OFG Bancorp (OFG) 2021 Q1 法說會逐字稿

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Maria, and I'll be your conference operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Vice Chair of the Board of Directors; and Maritza Arizmendi, Chief Financial Officer. A presentation accompanying today's remarks can be found on our Investor Relations website on the home page in the What's New box or on the Quarterly Results page.

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. (Operator Instructions)

I would now like to turn the call over to Mr. Fernández.

Good morning, and thank you for joining us. Before we get into the core of our presentation today, I want to share with you my perspective on how things are progressing in the island and how that translates into our businesses at OFG.

After almost 17 years as CEO, this is the most optimistic I have been on Puerto Rico and OFG. We're certainly not out of the woods yet, but the island is in a far better place today than we were last year, and our outlook is much better than the previous almost 2 decades.

Looking at the macroeconomic environment, we're a lot more optimistic about the flow of federal stimulus and reconstruction funds, the increased liquidity for individuals and small- and medium-sized businesses, the way that people are getting their vaccinations and the island's bankruptcy resolution. All this resulted in the overall improvement of Puerto Rico's economy. I hope this perspective helps investors understand the inflection point we're in and our potential to deliver consistent solid results as many of the macro distractions of the past finally are being resolved. At OFG, all our businesses are gaining very good momentum, and we're in an excellent strategic position to grow our market share in the years to come.

So let's turn to Page 3 and start with our presentation. Combined with the continued success of our strategies focused on our agility and service, we generated very strong first quarter results, while also increasing our dedication and purpose to help our customers, our people and our communities through the pandemic and beyond.

For our customers, our proprietary digital PPP portal once again facilitated access by small businesses to another $126 million in credit to keep their doors open and staff employed. Our teams helped our former Scotiabank customers to onboard and take advantage of our more robust online, mobile, ATM and ITM offerings.

For our people, we enabled vaccinations for our staff. And so far, more than 40% have been inoculated. We continued our COVID-related spending to protect our staff and customers, and we stepped up our investment, as planned, to create a more secure hybrid infrastructure to make it easier for our teams to work seamlessly from the office or home.

For our communities, we established a new outreach program to provide advice to small businesses affected by the COVID situation. We want to help them find better ways to manage through the pandemic. We also provided a series of virtual seminars during Women's History Month, and we sponsored virtual seminars for the next generation of college entrepreneurial leaders to help them better understand how innovation can solve business and community challenges.

Please turn to Page 4. Confirming our multiyear strategy to bring digital solutions to our customers and help them simplify their lives, our overall digital adoption continues to grow. You can see this -- you can see it in this slide the adoption levels across different digital solutions. These adoption levels confirm how much we have advanced our digital strategy, especially during COVID, but more importantly, how customers are sticking to digital online solutions, even as restrictions subside and the economy reopens.

A great example is how our customers are continuing to use our online or mobile platforms to schedule branch appointments. During the first quarter, we scheduled approximately 8,800 such appointments. Our goal is to convince customers that it is easier and more convenient to use our digital online technology for routine transactions, allowing our people to provide customers more value-added service, build stronger relationships, and in the process, increase business development opportunities.

Please turn to Page 5 to review our first quarter results. We reported $0.56 in earnings per share compared to $0.42 in the fourth quarter and breakeven in the year ago quarter, which was the first quarter to be impacted by the pandemic. Total core revenues were $128 million. Net interest income of $98 million benefited from PPP loan fees and lower cost of deposits. Provision was $6.3 million, primarily due to improved economic and credit trends. This included the release of some COVID-related loan reserves, partially offset by provisioning for a commercial loan in workout before COVID. Allowance remained virtually the same. Net interest margin ticked up to 4.26% from the fourth quarter.

Banking and Wealth Management revenues totaled $29 million. That's roughly equal to what we did in the fourth quarter when you eliminate seasonal items. First quarter fee revenue reflected strong mortgage banking activities as we have consistently generated a higher level of origination and servicing fees, both benefits of the Scotiabank acquisition.

Noninterest expenses totaled $78 million. This was relatively flat after excluding merger expenses in the fourth quarter and noncore items in this first quarter. First quarter expenses were also in line with our previously announced plans for spending this year. The effective tax rate was 32% compared to 22% in the fourth quarter.

Looking at the balance sheet. Compared to December 31, assets increased, reflecting higher cash balances. Loans declined due to higher mortgage fee financing activity, and to a lesser degree, businesses with higher liquidity levels paying down lines of credit. Loan production totaled an impressive $528 million. We have good pipelines and momentum going forward in all business lines. We also saw strong deposit growth due to new PPP loans and COVID relief payments.

Capital continued to build nicely, and we're starting to return some of that to shareholders via increases in common dividends and optimization of the capital stock via redemption of preferred shares. In January, we increased the regular quarterly cash dividend -- common cash dividend 14%. In March, we announced the redemption of all 3 outstanding series of preferred stock. In addition to improving our capital structure, this enables us to effectively deploy excess liquidity and increase net income available to shareholders -- to common shareholders by $6.5 million on an annualized basis. Stockholders' equity climbed to $1.11 billion.

I would like also to point out that as of the first quarter, we more than earned back all the tangible book value per common share dilution anticipated in the Scotiabank acquisition significantly ahead of schedule.

To sum up, the first quarter demonstrated another strong performance, supported by the island's economic recovery, solid loan generation, improving payment activity and credit trends and good banking and financial services fees.

Now here's Maritza to go over the financials in more detail.

Thank you, José. Please turn to Page 6 for our financial highlights. First quarter core revenues were $127.7 million. This compares to $132.8 million in the fourth quarter. First quarter revenues included $1.6 million in interest income from $92 million of PPP loans that were forgiven. First quarter revenues included 3 items: $3.9 million in noninterest income from annual insurance commissions, $3.1 million in interest income from acquired loan prepayments and $2 million in mortgage sales that were held back from the third quarter. When taking all that into consideration, core revenues increased $2.3 million or 1.9%. This was driven by $1.4 million in lower cost of deposits and higher mortgage banking activities.

First quarter noninterest expense totaled $7.7 million (sic) [$77.7 million]. This compares to $89 million in the fourth quarter. The first quarter reflected previously announced cost savings. It also included $1.8 million primarily in gains on sales and improved valuation of foreclosed properties. The fourth quarter included $10.1 million in merger and restructuring expenses. As a result, the efficiency ratio improved to 60.84% from 67.06% in the fourth quarter and 66.49% in the year ago quarter. Our objective is to return to the mid-50% range.

Looking at our performance metrics. Return on average assets increased to 1.21% from 94 basis points in the fourth quarter and virtually 0 in the year ago quarter. Our objective continue to be on return on average assets above 1%.

Return on average tangible common equity rose to 13.11% compared to 9.90% (sic) [9.99%] in the fourth quarter and virtually 0 in the year ago quarter. Our objective continues to be achieving return on average tangible common equity of above 12%. We were pleased to see that all of our key performance metrics significantly improved.

Looking at capital, tangible book value was $17.39 per share. That's an increase of 11.5% year-over-year and 2.5% from the fourth quarter. The CET1 ratio increased to 13.56%.

Please turn to Page 7 for our operational highlights. Average loan balances were $6.6 billion, a decline of 1% from the fourth quarter. Most of that was in our mortgage portfolio. This is to be expected, considering the high level of refinancing activity in Puerto Rico and our own strategy of selling most of our own new production.

Average core deposits were $8.5 billion, an increase of 1% from the fourth quarter. This reflected continued high liquidity in the economy from federal stimulus, which is especially meaningful in Puerto Rico, as well as our first quarter PPP lending.

As José mentioned, loan generation totaled $528 million or $401 million excluding PPP originations. In addition to PPP production, loan generation was driven by strong year-over-year increases in mortgage, auto and commercial lending. Mortgage reflected new home sales and refinancing. Auto reflected strong sales of new and used cars. Most of our commercial lending was with small- and medium-sized businesses. Loan yield was 6.61%, an increase of 6 basis points from the fourth quarter, largely due to PPP loan forgiveness. As anticipated in our last call, a reduction in CD balances helped drive the decline in cost of funds.

Cost of core deposit was 48 basis points, a decline of 5 basis points from the fourth quarter. We expect cost of core deposits to continue to improve this year as more CD balances will be priced lower.

During the first quarter, we acquired $127 million of mortgage-backed securities for our held-to-maturity portfolio. The result was that NIM increased 2 basis points from the fourth quarter. We expect a stable NIM this year.

Please turn to Page 8. Overall, credit trended positive across all portfolios. Our credit metrics are also in line with general improving trends we have been seeing on a fairly consistent basis.

Total net charge-offs were $9.1 million or 55% of total loans. This is a decline compared to net charge-offs of $44.8 million or 2.67% in the fourth quarter, which included $31.2 million to charge-off to acquire Scotiabank loans that were substantially and previously reserved. With the exception of the fourth quarter of 2020, the charge-off rate has been improving steadily from the fourth quarter of 2019. I would like to highlight the overall net charge-off rate. This fell to 0.85% in the first quarter from 1.56% in the fourth quarter and 2.31% in the year ago quarter.

Our nonperforming loan rate and our early and total delinquency rates all fell as well from the fourth quarter. In particular, the early delinquency rate fell to 2.15% in the first quarter from 2.68% in the fourth quarter and 3.16% in the year ago quarter.

Provision declined from $14.2 million in the fourth quarter. It should be noted that the fourth quarter included $4.7 million to cover the unreserved amount of the Scotia loans that we charged off. First quarter provision included a reserve release of $3.7 million. This reflects changes in our probability weight to the results of simulation using Moody's S3 and baseline scenarios. The first quarter also included a provision of $3.5 million for a commercial loan in workout prior to the pandemic. Excluding the large [COVID-related provision] in the year ago, provision also has been declining steadily from the fourth quarter of 2019.

Now here is José.

Thank you, Maritza. Please turn to Page 9 for our conclusion. Our culture, history, team and our fácil, rápido, hecho approach are continuing to prove both successful and adaptable. As I said earlier, we're building good momentum in all our businesses. Our excess, low-cost, core deposits continue to provide us with significant dry powder. Our most recent capital actions solidify our record of deploying and returning capital to shareholders.

Our agenda remains the same. We will continue, as planned, to invest for the future in transforming our business model. Our goal is to further simplify operations to improve efficiency and enhance our ability to serve customers. Our business focus is to utilize our excess liquidity, increase loan generation and grow fee income.

We still face challenges from COVID, high unemployment levels, our government's ability to effectively deploy federal stimulus and reconstruction funds and high cost of electricity, but the future is looking brighter. The island is experiencing early signs of recovery with individual and businesses benefiting from COVID relief and stimulus, vaccination being extensively deployed, reconstruction projects getting underway and a consensual agreement in principle to restructure Puerto Rico's debt and an end to out-migration last year with signs of possible in-migration this year.

At OFG, we're more than ready to benefit from and play a major role in the recovery of Puerto Rico and the U.S. Virgin Islands. We want to help our customers rise up and fulfill their lives again.

With this, we end our formal presentation. Thank you all for listening. Operator, please start the Q&A.

(Operator Instructions) Our first question comes from Alex Twerdahl of Piper Sandler.

First off, José, I appreciate your comments on how opportunistic you are for, I guess, the most optimistic in 17 years. I was wondering if you can give us a little bit more details. And you kind of alluded to a few things such as potential in-migration to the island. But are you able to see anything else in the numbers for job creation or real estate valuations or actual concrete data on population inflows that you're able to share with us?

Yes. So Alex, from a macro perspective, Puerto Rico's economy is starting to show signs, right, in terms of the activity -- the economic activity that we're seeing. But particularly, we saw last year that there was a net 0 migration. So you compare that to 2019 and 2018, where we had 70-plus, 60-plus thousand people net migration. 2020 was a very positive year from that end. So we expect and we're starting to see the need for workers -- lower line workers and entry-level workers are needed in several industries, particularly agriculture, construction, medical services, even education. And we're starting to see that need. And as the economy opens, we see also the opportunity for some of those that left to come back.

When you look at history, when Puerto Rico's economy gets into economic downturns, there's migration to the U.S. And then when the economy starts to recover, you see some of that migration and most of it coming back. The challenge we've had in the past -- in recent past is that the economic challenges have lasted for almost 2 decades, so we haven't seen that migration returning, right?

So our expectation is that it won't come back in [droves] immediately. But as the economy in Puerto Rico starts to show signs of higher economic activity and we expect that to occur into the end of this year and the beginning of next year, we will see some of that -- some of those people that left to come back because opportunities will arise. And we're starting to see that. We're in the early innings.

So I'm trying to -- the same way I've been in the past, when you see the picture, I'm trying to be candid and relay that picture from the ground. And when things were not looking well, that's what I did with you and with everyone else that I spoke about. Well, this is the time where we're seeing the beginnings of a resurgence. And it's going to take a couple of more years to solidify that, but it's moving in the right direction, and it's moving actually at the right speed, too. So we're seeing that activity moving, and we're seeing it from our customers. We're seeing it right now on the consumer side. We're seeing it on the construction side. Some of those customers are very active. So our expectation is for the economy to grow from here.

That's helpful color. And just kind of the next step from that is I think you said maybe see it more in the numbers starting in the tail end of this year. I mean is that the same time frame that we should be expecting maybe to see an inflection point in loan balances, excluding PPP, as well as -- as we think about the reserve levels, everything you said certainly doesn't -- wouldn't make you think that a reserve of 3.2% is still appropriate. So tackling those 2 issues, how should we be thinking about those (inaudible)?

Yes. You threw me a couple of questions in that one question, but I'll try to answer them all. And if I miss any, please let me know, so I can answer it.

But regarding loan growth, I actually think that the liquidity levels that we have in Puerto Rico and, for sure, in the financial systems are very high, and they will continue to increase because I don't know if you realize that, but the first quarter numbers do not reflect any of the $1,200 stimulus checks because they are starting to send them to residents and deposit them in their accounts just a couple of weeks ago. So what you're seeing in deposit growth is primarily a reflection of the $600 stimulus checks, not the $1,200. So I suspect that we will have more liquidity in the system.

So from -- regarding loan growth, we will see consumers and businesses with higher levels of liquidity and paying down some of those credit balances that they have, credit cards, auto loans and also lines of credit for the business. So I would not expect loan growth by the end of the year. But my expectation is and our expectation is that come next year when that liquidity starts to subside and flow through as individuals and small businesses and medium-size companies start using those deposits, they'll come back. And we'll start to see loan growth into next year, meaning calendar 2022. That's our expectation from loan growth.

So you mentioned something regarding our allowance, if I'm not mistaken. So this is the way we see this. Look, we are still in the middle -- I would say in the later innings of the COVID pandemic. Puerto Rico has reopened but not fully. And I've always said that the COVID pandemic is dealt with -- like the scientists have said in the past, with the hammer and the dance. Well, we're right now in a little bit of a hammer here in Puerto Rico, where you're having the -- a little bit of a resurgence on COVID, and you're seeing the government talking about -- maybe not locking down but at least increasing the restrictions.

So having said that, it's not the end of the world. It's just like the latter efforts as we get vaccination rolling even faster. And I think we -- the data on Puerto Rico is pretty available, but vaccinations are well on its way. So I suspect that by the summer, we will have some more news regarding the COVID pandemic. And when you look at our coverage and loan reserves, we will evaluate the levels as the credit continues to improve and as the economy continues to open. So we don't want to be too premature given what we're seeing here in the island.

Did I miss any of your questions, Alex?

No. That's great color. And then just a final one for me, and then I'll get back in the queue is just with respect to capital. Obviously, some nice actions we saw this -- in the first quarter with the dividend and the preferreds, but maybe you can start by telling us what sort of you see is your governing capital ratio and what your target for that might be? And what sort of the priorities for getting to that target will be, sort of what the time frame for that will be?

Yes. So -- thanks for the question. I think let's first look -- have a look back here for a second, if you allow me, indulge for a second here. The preferreds that we are redeeming, they were -- 2 of them where reissued in 2004 when I became CEO. The other one was issued when we acquired BBVA in 2011 or '12.

And so when you look at our history, we're the only bank who's paid them fully. We're the only bank who's never stopped paying those dividends. And I said, allow me to indulge, because we, as a team, are extremely proud of that. We have managed 20 years or so, close to, very difficult, challenging economic environment. And our preferred shareholders who supported us and believed in us never lost a beat from us. We delivered 100%. So first, that -- I just wanted to get that out of the way.

Short term, though, I think we need to deal with the execution of that redemption, and we'll be finishing it off in this second quarter. And then when you look at what we have done with the common dividend, we increased it in January. Our Board of Directors has decided to look at the dividend twice a year. So we will start looking at the dividend at the beginning of the year and also at the middle of the year. So we also want to make sure that our common shareholders who have also been long-standing supporters of us also get on that. And long term, we want to see how the Puerto Rico economy reopens, how it grows and what organic opportunities we have to deploy that excess capital and excess liquidity.

So when you look at ourselves today and you see common equity Tier 1 capital ratio of 13.56% and you see our earnings potential, and you guys have your own models, really, we do have a very good opportunity here not only to return capital to shareholders but also try to manage [bank] with a CET1 ratio closer to 11% to 12%. And again, I'm assuming that -- again, the economic reopening plays out as we're expecting, and obviously, the economy starts growing in a consistent basis for the next several years. And that's our expectation. We're confident about it, but we'll have our challenges. We'll have our issues to tackle, as everyone else does. And we're looking forward for the first time in many years to be constructive and be able to generate good returns.

Okay. And then just as a follow-up to that, with respect to the dividend and reassessing it later this year, is there a target payout ratio? I mean you guys are now, I think, around 14%, which is -- it seems like it's maybe around half of what you might expect out of a bank of your size. How should we think about the target payout ratio? And then in that same meeting that you'll discuss the dividend, is that also when you'd consider authorizing another common share repurchase authorization?

Yes. So the payout ratio for the dividend, we -- that's why the Board decided to look at the dividend twice a year because we want to make sure that we get more into the more normal payout ratio, which is closer to 25%, our target. So we want to build towards that.

Regarding share repurchase, I think it's too early to talk about that at this point. I think we -- as I said earlier, we want to kind of get through the redemption, let's look at the dividend and let's see how the economy reopens and grows and what organic opportunities for us to deploy the capital. Really, we want to have capital available to lend to our commercial and individual -- commercial clients and individuals also. So we see those opportunities there, and we want to have that ability.

So we'll have more news in the several -- next several quarters. But at this point in time, I think we're focusing more on the redemption of the preferreds and looking at the dividend, and we'll give you more news shortly on the dividend.

(Operator Instructions) Our next question comes from Glen Manna of Keefe, Bruyette, & Woods.

I just wanted to follow up on conditions down on the island. I mean, there was a pretty significant announcement last week that seems to indicate projects on the island could be approved with a little faster rate than they've been approved over the last few years. And there's been a double whammy on the island with COVID, causes depletion in inventory. What are you hearing from your customers and how they're kind of gearing up for those 2 events, maybe an inventory restocking and projects coming a little bit faster? And have you seen anything in your pipeline yet or...

Yes. So thank you for your question, Glen. Let me just start by saying that since the beginning of the year, the Washington executive branch and Congress has been much more constructive with Puerto Rico. Let me also say that the current Governor of Puerto Rico has also worked, so far, very positively in regaining the confidence and the trust from the Congress and the executive too, so -- to each their own, right? So that helps. I think the current administration is also constructively working with the fiscal board and that has also helped on reaching some of those agreements, at least in principle.

What it looks like we're on our way in a very positive way to get bankruptcy behind us some time later this year or maybe next year. The big question remaining is still the Electric Power Authority, and I know for a fact that they're working on that. So that's one thing.

The other thing is, I -- when you ask me about what our customers and commercial clients are saying to us. They're mostly construction services. They are already engaged, and they have been engaged in -- somewhat last year on the rebuilding with roads and bridges and the infrastructure. I think that's starting to accelerate now, and we're seeing them -- we're seeing new projects coming in and being put to work. So those construction services companies are starting to increase their level of activity.

I also think that we're very shortly later in this year going to start seeing home construction from the CDBG funds that are being released. And I think, again, some of those construction services firms are seeing that opportunity, and they're ready, too.

I mentioned in my remarks, I think -- or somewhere -- or to Alex's question earlier that there is a need for workers. And I think it's transitory. Part of it has to do with the excess liquidity in the system, but that's not going to last forever. So I think there's an opportunity here to add more people to the workforce, particularly on the reconstruction side of the economy as construction is also, Glen, the -- how an economic revival starts is with construction. So we're in the early innings of that, and you can see it in the island.

From the consumer side, I'd like just to mention that we're seeing good auto sales. We're seeing good consumption and good sales on all the retail places. There are some challenges right now with inventory, so -- and I think that's not particular to Puerto Rico. I think it's particular to the world and -- because of the chips and some of the parts that are missing on auto and other products. But our clients are recognizing that, and they're starting to either build their inventories or starting to look at larger facilities for them to hold larger amounts of inventory as they are seeing demand growing, particularly on the retail side.

You've mentioned your digital numbers that they've kind of stuck after COVID. And that kind of fits with the theory that once someone goes digital, they tend not to go back. What do you think that means for the future of branching on the island and what the right size of a franchise footprint is?

The branches in the island and how -- the future of branches in the island is no different than the future of branches in the United States. At the end of the day, digital adoption is here to stay, and it's here to grow. And we've been on that side of the equation for the last 5 years, and we've been pushing it. And as I said in other calls in the past, the COVID pandemic has accelerated that very nicely. Our job is to continue to provide that infrastructure, continue to provide that -- those digital solutions to our customers and help them understand the benefits of it, make their lives simpler. And that's kind of what -- we're at it.

And what you're seeing is precisely that. You're starting to see more and more of our customers feeling more and more comfortable using digital and starting to recognize that the branches are the place to get value add. It's not to cash a check or to deposit a check or pay a loan. It's more to sit down with our expert bankers and have a conversation about what their goals and their aspirations are and decide what is the best way for them to manage their finances. And we're moving in that direction, and I think that's the future of banking in Puerto Rico. And certainly, it's been in the United States for a while now.

But here in Puerto Rico as people recognize the benefits of digital, the time they save and the benefits and value-add that a good conversation can bring to help achieve financial success for our customers, I think that's what differentiates us, too. And we're really excited to be able to deploy them.

Now as to your question on what's the right size of branches, who knows. But we are being very methodical and very disciplined on how to look at it and really, really proud of the work we've done on the retail side and the retail channel, and our teams have done an excellent job. So in the next several years, you'll see how do we continue to push the envelope with digital solutions and value-add to our customers.

Okay. And then the last one for me and with the understanding that I heard Maritza -- what Maritza said, and I've heard what you said in the past that your practice is to sell a lot of your mortgage loan production. It is a significant part of your originations. And you kind of alluded to in your comments that construction could include some home construction and home renovation. Is there any point that you change your mind on that and maybe start to portfolio some of that residential mortgage production?

Yes. There's going to be a point at some point where we start to see that it makes kind of sense for us in terms of duration and yield, right? So at the end of the day, most of our originations are 30-year fixed-rate mortgages. And we feel that at this point, we rather not kind of speed up the excess liquidity utilization and manage it from the cost of funds perspective that -- as we've talked in the past.

But at this point, I think interest rates need to go a bit higher for us to feel more comfortable. You saw that we bought some mortgage-backed securities in the quarter. That was when interest rates kind of ticked up to a level where we said, "Okay. We got to put something on held-to-maturity." But that's kind of how we look at liquidity levels and how do we mortgage banking activities for us, nice fees that we're generating. So at the end of the day, I think interest rates need to tick higher for us to decide to keep it on the portfolio.

Okay. And I said that I'm going to ask you one more then because you kind of -- you led into it there. Maritza noted that there was about $126 million in mortgage-backed securities put on the balance sheet. Is this the beginning of something, the full execution of something? Or where do you expect you'd go with that? Because with more stimulus coming down to the island, there's going to be more deposits and you've been getting your share, so...

Yes. No. This is not the beginning of anything in particular, Glen. I think this is just us managing our asset and liability and making sure that we be opportunistic on some increases in interest rates. We do think that the economy in the United States is going to grow significantly this year and the next, and interest rates are most likely going to move higher. So we're in no hurry to get ourselves in a long situation of the investment portfolio at this level. So this is just more an asset and liability kind of decision.

(Operator Instructions) Our next question comes from Steven Martin of Slater.

I'm a recent shareholder and have been building my position over the last 6 months, so it was well-timed, I think. Can you -- most of my questions have been asked and answered. But can you talk about the prospect of statehood and its potential benefits? Can you talk about what may be in the infrastructure -- Biden's infrastructure plan to benefit Puerto Rico? And can you talk about the -- how you see the hospitality industry in Puerto Rico recovering from COVID and the hurricane 1.5 years ago?

Yes. So welcome to our call, and thank you for being a shareholder. Let me start with the last one, hospitality. Pandemic hit hospitality, as you will imagine, in the -- it happened in here in Puerto Rico also. We have taken care of most of our hospitality commercial clients. We gave them the deferrals, and most of them are out of the deferrals. We really don't have much deferral left.

Right now, what we're seeing in terms of hotel bookings and the level of percentage of occupancy, we're seeing it increasing above like, let's say, 60% or 65% some specific weekends and some holidays. But in general, it's still well below the levels that they were before the pandemic. They're more in the 30% and 40% levels. It depends on which hotels, right? The higher end, the ones that are in Dorado and Bahia Beach -- the Ritz-Carlton Reserve in Dorado as well as the Bahia Beach in Loíza, those are higher end. And from the information that we have, they're fully booked. The other ones that are more casual, less expensive, they're still having lower levels of occupancy.

Into the future, I think, given what's happened with COVID, I think hospitality in Puerto Rico as an island per se and as a Caribbean island will benefit and will recover nicely and probably will benefit even more from the aftermath of COVID given the weather that we have here. So that's kind of our take on the hospitality.

In terms of the second question that you asked in terms of the Biden infrastructure plan, I don't have any specific details. Things are really very fluid over there. And as you can imagine, we don't have that much granularity on what's going on over there. But I do tell -- can tell you that the infrastructure plan is going to include -- we expect that it will include Puerto Rico as one of the beneficiaries. How much we will benefit? It's hard to tell. But there is going to be some infrastructure funds coming to Puerto Rico from the -- whatever they approve in Washington, which is, as I said, and you know more than I do, it's very fluid right now. So we expect that.

And then your first question about statehood is the $64,000 question that has been asked for the last -- since, let's say, 80 years. And really, at the end of the day, that is -- the answer to that question is in Congress. Puerto Rico is still relatively divided through the middle in terms of remaining as we are or becoming a state. So it's going to take, I think, a lot of effort for Congress to take a look at Puerto Rico from -- as a statehood per se anytime soon. But -- and again, politics come in play too, and Democrats and Republicans also need to come to terms with that issue.

So I wish I can give you a more specific answer to that question on statehood. But I would say that in the short term, and when I say short term, I would say, in the next 5 years, It's very hard for me to visualize Puerto Rico becoming a state. But the work is in the hands of Congress. And Puerto Rico and the political community in Puerto Rico need to also come to some level of understanding on what's the path for Puerto Rico, and we're still sending very conflicting messages to Congress and Washington in general.

(Operator Instructions) Our next question comes from Alex Twerdahl of Piper Sandler.

I just had a couple of technical follow-up questions, if I could. First off, Maritza, I think you said that the NIM -- you expect the NIM to be stable for 2020 -- 2021, rather. Can you just walk through kind of what the moving parts that get you -- or like what the assumptions are that get you to that NIM stability this year in terms of, I think, the timing of PPP forgiveness, cost of deposits, cost of funds, cash, things like that?

Yes. I think, Alex, that you already identified key items that we're looking at in the next couple of quarters. We still see additional cash coming in, as José mentioned, regarding the most recent stimulus that was approved. So we will see more level of cash, so that would put pressure on our NIM. And then the lower cost of fund will compensate for that pressure in the cash balances. So that's what we are -- our [basis scenario] is to have a stable NIM for the rest of the year.

Got it. And then one of the things that I've asked you about in the past and just want to drill in -- on a bit is just the amount of cash. You had average balances of $2.2 billion during the quarter. It went up at the end of the quarter, should continue to go up based on your commentary, earning just kind of 10 or 11 basis points. And then I look at -- on the deposit side. And one thing that kind of jumped out at me is that the cost of deposits on NOW accounts and savings accounts actually increased a little bit in the first quarter, which I was hoping you can touch on maybe what caused that. And then just -- is there not just a huge opportunity here to really lower cost of deposits in a more aggressive way?

Yes. So thanks for your question, Alex. So we called it last quarter, and we said we finished the integration. We finished the conversion with Scotiabank. We -- as part of the acquisition, we had some fees that are coming -- maturing this year. They're starting to mature. Some of those balances kind of moved to the savings and checking. So first, we -- what we decided was to take care of our customers and not tinker with additional stress above and beyond COVID, integration, conversion, et cetera, from our Scotiabank clients. And we didn't want to move those deposit costs back then.

Now we're starting to see the CDs getting off the -- getting -- maturing. And at the same time, some of them are moving mostly higher balances. CDs are moving to the savings. And as you alluded to, we have a slight pickup in the cost of those deposits. And that's dry powder that we have, and we are actively working towards, and this is kind of our strategy now. It's kind of take advantage of that. And that's kind of some of the benefit that we expect to generate in the -- probably by the end of the year where we start to look at those accounts and reprice them.

So that's kind of how we see this. It's been a very -- 2020 was a really challenging year to do a conversion and integration on acquisition. And we just want to make sure that given all the noise that, that creates, we extracted all the value from the Scotia acquisition, which particularly is driven by our customers. And that's kind of how we think about it. But you're right. We do have an opportunity there, and we are definitely looking at it.

And are you able to share with us in terms of the CDs that you expect to reprice or potentially migrate over to savings in the second, third and fourth quarter? Is there a dollar amount that you can give us?

I don't have it with me right now. But if you want, we can provide that to you at a later time, Alex. I don't have that specific information.

Okay. And then another comment in the prepared remarks is that you're targeting an efficiency ratio in the mid-50% range. I was wondering if you have sort of a time frame on achieving that and if that can come just from the balance sheet and sort of what you're seeing in the current rate environment or if you really need higher rates to get that efficiency ratio lower.

Yes. I think probably right. We probably need a little bit of a break on the higher interest rates, so that we can comfortably achieve the goal. But we're also optimistic about 2022 and our level of fee and net interest income generation, so -- regardless of interest rates. So I think it's going to take us a couple of, I would say, a year or so to -- for us to start feeling more comfortable on mid-50% range on efficiency.

And again, there are many moving parts, but -- and one of them is a cost structure that we continue to look into, and we'll update you throughout the next several quarters on that end, on how we do with the cost side because we do want to continue to invest for our platforms. As -- and I think Glen mentioned about the digital adoption and all that. It doesn't happen out of thin air. We need to invest in technology and our infrastructure, and there's some timing issues.

So we need to make sure that we buy the time to invest on our vision and our strategy going forward. And that's kind of what we're doing. We're here for the long haul, and we are truly believers on what we're doing, how we're doing it and how we're going to be successful about it. So that's what our focus is. So give us a little bit of a breathing room on the efficiency ratio for the next 1 year, 1.5 years.

Got it. And then you guys just popped above the $10 billion threshold again this quarter. Is that something, at this point, that you're committed to being higher than $10 billion? Or is it still -- is there still some remixing and potentially delaying Durbin even forward that's a consideration?

Yes. I don't think there's any way back. I think we crossed $10 billion. We -- the rules are the rules, so we need to kind of do it. And we're going to have to make the investments and deal with the reality. So that's kind of how we see it. We were very effective of preventing that from happening at the end of last year. But with what I have said here today and the expectations that we have, I see it hard to prevent us from consistently being above the $10 billion mark.

Understood. And then just a final question for me. Another thing that jumped out is just the write-up in the value of foreclosed properties that you saw in the expense line. I know it's not the first quarter that we've seen that, but it is the biggest sort of gain that you've seen in the last couple of quarters. Is that being driven from commercial properties, from mortgage properties? And sort of what's really leading to those gains?

Yes. It's residential mortgage. And again, it's what we're seeing on the ground. We're no longer seeing high-end properties with -- increasing in prices. We're starting to see across-the-board in the different sizes home values, not only -- no longer stabilizing. They're starting to go up, and we're starting to see professional -- young professionals moving from renting to buying and trying to buy their homes. So again, those are the data points that are not shown in any statistics because the statistics are backward-looking. They look through the rearview mirror.

But as I sit here today, we're seeing a lot of home remodelings, and we're seeing a lot of $300,000 to $500,000 homes being bought. We're also seeing $75,000 to [$200,000] lower kind of income type of homes also in place. And the prices are -- I'm not saying they're skyrocketing like in some areas in the States but are picking up, and those are small green shoots that confirm what we've been saying in the call today.

(Operator Instructions) Our next question comes from Jon Krautmann of Rubric.

José, can you talk to us about what you're seeing on Moody's economic forecast real time? And does that appropriately capture the informal economy, workers getting paid in cash, et cetera? And then how much does that Moody's economic forecast (inaudible) as an input to your model, thinking about (inaudible)?

So I think I was able to understand your question. You were breaking up in the middle. But regarding the Moody's model and the probabilities that we assigned to, I think it's very hard for the Moody's to model -- to take into consideration the underground economy or the unofficial economy, however you want to call it. And I think it just reflects -- it's a model. And models are made of variables, and some of those variables are accurate and some are not.

So again, I don't have much insight to provide to you above and beyond the pointed question, right, about the informal economy. I don't think it's included in there. And it's going to continue to evolve, right? The model is going to continue to evolve as things play out in the economy in Puerto Rico. So I -- if you had another question regarding this issue, please feel free to repeat because it was hard to understand the full question.

That's fine. Just a second question. What is the latest that you're hearing on increased activity out of pharmaceutical companies, mainland pharmaceutical companies increasing their activity levels or staffing on the island? And what are you hearing coming out of D.C., out of the legislature? And any efforts there to aid Puerto Rico in attracting additional pharmaceutical activity on the island?

Yes. Last information we've got is 2 smaller pharmaceuticals are moving production to Puerto Rico. They're establishing some of their production in Puerto Rico. That was, I think, announced earlier this year or maybe late last year. That's going to happen some time during the year.

I think -- I don't know if people realize, but 25% of the GDP of Puerto Rico is pharmaceutical. It's either medical devices and/or pharmaceuticals, and we have still 90% to 95% of the global production of all kinds of medications and medical devices from Tylenol, Advil, to all the usual suspects in medications. So that is still in play.

And what we're seeing here now is with COVID, the opportunity for that infrastructure to be optimized even further. Have we seen any changes there? Not yet. And I think it's going to take a couple more innings for that to play out because there's politics involved and -- in Washington and in Puerto Rico also regarding that issue. And it's an opportunity for us to continue to look at the infrastructure of the island to make it more competitive and more efficient for those players to come to Puerto Rico.

So we'll be competing with some of the states in the United States. We have an advantage with the infrastructure that has already been built from those companies, but we need to do a better job as an island to provide efficiency in energy and on services and all that stuff. But to be honest, I think it's too early to call it -- pharmaceuticals increasing their production here in Puerto Rico. It's something that's still in the works.

And we have now reached the top of the hour. Does anyone have any final questions?

So if there are no other questions, I'll -- I thank the operator for coordinating this call, and I will like to thank all our team members who have helped our customers through the pandemic. They've done an outstanding job. And also, thanks to all our stakeholders listening today. Looking forward to our next call. Have a great day.

And thank you. This concludes today's call. You may now disconnect.