Q1 2022 OFG Bancorp Earnings Call
Good morning, Thank you for joining O F. G. Bancorp's Conference call. My name is Gretchen I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of Directors Directors and Maritza.
As many 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 managements goals plans and expectations.
The statements are subject to risks and uncertainties outlined in the risk factors section of O F. Gs at 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 background noise. After the speakers' remarks, there will be a question and answer session and instructions will be given at that time I would now like to turn the call over to Mr. Fernandez.
Okay.
Good morning, and thank you for joining us.
We had a great start to 2022.
We're extremely proud of our achievements, particularly our continuous focus on helping our customers and the communities we serve.
This is due in no small part thanks to our team members and their excellent work commitment and dedication.
So, let's turn to page three of our conference call presentation.
Fourth quarter <unk>.
P S diluted with 76 cents compared to 66 cents in the preceding quarter and 56 cents in the year ago period core revenues total $136 million, that's an increase of 7% year over year.
Asset quality continued to improve resulting in a net provision of $1 $6 million noninterest expenses were in line at $81 million.
Pre provision net revenues totaled $56 million, that's 9% greater than last year.
Looking at the March 31st balance sheet total assets grew two 9% from the end of the fourth quarter to $10 $2 billion.
Customer deposits increased 4% to $9 billion, we saw continued loan growth quarter over quarter in all three of our priority areas, 5% commercial loans consumer loans grew 11% and auto loans grew 2%.
New loan origination was seasonally strong at $623 million.
We also successfully executed on all our capital strategies, we completed $33 $5 million of our $100 million share buyback program. We early terminated all of our outstanding subordinated capital notes totaling $36 million.
We increased our regularly regular quarterly cash dividend by 25% to 15 cents per common share.
And we ended the quarter with continued strong levels of capital.
Our results continue to reflect the three main drivers of our business consistently growing recurring net income driven by loan growth.
Our larger scale and investment on our people.
Our focus on increasing digital utilization and customer service differentiation.
As a result, we had a strong quarter on all fronts. We grew loans at a stronger pace than we anticipated. While this is likely to moderate in the second quarter. We continued to expect single digit loan growth for the rest of the year.
Deposits increased from both our retail and commercial customers as a result, our balance sheet now is over $10 billion.
Our strong highly liquid balance sheet enable us to deploy more cash into higher yielding loans and investment securities improving our asset mix.
We also paid down higher cost borrowings all of this helped expand net interest margin.
In addition, we performed well from an operating perspective, giving us good momentum going forward.
We continued to introduce new digital solutions. This quarter, we launched fully digital processes for personal loan originations and for opening and making contributions into our I R. A fund.
Liquidity and credit continued to show positive trends this positions us well to benefit from the expected rate increases by the fed.
Okay.
Against this backdrop the.
Puerto Rico economy continues to show strength recent figures show employment increased close to 5% last year.
As of March the number of people employed is the highest since 2014 and the unemployment rate has fallen to the lowest level in several decades.
The manufacturing index is up year over year above pre pandemic levels.
The actual home values continue to increase and we're seeing incremental construction activity of single family housing.
Overall, many of our commercial clients are experiencing higher demand for their products and services. All this continues to validate our optimism regarding the future of Puerto Rico and O F. G.
Now here's mud eats up to go over the financials in more detail.
Thank you Jose.
Please turn to page four to review our financial highlights.
Core revenues increased $8 $7 million year over year and declined $4 $5 million quarter over quarter, there's a bunch of decline, reflecting the absence of a lot of issue I'm, Kevin that we received at the end of last year.
Interest income totaled $113 million this was a slightly higher than the fourth quarter.
Interest income benefited from increased yields on higher balances of loans and investments liquidity.
It also benefited from improved do you have some cash need.
This was despite two fewer days in the first quarter.
These de facto hasn't the effect. Okay. Do you think instead of income by $1.7 million.
Interest expense for both sound point, Amy Gonzales, he is worth $600000 lower than that.
Interest expense benefited from lower average balances.
Cost of both deposits and borrowings.
This was partially offset by $405000 to write off unamortized issuance cost related to the early retirement of our subordinated notes.
During the quarter, we paid down 30, the $36 million balance of those notes the notes carry a variable rate other carrying costs of three points, one and 3%.
Banking and wealth management revenues were $31 million on a year over year basis revenues increased $1.7 million. This was due to higher revenues in all three lines of business banking services mortgage banking and wealth management.
Non interest expenses totaled $81 million, that's $5 $3 million lower than the fourth quarter.
Most of that reduction he thought you with IL $2 million to $4 million less in do you guys have any surface prohibitions.
And at $2 million of dog, something I'm not going to be.
One off items, such as operational losses.
Later expenses and training costs.
The efficiency ratio was 59, 5% that's an improvement from both the previous a year ago quarters.
As we mentioned in our prior call. We will continue investing in our people and I'm, saying not only to further deploy our studies.
She can determine robotics also improve year over year and quarter over quarter. They also continue to be in our target range to be down on average assets was 148%.
Return on average tangible common equity was 15 point, 88%.
Diluted book value per share was $18.90 that is a decrease of 18 cents from the quote from the fourth quarter.
This reflects the repurchase of one 2 million shares of common stock and other option in other comprehensive income.
Partially offset by an increase in pretax earnings.
Yeah.
Please turn to page five to review our operational highlights.
Alright loan balances so about five point $52 billion.
That is an increase of $67 million from the fourth quarter.
And off the loans held for investment increased $145 $4 million, the increases reflect new Puerto Rico, and U S commercial loan and auto and consumer loans.
I've said that I think Glenn decline in my and mortgages on PPP loans.
Loan yield.
Loan yield was 669%.
A seven basis point increase from the fourth quarter.
New loan.
Or are you in a sense were $623 million.
He wasn't nearly level with the fourth quarter it.
He was also $97 million higher yeah, Oh, Yeah, we continue to see high levels of auto lending commercial lending in Puerto Rico, and U S and increasing demand for consumer loans, let's keep in mind, Yeah I got the election included $126 million in PPP loans.
During the quarter as interest interest rates move up we Opportunistically increase our investment securities portfolio. The average portfolio increased 6% from the fourth quarter and all spirit balances encourage it great.
$263 million.
Average core deposits stood at $8.8 billion that he saw a decline of $275 million from the fourth quarter.
That's primarily reflect the withdrawal was that occur at the end of last year I suppose they may shut at the bus its rebound over the course of the quarter and obviously, that's core deposits increased $375 million from the end of last year.
Core deposit costs continue to fall there were 25 basis point in the first quarter, but it is a reduction of one basis point from the fourth quarter. They have now fallen 44 basis points from the first quarter of 'twenty 'twenty.
And ill fated borrowings fell to 28%, but plenty of million dollars down $65 million. The decline reflects the paydown of $36 million of subordinated notes.
This follows the fourth quarter pay down of $33 million or 3% food at home loan bank advances.
Our cash balances totaled $2 billion. This is a decline of 19% or 480 $881 million from the fourth quarter.
And I'll speed up the cash balances stood at one point $86 billion that he started decline of 8% or $168 million.
Most of the end of period decline reflects redeployment of cash into loans and securities and paid down of subordinated notes and paying for share repurchases.
Net interest margin expanded 29 basis points from last quarter to $4 47 per cent.
This was primarily due to improved asset mix, where loan and investment volume make up a higher proportion of assets.
Okay.
Please turn to page six to review our credit quality I kept it kind of strange.
Asset quality metrics continue to trend positive.
First quarter net charge offs of $577000 the net charge offs fell.
Fell to four basis points.
Ncos included.
$2.8 million Laurie quality from an acquired P. C D call myself, along they also included a $1 million with quality.
The final settlement of the sale of noncore nonperforming mortgage loans that we transferred to held for sale last quarter.
This compares to fourth quarter, and net charge offs of $32 million, an NCL rate of 2%.
Core net charge offs included.
$30 million related to past due loans transferred to held for sale that during last quarter.
The early and total delinquency rates were one 197% and three point, 17% perspective.
So that npls rate, including D. C D was 149%.
All three of these metrics fell compared to the first spread compared to the previous and year ago quarters.
As a result, or we suffer any losses was $146 million compared to $7 $2 million in the fourth quarter.
The first quarter included three points.
Related to growth of loan balances.
$4 $2 million increase.
For our commercial loan previously placed in nonaccrual.
And a $5.7 million reduction in qualitative adjustments due to improved economic conditions.
This reduction was mainly due to improved employment situation. That's all so these costs our macroeconomic scenario remains the same.
Our allowance coverage was two 4% on a reported basis.
The CET one ratio was 13, 24% the times you won't go on equity ratio was nine.
54% and stuff all of this equity was $1 billion.
All three metrics were lower than the previous a year ago quarter.
This reflected increases in assets and total assets she's way to ask it.
The common stock buybacks, partially offset by the increase things like that.
Now he is at wholesale.
Yeah.
Thank you Maria So please turn to page seven for our outlook.
As I mentioned earlier, the Puerto Rico economy continues to show strength unemployment employment participation manufacturing residential home values, they're all moving in the right direction. Our commercial clients are experiencing a higher demand for their products and services consumer demand also remains strong and at long last Puerto Rico.
<unk> has exited bankruptcy.
Whereas the rest of the world is experiencing we're also seeing higher prices due to supply chain disruptions and the effects of the war in Ukraine.
Although it is too early to quantify the impact for now the high levels of reconstruction and stimulus funds are serving as a good cushion to dampen the negative effects.
Puerto Rico's economy should continue to grow in Puerto Rico on or G should perform better on a relative basis than the states or mainland banks.
With this environment as a backdrop, we will continue to execute the strategies that have been working for us so well, namely taking advantage of the growing economy growing loans and investing in people and technology speeding our digital transformation and enhancing the customer experience.
We Oh Gee are more than ready thanks to all our team members for their continued dedication and commitment with this we end our formal presentation. Thank you all for listening operator, please start the Q&A.
Yes.
If you have a question at this time. Please press star one on your telephone keypad, if you wish to remove yourself from the queue press the pound key again, if you'd like to ask a question Press Star then the number one on your telephone keypad. Our first question comes from Alex Alex Turtle from Piper Sandler Your line is.
The open.
Hey, good morning.
Good morning, Alex Good morning.
Well first off I was hoping Jose maybe you could expand a little bit on what drove the commercial loan growth that we saw in the first quarter and then you talked about maybe thinking that that might moderate a little bit as the year goes on you know what what are you seeing out there in terms of the pipelines and what makes you think that that growth is kind of slow you know against the backdrop of what you said about <unk>.
Tommy being strong.
Yeah. So let me start by repeating a little bit of what I, what I said in the call earlier and that is our first quarter was very strong we had a great start for 2022 and and really it's the first.
Quarter that we have in many years, where we have such a strong performance typically the first quarter of the year is a slower quarter in terms of particularly commercial loan production. So.
We're really excited about our results in the.
The loan generation in loan originations that we had is a lot of the quarter.
No.
I will give you some color in terms of how we are first of all which industries. We were seeing some some opportunities and then I'll give you a little color also on the outlook on how we see commercial going forward.
Most of our.
Commercial loan originations in the quarter and really in the last three or four quarters have been pretty much focused on.
Hospitality trade in services some manufacturing certainly construction services now are mostly on the on the infrastructure, but we're seeing also.
Business is building up and we've seen that throughout the last several quarters building up their capacity in and them coming to us for for financing and I mean to some degree health services to them. So so where we're seeing that and that is across the different buckets in the on the commercial.
Market here.
When I say it a different ballgame, so I'm, referring to small businesses and midsize companies. Those are the industries that we're kind of focused on and.
And we are being able to to serve those customers. So when we look at and loan growth and what we saw this quarter.
You know my Formula right. Our production was above our expectations. We had very few paydowns utilization of the lines of credit for working capital et cetera, and they're still running at a significantly lower level than normal so there's still.
Excess liquidity in the system.
Our pipeline coming into the fourth quarter I don't know if I mentioned on the call.
Gold was pretty strong so we will deliver on the production and and now when you look at.
The next several quarters.
We we see paydowns staying relatively.
Neutral, maybe we have a couple but cause you usually there is a little bit of a movement there.
We expect line utilization to slightly start moving up and starting to increase and our pipeline remains strong so are our commercial loan.
Origination outlook.
<unk> continues to show strength, and we're confident that our the rest of the year, we will be able to deliver them.
So that's a little bit of.
How do we see the commercial side of the business and are really excited really excited on on how we have been able to.
Be close to our customers and attract new customers too.
Right I mean, it seems like everything you just said it was pretty optimistic about the pipeline in the state of the industries that you're serving and how come the guidance is the only single digits given that commentary.
Well when I when I say, when we say for the rest of the year.
Single digits loan growth, we have to take into consideration that we still have a residential mortgage.
Book that we will have we expect to have lower originations there unless you know we originate himself. So we have.
That book of business is going to show you Downtrend, we had a very strong consumer and auto also levels of loan originations in the quarter.
It'll be it'll be difficult to replicate that going forward. It doesn't mean that it's going to go back to levels that are.
That are significantly lower but we have to think of where where do we start kind of plateauing in terms of the oh the levels of revision. So that's kind of how are we seeing it Alex.
I hope we're wrong I hope, we can keep on growing at the same rate, but are you guys know me I'm trying to also be cautious on the outlook.
Got it and does anything change with the mortgage model just given you know the move up in those rates do they become something that you would consider putting on balance sheet.
We have yet not to decided on that we continuously look at it.
Remember with the acquisition of Scotia Bank, we bought a very pretty large servicing book, so we have them.
Love better critical mass on the business. So yes, it's something that is on the table for us to decide you remember we also are the FHA loans that we originate we securitized and we book them on the investment portfolio with a north of 3% yield. So so it's not like we felt.
And not not keep anything on the balance sheet, we keep it on the investment portfolio on the FHA loans. So we still have the rest of the agency paper that.
We need to decide how we went out.
Manage it going forward, but as of now we are continuing to originate and sell in and generating the fees.
Okay, Great and then just talking about the impact of these rate hikes. There. We're now seeing and expecting is that in my notes that about 60% of commercial loans float with prime can you just confirm that number for me and then just maybe give us some.
Some thoughts about rate sensitivity and how you plan to manage the balance sheet through these rate hikes.
Yep, so 60% of our commercial loan book is viable wasn't necessarily Brian , but it makes it a prime and LIBOR or slash the alternative which is but again, where we're transitioning the LIBOR thing to mostly prime so I just want to just comment on that a little bit.
Just to be precise.
So 60% is relatively is variable rate okay.
In terms of.
Interest rate increases by the fed us everybody's talking about it you saw our 10-K and in our shocks and how we are well positioned to benefit from it certainly we have a $2 billion in gosh are in addition to the 60 per cent viable commercial book.
So we'll definitely be benefiting.
From rate increases and this quarter is really not showing any of that benefit yet. So we're really looking forward to.
Everything plays out.
And in our outlook is pretty optimistic.
So the benefits of the rate hikes.
Yeah during the quarter you guys purchased in a pretty good slug of securities.
It looks like it happened mostly towards the end of the quarter. You know just given that the 10 years now approaching 3% no can you talk about sort of the cash management strategy over the next couple of quarters, now, especially with the prospects of potentially some pretty strong commercial loan growth.
Yep.
So we did get our feet wet a little bit deeper this quarter at the end you just benefiting from a significant repricing on the Ah <unk>.
On the investment side of the equation. So we benefited from that yeah at the end of the quarter, we will look at it on a monthly basis.
And we are pretty much close to that dynamic and we will make the appropriate decisions in terms of asset mix. You know the the reason why we are very optimistic is because where we're seeing how our asset mix is transitioning very nicely towards a higher yielding asset base and the reason.
For that is you you may alone the melanoma.
You hit on the nail by its the cash so our first.
Yeah.
Option is gosh going to loans, our second is gosh going to investment securities.
So it's it's it's all part of the equation Alex.
Okay, great. Thanks for taking my question, so I'll get back in the queue.
Thank you, Alex and have a great day.
And our next question comes from Kelly Motta from K B W.
Hi, good morning, Thanks for taking my question.
Hi, welcome to our call from two other chairs and good call.
A great quarter I E.
I believe on your last call you guided to efficiency in the low 60% range in the quarter, but you had some nice NIM expansion and expenses were well controlled and you dip down below that in the first quarter for as you look out for the remainder of the year I know you're making some.
And taxes.
Low 60% efficiency ratio still a good outlook for this quarter or for the remainder of the year or should we be thinking of them.
It may be lower and then maybe if you could also tie that into.
Some of them.
The pushes and pulls of expenses.
As we look out to the remainder of the year that would be really helpful. Thank you.
I'll, let Marty to answer that question, Hi, Kelly how are you.
Good thanks.
This is Doug so.
So you know how we see it we see expenses. This first quarter, we are still having reflect the full effect of our deployment in our studies.
See this is a timing matter I wish we continue deploying into technology and our people it would see levels of capital assets and expenses to go up.
And we still have the same plan that we shared with you during the last quarter, we will continue to invest in our Wuxi capital assets as far less expensive to grow.
And if I can add a little bit. He here too we are very much cognizant of how well positioned we are for a <unk>.
Hiking interest rates, so I'm going back to your.
The point about efficiency ratio, we we do see a.
We realize that that interest rates are going to have a very positive effect on us and our results. So we just want to make sure that we have the flexibility to take advantage of accelerating some of the investments that we need to make up above and beyond.
Well, we have done just because we want to make sure that.
We take advantage of the environment, where we're operating in right now so that's not Etfs, we were sticking to our low sixty's our efficiency ratio for the time being I'm in spite of all the two variables are.
Yeah.
That number is.
Working on our on our favorite.
Yeah.
Got it that's really helpful.
Switching switching to the NIM.
Like you had some.
Nice.
Loan yields in the the rate hike was towards the end of the quarter. So I was just.
Wondering if that was a function of mix how spreads are holding up.
And how.
Our confidence.
Two continue to.
Expand loan yields.
From here beyond just the the rate hikes.
Well it Kelly.
At the end of this call them out into 'twenty and 2021 basis point that increase the their name.
16 basis points relates to us it makes it so so it's mostly driven by by the change in our ASIC means having more loans and on investment portfolio is there any asset type.
Got it.
That's helpful. Maybe a last question for me.
Really strong deposit growth I believe some of that was from E exit them towards the end of <unk>.
'twenty, one coming back as we look at it.
As you continue to gain share in Puerto Rico wondering how we should be thinking about that line because there is still quite a bit of liquidity, but I would imagine not so much.
Our growth is as we've seen in the past year is.
Looking for credit can you can you I know it's.
Hard to have a crystal ball, but maybe some thoughts about the cadence and up deposit growth.
Going forward.
So we we kind of got back on track and this quarter. After we we manage a little bit the mountain shoot down last quarter.
As we mentioned.
Quarter ago, what we're seeing here in Puerto Rico is maybe not at the same levels of.
Overall liquidity on the on the consumer side and the businesses. They have started to deploy it but we're also seeing a like for example that the.
Child tax the child tax credit in Puerto Rico, It's having an effect in this first quarter and continues to have that effect of the tax season, just and then for Puerto Rico, That's a big number and and because we use we use not to have the benefit of the child tax credit.
The rest of the states would have had it and now we are in parity with the rest of the states. So this first quarter first half of the year, we're seeing that as a as a another.
Positive in terms of deposits, but certainly the rest of the years.
You know our models it does not replicate the deposit growth that you'd seen in on years before given the the liquidity from the stimulus from the pandemic. So so and then going towards the earlier part of your questions regarding the $10 billion.
We're at $10 $2 billion. This is the first quarter lets see how everything plays out in the next several quarters, but.
Our goal and our expectation is to grow and and we want to break the 10 billion and we want to.
Do it with.
Right asset mix, so that we can increase our margins and increase our profitability and in the past we were trying to be a little cautious because.
I'm keeping money in cash was not generating a positive return exactly you're actually must be returned ingles in negative carry so so now that we're seeing and we've been seeing incrementally in this quarter, we saw the lone Wolf.
There were certainly looking forward to grow the balance sheet.
That's that's really helpful. Thank you so much and I'll step back.
Thank you.
And once again that is star and wonder if you'd like to ask a question. Our next question comes from Brett Roberston from Hovde group.
Yeah.
Hey, good morning, everyone.
Hi, Brett how are you good morning.
Good congrats on a good start to the year wanted to first talk about the fee income for the quarter and the outlook usually.
Little bit of seasonality in the first quarter with banking service and wealth management mortgage banking, obviously held and do the servicing but was hoping to get some color around the seasonality of those other two line segments in the first quarter.
Then how meaningfully they bounce back if so during the rest of the year and your thoughts generally on on driving those too.
One is on the also on the income statement.
Yes, so for fourth quarter on a fee income basis is really strong for us. So the comparison with the first quarter as you may have.
Pointed out.
<unk> has some seasonality. So we are we're seeing banking services continued to trend positively we see our customers' utilization of our banking services continuing to increase we're adding new customers and we are in a growing are there different services, particularly in the commercial and small commercial and mid size kind of.
Commercial clients certainly on the consumer side too on the wealth management side.
I think it's too early to tell in terms of.
How how it's moving forward you know we think it's moving positively I think higher rates will help that business as we started to see some some consumers.
Commercial clients starting to think about the moving money from deposits to investments and we have a pretty strong.
Legacy business, there that can benefit from that but it's still too early.
And the cycle. So that's how we see that we see insurance is an important business for us and one that continues to show some growth, particularly on the AR.
Yeah.
The cross selling that we do with commercial clients and consumer clients under different loan businesses that we have on the mortgage side as well on some of the consumer side and and commercial.
And lastly, mortgage banking mortgage banking I mentioned on the call that we were seeing a slowdown in the region.
Origination side.
But we also have another way you know seven 8 billion build our servicing book that are with higher rates and.
We should we should.
Doing well there too so we're excited about.
All of those different lines on the fee income side or are trending.
Hum.
How would that complement the rest of the ER will be our income statement from the loan side and the investment cycle.
Again, we're pretty happy.
Okay. That's good color and then wanted to circle.
Circle back to you talked about in the outlook for inflationary pressures that linear seen and I think you know early on one of the push backs around Puerto Rico is that the inflationary pressures might disproportionately affect.
The consumer base there versus the mainland.
Obviously, the economics, that's having more of that out at all and I continue to be surprised with the resiliency of the auto sales, which are up again this year for the first three months a year over year again, I guess, Puerto Ricans just drive them into the ocean.
Sure Juan.
Wanted to just to get you know any any color that you have on where you're seeing some inflationary pressures.
And as a part of that also wanted to ask about you know how many vacancies you have from a personnel perspective due to competition from the mainland and how they inflationary pressures might be affecting your own.
Our own.
Merit increases this year as well.
So.
I'm not sure if I heard you well in the second part of your question. I believe you are asking me about U S banks doing business in Puerto Rico on competition here in Puerto Rico in general right.
Well just find out I know that with remote work you know, there's Puerto Ricans Lincoln can now work you know in the U S alone and do it remotely in Puerto Rico, So theres competition for Thailand. So I was trying to get a sense.
Jose Rafael what you know how many maybe job postings you had open how many jobs are hoping to fill this year that's kind of just.
Yeah.
Understood. Yeah go ahead I'm, sorry, so yeah, yeah. So you know.
Let me just start by saying that and recruiting is itself.
It's a tough business as.
It is in the states also given the the great recognition all of that but having said that we are seeing those trends normalizing and and we saw a lot of pressure last year on the kind.
Kind of a individual contributors.
The bank, meaning at the branch level or the call centers, we did make the salary adjustments and we may be a different compensation adjustments that were needed to be done to make sure that we stabilize that and we're starting to see those trends stabilizing we're not seeing any.
You know high quality big contributors AR.
Turnover.
On your side or or senior manager level. So that's why we're fine, but but but if we're gonna be transforming because we are have been doing for many years, we need to continue to look out for talent and upgrade.
Our skills internally and that is something that we're very much focused on and if you look at the U S. That's what else are the Puerto Rico market too.
Drugs that talent.
So that's kind of what I want.
What kind of color I can give you regarding that Brent can you remind me kind of first part of it.
Oh, just the inflationary pressures that you know you might be saying, where they're showing up in the economy. You know the statistics don't really bear out any kind of.
Pressures at this point, but you know as soon as the year progresses, those will start to show up and so far.
Yeah, So I would say I wouldn't say, we need to be you know as everybody else in the world is inflation is a factor in the cost of living is going up on the housing market is pretty strong. So on the pricing are going up so.
It's very.
It's too early to quantify it as I mentioned, but oh those are areas that we need to be cognizant of because oh.
Consumers and businesses are paying higher prices for for the goods that they consume and therefore the services on the goods that they provide and to be able to do offered to customers. So that'd be another day.
Fed needs to get going and that's what they're telegraphing to everybody. So hopefully we have a we have a soft landing in the next year or year and a half.
Okay, and then lastly wanted to just circle back to the margin discussion and you know as I look at it. If you just take the static balance sheet I know that you know, there's obviously changes I wasn't going to affect the outcome, but it would seem to me that.
A 50 basis point hike would raise the margin by about 15 basis points.
Do you have any.
Pushback on any any color that you would want to say in a positive or negative relative to that.
That number.
So the margin might even say.
A.
We're not hearing you well bred and that's kind of the problem that we're having but if I understood. The question correctly I'll repeat it.
That money is not going to be.
We respond to it regarding the margin and if we expect a 50 basis point increase by the fed it ready, saying that our net interest margin would be impacted positively by 15 basis points and he wants you to confirm or at least give some color regarding that.
I think that at the end well somebody said it before in the call. It one of the questions. We we we saw all of our 10-K, we are very well positioned for a rate hike.
Shawcor analysis of 100 and say they just find photos.
A positive 9%.
Net interest income increase, though so I don't know how to get into your equation.
From there you can you can know that it would be a relatively important impact for us any any move in the marketplace.
Okay. Thank you.
Fred you can get more color from a return on that I'll tell you that much.
[laughter] okay.
Thanks for all the color and sorry, I'm hard to hear them I have a bad connection.
That's fine that's fine.
And our next question comes from Tim Remember Brazilian from Wells Fargo.
Hi, good morning.
Hi, good afternoon.
Just wanted to follow up on a couple of questions.
Maybe looking at the strength that you're seeing within the consumer segment and within the auto segment.
How much of that is still being driven by stimulus and the the child tax credits and.
I guess, what does normalized consumer demand look like and how far away are we from reaching that level.
Yep, that's a very good question because remember this is unchartered territory.
Cause of the stimulus, but for Puerto Rico in particular is is.
Additionally, unchartered territory, because we were just coming out of two decades of economic contraction, where consumers were very much squeezed. So thinking that the consumer is going to level off at a pre pandemic levels or at levels before the pandemic significantly earlier in the pandemic.
I think it's not what's going to happen our expectation is that the consumer is going to start leveling off sometime at the end of this year.
And we're very much focused on how is that behavior.
Moving right now.
And and but we should end up at a new.
Normal if you want to call it that way in terms of consumer in Puerto Rico given the.
The la city of money that continues to be acting in the Puerto Rico economy, and and and then in addition to that the the.
Reconstruction funds that are even though they're not coming in at the pace that we would desire.
In reality, we see that as a blessing in disguise not from a quality of life perspective, but from a capacity perspective, because with all the things that are going on in terms of building the economy back in building the infrastructure back.
<unk> be where what we wish for you we want all those phones to come down having said that I think are the effect and the ongoing effect of the stimulus money that was deployed in the last couple of years is continuing to have a significant.
The impact on the islands consumers and and that's gonna start leveling off sometime I would expect that at the end of the year and then we will hope that these things the reconstruction funds will start coming down as some of the projects get approved and are in the federal government starts releasing.
Those funds. So I think we have quite a bit of a oh the runway here in terms of the Puerto Rico economy, and the Big question Mark here He's now.
How is inflation and supply chain and all of those issues are affecting you, but I think on a relative basis as I said, given the size of our economy and the size of the reconstruction of stimulus funds. The mathematics tells me that on a relative basis, we will.
We will have it.
Better better performance in some of the states in the United States.
Got it Okay and then.
Circling back to expenses so.
But it says commentary it sounds like about four and a half million.
Last quarter might've been one time in nature, So I guess on the on the legal lower legal expense was that.
A charge in the other direction and that more or less normalizes in the second quarter and then the two plus million of other items, maybe you could just frame what a good starting point for expenses is in the second quarter. Once we remove some of the noise from the first quarter numbers.
So remember the first quarter.
When we mentioned when we talk about legal and when we talk about are you know some of the operating losses. It happened on the fourth quarter. So so that's that's the delta that you're seeing positively this quarter is because of that and what money money as I mentioned earlier is that.
If you net that out that's the base, where we starting which is this quarter's number but when you look at going forward. We have some investments that we're making and and we're probably going to see from a timing basis, we're going to see those expenses later in the second half of the year. So that's why we're making sure that you are all aware that were me.
Aching are continuing to make the technology and the people investments to move or our business model.
And accelerate some of the digital investments that we're we'd be making for years.
Understood. Okay, Great and then last for me just looking at allowance for loan losses, the ratio went down a little bit but dollars of allowance actually increased for the first time kind of post a post C. So have we found kind of a floor for for dollars of allowance in the expectation.
It should be that the ratio goes lower as loans get bigger or.
Is there incremental opportunity here to actually reduce allowance kind of three releases later this year.
Yeah and as it.
It happened this quarter.
The variable and then balance the loan and data.
All in that's viable adding to our allowed ROE.
It's about people and $7 million also that while he does if I just meant that as the economy continues to throw off will continue to adjust them in a in a positive way, but also then it tells me the other body that will impact the level of allowed one going forward and so so right now we are.
We are keeping our quarterly analysis and volume in fact, it would be one element, but also the economic environment will continue to be an element that definitely will win.
It will make us.
Greg on on on how to manage it and probably if it continues to be positive and we will see that call that it's going down but that's all that's all I'm Oh boy that went down we had already and its water yeah, it's ongoing anymore and and you know it is.
How the equation works, but.
But at the end of the day, what we're starting to see also on the consumer lending side as you can see this quarter. We saw around $4 million of chart net charges are we will have to.
Covered for that and we'd rather buy the loan book also so.
So again, we because we are optimistic with the economy. We were also optimistic on how we can.
Continue to.
Manage our our asset side of the equation and particularly on the reserve.
Great. Thanks for taking my questions.
Yep. Thank you for your questions.
Yeah.
And it looks like we have another question from Alex toward Gaal from Piper Sandler Your line is open.
Yeah.
And just a couple of follow ups for me. If that's okay. First off do you have the the contribution to net interest income from the PPP in the first quarter.
Well it was really lower than prior quarters I don't have it here with me, but I can share offline with you.
I don't think it's meaningful it's not me.
A significant number but put money so I can provide to you offline.
Okay.
And then do you have in the mortgage banking line the.
A breakout of the contribution from the sort of the the MSR valuation adjustment versus just the mortgage banking volume.
Yes.
For the quarter was positive, but a L or extend that the prior quarter and volume factor. It was impact. It also because he was there.
The portfolio is running down.
And but I don't have the exact amount, but the delta probably it's around $300000 I have to check that then I can go back to you on that on that number okay great.
Contribution of $300 $300000 swing from the from the prior quarter.
Yes $300000.
Yeah.
Okay.
And then just taking a little bit more into the.
The reserve you guys released $5 7 billion.
Qualitative factors was that mostly due to the omicron, what kind of what are the pieces of that that that contributed to that reserve.
Reserve release.
That does that and talk a little bit in the prepared remarks that mostly relates to a qualitative I just meant that we were doing adding to the allowance related to unemployment levels are at the vehicle and as well some age on it.
And then blame it hasn't been a steadily going down and and we have a historical level recently, it's all it's all at once.
And along that he has decided to keep that I'd, just I mean to the allowance.
Okay.
Roofing unemployment.
I'm sorry was there is there a component to the reserve that you could still sort of.
Attribute directly to Covid that you know over the next couple of quarters, if things continue knock on wood the way they have been that you know it could be released out of the reserve.
Well, we we do have probably that they've had jasmine that hasnt been tied to their most recent developments in the economic and vitamin <unk>.
I'll leave it to Godley, both all the I S.
And and yes, we do have and that wouldn't they call. It at the fed and I loved the allowance.
Are you are you able to share how much that is.
And I don't have it here with me, but probably we can share with you offline.
Okay, and then just a final question the $2 8 million dollar recovery on a P. C D alone.
I'm just curious if you can give us a little bit more color on what drove that.
Great quarter.
Yeah.
This is a Scotia bank acquired loan that are that we had written down.
And he was paid.
Back to us as part of the a government bankruptcy settlement and are we received.
From that settlement.
I think it was 4 million books and the difference is what you're seeing there in terms of the recovery. So because that's what it is it's an eye Scotia legacy government loan that was on our books and we've been done for $1 million they've paid us for and we got three that's kind of.
Hollywood in general numbers.
The directly correlates to the bankruptcy exit so in terms of kind of <unk>.
<unk> that were acquired from Scotia or from other institutions that had been marked down and with real estate values have doing what they're doing.
I mean, you could assume that well see more recoveries in the future, but but you wouldn't be able to point to this is sort of a leading indicator of that.
Alright, alright.
Okay. Thanks for taking my follow ups.
Yeah. Thank you Alex have a great day.
Once again that is star and wanted to ask a question, we'll pause for a moment.
Yeah.
At this time there are no further questions I will now turn the call back over to Mr. Fernandez for closing remarks.
Okay.
Thank you operator, thanks to all for their heart and thanks to all our team members for their hard work and dedication to these great start of the year.
And thanks to all of our stakeholders, who have listened and looking forward to our next quarter results.
Good day.
This does conclude today's program. Thank you for your participation you may disconnect at this time have a great day.
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