Popular, Inc. Q3 FY2021 Earnings Call

Hello, everyone, and welcome to the Popular, Inc. Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you today. I will now hand the call over to your host, Paul Cardillo, Investor Relations Officer at Popular. Over to you, Paul.

Good morning, and thank you for joining us and also for your patience as we dealt with some connectivity issues. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Good morning and thank you for joining the call. The third quarter was another strong one in which we achieved net income of $248 million. Our results reflect the continued strength in economic activity, driven by the unprecedented levels of federal stimulus. They also reflect our diversified sources of revenue and prudent risk management. Please turn to Slide 3. Our quarterly net income of $248 million was $30 million higher than the second quarter and $80 million higher than the same quarter of 2020. The sequential variance was driven by a higher benefit in the provision for credit losses, partially offset by higher expenses. Net interest income was in line with the second quarter. Our non-interest income increased primarily due to the sale of 2 corporate office buildings. Our higher volume of credit and debit card transactions in the quarter also contributed to the increase. Credit quality trends continue to be favorable in the period with lower NPLs and low levels of net charge-offs. During the quarter, we continued to return capital to our shareholders. On September 9, we completed the previously announced $350 million accelerated share repurchase program. And on September 30, we announced the redemption of our 6.7% trust preferred securities of which $187 million is currently outstanding. These actions evidence the strength of our capital position, which allows us to return capital to our shareholders while we continue to invest in our franchise. Please turn to Slide 4. On October 15, we acquired K2 Capital Group, a national healthcare equipment leasing business with $119 million in assets. This transaction will complement and expand our existing niche health care lending business. Our customer base in Puerto Rico continues to grow increasing by 12,000 in the third quarter and by nearly 42,000 year-to-date to reach more than 1.9 million unique customers. Adoption of digital channels among our retail customers continues to be strong. Active users on our Mi Banco platform exceeded 1.1 million and have grown by 18% since March 2020. We captured 66% of our deposits in the third quarter through digital channels. As expected, these trends have adjusted slightly lower but remain significantly higher than pre-pandemic levels. Within Popular's clientele, the dollar value of credit and debit card sales have continued to trend higher, increasing by 5% compared to the same quarter a year ago. Sales are also well above pre-pandemic levels, 34% higher than in the third quarter of 2019. Auto loan and lease originations at BPPR have remained extremely strong. While they had decreased slightly compared to the third quarter in 2020, which reflected the reopening of the economy, they were 26% higher versus the third quarter in 2019. We have continued to see strength in the housing market. While the dollar value of mortgage originations at BPPR decreased by 3% compared to the third quarter of 2020, they increased by 51% compared to the third quarter of 2019. Please turn to Slide 5 for an update on the current macro environment in Puerto Rico. In the third quarter, business trends and customer activity remained robust. We continue to see strong momentum in recent quarters, as most of the COVID-related restrictions that were in place have either been relaxed or eliminated. Puerto Rico has continued to make solid progress on the vaccination front, and we are proud to say that we have the highest vaccination rate of any U.S. state or territory. According to the CDC website, 81% of the population over 12 years old have been fully vaccinated and 90% have received at least one dose of the vaccine. New auto sales continue to reflect strong consumer demand and are on a record pace with 31,000 units sold in the third quarter. Year-to-date, auto sales were up 66% compared to the first 9 months of 2020 and are up 32% from the same period in 2019. Cement sales have also remained strong. Year-to-date sales through August were higher than the level of sales seen through the same period in 2018 and 2019 when the island was rebuilding following the 2017 hurricanes. Activity levels in the tourism and hospitality sector have continued to be a source of strength for the local economy. With much of world travel still somewhat limited, Puerto Rico continues to be a preferred destination for mainland residents. Hotel demand remained strong during the quarter. In August, occupancy rates in Puerto Rico have exceeded the comparable period in 2019 for the fourth consecutive month. Airport traffic has continued to improve. Year-to-date passenger traffic has more than doubled compared to last year and has now exceeded comparable 2019 levels. In September, traffic was up 130% compared to the same month a year ago and was 20% higher than in September of 2019. This was the sixth consecutive month that passenger traffic has surpassed the comparable figures in 2019. Cruise ship arrivals recommenced in August. According to the Puerto Rico tourism company, more than 300 trips are anticipated for the remainder of the 2021-2022 season. Employment levels have improved, but are still somewhat below pre-pandemic levels. Total nonfarm employment has increased by 3% since December 2020 and by 1% since August 2020. We are pleased with the results for the third quarter and continue to be optimistic about the prospects of the future. However, we will remain attentive to how the evolving health situation may impact the economy. I will now turn the call over to Carlos for more detail on our financial results.

Thank you, Ignacio. Good morning. Please turn to Slide 6. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the second quarter. Net interest income for the third quarter was $489 million, an increase of $2 million from Q2. Non-interest income increased by $15 million to $169 million in Q3. Around $12 million of the increase came from extraordinary items including a $7 million gain associated with the sale and leaseback of 2 corporate buildings plus $3 million higher net earnings from investments held under the equity method, along with other smaller positive variances. The provision for the second quarter was a benefit of $61 million. This was $44 million higher than the benefit recorded in the second quarter. Lidio will expand on credit-related matters. Total operating expenses were $388 million in the quarter, an increase of $20 million from Q2. This increase was primarily due to higher employee compensation cost by $3 million, mostly driven by annual merit increases; higher professional fees by $4 million; a lower OREO gain by $3 million; plus smaller increases in other categories like FDIC deposit costs and business promotion. Higher credit and debit card transactions also drove a $2 million increase in related expenses. For the fourth quarter, we expect expenses to be between $405 million and $410 million. This is consistent with our guidance for average quarterly expenses in 2021 to be between $380 million and $385 million. Obviously, if possible, we will try to improve on this number. Our effective tax rate for the quarter was 25%, the same as last quarter. In Q4, we expect the effective tax rate to be between 25% and 28%. Please turn to Slide 7. NII on a taxable equivalent basis was $536 million, $5 million lower than in the second quarter. The primary driver for this decrease was lower investment portfolio interest income by $7.7 million due to lower yields, which was partially offset by $1.5 million higher interest income from loans and lower deposit costs by $1.1 million. A lower mix of exempt income also contributed to this outcome. Deposits grew by $1.4 billion in the quarter. Most of the growth was at BPPR with a $700 million increase in Puerto Rico government deposits and a $500 million increase in our retail and commercial deposits. Net interest margin decreased by 14 basis points to 2.77% in Q3. On a taxable equivalent basis NIM was 3.04%, a decrease of 18 basis points. The lower margin was due to higher balances of low-yielding money market and investment securities. Total loan yield increased by 2 basis points in Q3, a result of higher PPP-related income of $22 million compared to $14 million in the second quarter. PPP loans yielded approximately 10.1% compared to 4.45% last quarter, due to higher accelerated recognition of fee income on forgiveness. Year-to-date, we have recognized $59 million in income from this program. The remaining unamortized portion of fees for the PPP portfolio is approximately $40 million, of which we expect to recognize half in Q4 and the remainder in the first half of 2022. As of the end of the third quarter, Puerto Rico public deposits were roughly $20 billion, an increase of $700 million from last quarter. We continue to expect public deposit balances to come down over time driven by the restructuring of public sector debt and the return to current debt service. Our ending loan balances decreased by $201 million in the quarter. This decline was due to a $354 million decrease in PPP loans and a $140 million runoff in our residential mortgage portfolio. Excluding the impact of PPP loan balances grew by $153 million, driven by higher commercial auto loan and lease balances in Puerto Rico. These increases were offset in part by lower commercial bases in the U.S., driven by high prepayments. We do not expect overall loan growth to materialize until the middle of next year when demand resulting from expected economic growth should outpace the forgiveness of PPP loans. Please turn to Slide 8. Our common equity Tier 1 ratio in Q3 was 17.4%, an increase of 80 basis points from Q2, primarily due to net income. On September 9, the corporation completed the previously announced ASR, and in total, we repurchased approximately 4.6 million shares at an average purchase price of $75.84. Additionally, last month, we announced the redemption of the $187 million outstanding balance of our 6.7% Trust Preferred Securities to be executed in Q4, which will result in reduced annual interest expense of $12 million. Tangible book value increased by $2.77 per share to $66.01. This increase was primarily driven by our quarterly net income and partially offset by dividends and lower accumulated unrealized gains on investments. Our return on tangible equity was 19.4% in the third quarter. In summary, during 2021, we have repurchased $350 million in common stock, increased our quarterly dividend by $0.05 per share to $0.45 per share, redeemed $187 million in high-cost trust. And on October 15, we acquired a national health care equipment leasing business for $155 million in cash. We have also returned to our normal capital planning schedule, which should result in an announcement of Popular's 2022 capital actions, no later than our January 2022 webcast. With that, I turn the call over to Lidio.

Thank you, Carlos, and good morning. During the third quarter, the corporation continued to exhibit strong credit quality metrics and low credit costs, driven by the improving economic environment. Please turn to Slide number 9 to discuss credit metrics. Non-performing assets decreased by $57 million to $710 million this quarter, mainly driven by an NPL decrease of $52 million, coupled with a decrease of $9 million in non-performing loans held for sale, offset in part by an increase of $4 million in other real estate owned. In Puerto Rico, NPLs decreased by $48 million, mainly due to lower commercial NPLs of $34 million. This was due to payments received and charge-offs taken on collateral-dependent loans, coupled with lower mortgage NPLs of $16 million, resulting from lower inflows and continued improvements in the credit profile of the portfolio. In the U.S., NPLs decreased by $4 million, mostly related to a commercial loan payoff. The $9 million decrease in NPLs held for sale was mainly due to loan sales. The ratio of NPLs to total loans held in portfolio was 2.2% compared to 2.4% in the prior quarter. Please turn to Slide 10 to discuss NPL inflows. Compared to the second quarter, NPL inflows, excluding consumer loans, decreased by $44 million driven by a decrease of $37 million in Puerto Rico after the prior quarter included the inflow of a $32 million commercial relationship, coupled with a decrease of $5 million in mortgage NPL inflows. In the U.S., NPL inflows decreased by $7 million, mainly due to lower commercial inflows. Turning to Slide number 11; net charge-offs amounted to $10.1 million or an annualized 12 basis points of average loans held in portfolio compared to a net recovery of $1.3 million or negative 2 basis points in the previous quarter. The quarter-over-quarter comparison was impacted by the recovery in the prior quarter of a $7.9 million commercial relationship in Puerto Rico. Excluding this, the net charge-off ratio would have been flat quarter-over-quarter, 12 basis points versus 9 basis points. Net charge-offs continue to be significantly below pre-pandemic levels. Our allowance for credit losses decreased by $67 million or 8.6% to $719 million driven mainly by improvements in the economic scenarios and credit quality as we will discuss in the following slide. The ratio of allowance for credit losses to loans held in portfolio decreased to 2.49% from 2.70% in the prior quarter. Excluding PPP loans and guaranteed mortgage loans, this ratio is 2.74%. The range of allowance for credit losses to NPLs held in portfolio was 114%, flat to the prior quarter. Please turn to Slide number 12 to discuss details on the drivers of the variance in allowance for credit losses. As we previously mentioned, the allowance of credit losses decreased by $67 million when compared to the previous quarter. Variances were driven by changes to qualitative reserves and economic outlook, as well as portfolio product quality and mix. While a strong recovery is evident, we also consider more adverse outcomes given uncertainties around the impact of new virus strains and the Puerto Rico government's ability to utilize the available federal systems. As a result, we continue to assign the highest probability to the baseline scenario followed by the more pessimistic S3 scenario. Our macroeconomic forecast uses a number of economic variables, with the unemployment rate and GDP being the largest drivers. The current baseline scenario expectations for 2022, GDP growth and the unemployment rate expectations are flat quarter-over-quarter. However, Moody's Analytics revisions to certain income-related variables in Puerto Rico contributed to a $17 million decrease in the allowance for credit losses. During the quarter, we released $50 million from our qualitative reserve prompted by the economic environment and improvements in the outlook for the U.S. CRE portfolio. Total portfolio changes, particularly in the Puerto Rico commercial and auto loan portfolio caused the ACL to decrease by $24 million. Portfolio changes include fluctuations in credit quality, volume, and mix. To summarize, our loan portfolio exhibited improved credit quality metrics during the third quarter, with net charge-off activity significantly below pre-pandemic levels. We will continue to monitor the exposure of the portfolios to pandemic-related risk and changes in the economic outlook. With that, I would like to turn the call over to Ignacio for his concluding remarks.

Thank you, Lidio and Carlos, for your updates. Our results in 2021 to date have been strong, driven by solid earnings, improved credit quality, record deposit levels, continued customer growth, and the successful execution of our capital actions. We are optimistic about the economic outlook. In addition to the unprecedented level of federal stimulus related to COVID, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed, which we expect will now start flowing at a faster pace. The combined impact of these factors and continued consumer spending should generate considerable economic activity in many sectors for the coming years, and we are well positioned to benefit from such activity. A successful resolution of the debt situation in Puerto Rico will also be a positive factor. And last but certainly not least, we'll be looking forward to having the entire team together in our offices again. Given progress in the vaccination process, a general improvement in health conditions in our markets, and sound safety protocols at our facilities, we have begun to bring back to the office our colleagues that were still working remotely. Managers and supervisors returned earlier this month and the remainder of our workforce will return in early November. We are entering the home stretch of 2021. Despite all these challenges, this has been a great year thus far with solid results and significant accomplishments. Our team is energized and committed to ending the year on a strong footing. We are now ready to answer your questions.

The first question comes from Brock Vandervliet of UBS. Brock, your line is open.

Thanks very much. I did manage to get in the queue. If you could just start in terms of core loan growth expectations, I understand overall loan growth is going to take a while to overcome the PPP paydown headwinds, which you already outlined. But how should we think about core loan growth over the next couple of quarters?

Well, this is Ignacio. I think we need to consider the situation sector by sector in the coming quarters. Aside from the Paycheck Protection Program, we have a significant mortgage loan portfolio in the U.S. that is paying down around 150 million. In Puerto Rico, we anticipate continued growth in auto loans, and the commercial sector is also looking very strong. We expect growth in both Puerto Rico and the U.S. for commercial loans. In the U.S. this quarter, we experienced many pay downs in the construction loan portfolio. However, sectors like auto and commercial are likely to recover sooner. Overall, as Carlos mentioned in his prepared remarks, we probably won’t see significant net growth in the overall loan balance until the second half of next year. Carlos, do you want to add to that?

Yes, Brock. We're quite pleased that excluding the PPP loans, our lending increased in both the last quarter and this quarter. However, in the fourth quarter, if about half of our remaining pipeline portfolio is forgiven and we see a similar reduction in our residential loans of around $0.5 billion, we'll start off with a reduction of $500 million. In the first half of next year, when we anticipate the other half of our PPP loans to also be forgiven and the mortgage runoff remains the same, that will bring us to a starting point of minus $600 million for the first half of next year. That's the situation we are dealing with. Overall, we are happy that excluding the PPP loans, we experienced net loan growth in both quarters.

Okay. And just separately on capital; I noticed you bought the leasing business, not a terribly large acquisition, but certainly material given that purchase price. You're continuing to build capital reserves look ample, given the credit contours. How should we think about capital allocation?

We keep trying to explore all options available to us, and I believe this year we have successfully accomplished that. We have utilized various methods to manage our capital, which we hope will be our approach moving forward. Currently, we are in the midst of our capital plan for 2022, and we expect to make an announcement during the webcast in January. Generally, given our capital levels, we will likely need to continue exploring all options to achieve our goal of aligning our capital levels with our U.S. peers while maintaining a comfortable buffer.

Okay, thanks all. I'll jump back in the queue.

Thank you, Brock.

Our next question comes from Alex Twerdahl of Piper Sandler. Alex, your line is open.

Good morning, guys. Can you hear me?

Good morning. Yes.

Sorry about that. I wanted to just start off a little bit more on this K2 acquisition. Initially, it seems like kind of small potatoes in terms of the net assets being acquired. But just looking at the purchase price, certainly leads me to the suspicion that maybe this is actually a pretty good loan generating engine. And I was hoping that you could expand a little bit more on sort of what kind of origination capabilities this platform has and how it's going to sort of fit into the overall model?

I don't have the exact numbers for the projection of originations, but I can tell you that we are focusing on niche businesses that can enhance our existing operations. K2 is a health care equipment leasing company that aligns well with our national health care lending business. We really appreciate the team behind K2 and believe they have a solid business. The synergies we can create with our health care division are significant, and we aim to develop it into a national platform similar to what we've achieved with PAB in our health care vertical.

Can you talk a little bit more on sort of what type of loans these are and what kind of yields that we expect to replace the cash with?

The long term primarily consists of finance leases for medical equipment, such as machines used in healthcare facilities. Specifically, these include healthcare x-ray machines and other types of equipment.

I'm sorry, I'm referencing MRIs, which might date me a bit. I don't have exact information on the yield. I don't have a specific number on the yield either, Alex, but once the acquisition details become clear and everything stabilizes in 2023, we expect it to contribute around high single-digit millions to net income annually and hopefully continue to grow. As Ignacio mentioned, one key advantage of this is that it not only adds an important product for healthcare clients but also enhances the competitiveness of our existing healthcare offerings. Therefore, part of the benefit from this acquisition will extend beyond the subsidiary itself and will actually contribute to Popular Bank.

Okay. In terms of a deal like this and the regulatory process, this one is relatively small, but I imagine it plays a role in overall capital allocation from a regulatory standpoint. Do you follow the same process as you do with buybacks and dividends?

The regulatory system is quite complex, but let's not call it Byzantine. How you approach an acquisition determines the regulatory processes you must navigate. In this case, since we are proceeding through a subsidiary of Popular Bank, we only had to engage with the New York DFS. This made the process relatively straightforward. I don't believe it will significantly impact our capital plan; while the Fed reviews everything we do, I don't think this will meaningfully affect our capital strategy.

Okay. And then just another question on the bankruptcy. You sort of alluded to the end being kind of within sight. It's a little bit hard I think sometimes for a lot of investors and for me to kind of boil through some of the headlines, but it seems like they're getting pretty close to a deal between the Board and the bondholders, and it seems like the government may have gotten what they wanted with the pensions. Can you just help us understand exactly where we are in that process?

Yes. We're currently at a critical stage. Negotiations have been ongoing, and both the executive and legislative branches indicated they would not approve any deal that included cuts to existing pensions. There has also been controversy over the budget allocated for the public university, UPR. After several rounds of discussions, it seems there is a preliminary agreement where the fiscal board will present a plan that includes no cuts to pensions and at least $500 million for UPR. Yesterday, the House of Representatives voted on legislation to support this plan. One technical issue is whether the plan involving an exchange of new bonds for existing bonds requires legislative approval. The House has approved it, but the Senate is still a bit short on votes. Some senators are not convinced that the guarantee against pension cuts is solid enough. The Senate is expected to address this on Thursday. The House has passed the enabling legislation, and now we await the Senate's decision. The governor has stated he will sign the legislation if passed. The Senate's situation is complicated, as no party has a clear majority, and the leading party has only a plurality. This requires more negotiation than usual. We're down to the wire with the Senate's approval potentially happening as soon as Thursday. If that doesn’t happen, a renegotiation will be necessary. I'm hopeful for Thursday, but we will have to wait and see.

If that occurs on Thursday, the assumption is that the bankruptcy will allow for an exit before the end of this year. Could you remind us how much in public deposits you mentioned before? I believe you stated that about $10 billion to $11 billion on Popular's balance sheet would be directly impacted by that bankruptcy. Is that correct?

Yes. That's our best estimate. Of course, the government has not told us exactly. We hold most of the public funds, but there are other financial institutions that have public funds, including local institutions, including city. That's our best estimate, yes. And the process would be, if this resolution is passed, the plan of adjustment be considered by the court, and it's up to the court to approve or disapprove the plan of adjustment. Theoretically, they could disapprove it. I don't think that given all the work that's gone through this, I think that's not a likely result. So hopefully, we will have something by the end of the year, in which case, I'm not clear how soon the money will go out, but it will go out relatively soon thereafter because it's a cash down payment.

Okay. Regarding the financial impact, if I remember correctly, it's not significant to net interest income, but it would certainly benefit net interest margin, tangible common equity, and return on assets. Is that correct?

That is correct. In the existing level of interest rate environment, it is not material to NII. And it will always be very significant to our margin. Our margin has basically been driven by this sole factor for the last four or five quarters. So, our margin will return to be more linked to our core business than it has been for the last year plus.

Thank you for taking my questions.

Thank you.

Our next question comes from Gerard Cassidy of RBC. Gerard, your line is open.

Thank you. Good morning, Ignacio and Carlos.

Good morning.

Maybe Lidio could start off by discussing credit. It's clear that net charge-offs for your company were quite low this quarter, although there was a slight increase from the positive figure reported in the previous quarter. The industry, in general, is seeing extremely low net charge-offs at this stage of the cycle. Can you share your thoughts on how long these low levels might persist? Do you anticipate that we will begin to see some normalization in net charge-offs by the end of next year into 2023? Although they should still be lower than during a downturn, I believe they will eventually need to start rising.

I'll give you my perspective. I mean prior to the pandemic, if you look over three, five year periods, the charge-off of Popular were between corridor between 75 basis points to 125 basis points. Since the pandemic, we have been significantly, as you mentioned, lower than that, including a net benefit in the prior quarter. When you look at NPL formation, when you look at early delinquency, suggest that at least for the short term, that will continue to be the case. I think a lot of it is going to be depending upon economic performance and the pace of the payroll assistance that Carlos and Ignacio alluded to in the prepared remarks that we expect to come to Puerto Rico. So if that were to happen, and we continue to see the level of economic activity that might last a little bit, but I agree with you also that at some point in time, things will normalize in the future.

Very good. Ignacio and Carlos, obviously, you announced this acquisition recently, and you're putting your cash to work, and you've done other deals similar like the Wells Fargo automobile portfolio in their business a couple of years back, I guess. Are there any other opportunities for you folks to put your excess capital to work in acquisitions, whether it's a non-depository or even a depository somewhere in the Mainland?

We have traditionally been opportunistic buyers of assets and we continue to be so. And so, people bring opportunities to us and we review them. This K2 seemed like a very nice fit to bolt-on. It complements our healthcare vertical, which is doing very well, and we think has great potential for the future given the demographics of the country, right? So, we will continue to look for those kind of unique opportunities, just like Reliable. We relied the auto sector, and it was there and it came across. I have said before that especially bank acquisition is not our focus in the near future. But we are opportunistic. So when things present themselves, we look at, especially acquisitions of things that complement our existing businesses. So I think our overall strategy hasn't changed. K2 came around. We looked at it carefully. We thought it fit perfectly with our existing strategy. So we execute.

Very good. And then just as a follow-up, I know you need to keep a certain amount of cash on the balance sheet when the government filing draws down those excess deposits from your organization. But Carlos, when you look out, when do you think you may want to start to lengthen the duration of maybe some of those cash assets into longer-term securities?

Well, since interest rates appear to be increasing, investment returns seem to be improving as well. We are examining this more closely now. It is challenging for me to extend duration to 7 to 10 years for a yield of $130 or so, but now we are seeing yields in the $160s, which makes it more appealing. This is part of our ALCO committee's responsibilities, and we evaluate this every week. We increased our investment portfolio by about $2 billion this quarter, and we do this selectively when we see good opportunities for extension. As rates rise, our willingness to extend will also increase. So, are we rushing in? No. But we are definitely considering our options at this moment.

Very good. I apologize for not knowing this, but do you have a swaps book, and if so, is it growing? Are you considering adding to it? Some of your peers are currently doing that given their outlook for rates.

No, we don't have a swaps book.

Okay, very good. Okay, thank you.

Thank you.

We have a follow-up question from Brock Vandervliet of UBS. Brock, your line is open.

Thank you. Regarding some of the credit questions, many people tend to focus on charge-offs and reserve levels. However, when we consider non-performing loans, they have consistently decreased, with a significant drop in Puerto Rico to $48 million this quarter. Why haven't they declined even more significantly? Are there certain structural non-performing loans that we should expect to remain? Given the economic trajectory and the persistently high level of problem assets we've experienced for years due to Puerto Rico being in a recession, there should be a substantial reduction.

Lidio, do you want to take that?

Sure. When we examine non-performing loans in Puerto Rico, it's clear that most of them are related to mortgages. These mortgage-related non-performing loans tend to take longer to resolve compared to other types. This situation points to what might be termed structural non-performing loans, which are likely to take more time to address, especially following the pandemic, as there has been a noticeable decrease in foreclosures. Mortgage non-performing loans have not declined as quickly as other types during this part of the cycle. This contributes to the elevated levels of non-performing loans that we typically see.

Okay. And just on expenses, a number of the mainland banks have called out and it's not unique to banking, just greater expense pressure, difficulty in hiring that general theme. Is that something we should also be aware of within your business?

Yes, we are not unaffected by the current situation. The hiring process has become significantly more challenging, and there are pressures on salaries. In Puerto Rico, we still hold some advantages compared to our mainland counterparts, but we are experiencing salary inflation in Puerto Rico due to competition from various sectors. We expect this trend to persist. We implemented some salary increases in July, as you may have noticed, and we will be reviewing our minimum wage, similar to others in the industry. While we do have a somewhat advantageous position in Puerto Rico, we are still impacted by the same trends.

Understood. Okay. Thank you for the follow-ups.

We have no further questions in the queue. So I'll hand the call back to Ignacio Alvarez for closing remarks.

Again, thank you everyone for joining. I apologize for the inconvenience at the beginning of the call, and we look forward to updating all of you on our progress in January. So have a great week. Thank you very much.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.