Q1 2022 First Bancorp Earnings Call
Hello, everybody and welcome to the first Bancorp first quarter 2022 financial result Montney.
My name is Sam and I'll be coordinating your call today.
If you'd like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
I'll now hand, you over to your host remind Rodriguez <unk> corporate strategy and Investor Relations officer to begin remind please go ahead.
Yeah.
Thank you Sam.
Good morning, everyone and thank you for joining first Bancorp's conference call and webcast to discuss the company's financial results for the first quarter of 'twenty two.
Joining you today from first Bancorp are president.
President and Chief Executive Officer, and Orlando, Manhattan, Executive Vice President and Chief Financial Officer.
Before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the Companys business.
The company's actual results could differ materially from the forward looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward looking statements made during the call.
If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website SBB investor Dot com at.
At this time I'd like to turn the call over to our CEO Aurelio Lehman.
Some of them on and good morning to everyone and thanks for joining our call today.
Please let move to slide four to go to the highlights of the quarter.
We're very very pleased to begin to anybody too on the heightened note with another record quarter of I would say exceptional results toward the Brian Chase, we generated $82 $6 million and net income or <unk> 41 per share.
And I think more importantly irregular.
11, 8 million in adjusted pretax pre provision income.
We clearly see the benefits of scale of being a larger organization.
When shall increases in pretax pre provision income lower over the last eight quarters or about the we did to our disciplined approach.
To execute on identified operational efficiencies.
Related to the acquisition, but also additional business across the United States showing upward.
We identified during that integration process I want to congratulate and thank my team for four disclose at that performance on there what we can call a challenging operating cycle. Thanks to all my teams Ned.
Net interest income was slightly up to 185, six and the margin expanded by 20 basis points to 381.
So it's clearly our economic backdrop continues to basically credit performance.
As we can see in asset quality.
Stabilized asset quality and low delinquency rates.
Well obviously.
We could see and improve long term economic outlook in Puerto Rico.
That also prompted the recognition of a provision benefit of $13 8 million during the quarter.
Asset quality.
As we continue to improve nonperforming assets decreased by $1 6 million twice once it is six five.
Primarily driven by the reduction of the newer grilled resi residential mortgages.
And the ratio of the ACL to loans down final leases decreased to $2, 21%.
On the capital from during the quarter, we continued to execute on our plan to return capital. We completed the <unk> went up roof share repurchase program.
By repurchasing three 4 million shares of promo stoga amounting to approximately $50 million that basically completed that program that we announced back in April 2021.
So we ended the first quarter with $17 seven common equity deal win ratio, leaving ample room to execute on further capital deployment Asia Daves.
Over the next call, which we will we will be disclosed later in the call. So let's move to slide five to review some highlights on the quality of the loan performance. Please.
I think finally, we achieved growth in the loan portfolio.
I'll be looking after this for some time very very positive on the way that by months are looking.
Link linked quarter growth marks an inflection point to the balance sheet as balances all the non PPP loans were up by $85 million when compared to the fourth quarter.
The growth was driven by $91 million increase in commercial $88 million increase in consumer and partially offset by $94 million decrease in the RSC.
Total originations were healthy, although there'll be lowered our fourth quarter, primarily driven by the number of the dollars of commercials refinancing and renewals that will completed this first quarter.
We do expect loan growth to continue accelerating during the year.
Again loan pilots are healthy and they should begin and continue to close is a combination of different projects initiatives acquisitions, including including the legal remaining investment in disaster recovery flow of funds.
Hey.
I will have to say that loan portfolio balances are still impacted by excess liquidity.
We still have Paydowns and line Utilizations are are not other other top level.
But on the other hand, lowering issuers are strong and we continue center in increasing both the consumer and commercial loan books, while we have mentioned before we continue to focus in marine 18 conforming residential mortgages.
Tore sustaining the size of the residential portfolio and originating and gain on sale on the mortgage book.
In terms of deposit.
Deposit most nicely excluding broker in government the way, we would like to make sure of course.
Race day, or an increase of $55 million during the quarter.
Let's please move to slide six to cover some additional highlights.
Yeah.
Definitely.
There is there is a potential negative impact of the valuable and conditions are in place I think we all recognize that Scotch us increasing oil prices and what's going to be the real impact of that we see these were option, where the supply chain and we definitely see labor cost inflation. So in spite of this I will have to say that there's many.
Many economic levers to pull.
<unk>, our growth outlook and objectives in our main market in.
Puerto Rico, just to summarize going to UN economic indicators continue to improve.
<unk> 2019, pre pandemic levels labor market continues to pick up total employment reached its highest level in recent history due in March and February actually will continue to March the.
The labor participation rate improved to 44, 7% compared to 40% pre pandemic and the unemployment rate is reaching an all time high every month now March report that six point a.
Long time, no I'm sorry.
<unk> reported a six 5% unemployment rate I don't remember seeing this is before.
The economic activity in there, which is highly correlated to GMP has already reached pre pandemic levels.
Importantly, we have mentioned this and everybody is very aware about the recent resolution of the government debt restructuring.
We believe will allow officials to shift resources and efforts toward the economic growth initiatives that are important.
There are still a large amount of obligated funds as you can see publicly and disaster relief funds that are pending to be disbursed, which definitely hopefully they continue to support the structural improvement needed in our in our environment.
Such as a very important critical modernization of our energy grid.
Also I will have to say, Puerto Rico continued to benefit from a high vaccination rate.
Which has led to an easing of COVID-19 related risk ratio.
We have to say a full reopening of the economy.
Sustained increasing retail auto sales home sales, both new and existing is evidence of improved consumer confidence.
Tourism remains very active with passenger activity at our main airports three 2% above pre pandemic levels.
For hotel rooms, increasing driven by higher <unk> rate.
Our view of improving demographic trends is reported by new residential housing construction and the portal available tax incentive product continued to attract investors to move into the island.
As our top priorities, we continue to make progress on our omnichannel strategy and value proposition.
During the quarter, we executed.
Actually a little bit ahead of time, some additional branch rationalization opportunities.
<unk> identified in the later part of the integration this actually as reported by including that engagement, which moved some of the traffic of our our brick and mortar channels.
That engagement this quarter continued to grow with register digital banking users, increasing 5% linked quarter by quarter.
Now capturing load over 42% of deposit transactions to the dialysis service channels.
Most importantly, we have a goal of launching indeed.
Consummate a broader or therapies.
Every quarter this quarter, we launched our new mobile business the debt obligation.
All our small medium and large businesses, which they can in the mobile devices other functionality as remote deposit capture and other additional functionality.
They will obviously can transact 24, seven in a very secondary level detail environment.
We mentioned before but we're going to continue.
With our sustained investment in additional detail functionalities.
For the year and it's a very important to continue enhancing our omnichannel experience to our customers.
Devin any of the franchise continued to demonstrate the strength of the reported balance sheet and how we have been able to capitalize on the improving operating backdrop.
After concluding our 'twenty two capital planning process, we announce last night, we're very pleased.
To announce the approval of another $350 million share repurchase program to be executed over the next the next quarters.
And an increase of 20% to our quarterly common dividend.
We are extremely committed to preserving shareholder value investing in our franchise on improving our competitive positions in the markets, we serve and we see the opportunities to continue on that path.
So now I will turn the call over to Orlando for more detail on our financial results.
Good morning, everyone.
So Aurelio mentioned we had.
Very very very strong quarter.
As you saw in the release earnings reached $82 6 million.
<unk> 41, a chair.
Theres $273 6 million last quarter or <unk> 36, a share.
Looking at the specific the quarter showed improvement of one 5 million in net interest income.
$205 million in other income and expenses were $4 8 million lower than last quarter.
I will touch up on those more in detail in the next few slides, but going to a provision on the provision.
For the quarter was a net benefit of $13 8 million similar to the $12 2 million benefit we had in the fourth quarter of 2021.
Driven by the outlook the positive outlook.
On the macroeconomic variables both.
Actual unexpected even even within within the uncertainties going on on the award on grain.
And some of these impacts as they relate to the qualitative factors that we have on the reserves.
Pre tax pre provision again really really strong at a $111 8 million 7 million higher than last quarter. So very very strong results for the quarter.
When looking at specific componentry.
Net interest income for the quarter was honored.
$185 6 million.
Grew $115 million and margin expanded by 20 basis points to 381.
The quarter chose increases in interest income on investment Securities comb.
Combination of the reinvestment yields which have improved.
And we've seen significant reductions in prepayments on the existing portfolio.
Which entails a lower premium amortizations.
For the quarter.
The overall yield on cash and investments increased 28, 22 basis points part of it obviously the money market and catch its lower as we use it for other purposes.
The cost of interest bearing liabilities.
Five basis points.
And Thats part of it where we use the use of cash we had high cost repos.
That mature during the quarter and we had some advances episode will be advances that mature at the end of last quarter and they were not renewed.
Therefore, resulting in reductions in <unk>.
In some of the expense components.
Interest expense components.
The quarter also a couple of things that quarter had two days less than last quarter that means about $2 4 million impact.
On net interest income, but on the other hand, we had part of it compensated by collection of $1 1 million.
On all non accrual loan that was paid off.
Going forward, we still see some margin pick up.
That is going to come from the repricing of variable rate loans.
A number of those loans reprice at the beginning of each quarter. So some of the largest impact that happened towards the end of the quarter, we will see on the repricing happening.
Now in April and early May.
And we also obviously expect some higher reinvestment yields from the normal.
Cash flows coming back from the portfolio on the agency paper we have.
Deposit pricing on the market as we have discussed in the past will happen at a lower at a slower pace.
That.
The loan price repricing.
But the way we see it it will depend a bit on the number and speed of future interest rate hikes.
Which could speed up the bed us that we have seen in the market in the past.
In the non interest income it was very much in line with last quarter, except that we collect that are prevailing unseasoned.
<unk> Insurance Commission.
This quarter. It happens every first quarter of the year based on prior year volumes.
The one thing we have seen its refinancing mortgage refinancings have come down so that component of the of the package it and sell leasing and selling its more.
Mostly on on <unk>.
New purchases that are happening in the market.
Expenses.
Which I know you have asked a lot about it and it's been one of the main focus.
Expenses were almost 107 million $106 seven compared to 111 the last quarter.
Last quarter, we had $1 9 million in merger.
And integration expenses that we didn't have any this quarter.
If we exclude these items the expenses for the quarter were $2 9 million lower than the fourth quarter of 2021.
We have continued to work on maximizing the efficiencies after completing the integration of the acquired operations.
And in fact have identified some additional opportunities.
However expenses in reality for the quarter were lower than anticipated and fuel domain. Some of the main factors that we had it.
We continue to run out at a higher level of vacancies.
Again, driven by both pandemic labor market dynamics.
Last January we mentioned that we had seen some improvement in hiring trends.
In reality was not sustained throughout the quarter.
Leaving us with cielo.
Reasonably high level of vacancies.
Compared to normal operating environment.
This potential value of Oreo properties continues to offset Oreo related operating expenses.
We had a $720000 gain in Oreo lower than last quarter, but still again, which is traditionally is not something that we have seen.
We expect that eventually.
We will revert back to.
More of a normalized cost of handling repossessed properties.
Based on his promotion for the quarter was $2 $3 million lower than last quarter.
With the seasonality and timing of marketing campaigns and sponsorships. So we will see some variability from quarter to quarter, depending on our marketing strategies going on.
Also this quarter, we received $1 million in credit card network expense reimbursements beta last year volumes that offset some of the credit card costs.
The quarter.
Lastly, but but no no no.
Smaller.
What we have seen it with all the global supply chain dislocations and.
The timing of and the timing of being able to obtain what's needed for the different.
<unk>.
Facilities construction.
Some of the information technology projects.
The expense impact from some of these strategies it's delayed.
We continue with.
Many of these projects has already mentioned, but.
But we have seen some delays on that so that would.
We'll have some impact on the timing of those expenses.
In general we believe.
Some of these factors will continue to persist through 2022.
But in addition, we have been identifying other efficiencies as I mentioned before that are being implemented this quarter, we closed three branches.
And we see that there are some opportunities on three others that we probably going to be acting on towards the end of the year. So those are additional opportunities.
As a result.
We feel that normalized.
The levels, we have been talking to you about we're revising that to a level of $114 million to $160 million range.
With the second one with the second quarter being lower slightly lower than that because of the timing of some of these airports that I previously mentioned.
The efficiency ratio for the quarter as you saw was pretty low was 48, 8%.
Lower than obviously, what we anticipated.
And looking at at this ratio based on the normalized expense levels. We have now seen we expected efficiency ratio would be more that 52% range than in the past we have talked about 55%.
Aurelio touched upon asset quality, but.
Asset quality trends continue to be positive nonperforming assets decreased $1 6 million.
And it represent now.
79% of total assets.
NPA reduction, mostly it was mostly on the residential mortgage side it came down by $6 3 million.
That includes a full repayment of our old.
Non performing of $1 3 million.
However, we did see some.
The increase.
The increase in inflows of Npls.
Reaching $21 6 million this quarter compared to 15 last quarter.
The increase mostly related to two commercial loan migrations, which were all but $4 million the other ones.
We have seen some some migration on the consumer side, but if you keep in mind that our portfolio is significantly higher than what it used to be percentage wise.
<unk> migration continues to be very much.
But at better pace than what we had in the past.
Early delinquency, meaning.
Meaning loans 30 to 89 days increased $10 million in the quarter, but in reality, it's all related to $17 2 million in loans that mature in the quarter or in the process of being renewed.
Commercial loan specifically these loans are current as to principal and interest. So it's not an issue of delinquency, but it but we do we do put it out to once they reach maturity.
On the residential and consumer portfolios, we saw reductions in early <unk> as compared to last quarter.
Aurelio I'll touch on the allowance the allowance for.
For the quarter was $260 million, which is $20 million down they are down from last quarter.
On loans the allowance on loans was $2 45, which is down $44 million.
John again, as I mentioned, it's improvement trends that we continue to see on <unk>.
Actual and projected macroeconomic variables.
And the impact those variables have on some of the qualitative reserves we have.
The ratio of the allowance to loans at two 2%.
Compared to what we had last quarter.
On the capital front important subject, we continue the execution of our plan.
As you saw in the release we completed.
The $50 million pending prior $300 million plan, we repurchased three 4 million shares.
And we're also beta we're at $19 9 million in dividends.
But even with the execution of our strategies with strong earnings are.
Maintaining our capital ratios significantly above well capitalized.
As you can see in the chart tier one as an example tier one common equity ratio only increased one basis points from December from 17, 8% to $17 seven still pretty significant.
During the quarter, we did have an impact on tangible book value common chair, which decrease from.
<unk> seven at the end of 'twenty, one to <unk> 63.
The increase is related to the $50 million in repurchases, but more important danone 30, 3100 $32 million.
Adjustments to our comprehensive loss, resulting from the from the fair value decrease in fair value.
The securities available for investment based on market interest rates.
The OCI impact will reverse over time since we have the intent.
And more more report on anything based on the strong liquidity position. We have we have the ability to hold these securities that have other sources. So we're not seeing that as a fairly.
Immediate.
Risk, we feel that at the end.
The risk can be and the economics are the same no matter how you look at it.
Where things sit.
And.
Luckily boat.
Nonetheless important we continue with the execution.
Okay.
Deployment capital deployment strategies, we announce.
Once that last night at you So Aurelio mentioned the.
The new repurchase plan as well as an increase in the common dividend starting this quarter.
With that I would like to open the call for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
If you change your mind take their staff on the budget.
When preparing to ask a question. Please make sure your line is ambitious locally.
Our first question comes from Brett Robinson from Hovde Group. Your line is now open. Please go ahead with your question.
Hey, good morning, everyone.
Good morning, Brett.
I wanted to first ask just thinking about the loan origination trend versus the expectation for loan growth I think if I got it right that you're expecting loan growth to.
Improve a little bit from here can you talk maybe about the loan origination trends.
They were a little bit lower year over year and quarter to quarter, but it sounds like you're pretty full.
Bullish on the economy.
Maybe just some thoughts on the loan growth outlook and what segments, you see growing and how you're seeing the pipeline.
Trending through the year.
Yes.
Obviously, I think you have to make sure that the way we will report on page.
Six of the deck I think it is <unk>, obviously, you can see the trends.
The consumer the consumer segment, obviously is continue to show increase over the last if you look at those five quarters I think when you look at the commercial there is a timely matter of the renewals which is embedded in this number.
But if we compare quarter to quarter linked quarter.
I'm, sorry last year quarter first quarter versus this year quarter first quarter, obviously, new money new money.
Is higher.
Hey.
We expect the construction portfolio to increase.
<unk> actually been very surprised that we continue to make more construction loans will there repaid fairly quickly in terms of the resi side because of the absorption.
We do have a better pipeline if I compare this year to last year on both commercial and construction.
And we have the volume of applications in an incoming applications shown across the consumer businesses are also hired the obviously on the mortgage business is not the case on the resi mortgage.
Because of the rate environment refinancing, it's lower so we also expressed that Apple.
Filippo will continue to subside and on the other hand, we have less PPP loans remaining on the book So.
And we expect us liquidity moves on that somewhat.
The usage of the credit lines inventory also contribute to some some some increase in the loan portfolio.
Yeah.
Okay. That's that's helpful. I appreciate that.
And then wanted to make sure there are some moving pieces, obviously with the margin.
You had less premium am that benefited the securities portfolio and lower government deposits wanted to.
Make sure I guess from a static perspective, youre filings kind of indicated 4%.
I am sorry, with 200 basis points.
I need to make sure I understood sort of the outlook on the margin.
And what you might do to optimize the balance sheet from here.
But it would seem like you indicated the margins should move higher I guess I'm, just trying to get a sense of moving patients and the magnitude of the increase from here.
Okay. So the component.
Commercial lending component and there is a floating side of it.
We have.
We have a good chunk of the commercial portfolio that float with LIBOR or prime.
Most of it it's based on three month LIBOR.
So the three month LIBOR component.
<unk> typically not all of it but typically.
Re prices at the beginning of each quarter.
So the the digest.
Of the improvement is going to happen now.
In April .
As compared to what happened in January with the increases that we had in there. So that's going to give us some pickup on the commercial side tied to LIBOR.
So thats one component.
We are seeing reinvestment yields on the investment portfolio.
At a much better rates.
Have all.
<unk> seen in the market so that allows us to reinvest the cash flows that come in from normal repayment of all of the agency paper that is TMO type paper that a base. Some some cash flow monthly cash flows.
To be reimbursed at or better rates.
We continue to to as I mentioned some of the longer term.
Like <unk> advances.
And repo, we're not renewing those.
We're higher rates.
It is becoming smaller chunk of the portfolio. So it has less impact, but still that that is that is there.
And at the end, we had a significant amount of cash you probably saw that cash came down.
Part of it it's because of the options on the on their long term borrowing towards part of it is also some of the of the.
Government deposits that left so.
We used cash on those deposits and in reality some of securities our pledge as collateral.
<unk> level.
So thats, a lower yielding assets.
Now changing that mix of interest earning assets.
On the deposit side what happened in <unk>, we are.
Obviously the market, we don't see the market moving as far we have seen some credit unions move.
And we feel that.
What we are anticipating some some behavior changes back to where they were before meaning.
There were significant.
In 2021 on Intuit on time deposit maturities that people move into either.
One month's time deposits something we rarely see saw before or into transaction accounts that it is going to come back into some of these term deposits.
Great change under deposits so.
So those.
On two different sites, but the net effect of all that we expect some pick up on the margin still.
Going forward.
Okay.
That's helpful Orlando.
And then wanted to make sure I understood you.
Youre right the guidance if I heard it right 104 change of 116.
Million with it being a little lower than that in the second quarter.
What components pick up from here and you know what spending do you need to do.
How are you.
Trying to get a better flavor for.
The Puerto Rican banks.
In general I've had lower expenses in our guidance.
I see.
A part of that might be that you want to make some hires and spending money on business promotion that was seasonally low in the first quarter, but wanted to make sure I understood. The components of the increase from here.
Yes.
You mentioned, one which is very important that.
We are on the compensation side.
The salary expenses lower than we had anticipated because of the level of vacancies, we continue to purchase to hire some of those positions.
We feel that a long term impact of that is going to reflect on service. We don't want that happening so but there are some market realities.
There is also.
And the salary adjustments that are being contemplated as part of their plan for the second half of the year based on again on dynamics in the market and what's happening.
Are there in terms of hiring so that complicate some of the expense component.
The other one that I think it's.
The Oreo component typically you don't have a.
A property, we've been having profits because of this focus on values.
But remember those are properties that came into oreos.
When prices were lower therefore, those volumes were lower now we're getting we're getting.
The recovery on those.
But the new things that are coming in when you go to a price volumes are based on current volumes.
We'll see less of that and still we have operating expenses, obviously on a much smaller portfolio. So the expenses are also lower which that helps but.
We shouldnt see a profit going forward on the Oreo side as I said.
Marketing, it's one that we have a few things going on that are we're going to be.
Launching <unk> expenses are related to some of those marketing strategies.
That's why I said, a number the number for the first quarter, it's lower than we anticipate on the next few quarters based on on the marketing strategies, we have outlined for the institution.
And then the last component is.
There have been we've been working on several projects.
On the facility side, we have a large project of getting.
All the facilities to accommodate all of our people after integration.
It's taken longer than we expected because of the availability of some of the materials.
<unk> for the remodeling and even getting the furniture and <unk>.
So that has delayed some of their process and has delayed also obviously the impact on the expense side since we don't have it yet.
We've seen some technology projects that also have some delays that we're expecting.
To start <unk>.
In the second half of the year. So those those combined are the things that are creating the increase on the expense side.
Clearly we had originally.
There are higher are hired.
Number of 117 to 119 after.
Integration and looking at all the components on whats been renegotiated on the contracts.
We feel those those expenses combined with solve is.
Difficulties in getting things on should be more on the 114 to $160 range.
But those are the main reasons for the change from what we are.
In reality, we were we were.
Lower this quarter than than we were anticipating a regionally.
Okay, that's great color I appreciate it.
Yeah.
Thank you Brad our next question comes from.
Perhaps <unk> from Bank of America Graham Your line is now open. Please go ahead.
Caroline good morning.
But I just wanted to go.
Wanted to follow up on.
Asset sensitivity. So I heard you in terms of you mentioned.
Should benefit if I heard you correctly your loans tend to re price at the end of the quarter and.
And I'm kind of looking at your asset sensitivity in the 10-K.
200, <unk> sedan, because about 5% NII up sight.
And I'm not sure if I missed it but give us a sense of if you get 100 basis points of hikes from the fed in May and June .
Where does the margin set to that 20 basis points of expansion more or less would appreciate any kind of color that you can pull it.
Yes.
We have not provided that I know that some institutions have said, but.
My concern with that.
Ebrahim it's.
I can tell you a number which is based on everything else being equal are not changing.
When in reality I'm expecting some change in behaviors on some of the deposit repricing component.
So when.
When you see that number of the 5% that you make reference to on the 10-K at December 31.
That included some of that impact on repricing.
So it's a combination of the two thats why im saying it all depends on.
If rates.
More slower the repricing component that I'm, assuming for deposits its going to happen at much lower base and that's why we haven't been providing that kind of indication.
That you're mentioning we have stayed true to the overall.
Component of the of.
The impact on net interest margin, our net interest income I'm sorry.
As you saw in the 10-K.
Got it.
Remind me again, you do you get the public fund deposits decline this quarter as we look out do you still expect deposits to run off from here or do you expect deposit growth.
On the on the government side, we still feel that there will be some usage remember that there are some large components that are related to that.
We have bonds from the NGL authority are related to the reconstruction. So eventually it is going to be used.
Some of the municipalities. We don't we don't see that changing that much because it's all operational account. So it's a function of the of the economics of the municipalities.
The strong start that moved out related to the settlement of those.
Those are out already but we don't have anything else, though on the government side, we do expect a little bit of reduction on.
On the on the customer side.
We don't expect significant growth, but we don't expect with options, we feel it's going to be fairly stable.
On the core deposit side meeting, our retail and commercial customers.
Okay.
Non government.
Relatively steady state and then.
And then.
Understood and just the final question around.
As you think about credit quality and I heard what you said earlier like where do you see.
How much more do we have the Florida bottom out just give us.
Remind us what the <unk> day, one what I know, there's some noise given the deal at the time, but what do you see it as a steady state reserve level is it 50 basis points lower from here.
Any.
Todd perspective would be helpful.
The reserves.
Yes, the reserve ratio.
Although the ratio.
The ratio.
There is.
On slide 12, I don't know if you have it handy, but you can see what we had at our option of seasonal.
It was two 6% reserve at that time.
Remember that after that that was before the transaction with Santander and we did not acquire any nonperforming assets on those loans.
On those portfolios so that helped the mix of what you have.
The.
We have taken a number of the qualitative component, that's <unk> reserves coming down.
I believe that now with loan growth.
We should see some some provisional income in future quarters, but some provisioning because on the other hand, the residential portfolio, which it's a longer lift portfolio and sales a higher percentage of reserve typically.
Because of the life of alone.
And we've seen reductions and we expect to continue to see some reductions.
So net net I would assume that percentage wise.
We serve it is going to come down a bit.
Dollar wise will have some provisioning.
But not at the levels, we had back in 2019 or anything like that.
Alright, thanks for taking my questions.
Yes.
Thank you Ebrahim.
Our next question comes from Tim a prisoner of Wells Fargo. Your line is now open. Please go ahead.
Hi, good morning.
Good morning, good morning.
Thank you just following up on the last line of questioning looking at the commercial allowance levels. There was a pretty good reduction this quarter.
I'm, assuming those are qualitative in nature and is that largely why you're assuming kind of provisioning from here in a more stable allowance.
And I guess.
How much more room is there on the commercial side, specifically for further qualitative adjustments down or could we actually see that reserve level on the commercial book increase.
If trends deteriorate more broadly speaking.
On your first comment externally correct.
With that.
When you look at the compensation there were a number of modifications.
Don on the carrier side, there were a number of cases.
That.
During during the pandemic had moratoriums and all of that so related to all those components. There were a number of qualitative reserves that we tied to the specific loan and two obviously the microeconomic expectations that were used in the modeling.
So clearly what we have seen it.
As time goes by most of those loans have significantly improve their financial position.
We haven't seen the they have been meeting every.
Requirement, we had as part of the.
All of the modifications that were done or the extensions that were done.
That resulted in some of those reductions that you mentioned.
With where they would be and that happened mostly on the CRE side more than anything.
On the commercial side.
Some impact which is related to what.
But it could be the expectation on on the impact of the.
Granted war, if that were to last longer.
Long event instead of our short event.
So.
Yes.
Answer to your question on the commercial side related to solve the all things we feel that a qualitative come could come down if some of the issues associated with the economic impact of the.
Conflict.
Were to be eliminated on our part of the modeling purpose.
Otherwise, it's going to be it's going to be more of a volume related.
As Aurelio mentioned, we saw BBB loans come down significantly in the quarter or <unk>.
Percentage of what we had outstanding with those loans had basically no reserve or no reserve at all.
Baird to new loans coming in which will go through our normal quarterly process.
So it's.
The improvement could come from from those macroeconomic <unk>.
<unk> at this point incorporated in the modeling.
Associated with the complex.
Okay. That's good color I appreciate that.
Switching to expenses, if I can ask a follow up question on expenses, maybe a little bit differently, how much of that $1 14 to 116 updated guidance is dependent on new hiring versus kind of earmarked projects and earmarks spend that's more formulaic.
Yeah.
Meaning from going from where we are to that point or the reduction on the guidance.
No.
Going from where we are today to that low 114, how much of that is dependent on new hiring versus internal spend.
There is a combination.
<unk> new hires.
Remember, it's a combination of new hires and what we expect is going to happen with salary basis compensation right.
Adjustments in merit and some other things so that.
That would make up about half of it.
The other component is seasonality on the on the.
On the.
Business promotion.
It would make maybe one $5 million of that.
The other things will come from the project.
Okay.
Okay. Thanks for that and then.
You had mentioned.
The role that credit Union play.
On the island and I'm, just wondering as we look at deposit betas and deposit pricing.
Is it the three banks and really popular thats going to be driving deposit costs on the island or the credit unions have.
Market share there.
They can accelerate maybe data expectations above kind of how we're thinking about it.
The credit unions have about it.
810% market share. So they are a player and there's some other credit unions that are failing not reported that number. So they also a player there.
Then you also have some detailed banks that are active in the island.
Even though they're a smaller player or a player when rates go up.
So we take all that into consideration.
But obviously the lead bank is in the driving seat.
When you look at the market share that they have so so so it is still I.
I will say, it's still a competitive environment, but obviously remember theres a lot of excess liquidity to which comes into the equation.
So so we do expect.
Our Florida business that those rates would move out of the plateau rate.
Rate increases on the deposit side.
Right.
But nonetheless, we expect that to be the case in Puerto Rico.
Okay.
We have to take another question active.
What we are seeing them more active it's been on the time deposit side.
They put out information in the market.
Some things like that so it creates on some of the noise.
Okay. Thank you.
Yes.
Thank you Tina.
Our next question comes from Alex <unk> of <unk>. Alex Your line is now open. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
I was hoping maybe it really Orlando you could give us a little bit of commentary.
And some of the things that we might not be able to get exactly from looking at the jobs numbers that you alluded to earlier and specifically kind of how wage inflation might be impacting.
The median household income in Puerto Rico, and I know you might not have specific numbers at your fingertips, but just kind of anecdotally.
What are you having to pay people today versus a couple of years ago, and I'm, just trying to sort of frame. It in the context of obviously inflation is kind of a hot button topic everywhere.
<unk> heard some concern over.
Over maybe just given that people in Puerto Rico make less money that maybe inflation is a bigger deal down there and the cost of oil or gas is a bigger deal, but I'm also under the impression they are making a lot more money than they use data. So I was hoping maybe you could sort of put some of that stuff into context for us.
Yes, I think we have to use anecdotal anecdotal data because we don't there's no real data on the government side.
Really when you look at the unemployment rate and the labor participation going up something is growing up something is going on definitely for sure.
And when you look at more people hiring.
In an economic.
Remember, we go back to living in a very prolonged recession. So when the when the economy grows there's always more competition in the job market and Thats why we are experiencing in Puerto Rico.
Service centers call centers if.
Just two anecdotally you take.
Our call Center staff, which which all banks have.
Some point in time, we pay three years ago, we were paying minimum salary now, we're probably paying 25% above 30% about minimal salary. So those are the kind of numbers same thing happened with tailors, the branch which are.
Quite a large number of them and each brand is still so that same thing happen and then.
At the professional level.
We're probably 10, 15% up versus the two prior years so.
So when when Orlando mentioned that.
And also remember the stimulus improve the consumer position I'm sure. The the per capita income Puerto Rico, and we look at the number.
It's much higher at the end of the day I think it's good for the economy that we personally think it's good for the for the people on the economy that we have that they might gets paid more that people make more money. So obviously.
The purchase capacity of the consumer.
It has improved.
But.
I think I don't see I don't think anyone is filled by reacting I think we're all managing the situation.
Little by little on the protection basis.
And this can be adjusted to some point in time.
We have to we have to wait.
The bulk of the reset of the potential recession that is that is being discussed in the call.
The impact that we know that you have on the oil cost in Puerto Rico, and the energy cost.
So we have to be cautious and monitor every quarter on bottega.
Our competitive positioning and how we pay but I don't think anyone is getting crazy. It's just managing the situation in a prudent manner.
But remember that minimum salary minimum salary went up 10% starting January the basic minimum salary and in reality.
Many many entities are ended up being higher than minimum salaries.
On those positions.
Great. That's that's great color. Thanks.
And the other thing Alex Yes.
Yes.
Remember I think we are seeing in our case, we are seeing the benefit of larger scale.
And we did a very deep dive on our on our operations. We do we did hold integration we did it it truly deep dive broke DVT exercise in every function.
And then in a year and a half to execute so we had identified opportunities.
Many banks are showing a 50, 248% efficiency ratio and saying that 52 is broadly the more normalized scenario. So I think that so so we're trying to be prudent and also obviously very focused on being efficient too.
Yes right.
As you kind of talk about your loan growth in our commentary and you also alluded to some of the federal money stemming from Hurricane Maria that you're starting to see flow a little bit do you have a line of sight on any bigger projects that might be coming online. Later this year I know that in the past you've talked about some of the programs and the applications that your customers have filed.
Waiting on government approval I was just wondering if you could give us any sort of update.
Kind of help us understand when some of those projects might.
Actually start to come online.
Yes, yes.
That the IBD program, which is the name of the government gave to the program is in the later stage of underwriting.
And we expect some of this price to be announced in the third quarter.
So we are participating in some of those.
Some of them will get the benefit of the projects or not.
But most of these projects.
Could happen either case with their benefit or with other benefit.
But yes, there are construction projects related to.
Hotels or.
Residential development or even even improve office space or.
Sure.
Element centers that could come into the play.
Some of them are also infrastructure related.
Okay.
And then as I think through the $350 million buyback that you guys authorized last night.
What is there an expectation on the cadence I know, it's kind of over the course of four quarters, but could you sort of frame. The ranges that you potentially could do in any given quarter.
I think we are going to be opportunistic on lets see the sales into more fun.
We have not we have not disclosed a specific execution plan, but we do we will do that at a later stage.
Okay.
I'm, sorry did I cut you off and really kind of a follow up comment on the last question.
No no.
Okay. Good alright, well, thank you for taking my questions.
Thank you Alex.
Thank you Alex and our final question today comes from Kelly Motta of K BW Kelly. Your line is now open. Please go ahead.
Yeah.
Hi, good morning, Thanks for the question.
Welcome welcome to the call Kelly.
Very happy to be joining.
All lines have been asked and answered already but.
Circling back to that.
Discussion of credit.
So you had a large release and things have been really.
Looking up in Puerto Rico.
And charge offs have been.
Really really into.
Just wondering if you guys have a sense of.
Over the intermediate term.
And warm Liza sabol.
Charge offs could look like for you guys.
I know there simply put.
Model Reserve releases, but also wanted to discuss more on.
Loan loss component of that.
About the predictions.
I mean at this stage.
Meaning 2022.
And frankly don't see significant changes on the current trends of charge offs.
We're not seeing that.
Sure.
Remember that this is at the end stage of what happens with the early delinquency migration of loans.
Risk stratification, and all of that and that has been really consistent.
We.
Some of the increases we're seeing it there is always going to be some some charge off at the end on on the consumer portfolios.
Typical of the.
Industry percentage wise is small.
Others have increased a bit because of the size of the other consumer portfolios.
But we don't see any anything that it's going to take us to.
Basically higher number.
If you look at our way back.
You wouldn't see on commercial side more than 50 basis points in charge offs.
And on mortgage Namara, Puerto Rico market at a point in time, you hit 10 basis points was a lot.
So so at this stage I don't see why the numbers are going to change.
For 2022 or the near term I think we have leading indicators that will help us answer that question as we continue to move forward right. Now delinquencies are the lowest we have had for some time.
And we did mentioned I think in the last in the in the last quarter call in the prior quarter call. We mentioned that we were expecting us liquidity run off on the consumer.
After the stimulus that some impact will have on the delinquencies or even the inflows.
We haven't seen that yet, we havent seen that yet, but because stimulus continue to flow and unemployment gets better so supported by.
Alarming indicators that are there are the backdrop. So so that that but I think we have learnt the leading indicators the way we monitor the portfolio to to help us raise a flag if that would be the case.
Got it that's really helpful. I appreciate all the color and if I could I wanted to ask a.
Kind of Nitpicky question on the 52% efficiency guidance.
I appreciate your conservatism there.
That you.
You're taking your expense.
Upfront from where they are here.
The ACC discussed, but if I just take the high end SAB $116 million and.
Over.
Your FTE NII.
On fees.
Have you between 51 and 15, 2%.
Is that efficiency guidance is that on an FTE basis or should I be using GAAP NII I'm just struggling to see how you can take.
Q, even increasing expenses cause.
Hi.
Hopefully NII will expand.
Yes. It is based on GAAP NII not on FTE NII.
Okay.
That's really helpful.
All my questions have mostly been asked and answered I appreciate the time today.
Thanks again for letting me during the call.
Thank you. Thank you.
Yes.
Thank you Kelly and there are no further questions. So we would like to thank everyone for participating in today's call.
I will conclude today's call. Thank you again for joining you may now disconnect your lines.
Okay.
Okay.
Yes.
Yes.
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Yes.
Yes.