Q3 2022 OFG Bancorp Earnings Call
Good morning, Thank you for joining O F G Bancorp's conference call.
<unk> is Britney and I will be your operator today, our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of Directors and Maritza Arizmendi, Chief Financial Officer.
Patient 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 for certain forward looking statements about management's goals.
And expectations. These statements are subject to risks and uncertainties outlined in the risk factors section of <unk> SEC filings.
<unk> results may differ materially from those currently anticipated we disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Instructions will be given at that time I would now like to turn the call over to Mr. Fernandez.
Good morning, and thank you for joining us.
We are pleased to report our third quarter results. This was our strongest quarter to date. This year driven by total core revenue growth of more than 7% quarter over quarter. As a result, all of our key performance metrics improved.
Thanks to the resilience of our dedicated staff on our detailed first banking model, we perform well we were able to fully support the needs of our customer customers in a very challenging environment. Following hurricane Fiona on September 18th.
Our Hearts go out to all those affected thankfully business activity has begun to return to pre hurricane levels.
Let's now turn to page three of our conference call presentation.
Looking at our third quarter income statement earnings per share diluted was <unk> 87.
Core revenue total of $157 million.
Net interest margin increased to 523%.
Provision was $7 million noninterest expense was $87 million in pre provision net revenues totaled $70 million.
Looking at our balance sheet total assets.
We're stable at $10 1 billion.
Customer deposits decreased to $8 8 billion.
Loans totaled $6 $7 billion in new loan origination remains strong at $511 million.
Our liquid balance sheet enabled us to continue to deploy cash into higher yielding investment securities improving our asset mix.
As a result investment totaled $2 billion in cash was $815 million.
Capital levels remained strong we increased our cash dividend, 33% overall, we had another excellent quarter. Despite a brief disruptor disruption to business on the island do to Fiona.
This reflects our three key drivers.
<unk>, increasing revenue netting recurring net income driven by loan growth.
Our larger scale and investment in our people on our focus on increasing digital utilization and customer differentiation to achieve incremental efficiencies and improve our customer experience.
For example, we recently launched our digital wallet for Oriental Mastercard, it improves the experience, allowing customers to pay with their cell phone our smartwatch in a secure way.
In addition, we now have 22 interactive teller machines and for self service kiosks, expanding our sales are expanding our 24 seven capabilities of sales and service network in the year.
On a macro level, we're seeing solid consumer and business liquidity and credit trends continue to be stable.
In turn this has positioned us well to further benefit from additional rate increases by the federal reserve.
We look forward to seeing Puerto Rico's economy continue its economic growth path.
Now heres my needs to go over the financials in more detail.
Thank you Jose Please turn to page four to review our financial highlights.
Let me start with total core revenues.
Greece $11 million quarter over quarter, and $22 million year over year.
Looking at the components of net interest income was $12 million higher than the second quarter.
And that reflects the benefit of higher average balances and yields.
And investment Securities.
It also reflects improved geos on lower balances of cash.
During the quarter, we effectively deployed $410 million of cash to purchase to purchase short term U S Treasury notes.
This was part of our strategy of taking advantage of the higher yield environment.
Net interest income for the quarter was higher by.
$11 $4 million or nine 9% from the second quarter.
$23 $8 million or 23% compared to the same quarter a year ago.
Looking at banking and wealth management revenues they declined by about $1 million from the second quarter. This reflected a decline in banking service revenues due to Fiona temporary effect on economic activity.
He needs to our clients by waiving late charges and other fees.
Wealth management revenues were up 7% year over year. This partially reflected the shift of some core deposits so investment accounts.
Other non interest income declined about $5 million from the second quarter that was when we had a large gain on the sale of our legacy branch building.
Looking at the efficiency ratio.
<unk>.
55, 8% in the third quarter.
That's another substantial improvement from both the previous a year ago quarters.
Similar to last period, each reflect positive operating.
Leverage.
As to our non interest expense totaled $87 million, that's $2 million higher than the second quarter.
The increase reflects $1 $4 million related to Fiona.
Interest expense also increased due to $600000 for real estate.
This compares to 1.1.
One $4 million.
Alice State income in the previous quarter.
So far we have profited from most of our Oreo disposition process.
Four we are more likely to see modest expenses versus large gains.
Expenses also reflect the impact of our investment in people, who are aligned salaries to current market conditions.
Facilitate our more flexible employee friendly hybrid model.
As we mentioned before we will continue investing in our people and technology.
Looking at our pro forma metrics, they improved nicely quarter over quarter or year over year. They also container.
Our target ranges.
Down always asset was 165%.
That is up seven basis points from the previous quarter.
Return on average tangible common equity was $18 five.
5%.
That is up 35 basis points from the second quarter.
Looking at tangible book value per share.
That was $18.46.
The glass on the second quarter. This reflects the reduction in the other comprehensive income on government and government backed securities.
In turn he was mostly offset by the English English.
Earnings.
Please.
Turn to page five to review our operational highlights.
Looking at average loan balances increased $57 million from the second quarter, However, and of loans held for investment decreased $19 million.
That reflect that they pay downs of residential mortgage as seasonal commercial lines of credit as well as PPP loan forgiveness.
This was offset offset ship lead by increases in auto and consumer loans.
Overall, we are pleased with our performance too.
This year.
Loans at September 30 have increased more than 4% year over year.
Looking at loan yield it was 689% that is 16 basis point increase from the second quarter.
That large library this luxury the effect of rate increases on new on variable rate loans in our portfolio.
Is also due to a higher proportion of auto and consumer loans versus residential mortgages.
Looking at average core deposits decreased $22 million from the second quarter.
However, anesthesia deposits declined 174 million.
Does reflect that customer shifting.
Some of their excess funds to Odeon thought wealth management operation and commercial clients using the proceeds to pay down lines of credit.
It also reflected some effect of local retail competition.
Looking at core deposit cost. It was 28 basis points that is an increase of four points from the second quarter that was mainly due to municipal accounts with the specific geos, but amateurs.
Deposit cost increased slightly during the quarter.
We expect deposit cost to increase in the coming quarter.
Given the magnitude and the speed offset from recent and expected increases.
Given the current competitive landscape in Puerto Rico that deposit beta should be lower than past experience locally and seen on the U S.
Looking at new loan origination.
Total $511 million compared to $587 million in the second quarter.
Overall, and then hit a record high of 20.
And $220 million.
So a lower production and consumer.
Or does equal our U S. Commercial loan production was also lower.
Hey, Sean.
<unk> production declined due to higher rate.
It has affected the home sales on their business.
Looking at net interest margin that was 523% an increase of 43 basis points from last quarter. It is also an increase of.
111 basis points year over year.
The higher net interest margins reflected four factors one.
Growth of the loan portfolio at higher yields.
This accounted for 43% of the increase in net interest income.
So the increase in higher yielding investment securities. These accounted for another 43%.
And three higher on lower volume of Gosh. This accounted for 23% in turn all this was slightly offset by this small increase in the cost of interest bearing liabilities.
Excuse me.
Turning to page six to review, our credit quality and capital strength.
Looking at net charge offs, they totaled $11 $3 million in the third quarter about half of that came from two commercial launch we provision from in the second water.
The remaining balance came from auto and consumer loans.
In part that was due to higher loan volumes also late payments as a result of piranha what were a factor.
Looking at the provision for credit losses, so that provision was seven $1 million.
Two main factors affected the non specie portfolio Wow us higher auto and consumer loan balances. These added $8 million. The other was an increase in the body that is component of the allowance to account for potential two are not related losses.
This added one $3 million.
The BCD portfolio benefited from produce balances and improved performance of residential mortgage loans. This led to a recapture of two $8 million.
Third quarter allowance.
Everest ex PPP was two point that at 3%.
Thats down five basis points from the second quarter.
Look it and not on nonperforming loans.
The total NPL rate was 155% that's down six basis points from the second quarter, and 53 basis points from a year ago.
Oh, it all great, what's a stable well, so stable or a little glitch at the end of the quarter due to the effects of Fiona.
Yes.
Capital remains strong the CET one ratio was 13, 34% that's up.
12.8% in the second quarter total stockholders' equity dip a little below $1 billion.
This reflects reduced other comprehensive income partially offset by the increase in retained earnings.
The D C E.
They show held fairly steady at 883% compared to the second quarter.
Now here's wholesale.
Okay.
Thank you Marty.
Let's turn to page seven for our outlook.
We're finishing the year with good momentum we plan to continue to expand our digital first solutions to provide customers with an easy to use $24 seven self service capabilities. We also plan to continue our focus on growing retail and commercial loans and customer relationships as well as our investments in people technology and net.
Work infrastructure.
Ultimately, we're focused on exceeding our performance metrics, specifically efficiency ratio return on average assets and return on average tangible common equity.
As for the Puerto Rico overall picture consumer and businesses continue to have high levels of liquidity with excess deposits in the accounts.
However, we remain vigilant for any economic repercussions from the worldwide inflation trends and the higher rate environment, we operate in.
Having said that we continue to believe that on a relative basis, Puerto Rico will perform better economically than the U S.
Given the flow of reconstruction and rebuilding funds coming to the island.
Thanks, again to our resilient team members for always being more than ready to help our customers achieve their financial goals.
This ends our formal presentation operator, please start the question and answer session.
Thank you have a question at this time. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. Please press star two and we will take our first question from Alex <unk> with Piper Sandler Your line is now open.
Hey, good morning.
Good morning.
First off I was hoping you could expand a little bit on some of the comments you made about hurricane Fiona I think you mentioned credit stability with the exception of some impact from the Hurricane and I was hoping maybe you could sort of expand on that a little bit and is that what attributed to a slightly higher level of early stage delinquencies that you saw at the end.
For the quarter.
Sure.
We continue to see credit trends relatively stable. Unfortunately, we had at the end of the quarter the hurricane Fiona strike the west part of Puerto Rico. So you can kind of.
Cloud a little bit.
Picture.
But I can I can share with you a little bit of what has happened after the quarter end in terms of.
Delinquency levels or at least the delinquent auto loans.
So just to share a little bit color here.
The additional delinquencies that we had at the end of the quarter. So far at 30% of that have already put themselves back parent. So so that's kind of an indication of.
End of the quarter kind of a disruption due to Fiona.
Also Joe.
As part of the deferrals.
Customers have.
Requested.
Alex on the consumer side.
We're talking about six to 700 of them totaled 13 to 14 million books. So we're really not seeing that significant effect. So we we feel that things through.
My life after after that.
End of the quarter.
Rent.
We can also say that on the commercial side. There is there was no effect whatsoever, and we didn't see any any effects from Fiona so that's from.
The credit cycle at this point, we continue to see credit stable and and encouraged by what we're seeing in the on the ground in terms of the economy.
Great that's helpful color.
And then maybe the same point on.
On loan growth.
Obviously, a hurricane hitting with two weeks of the quarter remaining and I imagine there was probably some disruption on.
On everything down there did you see loan that maybe would have closed in at the end of September get pushed into October or maybe just sort of comment on that piece and then also kind of what youre seeing from the pipelines overall and then just a third part of the question just the seasonality that you alluded to on the C&I book is that going to reverse.
Anytime soon.
Yeah. So we are still seeing loan growth in the for this year in the mid single digits.
End of the quarter, we might have had some closings that were postponed postponed but.
I don't want to make too much of a deal out of that.
Do you think that the biggest impact on loan growth in the quarter were a couple of commercial account lines of credits that were fully paid.
Because of excess liquidity that our customers have and that accounts for in the vicinity of $50 million to $60 million. So so I'm, just giving you a little bit of.
Hum.
The detail of what's what's happening within our commercial book, we do have a very good pipeline coming into the end of the year and we continue to feel.
Optimistic about.
Again, our target here mid single digits for the for the end of this year.
When you when you look when we look at our loan growth.
We're seeing positive origination trends, we're seeing positive strong pipeline.
But certainly pay downs in the line Utilizations are down so.
That's kind of what's having that effect hopeful that next year, we will have more in line utilization and frankly I also need to point out that higher interest rates are also putting a little bit of a.
And then on loan originations because rates are significantly higher and as everybody knows in this call they've gone faster higher faster than in the last 100 years old. So it is having an effect on our commercial clients thinking about financing projects for for the longer term. So.
So I'm not saying that we're now we're slowing down but it's certainly going to have an effect.
Got it.
And then next question for me just on the overall size of the balance sheet with some of the deposit outflows the balance sheet now, saying just over $10 billion last year, you guys were able to defer durbin by year end.
I'm, just curious how you're thinking about sort of balance sheet management going into the end of the year.
Especially considering that obviously pushing durbin out another year it would be a substantial savings.
Yes.
So we're in a lot better position this year than last year to achieve it so let's see how the fourth quarter plays out.
Deposit.
Rents are stabilized after the end of the quarter, given what I mentioned earlier about the some commercial clients using their excess cash to pay down lines and stuff. So.
I will update on what the outcome is about the $10 billion Mark by the end of the year, but certainly we're at this point in time, we're closer than we were last year in terms of total assets.
I can say, though that at the bank level, we closed below $10 billion. So so the CFPB gets postponed.
<unk> four consecutive quarters of compliance so of.
Above $10 billion. So so in that end.
We're we're kind of.
Pushing it for four more quarters.
That's great and roughly how much does that save the CFPB component.
I'm sorry does that does that does that CFPB component result in any any savings that you can point to.
No not really because where we already are planning on being above the $10 billion at some point in time in the near future. So so we are preparing ourselves to be fully compliant. It just gives us more time, so it doesn't have a.
In fact on that.
Great and then just one final question for me I was hoping you could just remind us what the tax treatment.
For the purchases of U S treasuries are down in Puerto Rico.
My understanding is that there are some differences to how our U S Bank might report taxes on those purchases I'm just wondering if you could remind us if that's the case.
Yeah, I'll, let Dan.
Answer that one yes, we do have benefits on the on the on the income from the Treasury and we invest so there is a cost effectiveness that we would benefit from that investment.
So those don't on a tax effected basis, those might even be higher than you might see in the U S. Bank is that wind up having a material impact on your tax rate over the next couple of quarters.
Yes, that's correct.
Okay, great. Thanks for taking my questions.
You're welcome. Thank you for your questions.
We will take our next question from Kelly Motta with <unk>. Your line is now open.
Hi, guys, good morning, and great quarter here.
I thought that might start on efficiency last quarter U.
Your efficiency outlook to the mid Fifty's range and your Youre currently there given the strong NII growth you've had.
Just wondering if you could.
Maybe update us on your outlook for efficiency and kind of how you're managing.
Expenses to that.
Weather.
Stronger NII should maybe allow efficiency to move.
Lower than the mid fifties or if you're willing to continue to invest in half.
Pressures that will that will kind of keep you there.
Any color on that would be very helpful.
Okay. Thank you Kelly for your question.
So we will and we are and we will continue to invest in our.
Our infrastructure our network, it's our path towards differentiation in this market.
The $24 seven self service digital first kind of perspective.
And that requires us to continue to maintain our efficiency.
Targets in the mid fifties.
Having said that we are benefiting from operating leverage as Marty mentioned and and we work towards a.
Surpassing the goals that we set ourselves on a quarterly basis on a yearly basis. So we're sticking to our.
Mid 50% efficiency ratio because we want to also have the flexibility to accelerate some of the investments that we might need to make in terms of technology, but.
And that's kind of our view of this for me from a business strategy perspective. So that's the best I can give you in terms of color.
That's super helpful. Thank you. Thank you very much.
And circling back to the Hurricane Fiona impacts.
The items you called out were.
Our fee waivers and.
The reduction in activity that.
Fees slightly lower this this last quarter.
Just wondering if.
Those fee waivers have ended and we should expect a more normalized quarter or that's something that's going to continue into Q4 would be a consideration.
Yep. So we offered as you know.
When an event like Fiona hates us we got to be on the.
Look our first for our people in and then for our for our customers and and we did we do both it's kind of way.
Standard operating procedures and in terms of our customers, we we waived the fees and we waived the fees until September 30. So.
The fourth quarter should not have an impact on the waiving of the fees.
So that's kind of a.
A one quarter event.
Got it. Thank you and last question for me on the buyback it doesn't look like you repurchased any shares in the quarter I believe 36 million remain on the authorization just wondering about your appetite for buybacks.
Thoughts about completion, yes.
Yeah got you.
Kelly.
We remain extremely optimistic on our outlook for the fourth quarter on the 2023.
We also are vigilant for the clouds that are getting closer and closer in terms of inflation and interest rates going up and all the.
A recessionary talk and in reality that we will probably be operating in so when we when we look at our balance sheet.
The key to our long term success has been.
Operating with a very strong balance sheet and operating with strong capital levels and that has allowed us to weather all the storms that we've had to dealt with in the last 20 years that I've been almost CEO . So.
When we are looking at buybacks today.
We might be able to go out there and and.
Be more aggressive on the buybacks, we will remain opportunistic but we.
But we also want to have the strong balance sheet in the event that there is a.
The economic situation in the world and the repercussions that he might have in Puerto Rico. So that's.
That's kind of how we view this that doesn't mean, we're not going to be in the market.
There's a good opportunity for us to do so but what.
But we feel at this point in time.
We have to operate with a.
A stronger balance sheet than normal and making sure that the.
When the clock.
Clouds subside will be.
A lot better shape and position so that's kind of how we view this.
And that's been our recipe for success and in some instances survival in this market and that's going to change in the near future.
Got it. Thank you so much I'll step back.
Yes, Thank you Kelly for your questions.
We will take our next question from Brett Robinson with Husky Group. Your line is now open.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to first Jose just talk about.
You mentioned, Fiona and talked about back can we talk about maybe just.
The <unk>.
Reconstruction, so to speak of Puerto Rico, Some philosophy hurricane I saw that the <unk>.
One the subcommittee for the house of Representatives here recently that the.
Reconstruction and wasn't advancing as fast as maybe it should be.
Can you just talk about what youre seeing besides the hurricane activity.
In terms of rebuilding.
What progress has been made in your mind.
Sure. Thank you for your question Brett So if there's a silver lining for it.
On the Hurricane Fiona hitting the island.
The awareness and the.
The fact that.
Washington in Puerto Rico.
Leaders.
Yeah.
Realize and makes it patently clear to them that the reconstruction on rebuilding efforts needs need to have higher urgency than what we have.
They have exhibited in the last several years.
So to me.
After hurricane Fiona and.
<unk> focused on Puerto Rico again.
For agility of the electric grid.
Grid.
I actually think that there is a lot more focus and he is an opportunity for local and federal officials to collaborate and and kind of get things going because at the end of the day.
We need to have a more reliable resilient low cost diversified well governed.
Not only electric grid, but also.
Infrastructure public services. So so to me that's just.
Super lining.
Can quantify it but I certainly see a lot higher level federal officials.
Being involved in this reconstruction process and trying to look at ways to facilitate the flow of funds into the island.
Okay. That's helpful.
Okay.
Are you still out there though.
The proof is in the pudding right. That's why you see that's why you here, but the proof is in the pudding and hopefully.
Hopefully they deliver.
Yes, let's hope that.
One of my users this will not percent anytime soon.
Improve.
The grid.
The resiliency and.
Well if I may.
Yeah.
And if I may add Bret I also think that it doesn't change the.
Theses actually it enhances the Ccs.
<unk>.
Puerto Rico's economy will on a relative basis.
<unk> performed better than the states because simply the.
The size of the economy relative to the amount of funds coming in and hopefully accelerate coming in it should certainly solidifies the theses. So that's kind of how we see it.
Okay.
And one of the other questions I had.
I think people were concerned about to some degree.
The Manheim Index has finally turned turned lower.
As car prices.
Possibly decline.
Maybe both new and used but that might have an impact.
On your credit quality can you just talk about.
Auto for a second and just how you think about the potential decline in auto values impacting your portfolio.
Yes.
So.
I read the same reports.
I just want to point out regarding the auto market in Puerto Rico is first Puerto Rico is an island without a mass transportation system to rely on so automobile sales are skewed positively simply because you don't have a car you can go.
To work. So so that's kind of the first differential the second one is.
There was there has been pent up demand.
For many years and.
And I think after the pandemic.
Or during the pandemic and all of the cash coming in into consumers' allowed them to kind of change there they're the vehicles. So so I am surprised.
The sales of new auto still at the level they are.
Think it was exacerbated because of the inventories in some some brands did not have the inventory levels here in Puerto Rico, So that was affected.
And in that sense, I think we will see a little bit of a normalization in terms of the sales in terms of the prices.
I think they are also going to normalize.
I think at the end of the day, when you're lending to an auto client.
You look at the auto collateral or something.
Important.
A component of the credit, but it's all about the consumer.
It's something that we've been focused on for <unk> 12, or 11 years now and what we have done is really increased the credit.
Profile or with a better consumer profile credit profile origination.
Originations also while the last couple of years. So so you know at the end of the day.
It's a high yielding asset for us it's yielding on our book is yielding north of eight 5% and and as you are seeing charges are.
Significantly lower than what they were in <unk>.
<unk> cycles in the island. So so we're actually really encouraged and actually gaining market share.
Against our competitors. So it's an area, where we see it normalizing and stabilizing I don't think we're going to keep the same origination levels.
But we are not seeing any deterioration in or significant deterioration in prices of the cars and or the credit profile of the.
Consumer consumers.
Okay.
Great that color as well.
And then maybe just last.
On the margin given you only had four basis points of deposit cost increases this quarter, which was.
Really nice versus the mainland.
I do believe that betas will lag the U S.
Can you talk about maybe the margin from here it seemed like it would continue to move a little bit higher but then as you mentioned.
Rates continue to move higher it gets.
Tougher to.
Average net loans, maybe at higher rates, what what do you think the outlook is for the margin maybe.
Past the fourth quarter.
Yeah. So as you pointed out our betas are significantly lower than in.
In the U S peers.
And that's given us the ability to.
This is the <unk>.
First cycle in many decades, where the banking system is operating with excess core deposits. So so that's number one number two we only have three or four banks in the island versus 10 or 12 that we had so so those components are definitely going to be my mind.
Makos performed differently positively different versus the.
The U S mainland banks in terms of the deposit beta so that's number one.
Number two.
In terms of the margin.
The <unk>.
Speed and magnitude of the interest rate increases by the fed is certainly benefiting us and he will continue to impact positively our margins.
And we are still seeing that we're not going to see the same rate of increase we're not going to see the same magnitude of the increase in margin as we've seen in this year.
Because we expect cost of funds creep up a little bit but in general.
To me the biggest.
And kind of.
Saying that we need to be vigilant on is how our higher interest rates on viable commercial loans going to potentially affect commercial clients. So far we're not seeing anything and we have a pretty close.
I put on that so that's kind of how we see margin that's how we see betas and that's.
That's a little bit how we are seeing the.
The effect of higher interest rates on our commercial clients.
Okay, Great appreciate all the color.
Thank you for your questions Brian .
So again, if you would like to ask a question. Please press Star then the number one on your telephone keypad, we will take our next question from Kumar Brazilian Brasilia with Wells Fargo Securities. Your line is open.
Hi, good morning, guys.
Hi, how are you.
Good thank you.
Just a couple of follow ups first going back to Alex's question on the $10 billion balance sheet size Jose you had said youre better positioned this.
This year to achieve it or are you, meaning you're better positioned this year to kind of go below $10 billion in the fourth quarter and delayed Durbin.
That's correct.
That is correct yes.
Okay, and I know that you know as the <unk>.
Balance sheet had been going growing through the year that was less of an emphasis and you guys are better positioned to absorb absorb durbin does this just kind of.
Paul in your hand, somewhat just given the outflow of deposits you saw in the third quarter and maybe just talk longer term about as we go into 'twenty three.
<unk> balance sheet size, and how that factors into the strategy.
Yeah. So.
What we're seeing right now with interest rates, Oh I'm sorry.
<unk>.
Balance sheet growth is probably.
Going to be.
Somewhat challenging given given what were seeing with interest rates. So it's an opportunity for us this year too.
Well below the $10 billion, Mark, but I don't want to I don't want to precipitate the outcome here I'm, just saying that if we're in a bedroom in a better spot today.
Into next year, we still have excess deposit so we will deploy those deposits primarily into loans.
We have the opportunity to and we see the opportunity to grow on the commercial side as well as on the consumer side, but primarily on the commercial side. So when you look into 2023 loan growth is probably on the low single digits and that is still going to be a scenario, where we're we'll be going to be in the <unk>.
80 of the $10 billion Mark in 2023, we're going to be up or down there depending on on how our commercial customers.
Behave in terms of their liquidity and and.
And also how the competition in Puerto Rico.
Reacts to higher interest rates were already seeing some of it.
So at the end of the data is there those are the variables that we're looking at in terms of how the balance sheet size moves.
But.
It doesn't seem to us that we're going to explode above the $10 billion anytime soon so so we're going to be navigating this level.
Okay and for that type of loan growth assumption for 'twenty three just looking at the puts and takes I'm, assuming you're expecting continued.
Continued strength on the commercial side I know commercial originations have declined for a couple of quarters in a row now I'm, assuming you're expecting that to kind of turn and then the offset would just be lower production out of consumer and auto is that the right way to think about how many three loan growth Yep Yep.
The macro base case scenario that we're using for next year.
Is basically the global economy is going to come into a recession and theres going to be an impact.
Some level in Puerto Rico, and <unk> and therefore, it's going to have an impact on loan originations across the board, having said that we talked about earlier, we do have a different dynamic here in the island given the rebuilding and reconstruction funds. So so we are seeing single digit loan growth, mostly driven by commercial and.
We're going to still see mortgage.
The balance is going down and consumer on auto will move up but it won't I don't we don't expect them to.
The increase at the same level.
Have increased this year.
Okay, and then just putting the funding base in context with that line of commentary it seemed like some excess liquidity was used to pay down lines. This quarter I guess, what's the incremental capacity.
I guess, what's the incremental level of kind of excess deposits as you called out that there are still on the balance sheet and with that willingness to kind of let some of that money be used to pay down.
Loan balances, but as I said that the beta is going to outperform prior cycles can you give us a sense of what you're expecting for a through the cycle beta and kind of how that transitions here in the fourth quarter and then $3 23 after the fed stops hiking.
Yeah. So the first part of your question. It is hard to answer whats the excess liquidity that our clients have.
Right now.
But certainly higher interest rates on their lines of credit is multi waiting them to use our cash.
To bring them down so I can't give you an answer to the first part of the question, but I can share with you a little bit of data here in terms of the beta in a different cycle. When we were in the 2016 2019 cycle, where interest rates went up our beta was around 17%. So that's that's kind of what we had in that.
Scenario in 2016, 2019, where the competitive landscape was somewhat different.
Then it is today and but certainly the the speed and the magnitude of the rate increases was also different so one one might negate the other right now we have a beta of around 3%.
Less than 3% so.
As Melissa mentioned, we feel that in this cycle, what we're seeing today, we will have a beta that it will be lower.
Or similarly, if you want to be conservative to the last cycle, where we had around 17% beta but the jury's still out there simply because of my mind rates have gone up significantly and very in a very short period of time, so let's see how the fed manages the whole transition.
From from growth to stabilization and reduction in inflation. So we'll give you more details in the next couple of quarters.
Okay. That's great and then just last for me going back to Kelly's question on the buyback and kind of your response.
Implying here that we're kind of through the excess capital position I mean capital ratios improved in the third quarter.
Versus the second quarter, where you guys were active in the buyback. So I'm. Just wondering is that just increased caution on your brands and then trying to be opportunistic or.
Exactly so so it doesn't change the long term view.
We know we have good strong capital position, we're seeing the landscape shifting.
And in terms of the global macros, and and we just want to be careful we want to make sure that we.
Getting our hands around what's really going to happen typically when interest rates go up and this amount. This speed typically there is a.
A moment of truth could be junk bonds it could be a housing bubble you call. It.
So we need to be vigilant and we need to be.
Okay.
Yeah.
Good stewards of capital and that's what we're doing but that doesn't change the longer term, we understand the benefits of buybacks and we understand the benefits of dividend increases and we've been delivering this year and will be on the lookout and we need to execute on any opportunity. We will do so but I just want to.
My comment comes from more of the.
The macro environment that we're seeing and typically it ends in a bad spot globally at some point in time and and.
And I just want to make sure that we're not caught off guard.
Got it no that makes sense and sorry, I know you said that was the last question, but if I can just ask one more on the allowance. So it looks like over the last couple of quarters, we've seen some level of normalization of credit.
And that dynamic allowance is still trended lower just looking at the allowance ratio here at two 3%.
Is that fairly stable is there still some room to take some reserves off the table here just given.
Maybe the more broad improvement off of when you originally put that on or should we expect that level to be more or less flat here going forward.
I will take that one yes, hi, Timur yeah, how we see it at this point to point that at 8% and given the <unk>, we feel that the delinquencies stable.
Tom Lynch during the quarter due to <unk>, but we will keep an eye on how the statements we will continue to call in.
But in general we think that so far we see that coverage stable at this point, we don't see any any potential releases self reserve I think Alec wait at this level and does the internet only money and at this point.
Got it. Thank you guys I appreciate all the color.
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