three or four banks in the island versus 10 or 12 that we had. So those components are definitely going to in my mind, make us perform positively different versus the U.S. mainland banks in terms of the deposit beta. So that's number one. Number two, in terms of the margin, the speed and magnitude of the interest rate increases by the Fed is certainly benefiting us, and it will continue to impact positively our margin. And we're still seeing that. We're not going to see the same rate of increase. We're not going to see the same magnitude of the increase in margin as we've seen in this year because we expect cost of funds creep up a little bit. But in general, to me, the biggest kind of thing that we need to be vigilant on is how our higher interest rates unviable commercial loans going to potentially affect commercial clients. So far, we're not seeing anything, and we have a pretty close eye put on that. So that's kind of how we see margin. That's how we see betas, and that's a little bit how we are seeing the effect of higher interest rates on our commercial clients. Okay, great. Appreciate all the color. Thank you for your questions, Brett.

Again, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll take our next question from Timur Brasilier with Wells Fargo Securities. Your line is open.

Hi, good morning, guys.

Hi, how are you?

Good, thank you. Maybe just a couple follow-ups first. Going back to Alex's question on the $10 billion balance sheet size, Jose, you had said you're better positioned this year to achieve it. Are you meaning you're better positioned this year to kind of go below $10 billion in the fourth quarter and delay Durbin? That's correct.

That is correct, yes.

Okay. And I know that, you know, as the balance sheet had been growing through the year, that was less of an emphasis, and you guys are better positioned to absorb Durbin. Does this just kind of fall in your hands somewhat, just given the outflow of deposits you saw in the third quarter? And maybe just talk longer term about, you know, as we go into 23, overall balance sheet size and how that factors into the strategy.

Yep. So... What we're seeing right now is interest rates, I'm sorry, balance sheet growth is probably going to be somewhat challenging given what we're seeing with interest rates. So it's an opportunity for us this year to fall below the $10 billion mark, but I don't want I don't want to precipitate the outcome here. I'm just saying that we're in a better spot today. Into next year, we still have excess deposits, so we will deploy those deposits primarily into loans if we have the opportunity to, and we see the opportunity to grow on the commercial side as well as on the consumer side, but primarily on the commercial side. When you look into 2023, loan growth is probably on the low single digits, and that is still going to be a scenario where we're going to be in the vicinity of the $10 billion mark into 2023. We're going to be up or down there, depending on how our commercial customers behave in terms of their liquidity, and also how the competition in Puerto Rico reacts to higher interest rates. We're already seeing some of it. So at the end of the day, those are the variables that we're looking at in terms of how the balance sheet size moves. But it doesn't seem to us that we're going to explode above the $10 billion anytime soon. So we're going to be navigating this level.

Okay. And for that type of loan growth assumption for 23, Just looking at the puts and takes, I'm assuming you're expecting continued strength on the commercial side. I know commercial originations have declined for a couple quarters in a row now. I'm assuming you're expecting that to kind of turn and then the offset would just be lower production out of consumer and auto. Is that the right way to think about 23 loan growth?

Yeah, yeah. You know, the macro base case scenario that we're using for next year, is basically the global economy is going to come into a recession, and there's going to be an impact at some level in Puerto Rico, and therefore it's going to have an impact on loan originations across the board. Having said that, we talked about it earlier, we do have a different dynamic here in the island given the rebuilding and reconstruction fund, so we are seeing single-digit loan growth mostly driven by commercial. we're going to still see mortgage balances going down. And consumer and auto will move up, but it won't. We don't expect them to increase at the same level that they have increased this year.

Okay. And then just putting the funding base in context for that line of commentary, it seemed like some excess liquidity was used to pay down lines this quarter. I guess what's the incremental capacity or I guess what's the incremental level of kind of excess deposits, as you called it, that are still on the balance sheet. And with that willingness to kind of let some of that money be used to pay down loan balances, you know, Maritza said that the beta is going to outperform prior cycles. Can you give us a sense of what you're expecting for through the cycle beta and kind of how that transitions here in the fourth quarter and then through 23 after the Fed stops hiking? Yeah.

Yeah, so the first part of your question is hard to answer. What's the excess liquidity that our clients have right now? But certainly higher interest rates on their lines of credit is motivating them to use their cash to bring them down. So I can't give you an answer to the first part of the question. But I can share with you a little bit of data here in terms of the beta in a different cycle. When we were in the 2016-2019 cycle, where interest rates went up, our beta was around 17%. So that's kind of what we had in that scenario in 2016, 2019, where the competitive landscape was somewhat different than it is today. But certainly the speed and the magnitude of the rate increases was also different. So one might negate the other. Right now we have a beta of around 3%, a little less than 3%. As Maritza mentioned, we feel that in this cycle, what we're seeing today, we will have a beta that it will be lower or similarly, if you want to be conservative, to the last cycle where we had around 17% beta. But the jury is still out there simply because of, in my mind, rates have gone up significantly and in a very short period of time. So Let's see how the Fed manages the whole transition from growth to stabilization and reduction in inflation. So we'll give you more details in the next couple of quarters.

Okay, that's great. And then just last for me, going back to Kelly's question on the buyback and kind of your response, is that implying here that we're kind of through the excess capital position? I mean, capital ratios improved in the third quarter versus the second quarter where you guys were active in the buybacks. I'm just wondering, you know, is that just increased caution on your end and then trying to be opportunistic?

Exactly. So it doesn't change the long-term view. We know we have a good, strong capital position. We're seeing the landscape shifting and in terms of the global macros. And we just want to be careful. We want to make sure that we get our hands around what's really going to happen. Typically, when interest rates go up in this amount and at this speed, typically there is a moment of truth. It could be junk bonds. It could be a housing bubble. You call it. So we need to be vigilant. We need to be... good stores of capital, and that's what we're doing, but that doesn't change the longer term. We understand the benefits of buybacks, and we understand the benefits of dividend increases, and we've been delivering it this year, and we'll be on the lookout, and if we need to execute on any opportunity, we will do so. But I just want to, my comment comes from more of the the macro environment that we're seeing. And typically, it ends in a bad spot globally at some point in time. And I just want to make sure that we're not caught off guard.

Got it. No, that makes sense. And sorry, I know I said that was the last question, but if I can just ask one more on the allowance. So it looks like, you know, over the last couple of quarters, we've seen some level of normalization of credit. And in that dynamic, allowance is still trended lower. Just looking at the allowance ratio here at 2.3%, you know, is that fairly stable? Is there still some room to take some reserves off the table here, just given maybe the more broad improvement off of when you originally put that on? Or should we expect that level to be more or less flat here going forward?

Maritza will take that one.

Yeah, hi, Timur. Yeah, how we see it at this point, 2.33% and given, you know, the scenario we're managing, we feel that the delinquency is stable. We have some glitch during the quarter due to Fiona, but we will keep an eye on how payments will continue to come. But in general, we think that so far, We see that coverage stable at this point. We don't see any potential releases of reserve. I think it's adequate at this level, and that's the scenario we're managing at this point.

Got it. Thank you, guys. Appreciate all the color.

Yep. Thank you for your questions.

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