OFG Bancorp - Q1 2024

Transcript

Speaker 6

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 Arizmendi, 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. 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 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. Fernández. Please go ahead.

Speaker 3

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 continue to do well in a strong economy. And our balance... 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. 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. We increased the quarterly cash dividend 14% to $0.25 per share. 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 wasn't an exception. The 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 the call to Maritza to go over the financials in more detail.

Speaker 5

Thank you, José. 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 point higher yield, and loans had a 2% higher average balance and 2 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.

This reflected the full effect of the $1.2 billion in government funds deposited this past December. Borrowings and broker deposits declined 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 valuations. 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 sale of non-performing Puerto Rico, 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 retirement, and facilities rightsizing. We continue to expect to average about $90-$92 million of non-interest expenses per quarter over the rest of 2024. The first quarter efficiency ratio was 52.49%, a 10 basis point improvement from the fourth quarter. The efficiency ratio should continue in the low- to mid-50% range this year. Excuse me. Other performance metrics remain high. Return on average assets was 1.77%. Return on average tangible common equity was 70.92%, and tangible book value per share was $23.50, down $0.42 from the first quarter, mainly due to the increase in 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 level. March 31st 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 sales 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 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.

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 deposits. Non-government deposits cost was 82 basis points. As of the first quarter, our cumulative deposit deposits, and 23.24% 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 31 balance was $203 million. The rate paid on wholesale funding decreased 41 basis points to 4.80% in the first quarter.

Looking at non-interest expenses, they total $91 million. Excuse me. Net interest margin was 5.30%, as anticipated. ... With the prospect of higher for longer, we now anticipate three rate cuts versus five cuts. As a result, for this year, we are guiding a net interest margin range of 5.45%-5.55%. Please turn to page 7 to review our credit quality and capital strength. Net charge-off totaled $20 million, up $4 million from the fourth quarter. The net charge-off rate was 105 basis points, up 17 basis points. 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 factor, including net charge-offs. The first quarter 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. With COVID cash stimulus fading away, we expected, we expect increases, increased NC, net charge-offs in auto and consumer, but lower than anticipated.

However, net charge-offs and delinquencies performed fairly, fairly well in the first quarter due to a strong employment and Puerto Rico's economy, as well as the federal child tax credit. Looking at some of our other capital metrics, total stockholders' equity remained level at $1.2 billion, and tangible common equity ratio increased to 10 point-. Our first quarter tax rate of 26.8% decreased from 31.9% in the fourth quarter. The first quarter reflected two factors. One was an expected full-year effective tax rate of 29% in 2024, due to higher forecasted business activity 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 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, reflecting seasonal line of credit paydowns. While loans remained level 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 continues to look. Expenses were in line with our expected range, and our expected tax rate should be lower. Now, here’s José.

Speaker 3

Thank you, Maritza. Please turn to page eight. 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, 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 sixtieth anniversary in business and our thirtieth on the New York Stock Exchange. With this, we end our formal presentation. Operator, let's start the Q&A.

Speaker 6

Thank you. If you have a question at this time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press star two. We'll go first to Brett Rabotin with Hovde Group.

Speaker 1

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 5.35-5.55. 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 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 you-- it sounds like, Maritza, you think the margin, despite the funding cost increase, is, is bottomed out here. Is that, is that a fair assessment?

Speaker 3

So, Brett, just to correct, the guidance that you pointed out is not what Maritza said. She said 545-

Speaker 1

Okay.

Speaker 3

- to 555.

Speaker 1

Okay.

Speaker 3

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-

Speaker 1

Okay.

Speaker 3

- got that, intermittent.

Speaker 1

Okay. Well, that again would kind of suggest that-

Speaker 3

Yeah-

Speaker 1

Go ahead. I'm sorry.

Speaker 3

I just, I just changed the premise of your question, so I don't know if you want to ask the question again.

Speaker 1

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 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-

Speaker 3

Yeah.

Speaker 1

Deposit betas to do from here?

Speaker 3

Yeah. 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 5 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 3 cuts the second half of the year. So since we're asset sensitive, and we have been for a while, we're gonna be benefiting from that. That's number 1. And then number 2, 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, not in, 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, on how we're guiding a range on the mar-- on the margin. Is that,

Speaker 1

Yeah, that's-

Speaker 3

Am I answering your question?

Speaker 1

Yeah.

Speaker 3

Is that giving you enough color?

Speaker 1

Yeah, that's helpful. 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 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.

Speaker 3

Yeah. So on the commercial, U.S. commercial loan, remember we have a seasoned 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, 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 César give you a little bit more specifics on the auto portfolio, because we have mentioned it somewhat last quarter, but we have made some changes throughout the last couple of years on the credit profile.

Speaker 2

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 first quarter of the year. So you'll see those benefits in the retail portfolios. But in auto also, we strategically improved the credit profile of our portfolio back in 2022, and we shifted this portfolio from a 64%-

Speaker 3

... 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 grades that they're sticking out to right now.

Speaker 1

Okay, that's helpful. And then if I could sneak in one last one. You know, José, 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? You know, obviously, the economy is a lot stronger than it's ever been, or has been in a long time.

Speaker 3

Yeah. Yeah. Yeah, I mean, 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, and at a higher pace than right after the hurricanes and the earthquakes, and certainly the pandemic kind of accelerated it 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 people investments in their own businesses, and you're seeing a US capital coming to Puerto Rico and, and, and, and expanding businesses and buying businesses.

So that has a lot to do with that bankruptcy getting out of bankruptcy. I think going forward, there's one more bankruptcy that needs to be eliminated, and this is the Puerto Rico Electric Power Authority. Hopefully, 2024 will be the year where it's out of bankruptcy, and that there are $11 billion of 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 tailwind 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 of 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. 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, Brad.

Speaker 1

Okay, great. Appreciate all the color.

Speaker 3

Yep, thank you.

Speaker 6

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

Speaker 0

Hey, good morning, all.

Speaker 3

Hi, Alex.

Speaker 0

I'm well, thanks. I wanted to start on just kind of sort of longer term strategy and sort of growth outlook, you know. And when I look at your capital levels, you know, 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, you're, there's, 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 you're thinking about, you know, deploying the excesses in the, in the next couple of quarters or years?

Speaker 3

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, with your premise in terms of our capital generation and, and we expect to deploy it accordingly.

Speaker 0

Okay. I mean, I guess, you know, as you sort of look over the next couple of years, you know, and, you know, balancing the outlook that you see in Puerto Rico, which, you know, continues to be favorable, do you see the chances of expanding a little bit more or 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, you know-

Speaker 3

Sure.

Speaker 0

Would those be sufficient to sort of absorb all that excess?

Speaker 3

Yeah, good point. We, 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 good, profitable business for us, so we see opportunities. We also recognize that Puerto Rico is decoupling. Our economy is decoupling steadily from the U.S., although the U.S. is being more resilient these days, and it's showing some growth, and that is also good for Puerto Rico, by the way. But, so we expect Puerto Rico's economy to continue trending upwards, and we see somewhat a little bit choppiness in the U.S. economy, so we'll be more cautious there.

In general, we will be investing also and deploying some capital for the U.S. business.

Speaker 0

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, you know, 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 in 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 all seem to suggest that, you know, credit on the consumer side should be significantly better than it even has been in the last couple of years.

Speaker 3

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 secured 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 mass transportation in the island, 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 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. But that's kind of my 30,000 feet kind of view. I'll let Cesar give you a little bit more details on the consumer side, because he already gave on the auto side.

Speaker 2

Yeah, the consumer, you know, portfolio was before— So that with— That, coupled with the macroeconomic strong outlook that we have, we, we, as also 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 auto, as, as we mentioned, we did shifted that portfolio, you know, as, as I mentioned before, from the 64% prime to 82% prime. So the outlook for auto is, is gonna be better than pre-pandemic levels because of that shift. So-

Speaker 3

Yeah. And again, you're gonna see right now what we have, 4.4 in terms of net charges for consumer. 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 2

High-yielding portfolios, too.

Speaker 3

Yeah, and these are both very high-yielding portfolios, so we're very happy with the performance and the profitability of both portfolios.

Speaker 0

Thank you. 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 the pandemic to today, I think you said 64%-82%, and I wasn't sure-

Speaker 3

Yes

Speaker 0

... if that was just for the auto or if that was for consumer as well?

Speaker 3

No, this is auto.

Speaker 2

Auto portfolio. The auto portfolio shifted from 64%, and now it's 82% prime. The consumer portfolio has always been an 80, 80, 89% prime portfolio. So it-- That's why I'm mentioning that the consumer portfolio has and still is a prime, super prime portfolio.

Speaker 0

Okay, thank you. And then just one final question-

Speaker 3

Sure

Speaker 0

... 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 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 3.5% yields up to 7.5% or 8%, you know, yields, as they kind of roll over in the next couple of years. You know, if we look back to 2020 and 2021, were there loans, commercial real estate loans, being put on with a, with yields as low as three- with a three handle, or, or were they a little bit structurally higher in terms of the yield back then?

Speaker 3

I'll take the last part first. We did not dabble 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% 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.

Speaker 0

Thank you very much for taking all my questions.

Speaker 3

Yeah, sorry, sorry for the intermittency. I know Brett also brought it up.

Speaker 0

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

Speaker 6

Again, if you would like to ask a question, please press the star and the number one on your telephone keypad. We'll go next to Kelly Motta with KBW.

Speaker 4

Hey, good morning. Thanks for the question.

Speaker 3

Hi, Kelly.

Speaker 4

The tax rate was a lot lower 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 you know, prior year is still a good run rate, or if given a shift in mix, it might be a bit lower?

Speaker 3

Well, hi, Kelly. Thanks for the question. 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%.

Speaker 4

All right. Appreciate the color. And I believe in your prepared remarks, you discussed you expect kind of loan growth continuing from here throughout the year. Previously, you had said about 3%-4% growth, assuming, you know, the economy grows 2%-2.5%. Just wondering, you know, where you see the drivers of growth ahead, and if there's any kind of shift in the outlook?

Speaker 3

Yeah.

Speaker 4

as to what, what growth you can sustain? Yeah.

Speaker 3

Yeah. No, no shift in the outlook. We're seeing 3%-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 on the consumer and auto. We're expecting commercial to have a higher contribution to the origination than in the first quarter.

Speaker 4

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, you know, managing what could get us to the higher or lower end of that range? Thanks.

Speaker 3

Yeah. Well, I think I understand, you know, you very well, your question. At the end, we're having expected high better NIM. But when we think about expenses, we think also about timing and when the investment are being deployed. And I think we will continue to be in that range, and probably most of the time, we'll be in the lower of that range. But so in other instances, or a high end of that range. So I think we continue to see the expenses, as I mentioned, $90-$92 million.

We need to continue investing in our strategy and I think that the range and I don't see any way of us being lower than that.

Speaker 4

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. Just wondering, you know, 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 cut impacts margin, at least on, on the near term. Do you have any kind of, heuristic on that?

Speaker 3

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 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 that we share that with the market.

Speaker 4

Fair enough. Thank you so much. I'll step back.

Speaker 3

Yeah. Thank you.

Speaker 6

Again, if you would like to ask a question, please press star one on your telephone keypad. Again, that is star one if you would like to ask a question. We'll return to Alex Twerdahl with Piper Sandler.

Speaker 0

Hey, just one follow-up on the NIM. Just when you think about that, the large government deposit that I think you mentioned is gonna flow out, or a good chunk of it is gonna 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?

Speaker 3

Yeah. I'll let Maritza give you the details.

Speaker 4

Yeah. When, when we think about this, you know, we, as, as we experienced this, this quarter, we did have some, we did have increase in the, in the deposit side. We're expecting deposit to, to grow. That would be part of that, replacing that funding. We will use wholesale funding. And, 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, in May, and about $150 million already mature, now in April. So, so we do have a, a plenty of resources to, to replenish that exit, and there could be some effectiveness in the cost of fund through that process.

Speaker 3

Yeah. And we're not taking that into consideration completely in our margin guidance.

Speaker 0

Okay, perfect. Thanks for taking my call.

Speaker 3

Yep, thank you.

Speaker 6

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

Speaker 3

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

Speaker 6

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