Earnings Call Transcript
OFG BANCORP (OFG)
Earnings Call Transcript - OFG Q2 2022
Operator, Operator
Good morning. Thank you for joining the OFG Bancorp's Conference Call. My name is Katie and I will be your conference operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer, and Vice Chair of the Board of Directors; and Maritza Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks. It can be found on the Investor Relations website on the homepage 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 the OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez. Please go ahead.
Jose Fernandez, CEO
Good morning, and thank you for joining us. We are proud of this quarter's performance. It is a direct result of our focus on helping customers achieve progress and financial well-being. As always, thanks to our team members for their excellent work, commitment and dedication. So let us turn to Page 3 of our conference call presentation. Looking at our second quarter income statement, earnings per share diluted was $0.84. Core revenues totaled $146 million that included a $4.7 million gain from the sale of a legacy branch building. Net interest margin was 4.8%, provision was $6.7 million, non-interest expenses were $85 million, and pre-provision net revenues totaled $66 million. Looking at our balance sheet. When we compared to the prior quarter, total assets amounted to $10.2 billion. Customer deposits increased both from retail and commercial accounts and total approximately $9 billion. Our liquid balance sheet enabled us to continue to deploy cash into higher yielding loans and investment securities, which improved our asset mix. Total loans held for investment increased 2.4%. We saw continued loan balance increases in all three of our key businesses, 4.7% increase in commercial loans, 9.7% increase in consumer loans, and 3.2% increase in auto loans. New loan origination remained high at $587 million. Investment securities increased to $1.7 billion. Cash balances declined to $1.3 billion. Looking at our capital and capital actions, we completed an additional $30.6 million of our $100 million share buyback program. Year-to-date, we have bought back a total of $64.1 million of shares. We ended the quarter with high levels of capital. Overall, we had another great quarter in all our core businesses. This reflects our three main key drivers, consistently increasing recurring net income, driven primarily by loan growth. Number two, our larger scale and investment in our people and three, our focus on increasing digital utilization and customer service differentiation. During the second quarter, we continue to improve the customer experience. We expanded our number of self-service banking kiosks. We introduced digital commercial account opening. Enhancements like these make it fast, easy and convenient for retail customers and commercial clients to do their banking with us. On a macro level, consumer and business liquidity and credit trends continue to show good momentum. This has positioned OFG well to benefit from further anticipated rate increases by the Fed. Despite global headwinds, the Puerto Rico economic environment also continues to trend positively. This is due in part to the ongoing benefit from the flow of both federal stimulus and reconstruction funds. Now, here’s Maritza, who will go over the financials in more detail.
Maritza Arizmendi, CFO
Thank you. Please turn to Page 4 to review our financial highlights. Our total core revenues increased by $13 million year-over-year and $10 million quarter-over-quarter. Interest income amounted to $122 million, which is $9 million higher than the first quarter. This increase was driven by improved yields on larger loan balances and investment securities, as well as higher yields on cash. Non-interest income was $36 million, reflecting a $5 million increase from the first quarter. Core non-interest income of $31.2 million was boosted by higher revenues from banking services and wealth management, although it was partially offset by lower mortgage banking revenues. Non-core non-interest income included a gain of $4.7 million from the sale of a legacy branch building. The efficiency ratio stood at 58.27% in the second quarter, showing improvement from both the previous quarter and the same quarter last year, indicative of revenue growth outpacing expenses. Total expenses reached $85 million, which is $4 million higher than the first quarter, largely due to increased compliance-related professional expenses resulting from heightened business activity, alongside higher technology expenses linked to our digital investment. Our return metrics improved both year-over-year and quarter-over-quarter, remaining within our target range. The return on average assets was 1.58%, up 10 basis points from the previous quarter. The return on average tangible common equity rose to 17.70%, an increase of more than 180 basis points from the first quarter. The tangible book value per share declined to $18.86, decreasing by 4 basis points from the first quarter. This change reflects the repurchase of common stock, a reduction in other comprehensive income, and was partially offset by the increase in annual returns. Please turn to Page 5 to review our operational highlights. Average loan balances reached $6.64 billion, up $121 million from the first quarter. Loans held for investment increased by $155 million at the end of the period, marking two consecutive quarters of nearly 10% annualized growth. This increase was supported by new commercial and auto loans, though it was partially offset by declines in mortgages and PPP loans. The loan yield rose to 6.73%, a 4 basis point increase from the first quarter. It typically takes time for Fed rate increases to filter into our portfolio through new and variable rate loans. Average core deposits reached $8.95 billion, an increase of $138 million from the first quarter, with end-of-period deposits up by $50 million. Core deposit costs were 24 basis points, a 1 basis point reduction from the first quarter. So far, we have not observed significant deposit outflows. In terms of new loan originations, they remained robust at $587 million, driven by high levels of auto and consumer lending, with auto loan origination reaching a record high of $193 million. Our net interest margin increased to 4.80%, up 33 basis points from last quarter and 58 basis points year-over-year. The improvement in net interest margins was attributed to three key factors: growth in the loan portfolio at slightly higher yields, an increase in investment securities at higher yields, and higher yield on a lower volume of cash. Please turn to Page 6 to review our credit quality and capital strength. Net charge-offs totaled $4.5 billion in the second quarter, compared to $577,000 in the first quarter. This quarter included $2.5 million in net charge-offs from a commercially reserved loan that was sold. The second quarter also showed significantly lower net charge-offs across the loan portfolio and an improvement in the mortgage portfolio. The first quarter benefited from $3.9 million in recoveries related to an acquired PCD loan and finalized settlements of non-performing loans sold in the fourth quarter of 2021. The total provision for credit losses was $6.7 million. The non-PCD portfolio was affected by two main factors: the rise in loan volume, adding $6.7 million to the provision, and two commercial loans entering non-performing status, contributing an additional $6 million. The PCD loan portfolio was impacted by a reduction in loan volume, decreasing the provision by $1.6 million, along with a $3 million reduction in qualitative adjustments and loss factors due to ongoing improvements in credit quality. An economic model adjustment of $1.7 million accounted for the increased likelihood of recession, which necessitated a reserve addition to the U.S. loan portfolio. Ultimately, the second quarter allowance coverage remained flat at 2.37% compared to the first quarter. The total non-performing loan rate was 1.61%, increasing by 12 basis points from the first quarter while improving by 50 basis points from the previous year. The CET1 ratio stood at 12.80%, down from 13.24% in the first quarter, due to three main factors: the repurchase of common stock, an increase in risk-weighted assets, and a partial offset from the growth in retained earnings. Now, here is Jose.
Jose Fernandez, CEO
Thank you, Maritza. Let's turn to Page 7 for our outlook. Starting first with OFG. We see continued increases in levels of business activity and loan growth. Credit metrics remain under control and significantly better than pre-pandemic. With our higher levels of revenue, we are now targeting our efficiency ratio to be in the mid '50s range for the rest of the year and 2023. We will continue to invest in our people, technology and infrastructure with an even greater focus on improving the customer experience. As seen during the past several quarters, we continue to expect core revenues to grow primarily driven by loan growth and interest rates. Our capital metrics will continue to remain high compared to our U.S. peers. Looking at the Puerto Rico macro environment, consumers and businesses in Puerto Rico continue to demonstrate good levels of liquidity. Having said that, we are keeping a watchful eye on inflation and its economic repercussions in Puerto Rico, particularly on consumers. As I mentioned earlier, we believe the significant amount of federal stimulus and reconstruction spending in Puerto Rico should help mitigate the impact of potential headwinds. We at OFG are more than ready. I want to thank all our resilient team members for their dedication and commitment. They've done a great job. Thanks and that ends our formal presentation. Operator. Let's start the Q&A.
Brett Rabatin, Analyst
Hey. Good morning, everyone.
Jose Fernandez, CEO
Hi, Brett.
Brett Rabatin, Analyst
Wanted to first just talk about the credit backdrop a little bit. It seems like with the qualitative adjustment that things continue to get better from a macro perspective in Puerto Rico, which did have two credit migration non-accrual. Can you talk one about what you're seeing in terms of migration overall, and then maybe specifically about those two credits and give us any color on those two particular ones?
Jose Fernandez, CEO
Sure. As I mentioned earlier, the credit situation in Puerto Rico is trending positively, and both consumers and businesses maintain high levels of liquidity. We haven't observed any changes in credit behavior in Puerto Rico at this time. Regarding the two specific credits, they are isolated commercial loans. One is a $2 million small business loan in the telecommunications sector, which has faced some challenges due to supply chain issues affecting the import of necessary materials. We believe this is a completely isolated incident, and we're managing it, so it's not a major concern. The other loan is a participation in a U.S. loan related to the packaging business, which is also experiencing some disruptions in manufacturing and supply chain, prompting us to make provisions. However, we do not see any changes in the overall credit profile on the island. While global inflation and disruptions have impacted us, especially in electricity and gasoline costs, business activity remains robust. I visit the island frequently to engage with various businesses, branches, and employees, and while it may be challenging to sustain the same growth levels we experienced earlier in the year, Puerto Rico is currently in a strong economic position.
Brett Rabatin, Analyst
Okay. And you mentioned inflation, Jose Rafael. I guess one of the pushbacks like yeah, when I talk about Puerto Rico is that while the inflationary pressures will have a disproportionate impact on the population in Puerto Rico. But with all of the funds flowing to the island it certainly seems like things to continue to be strong. Are you seeing anything from a consumer perspective that would tell you that they're starting to not be able to continue their usual expenditures or there is pressure from the inflation?
Jose Fernandez, CEO
We have not observed any significant changes in consumer behavior. The consumer remains robust, as indicated by record levels of auto lending this quarter. People are still purchasing big-ticket items. So far, we haven't seen any decline, but we are aware of the rising cost of living on the island and its impact globally, which could lead to a slowdown. We do not anticipate maintaining the current activity levels, given the increase in interest rates and inflation.
Brett Rabatin, Analyst
Okay. Great. And then maybe just one last one, auto continues to be strong in Puerto Rico. Any sense of where auto goes from here? Do you think it trend similar to last year from here or do you think it continues its current trend?
Jose Fernandez, CEO
It's challenging to maintain the current pace of new auto sales in Puerto Rico overall. There have been some recent disruptions in inventory due to issues with chip manufacturers. Surprisingly, dealers still have enough inventory to sell cars, but I don't believe this level of availability will be sustainable moving forward. However, new car sales in Puerto Rico are expected to remain strong due to the resilience of consumers and businesses on the island. Regarding the stimulus and reconstruction funds, we've observed significant activity in reconstruction projects, primarily driven by government efforts, which is boosting the economy, especially for the middle and lower-middle classes. This momentum should be sustainable for several years due to the scale of these funds. Additionally, the COVID stimulus funds are still flowing in, and the introduction of the child tax credit has notably impacted Puerto Rico, as it allows the region to receive tax credits similar to other U.S. states. This change is encouraging higher tax return filings, which hasn't been the case in many years, drawing more individuals into the formal economy. Overall, there are many underlying positive factors at play in Puerto Rico right now, suggesting a promising outlook for the coming years.
Brett Rabatin, Analyst
Yeah. That's helpful, Jose Rafael. I certainly think that Puerto Rico could decouple from mainland U.S. assuming the U.S. is in a recession at some point. I appreciate all the color and congrats on the quarter.
Jose Fernandez, CEO
Sure. Thank you.
Timur Braziler, Analyst
Hi. Good morning.
Jose Fernandez, CEO
Hi.
Timur Braziler, Analyst
Following up on one of your statements, Jose, regarding loan growth, we expect good loan growth but it likely won't maintain the same pace we saw in the first half of the year. Can you discuss which line items this pertains to? Is it mainly related to consumer sentiment about a slowdown in auto loans, or is there a broader trend that leads you to believe the current pace of lending activity isn't sustainable?
Jose Fernandez, CEO
Yeah. Thank you for your question. Yes. We see loan growth during the second half of the year and we see still loan growth on the auto portfolio. We also see it on the consumer portfolio and as you've seen, we've grown the commercial book three quarters in a row at an annualized rate of 10%. So, we still see very good opportunities on the commercial side might slow down a little bit in the second half, but we still see those three lines being the main drivers of our loan growth in the next second half of the year.
Timur Braziler, Analyst
Okay. That's helpful. Thank you for that. And then, as you're looking to fund that loan growth, deposit growth slowed a little bit here in the second quarter utilizing some on-balance sheet liquidity. As you look to fund the loan growth for the rest of the year and into '23, is the expectation that that will be funded through deposits, is there still some on-balance sheet liquidity plan on using, maybe just talk about the funding strategy going forward.
Jose Fernandez, CEO
We are experiencing a significant opportunity in Puerto Rico for the first time in many decades, particularly in the banking sector, which currently has excess core funding. We plan to leverage this situation, and as you can see from this quarter, we have continued to grow our deposits. We anticipate that loan growth will be supported by these excess core deposits. The Puerto Rico banking market today is markedly different from what it was 20 years ago and from the conditions seen in the States. This situation is advantageous for us at OFG, as there are only three main players in the market, and all of us have excess deposits while maintaining rational deposit strategies. Therefore, as we expand our loan portfolio, we will rely on our core deposit balances.
Timur Braziler, Analyst
Okay. Thank you for that color. Next from me on the bond purchases this quarter, can you just talk through what some of those reinvestment yields or during the quarter where you're seeing yields today and what the appetite there is for additional securities purchases here in the back end of the year?
Jose Fernandez, CEO
Yeah. I would say in the three handle, 3% or so can only handle for both for the mortgage-backed securities as well as for the treasuries. There is not that much availability to buy mortgage-backed securities in the U.S. market as interest rates have shifted up quite dramatically, the supply of the securities has been quite slow. So, but anyway the purchases we've done, it's around 3%, north of 3%.
Timur Braziler, Analyst
Okay. And then just last from me again following up on the credit quality and understanding your comments about the macro trends and how that's going to be much better than where we achieve Puerto Rico on the past, but do you think that we're nearing kind of a bottom of how good credit quality has been and we're starting to inflect whatever this new normal level is or do you just see these two credits popped up this quarter as one-off?
Jose Fernandez, CEO
So, you have a two-part question there. So, I think we're hitting a bottom. We've hit a bottom in terms of credit quality across the island. It's not sustainable having net recoveries as we've had in the last year and part of this year in some of the loan book. So, does that mean it's going to deteriorate to what we have been accustomed to in Puerto Rico for the last two decades? The answer is no. We feel that it's a different story now and we will see trending up some delinquencies on the consumer book auto and consumer. We see the profile of the consumers a lot better than it was in years past. So, we feel confident with that. And in terms of the commercial side, I think we will continue to see the strength of the business in Puerto Rico and we are not seeing any deterioration whatsoever for the commercial side of the loan book. So, I split it in two, because I feel that the consumer is going to kind of start normalizing a little bit the trends on the credit into the next several quarters. But on the commercial side, there is quite a strength on the businesses in Puerto Rico and we don't foresee any deterioration forward.
Timur Braziler, Analyst
Okay. Thank you for the color.
Jose Fernandez, CEO
Yeah. Thank you.
Alex Twerdahl, Analyst
Hey. Good morning.
Jose Fernandez, CEO
Hi. How are you, Alex?
Alex Twerdahl, Analyst
I'm well. Thanks. I wanted to drill in on a couple of more points here. One, maybe you can just give us an update on sort of the asset sensitivity expectation. Just given that the rate hikes that we've seen in May and June clearly aren't fully reflected in the quarter, just kind of with what we've done so far, what would be the expectation for the NIM and for NII more importantly heading into the third quarter?
Jose Fernandez, CEO
This quarter does not yet show the full impact of the recent interest rate increases from the Fed, as there is typically a two to three-month delay before we see the complete effects. In the third quarter, we will experience the full impact of the rate hikes that occurred in the second quarter, along with a partial impact from the upcoming rate changes. Overall, our outlook on net interest income and margin remains strong, supported by our solid core deposit position and our current betas being around zero or negative. We are confident about how interest rates will influence our loan portfolio for the remainder of the year and into 2023. Because of the investments we are making in technology and improving customer experience, we are now more assured that our efficiency ratio will be in the mid '50s for the rest of this year and next year. I wish I had clearer foresight two quarters ago to feel as optimistic about the efficiency ratio as I do now, but that's the situation.
Alex Twerdahl, Analyst
Just as a quick housekeeping item, do you have the PPP fee contribution from the second quarter in the NIM and NII?
Jose Fernandez, CEO
I don't know. I'm sure Maritza has a number.
Maritza Arizmendi, CFO
I don't have it with me. It should be much lower than we saw last quarter. I can provide it to you later.
Alex Twerdahl, Analyst
Okay. Thank you much on that. And then you mentioned that in the second quarter, you're seeing really nothing in the way of deposit beta so far. Is there any inclination that the customers are looking for higher deposit rates? Are you seeing any pressure thus far with all the hikes we've seen?
Jose Fernandez, CEO
I will divide my response into two parts. On the consumer side, we are beginning to observe some high-balance customers transferring funds to our wealth management division. This is reflected in a small increase in fees from our broker-dealer and trust services. While we don't capture all of it, we are definitely noticing some of these trends. Specifically, high-balance consumers are redeploying money from maturing CDs into savings accounts at higher rates earlier this year, but now those funds are moving into wealth management. On the commercial side, large commercial account balances are exerting some pressure due to interest rates. We have competing factors in play that we must be mindful of, which may lead to pressure on our large commercial deposits in the coming quarters. Nevertheless, we feel optimistic about our position in Puerto Rico, as OFG competes in a market with significant players holding excess deposits, alongside other competitors. Overall, we remain hopeful about our deposit performance at OFG moving forward.
Alex Twerdahl, Analyst
Great. And then can you give us some color on the mortgage market in Puerto Rico, have you seen a slowdown? I really wasn't reflected anywhere near as much as I expected in mortgage banking this quarter. But just maybe give us a little bit of color on sort of what higher rates have done to mortgage application volume.
Jose Fernandez, CEO
Yeah. So two things that I can give you color on. One is certainly interest rate increases have basically brought to zero on the refinancing on the residential mortgage side. So, from that point of view that type of business is pretty much zero, but on the other hand Puerto Rico's real estate market have improved. We have seen increases in prices across all different buckets in terms of residential and actually, we've seen that coming from a really, really depressed level as you can recall. So, what we're seeing is that there is still quite a bit of a purchase market here in the island and there is quite a bit of an activity in spite of the increase in interest rates and that is because we still have a need for housing in the island and that's what some of the things that are being taken care of by the reconstruction fund. So, you might not see the residential mortgage market in Puerto Rico be as affected as in the States given that our residential prices have not gone as on a relative basis have not gone as high as pretty much all the states in the United States and what we're seeing is that there is still some good opportunities for purchase market here.
Alex Twerdahl, Analyst
Got it. And then with the rates going higher, I mean at some point, does it make sense to put more of that on your balance sheet?
Jose Fernandez, CEO
So, that's a good point. And we are starting to do that as rates have gone up, we've started to do that in this summer in the late June, early, early July. So, we're actually retaining some of the loan residential loans that we originate because they have a better yield. So, yeah, we are doing that. So, you will see mortgage banking activities slightly trending down simply because we're retaining and not selling.
Brett Rabatin, Analyst
All right. Just a couple of follow-ups here. First, would you happen to have the balances for the U.S. portfolio, and then what the appetite might be going forward? Just kind of given concerns about the U.S. economy and what industries that you're interested in the U.S.?
Jose Fernandez, CEO
Yeah. So, just to give you some background, we started back in 2017. So we built around $600 million in loan balances, as of June 30. So, that's kind of the size. Most of it is small commercial loans and there is around $130 million some of middle market loans. So, that's the composition.
Brett Rabatin, Analyst
And then Jose Rafael, any thoughts on your appetite for production?
Jose Fernandez, CEO
I believe what you have seen in the past several quarters will continue going forward. Since 2017, we have been pursuing a strategy of geographic diversification, and you can expect us to remain nationally diversified, primarily focusing on small businesses in the U.S. We are also working on building our team for the U.S. business, which is part of our overall strategy. We see this geographic diversification as essential for our U.S. business today.
Brett Rabatin, Analyst
Okay. And then you're mostly through the current authorization on the server purchase plan. Any thoughts on share repurchases from here and how you see that might in the back half of the year?
Jose Fernandez, CEO
We have been proactive in the last two years since we announced our first repurchase in 2021, and we plan to continue being opportunistic. We also consider the dividend and recognize our strong capital position. Our business shows great momentum, so we will evaluate both options and provide updates to the market as needed.
Brett Rabatin, Analyst
Okay. And then just lastly I saw on the news in a publication that there is an estimate for the positive impact of Airbnb in Puerto Rico and the tourism market in Puerto Rico, any thoughts on what you're seeing tourism wise and just how that's benefited the economy and what do you think the outlook might be for that?
Jose Fernandez, CEO
Hospitality in Puerto Rico is showing strong positive growth. Our commercial loans in the hospitality sector are performing much better than we initially expected when we issued them. We are noticing historically low vacancy rates, and there is a significant increase in travel-related business activity. Puerto Rico is also improving its marketing efforts to attract visitors from abroad. Overall, we view the hospitality sector as a growth area on the island. While there is a substantial presence of Airbnb, there has also been considerable construction of hotel rooms throughout the island, not just in metropolitan areas. These hotels are performing well and are expected to continue supporting tourism in Puerto Rico.
Brett Rabatin, Analyst
Okay. And then maybe just one last one, I saw the Oversight Board froze the Act 41 here recently, any update or any thoughts on what's going on with the Oversight Board and their actions, and how that's impacted Puerto Rico?
Jose Fernandez, CEO
I believe the Oversight Board has a clear mission to achieve balanced budgets and to ensure the restructuring of debt. In my view, they are doing a commendable job in maintaining fiscal discipline on the island. It's challenging to uphold fiscal discipline for governments throughout the United States and globally. The fiscal board, despite its shortcomings, is effectively working to maintain this discipline. While it is not perfect, I anticipate it will require two or three more balanced budgets to fulfill its objectives. They are also in the process of restructuring the PREPA debt. Overall, I think the situation is developing in a favorable direction.
Brett Rabatin, Analyst
Okay. Great. Thanks for additional color.
Jose Fernandez, CEO
Yeah. Thank you for your questions, Brett.
Kelly Motta, Analyst
Hi. Good morning. Thanks so much for the question. I got disconnected a little while ago, so I apologize if this is already been asked, but I know it's your efficiency guidance was taken down to the mid-50% range with this quarter. I was wondering if that mostly a function of the higher NII outlook versus expense growth and if you could also talk about whether the higher NII outlook is changing. How do you think about maybe further investments into the franchise and a little bit about what you're doing to help grow and improve the customer experience on the expense side would be excellent. Thank you.
Jose Fernandez, CEO
Thank you, Kelly, for the questions. Regarding the efficiency ratio, we are targeting a mid-50s range, which is influenced by higher net interest income. We will continue to invest in technology and our digital initiatives as we have discussed in previous quarters, and this is the reason behind our guidance for a mid-50s efficiency ratio. On the expense side, we noticed an increase this quarter due to business activity, mainly related to compliance, but we do not expect these expenses to be recurring. We anticipate some of these expenses will decline, and we will focus on managing our expenses while we invest in our franchise. As for net interest income, interest rates are leading to an increase in this area, and as we expand our loan portfolio, we expect to benefit from higher net interest income both on loans and investments. We are well positioned for the Fed's actions regarding interest rates in the coming quarters. Did I cover everything? You also asked about customer experience, which I believe we addressed.
Kelly Motta, Analyst
Yes.
Jose Fernandez, CEO
We launched two self-service kiosks this quarter as part of our strategy to streamline transactions at our flagship branches that can be handled through self-service, either digitally or via mobile. These kiosks will enable customers to address older issues quickly and efficiently. This will also allow our employees at the branches to better understand customer needs and assist them with their financial concerns. As we continue transitioning our banking network, we will invest in technology to implement our strategic differentiation effectively.
Kelly Motta, Analyst
Got it. Thank you so much for the help. I appreciate it.
Jose Fernandez, CEO
Thank you for your questions Kelly.
Timur Braziler, Analyst
Hi. Just a two quick follow-ups on the dollar of U.S. participation loans if you have that on hand.
Jose Fernandez, CEO
I'm sorry, could you repeat the question?
Timur Braziler, Analyst
The dollar amount of participation loans on the Mainland.
Jose Fernandez, CEO
So, I said $600 million split in two, $130 million plus or minus on middle market loans and the difference in small commercial businesses. So, that's the composition.
Timur Braziler, Analyst
And that's all participation or is participation just the channel.
Jose Fernandez, CEO
These are all participations with key partners that we have.
Timur Braziler, Analyst
Okay. Understood. Thank you for that.
Jose Fernandez, CEO
Yeah.
Timur Braziler, Analyst
And then just a modeling question and I'm sorry if I missed this in the documents but the number of shares repurchased this quarter?
Jose Fernandez, CEO
We will disclose. I don't have them with me but we can disclose that. It's around 1.1 million shares or so.
Timur Braziler, Analyst
Okay.
Jose Fernandez, CEO
I don't have the specific number, but it's around there.
Timur Braziler, Analyst
Thank you.
Jose Fernandez, CEO
Yeah. You're welcome.
Alex Twerdahl, Analyst
Hey. Just a couple of follow-up questions. On the qualitative reserve release, the $4.9 million during the quarter, was that kind of because COVID one way or maybe just walk through sort of the inputs and outputs of that and does that kind of take into account some of the negativity that economists are projecting for Mainland?
Jose Fernandez, CEO
I'll let Maritza get an answer for that.
Maritza Arizmendi, CFO
The adjustments we disclosed do not include the $1.7 million mentioned in our economic model; that amount is excluded. The qualitative adjustment is a part of the modeling process. We have seen improved trends in recoveries, especially in the mortgage portfolio and more specifically in the PCD loan portfolio. On Page 19 of the presentation, you can see the reserve release of $4.9 million, which breaks down to approximately $3 million for PCDs and $1.9 million for non-PCDs. This is due to positive trends in the portfolios, particularly regarding delinquencies and charge-offs.
Alex Twerdahl, Analyst
Okay. Thanks for the color there. And then Jose, when you talk about the loan growth prospects for later in this year. Can you maybe give us some color on line utilizations? And then it seems like one of the commentary or one of the things, I'm hearing from banks here is that higher rates has kind of put some deals into sort of holding patterns. Are you kind of, are you seeing that as well down there or is there less rate sensitivity just given that many customers have already been operating with higher interest rates, just given the Puerto Rico economy and the characteristics of the loan yields down there?
Jose Fernandez, CEO
Line utilization Alex has increased in the last couple of months, yet to reach the levels pre-pandemic but it has increased. In terms of the impact of interest rates on commercial loan originations certainly that has had some effect here and there has been some delays and postponements of some transactions that we might have booked for this quarter and maybe they never get booked. So yes, we are starting to see some of the interest rate effects on the loan origination on the commercial side. But having said that, we still feel that we have a pretty good pipeline and we will be able to achieve our goals for this year.
Alex Twerdahl, Analyst
Okay. And then just final follow-up, you mentioned some of the expenses, the compliance-related expenses being non-recurring, are you able to break that out for us and maybe explain what they were?
Jose Fernandez, CEO
This business activity has been increasing for the last several quarters. We need to catch up and ensure we are current with all consumer compliance issues, as well as prepare for the CFPB. We are above $10 billion and expect to remain so. All of these elements are in place as part of managing a bank.
Alex Twerdahl, Analyst
Okay. So when you say that they won't recur as there's a one item is kind of a little bit of catch up, a little bit of planning for…
Jose Fernandez, CEO
What I trying to say when I say it is non-recurring is that yes, there is a catch up here and we don't expect that same level of expenses to be deployed into that items, particularly in the next several quarters. That doesn't mean it's eliminated to zero. It's just that it's the level is not recurring. The level amount off.
Alex Twerdahl, Analyst
Okay. Thank you for clearing that up for me. That's it from me. Thank you.
Jose Fernandez, CEO
Yeah. You're welcome.
**Operator, **
Thank you. We have no further questions at this time, I would now like to turn the program back over to Mr. Fernandez, for any additional or closing remarks.
Jose Fernandez, CEO
Thank you, operator and thanks again to all our team members for their hard work and dedication, and thanks to all our stakeholders who have listened in. Looking forward to our next call at the end of the third quarter.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.