Timur Brazilia

Timur Brazilia (Wells Fargo) asked for details on a large commercial and industrial (CNI) loan, including specific reserves, resolution timing, and why it moved to non-accrual status. He also questioned if it was one of the larger credits, the overall health of the Puerto Rico economy from a business and consumer standpoint, and the NII trajectory given margin expansion and public deposit balance expectations.

Answer

Lidio Soriano, EVP and CRO, explained that the CNI loan was current on payments but placed on non-accrual due to a deteriorating situation and management's intent to right-size its capital structure, with resolution likely next year. Jorge García, EVP and CFO, indicated the loan was the primary driver of the quarter's provision variance. Javier Ferrer, President and CEO, affirmed the strong health of the Puerto Rico economy, noting the credit event was isolated and not indicative of broader concerns. Jorge García reiterated expectations for continued NII growth and margin expansion, attributing the NII guidance range to public deposit balance perspectives and the lag in public deposit repricing tied to three-month US Treasury notes.

Timur Brazilia inquired about the specific reserves set aside for a large commercial and industrial (CNI) loan, its resolution timeline, and why it moved directly to non-performer status. He also asked about the size of this credit relative to the loan book, the overall health of the Puerto Rico economy from both business and consumer standpoints, and any signs of degradation. Finally, he sought clarification on the net interest income (NII) trajectory, margin expansion, and the impact of deposit pricing lags on NII growth.

Answer

Lidio Soriano, EVP and CRO, clarified that the CNI loan is current on payments but was placed on non-accrual due to a deteriorating situation and management's intent to right-size its capital structure, with resolution likely next year. Jorge García, EVP and CFO, confirmed the provision variance was related to these loans. Javier Ferrer, President and CEO, emphasized that the Puerto Rico economy shows no signs of degradation, with strong performance and isolated credit events. Jorge García reiterated expectations for NII growth and margin expansion due to fixed asset repricing and loan growth, noting that public deposit costs are linked to short-term market rates with a quarterly lag.

Asked about the surprising nature of the Q2 deposit outflows, how the bank plans to fund its expected loan growth in the second half of the year, and the expected geographic and segmental composition of that loan growth.

Answer

The deposit decline was due to a concentration of non-recurring business activities and tax payments in a few large commercial accounts. Second-half loan growth will be funded by expected deposit stability and over $1 billion in cash flows from the investment portfolio. The loan growth is expected to be a combination of contributions from both Florida and the Puerto Rico commercial sector, with stability in consumer and some growth in residential mortgages.