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Earnings call: OFG Bancorp reports robust Q1 2024 with digital growth

Published 04/19/2024, 09:10 AM
© Reuters.
OFG
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In the first quarter of 2024, OFG Bancorp (NYSE: NYSE:OFG) delivered a solid financial performance, as outlined by CEO José Rafael Fernández in the company's earnings call. The firm's Digital First strategy has been a significant driver of customer acquisition and engagement, contributing to a 9% increase in diluted earnings per share, which reached $1.05. Core revenues rose by 6% to $174.2 million, and the net interest margin stood at 5.4%. OFG Bancorp's total assets amounted to $11.2 billion, supported by $9.5 billion in customer deposits and $7.5 billion in loans held for investment.

The company also announced a 14% increase in its quarterly cash dividend and a new $50 million stock repurchase authorization. Despite a slight decline in net interest margin due to various factors, the outlook for both Puerto Rico's economy and OFG Bancorp remains positive, with expectations of continued growth in the upcoming year.

Key Takeaways

  • Diluted earnings per share increased by 9% to $1.05.
  • Total core revenues grew by 6% to $174.2 million.
  • Net interest margin reported at 5.4%.
  • Total assets reached $11.2 billion, with customer deposits at $9.5 billion.
  • Loans held for investment stood at $7.5 billion.
  • Quarterly cash dividend increased by 14%, and a new $50 million stock repurchase program was approved.
  • Positive outlook for Puerto Rico's economy and OFG Bancorp's future growth.

Company Outlook

  • Management remains optimistic about continued economic and business growth in Puerto Rico.
  • The company plans to invest in customer-friendly technology and enhance customer experience.
  • OFG Bancorp is well-positioned to benefit from a higher interest rate environment and loan growth.
  • Capital levels are rising, with plans to deploy capital through organic growth, shareholder capital return strategies, and opportunistic execution.
  • Growth opportunities are seen in both Puerto Rico and the US markets.

Bearish Highlights

  • A slight decline in net interest margin due to higher average balances and yields of securities, cash on loans, and lower wholesale funding costs.
  • Core deposits decreased slightly due to commercial withdrawals.

Bullish Highlights

  • Significant growth in digital enrollment, loan payments, virtual teller utilization, and customer growth due to Digital First strategy.
  • The commercial real estate market in Puerto Rico is performing well, with a diversified CRE book showing good coverage and occupancy.

Misses

  • The company expects the outflow of a large government deposit, which they plan to replace with deposit growth and wholesale funding.
  • The call experienced audio issues, but no significant information was missed.

Q&A Highlights

  • The company discussed capital generation and shareholder capital return strategies, including the increased dividend and repurchase program.
  • Consumer and auto loan portfolios are not performing worse than pre-pandemic levels.
  • The company is asset sensitive but is reducing this sensitivity by investing in longer-duration assets.
  • Expectations for net interest margin to improve and expenses to be in line with projections of $90 million to $92 million.

OFG Bancorp's first quarter of 2024 results reflect a strong start to the year, buoyed by strategic investments in digital initiatives that have enhanced customer interaction and acquisition. The company's forward-looking statements indicate a commitment to leveraging technology for improved services and efficiency, while maintaining a positive outlook on the economic environment in Puerto Rico. With a robust capital position and a prudent approach to managing its asset sensitivity, OFG Bancorp appears poised for continued success in the financial landscape.

InvestingPro Insights

OFG Bancorp's recent financial performance has been marked by several positive indicators, as reflected in InvestingPro's analysis. The company's commitment to dividend growth is underscored by its track record of raising dividends for 3 consecutive years, with a notable 25% dividend growth in the last twelve months as of Q1 2023. This is in line with the company's announcement of a 14% increase in its quarterly cash dividend, highlighting the firm's shareholder-friendly policies.

In terms of valuation, OFG Bancorp is currently trading at a low P/E ratio of 8.75, which is attractive relative to its near-term earnings growth. This favorable P/E ratio, combined with a PEG ratio of 0.76, suggests that the company's stock may be undervalued given its growth potential.

InvestingPro Data metrics also show that OFG Bancorp has maintained a steady revenue growth, with a 6.62% increase in revenue over the last twelve months as of Q1 2023. However, it is important to note that the company suffers from weak gross profit margins, which may be a point of concern for potential investors.

InvestingPro Tips for OFG Bancorp also indicate that analysts predict the company will be profitable this year, with profitability over the last twelve months, reinforcing the positive outlook presented in the company's earnings call.

For readers looking to delve deeper into OFG Bancorp's financials and future prospects, InvestingPro offers additional tips and insights. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of information that can inform investment decisions. There are currently 5 more InvestingPro Tips available for OFG Bancorp, which can be found at https://www.investing.com/pro/OFG.

Full transcript - Oriental Financial Group Inc (OFG) Q1 2024:

Operator: Thank you for joining OFG Bancorp's Conference Call. My name is Jamie, and I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Vice Chair of the Board of Directors; Maritza, Chief -- I'm sorry, apologies. Maritza Arizmendi, Chief Financial Officer; and César 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. 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 filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the 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. Fernández. Please go ahead.

José Rafael Fernández: 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. Business activity, consumer liquidity and employment levels in Puerto Rico continued to do well in a strong economy. And our balance [Technical Difficulty] 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. 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, pre-provision net revenues totaled $83 million. 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 totaled $7.5 billion approximately level with last quarter and up 10% from a year ago. New loan production was $536.6 million [Technical Difficulty] totaled $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. We increased the quarterly cash dividend 14% to $0.25 per share [Technical Difficulty] 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 and 32% in virtual teller utilization and 3% in customer growth. 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 not an exception. [Technical Difficulty] the addition -- additional functionality to manage IRA accounts and IRA funds. All of this continues to validate our Digital First strategy and investments. Our goal is to use technology, to provide more value-added service, increase our efficiency and have more staff dedicated to new business development activities. Now, I'd like to turn on the call to Maritza, to go over the financials in more detail.

Maritza Arizmendi: Thank you, Jose. Please turn to Page 5, to review our financial highlights. And 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 point higher yield. Cash reflected a 16% higher average balance and a six basis point higher yield, and loans had a 2% higher average balance and two basis points higher yield. 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 [Technical Difficulty] This reflected the full effect of the $1.2 billion in government funds, deposited this past December. Borrowings and brokered deposits declined [Technical Difficulty] due to the reduced need for wholesale funding. The day 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 fee revenue was up $1.5 million, reflecting increased wealth management and mortgage banking revenues. There was a minor amount of other non-interest income compared to the fourth quarter, which included $6 million in gains on sales 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 workforce, early retirements and facilities rightsizing. We continue to expect to average about $90 million 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 improvement from the fourth quarter. The efficiency ratio should continue in the low to mid-50 percentage range this year. Our performance metrics remain high. Return on average assets was 1.77%. Return on average tangible common equity was 17.92% and tangible book value per share was $23.50 [Technical Difficulty] $0.42 from the fourth quarter, mainly due to the increased retained earnings. Please turn to Page 6 to review our operational highlights. Average loan balances were $7.5 billion, end-of-period balances were approximately leveled. March 31 balances reflected sequential growth in auto and consumer loans, offset by decreases in commercial and residential mortgages. Commercial reflected seasonal paydowns of lines of credit, residential mortgage reflected regular paydowns and securitization and sale of conforming loans. Loan yield was 7.98%, up 2 basis points from the first quarter. This reflected variable rate commercial loans higher entry yields on new loans and a smaller propulsion 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 31. This reflected a $48 million decline in commercial deposits related to the line of [Technical Difficulty], 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 deposits. Non-government deposit cost was 82 basis points. As of the first quarter our cumulative deposit data [Technical Difficulty] deposits and 23.24% for total deposits including interest bearing deposits. Excluding government deposits, it was about 16%. Average borrowings and brokerage deposits were $280 million compared to $602 million in the fourth quarter. The March 31 balance was $203.3 million, the rates paid on wholesale funding decreased 41 basis points to 4.80% in the first quarter. Looking at non-interest expenses, they totaled $91 million. Excuse -- net interest margin was 5.30% as anticipated. With the prospect of higher for longer, we now anticipate three fed cuts versus five -- cuts as a result for this year we have guided a net interest margin range of 5.45% to 5.55%. Please turn to page 7 to review our credit quality and capital strength. Net charge-offs totaled $20 million up $4 million from the fourth quarter. The net charge off rate was 105 basis points up 17 basis points [Technical Difficulty] two factors. One was lower $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 our performing US commercial loan. The auto net charge-off rate declined sequentially, while the consumer rate increased. Looking at provision for credit losses, which totaled $15 million related to volume factors including net charge-offs. The first quarter included $1.7 million related to the US loan sales which was offset by a separate $1.7 million reduction in a specific reserve for payments received on substantially reserved US 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 with COVID cash stimulus fading away we expect increased NCO -- net charge-offs in auto and consumer, but lower than [Technical Difficulty]. However, net charge-offs and delinquencies performed fairly well in the first quarter due to a strong employment and Puerto Rico's economy as well as the federal tax charge credit. Looking at some of our other capital metrics. Total stockholders' equity remained leveled at $1.2 billion and tangible common equity ratio increased to 10 [Technical Difficulty]. Our first quarter tax rate of 26.8% decreased from 31.9% in the fourth quarter. The first quarter reflected two factors; one was unexpected 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. To sum up during the first quarter, net interest income continued to grow despite the slight decline in net interest margin. This reflected higher average balances and yields of securities, cash on loans and lower wholesale funding costs partially offset by higher cost of government deposits. Excluding government deposits, core deposits declined slightly due to commercial withdrawals, reflecting seasonal line of pay downs. While loans remain leveled quarter-over-quarter, we anticipate growth over the balance of the year based on the strength of our pipeline. As I mentioned, net interest margin should gradually improve, credit to continue to look [Technical Difficulty] expenses were in line with our expected range and our expected tax rate should be lower. Now, here's Jose.

José Rafael Fernández: 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. Local businesses are expanding. Overall business activity is good. [Technical Difficulty] is doing well. We continue to be vigilant for the big macro uncertainties, interest rate changes, inflation trends, a possible mainland recession, and ongoing global conflicts. Of course we're always keeping an eye on the competition. 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 customer experience. 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 to them and we're excited for what's to come. This year marks our 60th anniversary in business and our 30th [Technical Difficulty] New York Stock Exchange. With this, we end our formal presentation. Operator, let's start the Q&A.

Operator: Thank you. [Operator Instructions] We'll go first to Brett Rabatin with Hovde Group.

Brett Rabatin: Hey, good morning everyone. 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 5.35% to 5.55%. 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 increase. 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 cost in Puerto Rico in the past quarter or two. Just wanted to make sure I understood that guidance from here and it sounds like Maritza, you think the margin despite the funding cost increase is bottomed out here, is that a fair assessment?

José Rafael Fernández: So, Brett just to correct the guidance that you pointed out is not what Maritza said. She said 545 to 555.

Brett Rabatin: Okay.

José Rafael Fernández: 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 had that to mid-teen [ph].

Brett Rabatin: Okay. Well, that stick to back again that would come to -- go ahead, I’m sorry.

José Rafael Fernández: Yes. And going in the fact that, I just changed the premise of your question, so I don't know, if you want to add a question again.

Brett Rabatin: Well, maybe to rephrase it given that the margin is expected to be slightly higher from here. I just want to make sure I understood. Obviously, we've had margin pressure with the rise in funding costs in the past three quarters. The margin moving higher from here, what would that be a function of? And can you talk maybe about what you expect deposit betas to do from here?

José Rafael Fernández: Yes. 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's going on in the first quarter and a little bit afterwards, we are now modeling three cuts in the second half of the year. 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 and we mentioned in the call. Our expectation for that deposit is to flow out of the balance sheet [Technical Difficulty] 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 -- am I answering your question? Is that giving you enough color?

Brett Rabatin: Yes, that's helpful. And then I wanted to talk about credit quality for a second, just around the Mainland net charge-offs were higher, auto performed better than I would have expected. And I don't know if you would attribute that to tax returns or anything specifically but was just hoping for some color on both of those. If I heard you correctly, it sounds like you do expect the auto to have a little bit of softening from the 1Q levels from here?

José Rafael Fernández: So on the US commercial loan, remember we had a seasoned portfolio and we make decisions based on risk management and that's kind of 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, it's around 30% of our loan book. And we're very encouraged with the first quarter levels of delinquency and lower charge-offs. 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 César 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.

César Ortiz: I want to highlight that the first quarter is always seasonal in terms of tax benefits. Maritza mentioned tax credits, tax refund, but also the end of the holidays that benefits the quarter, especially first quarter of the year. So, you'll see those benefits in the retail portfolio. But in auto also, we strategically improved the credit profile of our portfolio back in 2022 and we shifted this portfolio from [Technical Difficulty] seeing the benefits of that shift in credit profile since we eliminated the tranches that due to the higher losses during those years. So, I think that's what's been noted in the credits [indiscernible] right now.

Brett Rabatin: Okay. That's helpful. And then if I could sneak in one last one. José, any high-level comments on -- we've seen stronger flows of funds to the island for projects. Anything in particular that you would highlight, as 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.

José Rafael Fernández: Yes, let's step back 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 at all. But if we also think about it, Puerto Rico came out of bankruptcy a couple of years ago. 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 [Technical Difficulty] investments in their own businesses and you're seeing US capital coming to Puerto Rico and expanding businesses and buying businesses. So, that has a lot to do with that bankruptcy getting out -- getting off bankruptcy. I think going forward, there's one more bankruptcy that needs to be eliminated and this is the electric power authority. Hopefully, 2024 will be the year where it out of bankruptcy and there is $11 billion of federal funds that are on the sideline 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 backwind for Puerto Rico's economy, because the engines are at work, federal funds, private capital coming in and businesses putting capital to work too. So we're optimistic about Puerto Rico and that's what banks exist and that's why we're here. We are here to support small and midsized commercial clients. We're here to support our consumers and our clients and trying to help them achieve their goals. So, I just think that we have a pretty strong pipeline on the commercial side on the 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, we're seeing good momentum overall, Brett.

Brett Rabatin: Okay. Great. Appreciate all the color.

José Rafael Fernández: Thank you.

Operator: We'll go next to Alex Twerdahl with Piper Sandler.

Alex Twerdahl: Hey good morning all.

César Ortiz: Hi Alex.

Alex Twerdahl: 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 they continue to rise. TCE now above 10% and that common equity Tier 1 continues to rise. And kind of coupled with all the money you guys are making it just seems like -- 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 kind of how you're thinking about deploying the excesses in the next couple of quarters or years?

José Rafael Fernández: Yeah. 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. I agree with you. We have a lot of capital. And we're generating a lot of capital. So we also have shareholder capital return strategies. We increased the dividend. We continue to look at that. We announced -- 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 states. But in general, I agree with your premise, in terms of our capital generation. And we expect to deploy it accordingly.

Alex Twerdahl: Okay. I mean, I guess, as you sort of look over the next couple of years in balancing the outlook that you see in Puerto Rico which continues to be favorable. Do you see the chances of expanding a little bit more or deploying a little bit more towards the US is something that's likely? Or I mean, I guess, when you talk about the growth opportunities in Puerto Rico, would those be sufficient to sort of absorb all that excess?

José Rafael Fernández: Yeah. Good point. As you know we have the US 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 good profitable business for us. So we see opportunities. We also recognize that Puerto Rico is decoupling -- our economies decoupling steadily from the US. Although, the US is being more resilient these days and it's showing some growth. And that is also good for Puerto Rico by the way. So we expect Puerto Rico's economy to continue trending upwards. And we see somewhat a little bit choppiness in the US economy. So we will be more cautious there. In general, we will be investing also and deploying some capital for the US business.

Alex 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 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 with the strength in the consumer that we're seeing in all the jobs numbers, and the unemployment numbers, and 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 it even has been in the last couple of years.

José Rafael Fernández: Yeah. So I'll give you some thoughts. And I'll let César then add some of the details. But when you look at consumer and auto, our own auto portfolio, you need to start by recognizing that both have different loss content in 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, it's also the – it's a necessity in Puerto Rico to own a car. As you know, we don't have a massive – mass transportation in 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 neither portfolio to go back to pre-pandemic or worse. We are seeing them trending inching upwards because certainly some of the stimulus has been taken away and it's kind of flowing out. But in general, we're not seeing those portfolios performing worse than pre-pandemic levels. But that's kind of my 30,000-feet kind of view. I'll let César give you a little bit more details on the consumer side because already gave on the auto side.

César Ortiz: Yes, the consumer portfolio [Technical Difficulty] so with that coupled with the macroeconomics strong outlook that we have as I also mentioned, we don't expect it to deteriorate more than the pre-pandemic and we expect it to be actually better than the pre-pandemic level. So in outlook, as we mentioned we shifted that portfolio. As I mentioned before from the 64% prime to 82% prime, so the outlook for auto is going to be better than pre-pandemic level because of that shift. So…

José Rafael Fernández: And again, you're going to see right now what we have, 4.4 in terms of net charges off for consumer that is lower than what we had in the past before the pandemic. In auto, we're around 1% or so a significantly lower also….

Maritza Arizmendi: High-yielding portfolios

José Rafael Fernández: And these are both very high-yielding portfolios. So we're very happy with the performance and the profitability of both portfolios.

Alex Twerdahl: Would you mind just going through – I don't know if anyone else on the call is getting the same issues with it kind of breaking up every so often, but the percentage prime before pandemic to today, I think you said 64 to 82 and I wouldn't sure if that was just for the auto or if that was for consumer as well

José Rafael Fernández: This is auto.

César Ortiz: Auto portfolio, the auto portfolio shifted from 64% and now it's 82% prime. The consumer portfolio has always been [Technical Difficulty] 89% prime portfolio. So that's why I'm mentioning that the consumer portfolio have and still is a prime superprime portfolio.

Alex Twerdahl: 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, I think one of the big concerns here is just the refinancing risk of loans going from 3.5% yields, up to 7.5% or 8% yields, as they kind of roll over in the next couple of years. If we look back to 2020 and 2021, were there loans – commercial real estate loans being put on with yields as low as three – with the three handle? Or were they a little bit structurally higher in terms of the yield back then?

José Rafael Fernández: I'll take the last part first. We did not double much on 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, the diversification comes from several industries. One is hospitality, hotels, another one is retail space and shopping centers. 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 gather.

Alex Twerdahl: Thank you very much for taking all my questions.

José Rafael Fernández: Yeah. Sorry for the intermittency. I know Brett also brought it up.

Alex Twerdahl: Yeah. I'm sure there's nothing you can do about it, so no worries.

Operator: [Operator Instructions] We'll go next to Kelly Motta with KBW.

Kelly Motta: Hey, good morning. Thanks for the question.

José Rafael Fernández: Hi, Kelly.

Kelly 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 you partook in or business mix. So just wondering how we should be thinking about the overall tax rate as we look ahead if prior year is still a good run rate or if given a shift in mix, it might be a bit lower?

Maritza Arizmendi: Well, hi, Kelly. Thanks for the question. And as I shared in my prepared remarks, we are now expecting 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%.

Kelly Motta: All right. I appreciate the color. And I believe that your prepared remarks, too, you discussed you expect kind of loan growth continuing from here throughout the year. Previously you had said about 3% to 4% growth, assuming the economy grows 2% to 2.5%. 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.

José Rafael Fernández: Yes. No shift in the outlook. We're seeing the 3% to 4% growth for the year. And we are seeing 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 we're seeing some growth in the consumer and auto, we're expecting commercial to have a higher contribution to the origination than in the first quarter.

Kelly Motta: Got it. That's really helpful. I guess, 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 low to mid-50s. It seems net-net given 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 managing what could get us to the higher or lower end of that range? Thanks.

Maritza Arizmendi: Yes. Well, I think, I understand very well your question. At the end we haven't expected better NIM. But when we think about expenses, we think also 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 would be in the lower of that range. But in other instances [Technical Difficulty] the high end of that rate. So, I think, we continue to see the expenses as I mentioned $90 million to $92 million, we need to continue investing in our strategy. And I think that's the range, I don't see anyway, of course, being lower than that.

Kelly Motta: Got it. That's helpful. Maybe one last for me, and then I'll step back. Most of my questions have been asked and answered at this point. Just wondering if there's any rule of thumb as to, I know you had said you're still asset sensitive a bit how each kind of rate cuts impacts margin at least on the near term. Do you have any kind of heuristic on that?

José Rafael Fernández: We update that on the 10-Q, and you'll see it when we file the 10-Q. But 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. And that has helped us reducing our asset sensitivity, but we're still asset sensitive. And you'll get the details in the 10-Q when we file it because I think that's kind of the timing that we shared out with the market.

Kelly Motta: Fair enough. Thank you so much. I will step back.

A – José Rafael Fernández: Yes. Thank you.

Operator: [Operator Instructions] We'll return to Alex Twerdahl with Piper Sandler.

Alex Twerdahl: Hi. Just one follow-up on the NIM. Just when you think about the large government deposit that I think you mentioned is going to flow out or a good chunk of it's going to flow out in 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?

A – José Rafael Fernández: Yes, I'll let Maritza give you details.

Maritza Arizmendi: Yes. When we think about this we -- as we experienced this quarter we did have some -- we did have increase in the deposit side. We are expecting deposit to grow that would be part of that replacing that funding. We will use wholesale funding. And if you think about the maturities that we have in the investment portfolio that we do have about $200 million in treasury notes that will mature in May and -- about $150 million already matured now in April. So we do have plenty of resources to replenish the exit and there could be some effectiveness in the cost of fund through that process.

A – José Rafael Fernández: And we're not taking that into consideration completely in our merging guidance.

Alex Twerdahl: Okay. Perfect. Thanks for taking my follow-up.

A – José Rafael Fernández: Yes. Thank you.

Operator: At this time there are no further questions. I will now turn the call back over to management for closing remarks.

José Rafael Fernández: Thank you, operator. Thanks again to all our team members and thanks to everyone for listening. Have a great day.

Operator: Thank you. Ladies and gentlemen, we apologize for the audio issues experienced on today's event. We thank you for your participation. You may disconnect at this time and have a great day.

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