Q1 2024 OFG Bancorp Earnings Call
Operator: Please stand by; we're about to begin. Thank you for joining OFG Bancorp's conference call. My name is Jamie, and I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors. Maritza Erezmendi, Chief Financial Officer, and Cesar Ortiz, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG website under the first quarter 2024 section.
Please standby we're about to begin.
Jamie: Thank you for joining O F. G. Bancorp's Conference call. My name is Jamie and I will be your operator today.
Speaker Change: Our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the board of directors.
Speaker Change: Maritza Chief I'm, sorry, apologies Maritza, Erez, Mindy, Chief Financial Officer, and saves aren't Ortiz Chief risk Officer, a presentation accompanies today's remarks. It can be found on the homepage of the OFC website under the first quarter 2024 section.
Operator: This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties outlined in the risk factors section of OFG's SEC filing. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise.
Speaker Change: This call May feature certain forward looking statements about managements goals plans and expectations. These statements are subject to risks and uncertainties outlined in the risk factors section of Lfg's SEC filings actual results may differ materially from those currently anticipated we disclaim any obligation.
Speaker Change: To update information disclosed in this call as a result of developments that occur afterwards.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez. Please do so.
Jos Rafael Fernndez: 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. Please go ahead.
Jos Rafael Fernndez: Yeah.
Jos Rafael Fernndez: Thank you for joining us. We are pleased to report our first quarter 2024 results, which reflected good, solid performances across all our businesses. Growth was in line with both our short- and long-term strategies and plans. Our digital first strategy continues to drive customer acquisition and engagement.
Fernandez: Thank you for joining US we are pleased to report our first quarter 2024 results, which reflected good solid performances across all our businesses.
Fernandez: Growth was in line with both our short and long term strategies and plans. Our diesel first strategy continues to drive customer acquisition and engagement.
Jos Rafael Fernndez: Business activity, consumer liquidity, and employment levels in Puerto Rico continue to do well in a strong economy and an interest rate environment. Thanks to the entire team for their hard work and commitment helping our customers reach their goals and our communities to achieve progress.
Fernandez: Activity consumer liquidity unemployment levels in Puerto Rico continued to do well in a strong economy.
Fernandez: And our bonds.
Fernandez: The interest rate environment.
Speaker Change: Thanks to the entire team for their hard work and commitment to helping our customers reach their goals and our communities to achieve progress.
Jos Rafael Fernndez: Please turn to page 3 for a summary of our first quarter results, looking at the income statement. Earnings per share diluted increased more than 9% year-over-year to $1.05 on close to a 6% increase in total core revenues to $174.2 million. Net interest margin was in line at 5.4%. Provision was $15.1 million, non-interest expenses were in line at $91.4 million, and pre-provisioned net revenues totaled
Speaker Change: Please turn to page three for a summary of our first quarter results.
Speaker Change: Looking at the income statement earnings per share diluted increased more than 9% year over year to $1.05 on close to a 6% increase in total core revenues to $174 $2 million.
Speaker Change: Net interest margin was in line at five 4%.
Speaker Change: Provision was $16 $1 million noninterest expenses were in line at $91 $4 million preferred.
Speaker Change: Pre provision net revenues totaled $83 million.
Jos Rafael Fernndez: Turning to the balance sheet, total assets were $11.2 billion, 2% less than last quarter and 11% higher than a year ago. Customer deposits were $9.5 billion, reflecting the $1.2 billion public funds deposited in mid-December. Loans held for investment total $7.5 billion, approximately level with last quarter, and up 10% from a year ago. New loan production was $536.6 million. Total $2.5 billion down from the fourth quarter, mainly due to the sale of a treasury bill position. Cash increased to $754 million from last quarter. Looking at capital, the CET1 ratio was 14.45%, up from 14.12% in the fourth quarter.
Speaker Change: Turning to the balance sheet total assets were $11 $2 billion.
Speaker Change: 2% less than last quarter, and 11% higher than a year ago.
Speaker Change: Customer deposits were $9 $5 billion, reflecting the $1 $2 billion of public funds deposit in mid December.
Speaker Change: Loans held for investments totaled $7 $5 billion approximately level with last quarter and up 10% from a year ago.
Speaker Change: New loan production was $536 6 million.
Speaker Change: Since totaled $2 $5 billion down from the fourth quarter, mainly due to the sale of a treasury bill position.
Speaker Change: Cash increased to $754 million from last quarter.
Speaker Change: Looking at capital the CET, one ratio was 14, 45% up from $14, 12% in the fourth quarter, we increased the quarterly cash dividend, 14% to <unk> 25 per share.
Jos Rafael Fernndez: We increased the quarterly cash dividend 14% to $0.25 per share and approved a new $50 million stock repurchase authorization. Please turn to page 4 for an update on our Digital First strategy. As of the first quarter, 94% of all routine retail customer transactions, 96% of retail deposits, and 64% of retail loan payments are being made through our digital and self-service channels. This is being driven by year-over-year growth of 12% in digital enrollment, 68% in digital loan payments, 32% in virtual teller utilization, and 3% in customer growth.
Speaker Change: [noise] approved a new $50 million stock repurchase authorization.
Speaker Change: Please turn to page four for an update on our detailed first strategy.
Speaker Change: So the first quarter, 94% of all routine retail costume customer transactions, 96% of retail deposits and 64% of retail loan payments are being made through our digital and self service channels.
Speaker Change: This is being driven by year over year growth of 12% and digital enrollment, 68% in diesel loan payments and 32% in virtual teller utilization.
Speaker Change: And 3% in customer growth.
Jos Rafael Fernndez: Another factor is the continued success of our Oriental Servicing Portal, which was introduced in mid-2023. The portal, as you know, is a cornerstone of our self-service strategy. Customers can manage all loan and deposit accounts. It enables digital account opening for checking and savings and CDs, applying for and accessing loans, managing automatic loan payments, and downloading bank letters and tax documents, among other things. Every quarter, we add new features, and this quarter was no exception, adding additional functionality to manage IRA accounts and IRA funds.
Speaker Change: Another factor is the continued success of our Oriental servicing portal, which was introduced in mid 2023.
Speaker Change: The portal as you know is a corner store cornerstone of our self service strategy.
Speaker Change: Customers can manage all loan and deposit accounts.
Speaker Change: <unk> digital account opening for checking and savings and Cds applying for and accessing loans managing automatic loan payments and downloading bank letters and tax documents among other things.
Speaker Change: Every quarter, we add new features and this quarter was no exception.
Speaker Change: The addition, additional functionality to manage IRA accounts and I are a funds all of this continues to validate our detailed first dropping and investments. Our goal is to use technology to provide more value added service increased rfps.
Jos Rafael Fernndez: All of this continues to validate our Digital First strategy and investments. Our goal is to use technology to provide more value-added services, increase our efficiency, and have more staff dedicated to new business development activities. Now, I'd like to invite and call Maritza to go over the financials in more detail. Thank you, Jose.
Speaker Change: <unk> C and have more staff dedicated to new business development activities.
Speaker Change: Now I'd like to pass the call to might even start to go over the financials in more detail.
Maritza Arizmendi Diaz: Thank you, Jose. Please turn to page 5 to review our financial highlights. Starting with the components of core revenues, total interest income was $183 million, up 4% from the fourth quarter. Key factors were increases of $5 million from investment, $1 million from cash, and $800,000 from loans. Investment securities benefited from an 18% higher average balance and a 24 basis points higher yield. Cash reflected a 16% higher average balance and a 6 basis points higher yield, and loans had a 2% higher average balance and two basis points higher yield.
Mighty: Thank you Jose Please turn to page five to review our financial highlights.
Mighty: And starting with the components of core revenues towards asking Dennis income was $183 million up.
Speaker Change: For a person from the fourth quarter.
Might Even: These factors were increases of $5 million Archstone investment $1 million from guys.
Speaker Change: $800000 some loss.
Speaker Change: Investment Securities benefited from an 18% higher average balance and 24 basis points higher deal Gotcha.
Speaker Change: Gosh reflected a six 2% higher average balance on our six basis points higher deal.
Speaker Change: Alone had a 2% higher average balance and two basis points higher Jill.
Maritza Arizmendi Diaz: There was one less day in this first quarter compared to the fourth quarter. This reduced income by $1.4 million. Total interest expense was $39 million, an increase of $6.7 million from the fourth quarter. $1,000,000,000. This reflected the full effect of the $1.2 billion in government funds deposited this past December.
Speaker Change: There was one less day in this first quarter compared to the fourth quarter. These reviews.
Speaker Change: One $4 million.
Speaker Change: Does that interest expense was $39 million.
Speaker Change: An increase of $647 million from the fourth quarter.
Speaker Change: This.
Speaker Change: <unk> and the full effect of the $1.2 billion in government bonds reported this past December.
Maritza Arizmendi Diaz: Borrowings and brokered deposits declined. Due to the reduced need for wholesale funding, the date factor reduced interest expenses by $300,000. Total banking and financial service revenues were $30 million compared to $32 million in the fourth quarter, which included annual insurance commission recognition of $2.5 million. First quarter mortgage banking revenues increased $400,000 due to higher MSR valuation. Year over year, total C revenue was up $1.5 million, reflecting increased wealth management and mortgage banking revenue.
Speaker Change: Borrowing some broker deposits declined.
Speaker Change: Those are the reduced need for wholesale funding the Dave Baxter reduce <unk> expenses by $300000.
Speaker Change: Does that banking and financial services revenues were $30 million compared to $32 million in the fourth quarter, which included one insurer information recognition of $2 $5 million.
Speaker Change: First quarter mortgage banking revenues increased $400000 due to higher MSR valuation.
Speaker Change: Year over year total fee revenue was up one 5 million on the daughters, reflecting increased wealth management and mortgage banking revenues.
Maritza Arizmendi Diaz: There was a minor amount of other non-interest income compared to the fourth quarter, which included $6 million in gains on the sale of non-performing Puerto Rico small business loans. Looking at non-interest expenses, they totaled $91 million, down $3 million from the fourth quarter, which included $3.2 million due to the cost of the workforce, early retirement, and facilities' right sizes. We continue to expect to average about $90 to $92 million of non-interest expenses per quarter over the rest of 2024. The first quarter efficiency ratio was 52.49%. 10 basis point improvements from the fourth quarter. The efficiency ratio should continue in the low to mid-50 percentage range this year. Other performance metrics remain high.
Speaker Change: There was a minor amount of other non interest income compared to the fourth quarter, which included $6 million in gains on sale of nonperforming, Puerto Rico, but somebody's got smoked beef ethanol.
Speaker Change: Non interest expenses totaled $91 million down $3 million from the fourth quarter, which included $3.2 million due to the cost of workforce early retirements on facilities right sizing.
Speaker Change: We continue to expect to Alex about $90 million to $92 million of noninterest expenses per quarter over the rest of 2024.
Speaker Change: First quarter efficiency ratio was 52 point, 49%.
Speaker Change: 10 basis point improvement from the fourth quarter the efficiency ratio should continue in the low to mid 50% range. This year.
Speaker Change: Okay.
Speaker Change: Well their performance metrics remain high.
Maritza Arizmendi Diaz: Return on average assets was 1.77%. Return on average tangible common equity was 70.92%. Tangible book value per share was $23.50, 42 cents from the first quarter, mainly due to the increased pre-change ending. Please turn to page 6 to review our Operational Highlights.
Speaker Change: Return on average assets was 177% <unk> tangible common equity was 70 point, 92% and tangible book value per share was $23.50.
Speaker Change: But 40% from the fourth quarter, mainly due to the increased churn.
Speaker Change: Please turn to page six to review our operational highlights.
Maritza Arizmendi Diaz: Average loan balances were $5.00 for $7.5 billion. End-of-period balances were approximately level. March 31st balances reflected sequential growth in auto and consumer loans offset by decreases in commercial and residential mortgages. Commercial mortgages reflected seasonal paydowns of lines of credit. Residential mortgages reflected regular paydowns and securitization and sales of conforming loans.
Speaker Change: Each loan balances were five points.
$475 billion.
Speaker Change: <unk> balances were approximately leveled.
Speaker Change: March 31st bonuses reflected sequential growth in auto and consumer loans.
Speaker Change: Offset by decreases in commercial and residential mortgages.
Speaker Change: Gourmet chef reflect the seasonal pay downs of lines of credit residential mortgage reflect the regulated phasedown. So I figure of deflation on sales of conforming loans.
Maritza Arizmendi Diaz: Loan yield was 7.98%, up two basis points from the first quarter. This reflected variable rate commercial loans, higher entry yields on new loans, and a smaller proportion of residential mortgages in the loan book. Average core deposits were $9.5 billion, up 10% from the fourth quarter due to the large deposit of public funds in December. End-of-period balances declined 1% from December 31st.
Speaker Change: Last year was 798% person up two basis points from the first quarter. This reflects the variable rate commercial loans higher entry yields on new loans and a smaller proportion of precedence on mortgages in the loan book.
Speaker Change: Average core deposits were $9 5 billion up.
Speaker Change: 10% from the fourth quarter due to a large deposit of public funds in December.
Speaker Change: End of period balances declined 1% from December 31st.
Maritza Arizmendi Diaz: This reflected a $48 million decline in commercial deposits related to the lack of... Partially offset by a $20 million increase in retail deposits. Core deposit cost was 147 basis points compared to 107 in the fourth quarter. This increase reflects the full impact of the new government deposit.
Speaker Change: This reflected a $48 million decline in commercial deposits related to the lung.
Speaker Change: Partially offset by a 40 million dollar increase in retail deposits.
Speaker Change: Deposit cost was 147 basis points compared to <unk>.
Speaker Change: 107 in the fourth quarter.
Speaker Change: This increase reflects the full impact of the new government policies Nongovernment deposit Scott was 82 basis points.
Maritza Arizmendi Diaz: Non-government deposits cost 82 basis points. As of the first quarter, I want cumulative deposit data. .24% for total deposits, including interest-bearing deposits. Excluding government deposits, it was about 16%. Average borrowings and brokered deposits were $280 million, compared to $602 million in the fourth quarter. The March 31st balance was $203 million. The rate stayed on wholesale funding decreased 41 basis points to 4.80% in the first quarter. Looking at non-interest expenses, they totaled $91 million. Net interest margin was 5.30%, as anticipated. With the prospect of hiring for longer, we now anticipate three trade cuts versus five.
Speaker Change: As of the first quarter our communities the Boston data.
Speaker Change: In deposits and 23.
Speaker Change: 24% for total deposits, including interest the ANZ buses.
Speaker Change: Excluding government deposit it was about 16%.
Speaker Change: Average borrowings and broker deposits were $280 million compared to $602 million in the first quarter. The March 31st balance was $233 million the rate stay on wholesale funding decreased 41 basis point to four point 80 person.
Speaker Change: Vince.
Speaker Change: In the first quarter.
Speaker Change: Looking at non interest expenses totaled $91 million.
Speaker Change: Oh excuse me net interest margin was five four inside a person as anticipated.
Speaker Change: With the prospect of higher for longer we now anticipate three breakpoints versus five.
Maritza Arizmendi Diaz: As a result, for this year, we are guiding a net interest margin range of 5.45 to 5.55. Please turn to page 7 to review our credit quality and capital... Net charge of total $20,000,000 Up $4,000,000 from the fourth quarter. The answer to our break was 105 basis points, which included two factors. One was $3.5 million from previously and fully-reserved, non-performing PPP loans. The second was $1.7 million as a result of the strategic sale of a performing U.S. commercial loan. The auto net charge-off rate declined sequentially, while the consumer rate increased. Looking at provision for credit losses, it totaled $15 million related to volume factors, including net charges.
Speaker Change: As a result for this year, we are guiding on net interest margin in the range of $5 45 to <unk> 55.
[noise].
Speaker Change: Please turn to page seven to review, our credit quality and capital strength net charge offs totaled $20 million.
Up $4 million from the fourth quarter.
Speaker Change: In search of rate was 105 basis points.
17 basis.
Speaker Change: Florida two factors one was it well.
Speaker Change: One was $3 $5 million from people previously fully reserved nonperforming PPP loans. The second was one $7 million as a result of the strategic sale of our performing U S commercial loan.
Speaker Change: The auto net charge off rate declined sequentially, while the consumer rates increased.
Speaker Change: Looking at provision for credit losses, which totaled $15 million related to volume factor included in the charge offs.
Maritza Arizmendi Diaz: The first quadrant included $1.7 million related to the U.S. loan sale, which was offset by a separate $1.7 million reduction in a specific reserve for payments received on substantially reserved U.S. commercial loans. Looking at other credit metrics, first quarter early and total delinquency rates were lower than the fourth quarter, at 2.41% and 3.30%, respectively. The non-performing loan rate of 1.10% was the lowest over the last five quarters. Overall, credit continues to be good.
Speaker Change: The first quarter included $1 $7 million related to the U S loan sales, which was offset by a separate 1.7 million reduction in a specific reserve for payments received on substantially Pizza U S commercial launch.
Speaker Change: Looking at or great metrics first quarter early and total delinquency rates were lower than the fourth quarter of two point, 41% and three point, 30% respectively.
Speaker Change: Non performing loan rate of one salesperson was the lower over the last five quarters.
Speaker Change: Well it continues to be good with Covid gosh stimulus fading away. We expected, we expect increases increase and see a net charge offs in auto and consumer but lower Duncan.
Maritza Arizmendi Diaz: With COVID, cash stimulus is fading away. We expect an increased net charge in order and consumer, but lower than pre-pandemic. However, Necharchuk, and Delinquencies performed fairly well in the first quarter due to strong employment and Puerto Rico's economy, as well as the federal tax charge credit. Looking at some of our over capital metrics, total stockholders' equities remained level at $1.2 billion, and the tangible common equity ratio increased to 10.8%. Our first quarter tax rate of 26.8% decreased from 31.9% in the fourth quarter.
However, net charge offs.
Speaker Change: On delinquencies performed fairly well in the first quarter due to our strong employment in Puerto Rico.
Speaker Change: He goes economy.
Speaker Change: Well as they figure it out.
Speaker Change: Chuck Friday.
Speaker Change: Looking at some of our.
Speaker Change: Well that could be done metrics total stockholders' equity remained level at $1 2 billion and tangible common equity ratio increased to standpoint.
Speaker Change: Our first quarter tax rate of 26, 8% decrease from 31, 9% in the fourth quarter.
Maritza Arizmendi Diaz: The first quarter reflected two factors. One was an expected full-year effective tax rate of 29% in 2024 due to higher forecasted business activities, with preferential tax treatment under the Puerto Rico tax code. The second item was a $1.1 million discrete benefit for stock vested in the first quarter.
Speaker Change: In the first quarter reflected two factors.
Speaker Change: While it was unexpected for the year.
Speaker Change: This tax rate of 29% in 'twenty four 'twenty 'twenty four due to higher forecasted business activity with preferential tax treatment on the Puerto Rico tax called the second item was a $1 1 million discrete benefit for the stock vested in the first quarter.
Maritza Arizmendi Diaz: To sum up, during the first quarter, net interest income continued to grow despite the slightly declining net interest margin. This reflected higher average balances and yields on securities, cash, and loans, and lower wholesale funding costs partially offset by higher costs of government deposits. Excluding government deposits, core deposits declined slightly due to commercial withdrawals, reflected seasonal lines of credit failed to pay down. While loans remain level quarter over quarter, we anticipate growth over the balance of the year based on the strength of our past clients. As I mentioned, near-interest marketing should gradually improve, credit continues to look good, Experiences were in line with our expected range, and our expected tax rate should be lower. Now, here's hope.
Speaker Change: To sum up during the first quarter net interest income continued to grow despite the slight declining net interest margin.
Speaker Change: This reflected higher average balances and yields of securities guys.
Speaker Change: <unk> loans and lower wholesale funding costs, partially offset by higher bulk of government deposits.
Speaker Change: Excluding government deposit core deposit declined slightly due to commercial with rollouts, reflecting seasonal lineup phase phase phase out.
Speaker Change: Why not why loans remain level quarter over quarter, we anticipate growth over the balance of the year based on the strength of our pipeline.
Speaker Change: As I mentioned.
Speaker Change: Net interest margin should gradually improve kinetic convenience and convenience continue to look.
Speaker Change: Expenses were in line with our expected range on our expected tax rate should be lower.
Speaker Change: Now here's quota.
Jos Rafael Fernndez: Thank you, Maritza; please turn to page 8. Our outlook is positive for both Puerto Rico and OFG. The flow of federal funds to rebuild the island's infrastructure continues at a solid pace, and local businesses are expanding. Overall, business activity is good and is doing well. However, we continue to be vigilant for the big macro uncertainties, interest rate changes, inflation trends, a possible mainland recession, and ongoing global conflict. Of course, we're always keeping an eye on the competition.
Quota: Thank you Marisa please turn to page eight.
Quota: Our outlook is positive for both Puerto Rico and OMG.
Quota: The flow of federal funds to rebuild the islands infrastructure continues at a solid pace local businesses are expanding overall business activity is good.
Speaker Change: He is doing well, we continue to be vigilant for the big macro uncertainties interest rate changes inflation trends and possible mainland recession and ongoing global conflicts of course, we're always keeping an eye on the competition.
Jos Rafael Fernndez: We are optimistic about Puerto Rico and the future. We look forward to continuing overall economic and business growth, as well as strong levels of employment. Turning to OFG, we're well positioned to continue to benefit from a higher-for-longer interest rate environment, as well as loan and client growth. Consumer credit trends should remain below pre-pandemic levels, and digital adoption and customer acquisition should continue to expand. Clearly, our strategy is working, so we will continue to invest in and deploy more customer-friendly technology, adapt to customer needs, and tirelessly work to improve the customer experience.
We are optimistic about Puerto Rico, and the future. We look forward to continued overall economic and business growth as well as strong levels of unemployment.
Speaker Change: Turning to RG, we're well positioned to continue to benefit from a higher for longer interest rate environment, as well as loan and client growth.
Speaker Change: <unk>, great training trends should remain remain below pre pandemic levels and digital adoption and customer acquisition should continue to expand.
Speaker Change: Clearly our strategy is working so we will continue to invest in and deploy more customer friendly technology adapt to customer needs and tirelessly worked to improve customer experience overall, we look forward to another strong year in 2024.
Jos Rafael Fernndez: Overall, we look forward to another strong year in 2024. In closing, I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members. We are thankful for them, and we're excited for what's to come. This year marks our 60th anniversary in business, and our 30th anniversary in business on the New York Stock Exchange. With this, we end our formal presentation. Operator, let's start the Q&A. Thank you.
Speaker Change: In closing I want to emphasize that our results could not have been achieved without the hard work and dedication of all our team members. We are thankful to them and we're excited for what's to come this year marks our 60 <unk> anniversary in business on our 30th.
Speaker Change: On the newer stock exchange.
Speaker Change: With this we end our formal presentation.
Speaker Change: Greater let's start the Q&A.
Operator: Thank you. If you have a question at this time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, press star 2. We'll go first to Brett Rabatin with Hovde Group.
Speaker Change: Thank you if you have a question at this time, please press star one on your telephone keypad.
Speaker Change: Wish to remove yourself from the queue.
Speaker Change: Star two.
Okay.
Speaker Change: We'll go first to Brett Robinson with have D group.
Brett D. Rabatin: Hey, good morning everyone. I wanted to start with the margin, and my call is breaking up a little bit intermittently, but if I heard correctly, the guidance for the full year margin is 535 to 555. And if I think about the low end of that guidance, that would suggest that the margin only has a few basis points of downside from here. And I wanted to kind of think about that versus the cost of interest-bearing funds increases.
Brett Robinson: Hey, good morning, everyone wanted to start with the margin and my my my call is breaking up a little bit intermittently, but if I heard correctly the guidance for the full year margin is $5 35 to $5 55.
And if I think about the low end of that guidance that.
Brett Robinson: That would suggest that the margin only has a few basis points of downside from here.
Brett Robinson: And I wanted to kind of think about that versus the cost of interest bearing funds increase.
Brett D. Rabatin: And if I think about the past three quarters, that's gone from 30 to 32 to 43 basis points. And so it seems like the higher for longer, more normal for longer, is having somewhat of an impact on the lower funding costs in Puerto Rico in the past quarter or two. Just wanted to make sure I understood that guidance, you know, from here. And if it sounds like Maritza, you think the margin. Despite the funding cost increase being bottomed out here, is that a fair assessment?
Brett Robinson: I think about our past three corners, that's gone from 30 to 32 to 43 basis points and so it seems like the higher for longer more normal for longer is having somewhat of an impact on.
Brett Robinson: The lower funding costs from Puerto Rico in the past quarter or two.
Speaker Change: Just wanted to make sure I understood that guidance from here and if it sounds like you think the margin.
Speaker Change: Despite funding cost increase is bottomed out here is that a fair assessment.
Jos Rafael Fernndez: So, Brett, just to correct, the guidance that you pointed out is not what Maritza said. She said 545 to 555. Okay. So it's actually north of 540, which is what we had this quarter. So just to clarify that, and I'm sorry that you got that.
Speaker Change: So Brett.
Speaker Change: Two correct.
Brett Robinson: The guidance that you pointed out is not one might have thought.
Brett Robinson: She said five five to $5 55.
Brett Robinson: Okay.
Brett Robinson: So so it's actually north of.
Brett Robinson: $5 40, which is what we had this quarter.
Brett Robinson: So.
Speaker Change: Just just to clarify that and I'm, sorry that you have that.
Speaker Change: Jeremy.
Jos Rafael Fernndez: Okay, well, I would kind of suggest that... Yeah, I'm sorry, I just changed the premise of your question, so I don't know if you want to ask the question again. Well, maybe to rephrase it, given that the margin is expected to be slightly higher from here, I just wanted to make sure I understood. You know, obviously, we've had margin pressure with the rise in funding costs for the past three quarters. [inaudible] The margin moving higher from here, what would that be a function of, and can you talk maybe about what you expect?
Speaker Change: Okay.
Speaker Change: Again that would kind of then Jonathan.
Jonathan: Yeah go ahead I'm sorry.
Jonathan: Just I just changed the premise of your question. So I don't know if you want to.
Jonathan: Okay.
Jonathan: Well, maybe to rephrase it given that the margins would you expect it to be slightly higher from here I just wanted to make sure I understood. Obviously, we've had margin pressure with a rise in funding costs the past three quarters.
Jonathan:
Speaker Change: The margin moving higher from here or what would that be a function of them can you talk maybe about what you expect deposit betas to do from here.
Jos Rafael Fernndez: So let me see if I can give you a high level, and if Maritza needs to chime in here on more specifics, she will do so. But remember, when we spoke last time, we were assuming five rate cuts in the second half of the year as part of our guidance on the margin. After what happened in the first quarter and a little bit afterwards, we are now modeling three cuts in the second half of the year.
Yeah. So let me see if I can give you a high level and I mean, my refund needs to chime in here on more specifics she will do so but remember when we spoke last time, we were assuming five rate cuts in the second half of the year.
Speaker Change: As part of our guidance on the margin.
Speaker Change: After two months.
It's going on in the first quarter, and then a little bit.
Refund: Afterwards, we are now modeling three cuts the second half of the year. So it seems we're asset sensitive and we have been for a while.
Jos Rafael Fernndez: So since we're asset-sensitive, and we have been for a while, we're going to be benefiting from that. That's number one. And then, number two, we have a large government deposit, as you alluded to and we mentioned in the call. Our expectation for that deposit is to flow out of the balance sheet, not in its entirety, but in a significant amount, at the end of the second quarter or the beginning of the third quarter, so that in itself also has implications on how we're guiding a range on the margin. Is that... Yeah, that's... Am I answering your question? Yeah, that's...
Refund: We're gonna be benefiting from that that's number one.
Refund: And then number two are we.
Refund: The large Carmen deposit as you alluded and we mentioned in the call the our expectation for that because it has to flow out of the balance sheet.
Refund: Its entirety flooding a significant amount.
Refund: At the end of the second quarter or the beginning of the third quarter. So that in itself also has implications on how we're guiding a range on the margin is that yes.
Refund: Answering your question is that giving you enough color.
Jos Rafael Fernndez: Yeah, that's, that's helpful. Um, and then I wanted to talk about credit quality for a second, just around, you know, the mainland net charge-offs were higher, and the auto performed better than I would've expected. And I don't know if you would attribute that to tax returns or anything specifically, but I was just hoping for some color on both of those. If I heard you correctly, it sounds like you did expect the auto to have a little bit of softening from the 1Q levels.
Refund: Yes.
Speaker Change: That's helpful.
Speaker Change: And then wanted to talk about credit quality for a second just around you know the mainland net charge offs were higher auto performed better than I would've expected and I don't know if you would attribute that to tax returns or anything specifically, but was just hoping for.
Speaker Change: Some color on both of those if I heard you correctly. It sounds like you didn't expect.
Speaker Change: Auto too to have a little bit of softening from the <unk> levels from here.
Jos Rafael Fernndez: So on the commercial, U.S. commercial loan, remember we have a CSUN portfolio and we make decisions based on risk management, and that's kind of what was a risk management decision. The sale of that performing loan, we just felt that it was the right thing to do from a risk management perspective, and that's what you saw. And we certainly look at the auto portfolio as a key component of our balance sheet, as you know.
Speaker Change: Yeah. So on the on the commercial U S commercial loan.
Speaker Change: Remember, we have to see some portfolio and.
Speaker Change: And we.
Speaker Change: We make decisions based on on risk management and.
Speaker Change: And that's kind of what was a risk management decision to sale of performing loans, we just build on it.
Speaker Change: It was the right thing to do from a risk management perspective, and Thats when you saw.
Speaker Change: And we certainly are.
Speaker Change: Look at the auto portfolio.
Speaker Change: A key component of our balance sheet as you know, it's around 30% of our loan book.
Jos Rafael Fernndez: It's around 30% of our loan book, and we're very encouraged with the first quarter levels of delinquency and lower charges. So from our perspective, we're still seeing good trends. It has a lot to do with how we manage that loan book, and I'll let Cesar give you a little bit more specifics on the auto portfolio because we have, we mentioned it somewhat last quarter, but we have made some changes throughout the last couple of years on the credit profile.
Speaker Change: And we're very encouraged with the first quarter.
Levels of delinquency and and lower lower charge offs. So so from our perspective.
Speaker Change: We're still seeing good trends he has a lot to do with how we manage that our loan book.
Speaker Change: And I'll, let us answer I'll give you a little bit more specifics on the auto portfolio. Because we we have we mentioned it somewhat last quarter, but we have made some changes throughout the last couple of years on the credit profile.
Cesar A. Ortiz: I want to highlight that the first quarter is always seasonal in terms of tax benefits, you know, Maritza mentioned it, tax credits, tax refunds, but also the end of the holidays, you know, that benefits the quarter, especially the first quarter of the year. So you'll see those benefits in the retail portfolio. But in ALCO also, we strategically improved the credit profile of our portfolio back in 2022. And we shifted this portfolio from a 64% We are seeing the benefits of that shift in credit profile since we eliminated the tranches that yielded the higher losses during those years, so I think that's what's being noted in the credit statistics in Alto right now.
I want to highlight that the first quarter is always season on the turns of tax benefits.
Speaker Change: I mentioned this tax rate tax refunds, but also the end of the holiday that benefit the quarter, especially first quarter of the year. So you'll see those benefits in the retail portfolio Boardinghouse also we strategically improve the credit profile of our portfolio back in 2022, and we achieved.
Speaker Change: This portfolio on a 64%.
Speaker Change: Seeing the benefits of that safety profile.
Speaker Change: Eliminated tranches that Jim that the high end loss, excluding those years. So I think that's what's been noted in the Grace is taking out right now.
Jos Rafael Fernndez: That's helpful. And then, if I could sneak in one last one, you know, Jose, any high-level... Comments on you know, we've seen stronger flows of funds to the island for projects. Anything in particular that you would highlight as, You know, maybe more impactful things that you see happening this year in Puerto Rico? Obviously, the economy is a lot stronger than it's ever been or has been in a long time.
Speaker Change: Okay.
Speaker Change: That's helpful and then if I could sneak in one last one.
Speaker Change: Any high.
Speaker Change: High level.
Speaker Change: That's on <unk>.
<unk> seen stronger flows of funds to the island for projects anything in particular that you would you would highlight as you know.
Speaker Change: Maybe.
Speaker Change: More impactful things that you see happening this year in Puerto Rico, obviously, the economy somewhat stronger than it's ever been.
Speaker Change: Or has that.
Speaker Change: A long time.
Jos Rafael Fernndez: Let's step back for a second here. When you look at the macro and when you look at Puerto Rico, what we're seeing today is not only federal funds coming in and flowing in at a steady pace and at a higher pace than right after the hurricanes and the earthquakes and certainly the pandemic kind of accelerated all of this. But if we also think about it, Puerto Rico came out of bankruptcy a couple of years ago.
Speaker Change: Yeah, Yeah yeah.
Speaker Change: Step back a second here when you look at the macro and when you look at Puerto Rico.
Speaker Change:
Speaker Change: What we're seeing today is not only federal funds coming in and flowing in at a steady pace and at a higher pace than.
Speaker Change: Right after the hurricanes and the earthquakes and certainly different mimic kind of accelerated at all.
Speaker Change: But if we also think about it Puerto Rico came out of bankruptcy a couple of years ago. So what youre seeing now is private capital at work from abroad as well as internally. So youre seeing business is expanding commercial business.
Speaker Change: Investments in their own businesses, and Youre seeing a U S capital coming to Puerto Rico and.
Jos Rafael Fernndez: So what you're seeing now is private capital at work from abroad as well as internally. So you're seeing businesses expanding, commercial business people own businesses, and you're seeing U.S. capital coming to Puerto Rico and, [inaudible] federal funds that are on the sidelines right now to continue to strengthen the electric grid and the transformation that is being done there for resiliency as well as for diversified sources. So I think if you look forward, there's still quite a bit of a back wind for Puerto Rico's economy because the engines aren't working.
Speaker Change: Expanding businesses on buying businesses. So so that has a lot to do with that bankruptcy getting out getting off bankruptcy I think going forward. There's one more bankruptcies that needs to be eliminated and this is the electric power authority, hopefully 2024 will be the year where it.
Speaker Change:
Out of bankruptcy and then they're $11 billion of federal funds that are.
Speaker Change: On the sideline right now to continue to.
Speaker Change: Strengthen the electric grid and the transformation that has been done there for resiliency as well as for diversified sources. So so I think if you look forward, there's still quite a bit of a.
Speaker Change: And back when for Puerto Rico's economy.
Speaker Change: The engines are at work federal funds private capital coming in and businesses, putting capital to work too so.
Jos Rafael Fernndez: Federal funds, private capital coming in, and businesses putting capital to work too. So we're optimistic about Puerto Rico, and that's why banks exist, and that's why we're here. We're here to support small and mid-sized commercial clients; we're here to support our consumers and our clients and try to help them achieve their goals. I just think that we have a pretty strong pipeline on the commercial side. We have a pretty strong pipeline for the larger kind of middle and higher kind of commercial clients, but we also had a pretty strong quarter; we had a pretty strong quarter in the small business commercial, and we have a pretty good pipeline there too. So we're seeing good momentum overall.
Speaker Change: We're optimistic on Puerto Rico, and that's what banks exist and that's why we're here we're here to support small and mid sized commercial clients where it is.
Speaker Change: Here to support our consumers.
Speaker Change: And our clients and trying to help them achieve their goals.
Speaker Change: I just think that we have a pretty strong pipeline on the commercial side on the <unk>.
Speaker Change: A larger kind of middle and higher.
Kind of commercial clients, but we also have a pretty strong quarter, we had a pretty strong quarter in the small business commercial and we have a pretty good pipeline there too. So so we're seeing good momentum overall right.
Brett D. Rabatin: Okay, great. I appreciate all the color. Yep, thank you.
Speaker Change: Yes.
Speaker Change: Okay, Great appreciate all the color.
Speaker Change: Yes. Thank you.
Alexander Roberts Huxley Twerdahl: We'll go next to Alex Twerdahl with Piper Sandler.
Speaker Change: We will go next to Alex <unk> with Piper Sandler.
Alexander Roberts Huxley Twerdahl: Well, thanks. I wanted to start on just kind of a longer-term strategy and sort of growth outlook, you know, and when I look at your capital levels, they continue to rise, TCE now above 10%, and that common equity tier one continues to rise. And, you know, kind of coupled with all the money you guys are making, it just seems like, you know, it's hard to imagine you being able to deploy all that capital just through organic growth.
Alex: Hey, good morning, all.
Alex: Hi, Alex.
Alex: Well thanks.
Alex: I wanted to start on just kind of sort of longer term strategy and sort of growth outlook and when I look at your capital levels continue to rise.
Alex: TCE now above 10% and that common equity tier one continues to rise and you know getting coupled with all the money you guys are making it just seems like you know.
Alex: It's hard to envision you being able to deploy all that capital just through organic growth. So I'm just I'm wondering if you have any updated sort of longer term thoughts on utilization of capital and you know kind of how youre thinking about.
Alexander Roberts Huxley Twerdahl: So I'm just wondering if you have any updated sort of longer-term thoughts on utilization of capital and, you know, kind of how you're thinking about, you know, deploying the excesses in the next couple of quarters or years. Yeah.
Alex: Deploying the excesses in our in the next couple of quarters or years.
Jos Rafael Fernndez: So, the game plan for us remains relatively the same. We still see opportunities for us to grow here in Puerto Rico, and we still see opportunities for us to deploy capital here in Puerto Rico.
Speaker Change: So the game plan for us remains relatively the same.
Speaker Change: We still see opportunities for us to grow here in Puerto Rico, and we still see opportunities for us to deploy capital here in Puerto Rico I agree with you.
Jos Rafael Fernndez: We have a lot of capital, and we are generating a lot of capital. So, we also have shareholder capital return strategies. We increased the dividend, and we will continue to look at that. The board announced a $50 million repurchase program that is also available to us, and we will be opportunistically executing on all three fronts. We operate with higher levels of capital than our peers in the state. But in general, I agree with your premise in terms of our capital generation, and we expect to deploy it accordingly.
Speaker Change: We have a lot of capital and we're generating a lot of capital. So so we also have.
Speaker Change: Shareholder capital return strategies, we increased the dividend we continue to look at that we announced on the board announced a $50 million repurchase program that that is also available to us and we will be.
Speaker Change: Opportunistically.
Speaker Change: Executing on all three fronts.
Speaker Change: We operate with higher levels of capital than our peers in the states.
Speaker Change: But in general I agree with your with your premise in terms of our capital generation and.
Speaker Change: We expect to deploy it accordingly.
Alexander Roberts Huxley Twerdahl: Okay. I mean, I guess, you know, as you sort of look over the next couple of years, you know, in, you know, balancing the outlook you see in Puerto Rico, which, you know, continues to be favorable, do you, do you see the chances of expanding a little bit more, deploying a little bit more towards the U.S. as something that's likely? Or, I mean, I guess when you talk about the growth opportunities in Puerto Rico, would that, would that be sufficient to sort of absorb all that excess?
Speaker Change: Sure.
Speaker Change: Okay, I mean, I guess as you sort of look over the next couple of years.
Speaker Change: Balancing the outlook do you see in Puerto Rico, which continues to be favorable.
Speaker Change: Do you see the chances of expanding a little bit more deploying a little bit more towards the U S is something that's likely.
Speaker Change: Likely or.
Speaker Change: Yes.
Speaker Change: When you talk about the growth opportunities in Puerto Rico.
Speaker Change: Would that be sufficient to sort of absorb all of that excess.
Speaker Change: Yeah good point.
Speaker Change: As you know we have the the U S business and we have been.
Speaker Change: Growing for the last five six years, we will continue to invest in that business. It's been a very good profitable business for us. So we see opportunities. We also recognize that Puerto Rico is decoupling.
Jos Rafael Fernndez: Good point. As you know, we have the U.S. business that we have been growing for the last five, six years. We will continue to invest in that business. It's been a very profitable business for us, so we see opportunities. We also recognize that Puerto Rico is decoupling, and our economy is decoupling steadily from the U.S., although the U.S. is more resilient these days, and it's showing some growth. And that is also good for Puerto Rico, by the way.
Speaker Change: Our economy is decoupling.
Speaker Change: Steadily from from the U S. Although the U S. A.
Speaker Change: Being more more resilient these days and it's showing some growth and that is also good for Puerto Rico by the way.
Speaker Change: Some of them. So we expect Puerto Rico's economy continued trending upwards and we see somewhat a little bit.
Speaker Change: The choppiness in the U S economy, So we will be more cautious there but.
Speaker Change: In general.
Speaker Change: We will be investing also in deploying some capital for the U S business.
Speaker Change: Okay. Thanks.
Jos Rafael Fernndez: So we expect Puerto Rico's economy to continue trending upwards, and we see a little bit of choppiness in the U.S. economy, so we'll be more cautious there. But in general, we will be investing and deploying some capital for our U.S. business.
Speaker Change: And then I was hoping you could give us a little bit more commentary on the consumer in Puerto Rico, and just I recognize that there is still some normalization going on and maybe just kind of frame sort of where you expect net charge off levels on the consumer and then also on the auto to level out and just kind of help us square that continued deterioration if you can call it that.
Alexander Roberts Huxley Twerdahl: Okay, thanks. And then, I was hoping you could give us a little bit more commentary on the consumer in Puerto Rico. And just, you know, I recognize that there's still some normalization going on. And maybe just kind of frame sort of where you expect net charge-off levels on the consumer and then also on the auto to level out and just kind of help us square the continued deterioration, if you can call it that, you know, with the strength and the consumer that we're seeing and all the jobs numbers and the unemployment numbers and the wage salary numbers and all that kind of stuff that that even has been in the last couple of years.
Speaker Change: With the strength in the consumer that we're seeing in all the jobs numbers in the unemployment numbers in the wage salary numbers and all that kind of stuff that all seem to suggest that credit on the consumer side should be significantly better than then.
Speaker Change: And then even has been in the last couple of years.
Speaker Change: Yeah.
Speaker Change: So I'll give you some some thoughts and I'll.
Speaker Change: Then add some some of the details but.
Speaker Change: When you look at consumer on auto our own auto portfolio.
Speaker Change: You need to start by recognizing that both have different loss content itself inherently there are different types of loans. One is secure and the other one is unsecured that's number one number two when you look at auto loans.
Speaker Change: It's also the the.
Jos Rafael Fernndez: So I'll give you some thoughts, and I'll let Cesar then add some other details. When you look at consumer and auto, our own auto portfolio, you need to start by recognizing that both have different loss content in themselves. Inherently, there are different types of loans. One is secure, and the other one is unsecure. That's number one.
Speaker Change: Assessing Puerto Rico to own a car as you know we don't have a massive trials.
Speaker Change: Mass transportation and the island, all that stuff. So so consumers prioritize the auto loan payments and that is why youre seeing a divergence and you'll see a natural divergence historically between consumer and auto and <unk>.
Speaker Change: But again, we come back to the same kind of land in the same place Puerto Rico's economy is doing well unemployment levels are low. So we are not seeing neither portfolio too.
Jos Rafael Fernndez: Number two, when you look at auto loans, it's also a necessity in Puerto Rico to own a car. As you know, we don't have massive mass transportation on the island and all that stuff. So consumers prioritize the auto loan payment, and that is why you're seeing a divergence, and you see a natural divergence historically between consumer and auto. But again, we come back to the same kind of land in the same place. Puerto Rico's economy is doing well, unemployment levels are low, so we are not seeing either portfolio to go back to pre-pandemic or worse. We are seeing them trending inching upwards because certainly some of the stimulus is being taken away, and it's kind of flowing out. But, in general, we're not seeing those portfolios performing worse than pre-pandemic levels.
Speaker Change: We'll go back to pre pandemic or worse, we're seeing them trending inching upwards, because certainly some of the stimulus has been.
Speaker Change: Taken away and it's kind of flowing out but in general we're in we're not seeing those portfolios performing worse than pre pandemic levels.
Speaker Change: But that's kind of my my 30000 feet kind of let's say, so I'll give you a little bit more details on the consumer side, because you already gave on the auto side, yes, the consumer portfolio was before.
Speaker Change: So that with that coupled with the macroeconomic strong outlook that we have we also mentioned we don't expect it to deteriorate worse, nothing pandemic and we expect it to be actually better than the pre pandemic level. So.
In outlets as we mentioned, we did shifted that portfolio.
Speaker Change: As I mentioned before from the 64%, Brian 282% price. So the outlook for <unk> is going to be bad.
Jos Rafael Fernndez: So that, coupled with the macroeconomic strong outlook that we have, as I mentioned, we don't expect it to deteriorate worse than the pandemic, and we expect it to be actually better than the pre-pandemic level. So in Alto, as we mentioned, we did shift that portfolio, as I mentioned before, from the 64% priming to 82% priming, so the outlook for Alto is going to be better than pre-pande
Speaker Change: <unk> done pre pandemic level because of that shift so.
Speaker Change: And again Youre going to see right now what we have $4 four in terms of net charges for a consumer that is lower than what we had in the past.
Speaker Change: Before the pandemic in auto were around 1% or so at a significantly lower also hydrogen portfolio and these are both very high yielding portfolio. So we're very happy with the win.
Speaker Change: With the performance and the profitability of both portfolios.
Speaker Change: Would you mind, just going through I don't know if anyone else on the call is again the same issues with it kind of breaking up every so often but the percentage prime before the pandemic to today I think you said 64 to 82 and I wasn't sure. If that was just for the auto or if that was for consumer as well.
Jos Rafael Fernndez: And again, you're going to see right now what we have, 4.4 in terms of net charges for consumers. That is lower than what we had in the past, before the pandemic. In auto, we're around 1% or so; that's significantly lower also.
Speaker Change: This is auto auto portfolio, the Alco portfolio shifted from 64% and now it's 82% Brian.
Speaker Change: The consumer portfolio was always being on.
Jos Rafael Fernndez: High-yielding portfolios. Yeah, and these are both very high-yielding portfolios. So we're very happy with the performance and the profitability of both portfolios.
Speaker Change: E <unk> and <unk>, 9% Prime portfolio. So that's why I'm mentioning that the consumer portfolio have and skill is applying support client portfolio.
Speaker Change: Okay. Thank you and then just one final question just also on credit I'm. Just curious if you can give us a little commentary on commercial real estate in Puerto Rico, and just kind of how that market has fared up recently and then also just remind US you know I think one of the big concerns here is just the refinancing risk of loans going from three 5% yields up to seven and a half.
Alexander Roberts Huxley Twerdahl: Would you mind just going through, I don't know if anyone else on the call is having the same issues with it kind of breaking up every so often, but the percentage prime before the pandemic to today, I think you said 64 to 82, and I wasn't sure if that was just for the auto industry or if that was for consumers as well.
Speaker Change: 8% yields as they kind of roll over in the next couple of years.
Speaker Change: If we look back to 2020 in 2021, where their loans commercial real estate loans being put on with the with yields as low as three with a three handle or were they a little bit structurally higher in terms of the yield back then.
Cesar A. Ortiz: Now, this is the auto portfolio. The auto portfolio shifted from 64%, and now it's 82% prime. The consumer portfolio has always been and still is an... 89% prime portfolio, so that's why I'm mentioning that the consumer portfolio has and still is a prime, super prime portfolio.
Speaker Change: I'll take the last part first we did not dabble much on the 335%, 4% type of loan commercial real estate loans, we don't have that.
Speaker Change: Type of yield on our CRE book.
Alexander Roberts Huxley Twerdahl: Okay, thank you. And then just one final question, also on credit. I'm just curious if you can give us a little commentary on commercial real estate in Puerto Rico and just kind of how that market has fared recently. And then also just remind us, you know, I think one of the big concerns here is just the refinancing risk of loans going from three and a half percent yields up to seven and a half or eight percent, you know, yields as they kind of roll over in the next couple of years.
Speaker Change: So it's not something that.
Speaker Change: Now we have to.
Speaker Change: Content with and then in general we.
Speaker Change: We are having a very diversified well diversified CRE.
Speaker Change: A book.
Speaker Change: Most of the I would say the diversification comes from several industries. One is hospitality hotels and other one is retail space on the shopping centers and then we have.
Jim.
Speaker Change: <unk> $90 million in office space. This is non owner occupied and these are 40%, 45% loan to value. We have 90 some percent occupancy we have good coverage, we're not seeing any stress on the commercial real estate.
Alexander Roberts Huxley Twerdahl: You know, if we look back to 2020 and 2021, were there loans on commercial real estate loans with yields as low as three, with a three handle, or were they a little bit higher in terms of the yield back then?
Speaker Change: Our broken and La Mer.
Speaker Change: Later in the Puerto Rico market so.
Speaker Change: It's a different story here in Puerto Rico versus what Youre seeing in the states from from what I can gather.
Jos Rafael Fernndez: I'll take the last part first. We did not dabble much in the 3, 3.5%, 4% type of commercial real estate loans. We don't have that type of yield on our CRE book, so it's not something that we have to contend with. And then, in general, we have a very diversified, well-diversified CRE book. Most of the, I would say, diversification comes from several industries. One is hospitality, which is hotels. Another one is retail space and shopping centers.
Speaker Change: Thank you very much for taking all my questions.
Speaker Change: Yeah, sorry, sorry for the Intermittency I know.
Speaker Change: Brett also Bruno yes, nothing I'm sure. There is nothing you can do about it so.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question. Please press the star and the number one on your telephone keypad.
Speaker Change: We will go next to Kelly Motta with K B W.
Kelly Ann Motta: Hey, good morning, Thanks for the question.
Kelly Ann Motta: Hi, Kelly.
Kelly Ann Motta: The tax rate was.
Kelly Ann Motta: Lower this quarter and I know you have a discrete benefits in there, but it also as you mentioned was related to the mix of.
Jos Rafael Fernndez: And then we have around $90 million in office space. This is non-owner-occupied, and these are 40%, 45% loan-to-value. We have 90%-some percent occupancy. We have good coverage. We're not seeing any stress on the commercial real estate in our book, and for that matter, in the Puerto Rico market. So it's a different story here in Puerto Rico versus what you're seeing in the States, from what I can
Kelly Ann Motta: Tax advantage activities that.
Kelly Ann Motta: Or is this Max so just wondering how we should be thinking about the overall tax rate as we look ahead.
Kelly Ann Motta: You know prior year run.
Kelly Ann Motta: Run rate or just given given the shift in mix it might be a bit lower.
Alexander Roberts Huxley Twerdahl: Thank you very much for taking all my questions.
Speaker Change: Well Hi, Kerry Thanks for your question and I think shared in my prepared remarks, we.
Operator: Yeah, sorry, sorry for the intermittency. I know... Brett also brought it up.
Max: We are now expecting 29% effective tax rate for the full year or so.
Operator: Brett also brought it up. Yeah, nothing. I'm sure there's nothing you can do about it, so no worries.
Kerry: That there's a decrease from what we saw last year or so so yeah, we see.
Operator: Again, if you would like to ask a question, please press the star and the number 1 on your telephone keypad.
Kerry: No it's actually for the full year of 2009.
Kerry: Alright, I appreciate I appreciate the color and I believe in your prepared remarks.
Operator: Hey, good morning. Thanks for the question.
Kerry: Q.
Kerry: You were you discussed you expect kind of loan growth continuing from here throughout the year.
Kelly Ann Motta: The tax rate was lowered this quarter, and I know you had a discrete benefit in there, but it also, as you mentioned, was related to the mix of tax advantage activities that Per Token or Business Next. So just wondering how we should be thinking about the overall tax rate as we look ahead. If the prior year is still a good run rate or if we need to make a shift.
Kerry: Previously you had said about 3% to 4% growth I'm, assuming you know the economy grows two to two and a half per sad just wondering you know where where you see the drivers of growth ahead, and if there is any kind of shift in the outlook.
Maritza Arizmendi Diaz: Well, Kelly, thanks for the question. And as I shared in my prepared remarks, we are now expecting a 29% effective tax rate for the full year. So that's a decrease from what we saw last year. So yeah, we see a lower tax rate for the full year at 29.
Speaker Change: As to why not let them around that you can sustain yeah, yeah, no not shifting the outlook, we're seeing three 4% growth for the year and.
Speaker Change: We are seeing mostly from.
Speaker Change: The commercial.
Speaker Change: Business, we see opportunities there and we have a pretty good pipeline there and we're also seeing as you saw this quarter, we're seeing some growth on the consumer on auto.
Kelly Ann Motta: All right, I appreciate the color, and I believe that your prepared remarks Q. As you discuss, you expect some kind of loan growth continuing from here throughout the year. Previously, you had said about 3 to 4 percent growth, assuming, you know, the economy grows 2 to 2.5 percent. Just wondering where you see the drivers of growth ahead and if there's any kind of shift in the outlook as to what growth you can sustain. Yeah, no, and no.
Speaker Change: Sure.
Speaker Change: We're expecting commercial to have a.
Speaker Change: We hired.
Speaker Change: Contribution to the origination then and in the first quarter.
Speaker Change: Got it that that's that's really helpful.
Speaker Change: I guess I guess final question for me I mean, it seems like the margin outlook is is somewhat better than what we had been expected.
Speaker Change: Before withdraws from here.
Speaker Change: <unk>.
Jos Rafael Fernndez: Yeah, no shift in the outlook. We're seeing 3-4% growth for the year, and it's mostly from the commercial business. We see opportunities there, and we have a pretty good pipeline there. And we're also seeing, as you saw this quarter, some growth on the consumer and auto. We're expecting commercial to have a higher contribution to origination than in the first quarter.
As we look ahead I know you had said the efficiency ratio low to mid fifties. It seems net net given your your expense outlook hasn't changed that we may be in the lower part of that range versus the higher end, just wondering kind of how you're thinking about as we look ahead kind of where we could.
Speaker Change: Fall out and how how you're.
Speaker Change: Managing.
Speaker Change: What could get us to the higher or lower end of that range. Thanks.
Kelly Ann Motta: Got it. That's really helpful. I guess the final question for me, I mean, it seems like the margin outlook is somewhat better than what we had been expecting before with growth from here. As we look ahead, I know you had said the efficiency ratio was low to mid-fifties. It seems net-net given your... Your expense outlook hasn't changed that we may be in the lower part of that range versus the higher end. Just wondering kind of how you're thinking about, as we look ahead, kind of where we could fall out and how you're, you know, managing what could get us to the higher or lower end of that range.
Speaker Change: Yeah, well I think.
Speaker Change: I understand.
Speaker Change: Well your question IBM, where we.
Speaker Change: Having a second lien.
Speaker Change: But when we think about expenses, we think about timing and when the investments are being are going to be deployed.
Speaker Change: And I think we will we will continue to be in that range and probably most of the time would be in the lower of that range, but in other instances.
Speaker Change: Well there are high high end of that range. So I think we'll continue to see the expenses as I mentioned $90 million to $92 million, we need to continue investing in our study and and I think that their nation.
Speaker Change: I don't see any any.
Any way.
Speaker Change: A way of us being lower than that.
Speaker Change: Got it that's that's helpful. Maybe one last for me and then I'll I'll step back most of my questions have been asked and answered at this point.
Maritza Arizmendi Diaz: Yeah, well, I think I understand very well your question. In the end, we're having expected to have a better need. But when we think about expenses, we also think about timing and when the investments are going to be deployed. And I think we will continue to be in that range, and probably most of the time, we'll be in the lower end of that range. But in other or at the high end of that range.
Speaker Change: Just wondering you know if theres any rule of thumb adds to I know you had said you're still asset sensitive about.
Speaker Change: How each kind of rate cut impact margin at least on on the near term do you have any kind of.
Speaker Change: Touristic on that.
Speaker Change: We update that on the 10-Q and Youll see it when we filed the 10-Q.
Maritza Arizmendi Diaz: So I think we continue to see these expenses, as I mentioned, $90 to $92 million. We need to continue investing in our strategy, and I think that the range, and I don't see any... Any way of us being lower than that?
Speaker Change: But as you will see we have been gradually.
Opportunistic investing longer on the duration side of the investment portfolio locking in rates on a higher level and that has helped us.
Kelly Ann Motta: That's helpful. Maybe one last question for me, and then I'll step back. Most of my questions have been asked and answered at this point. Just wondering, you know, if there's any rule of thumb as to, I know you're still asset sensitive a bit, how each kind of rate cut impacts margin at least in the near term. Do you have any kind of heuristic on that?
Speaker Change: Reducing our asset sensitivity, but we are still asset sensitive and you'll get the details in the 10-Q, when we file and it goes on.
Speaker Change: I think that's kind of the.
Speaker Change: The timing that we share that with the market.
Speaker Change: Fair enough. Thank you so much I'll step back.
Speaker Change: Yes. Thank you.
Speaker Change: Again, if you would like to ask a question. Please press the star keyed on and followed by the number one on your telephone keypad again that is star one if you would like to ask a question.
Jos Rafael Fernndez: We update that on the 10-Q, and you'll see it when we file the 10-Q. As you will see, we have been gradually being opportunistic, investing longer on the duration side of the investment portfolio, locking in rates at a higher level. That has helped us in reducing our asset sensitivity, but we're still asset sensitive. You'll get the details in the 10-Q when we file it because I think that's kind of the timing when we share that with the market. Fair enough. Thank you so much.
Speaker Change: We'll return to Alex <unk> with Piper Sandler.
Alex: Hey, just one follow up on on the NIM just when you think about that the large government deposit that I think you mentioned is going to flow out or a good chunk of its got blowout in the.
Alex: The end of the second early third quarter does that get funded with sales in the securities portfolio or does it get replaced with borrowings how you're thinking about managing that outflow.
Kelly Ann Motta: Fair enough. Thank you so much. I'll step back.
Operator: Again, if you would like to ask a question, please press the star key on and followed by the number one on your telephone keypad. Again, that is star one if you would like to ask a question.
Speaker Change: Yes, yes.
Speaker Change: Yes.
Speaker Change: When we think about this.
Speaker Change: As we experience this quarter, we did have some leading have increase in the deposit side, we're expecting deposit.
Speaker Change: So growth that will be part of that.
Speaker Change: I think that funding we will use wholesale funding.
Alexander Roberts Huxley Twerdahl: Just one follow-up on the NIM. When you think about the large government deposit that I think you mentioned is going to flow out, or a good chunk of it is going to flow out at the end of the second, early third quarter, does that get funded with sales and securities portfolio, or does it get replaced with borrowings? How are you thinking about managing that outflow?
Speaker Change: And if you think about the maturities that we have an investment portfolio that we do have about $200 million internationally notes that were maturing in may.
Speaker Change: And what homes and about $150 million already mature now in <unk>.
Speaker Change: So we do have a plenty.
Speaker Change: Plenty of resources to replenish that exit.
Speaker Change: And there could be some effectiveness in the cost of funds through that process.
Maritza Arizmendi Diaz: When we think about this, as we experienced this quarter, we did have an increase on the deposit side. We are expecting deposits to grow. That will be part of replacing that funding. We will use wholesale funding. And if you think about the maturities that we have in the investment portfolio, we do have about $200 million in treasury notes that have already matured now in April. So we do have plenty of resources to replenish that exit. And there could be some effectiveness in the cost of funds through that process. Yeah And we're not taking that into consideration completely in our margin guidance.
Speaker Change: And we're not taking that into consideration completely in our margin guidance.
Speaker Change: Okay.
Speaker Change: Perfect. Thanks for taking my call.
Speaker Change: Yes. Thank you.
Speaker Change: At this time there are no further questions I would now I'll turn the call back over to management for closing remarks.
Speaker Change: Thank you operator, thanks again to all our team members and thanks to everyone for listening.
Speaker Change: Great day.
Speaker Change: Thank you, ladies and gentlemen, we apologize for the audio Wishy issues experienced on today's event. We thank you for your participation you may disconnect at this time and have a great day.
Speaker Change: Hmm.
Speaker Change: [music].
Alexander Roberts Huxley Twerdahl: Okay. Perfect. Thanks for taking my follow-up.
Operator: At this time, there are no further questions. I will now turn the call back over to management for closing remarks. Thank you, operator.
Okay.
Speaker Change: [music].
Jos Rafael Fernndez: Thank you, operator. Thanks again to all our team members and thanks to everyone for listening.
Operator: Thank you. Ladies and gentlemen, we apologize for the audio issues experienced during today's event. We thank you for your participation. You may disconnect at this time, and have a great day.
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