OFG Bancorp (OFG) Q2 2021 Earnings Call Transcript

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OFG Bancorp (OFG -1.38%)
Q2 2021 Earnings Call
Jul 21, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining OFG Bancorps Conference Call. My name is Christie, and I will be your 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 our 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 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. Instructions will be given at that time. I would now like to turn the call over to Mr. Fernandez.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Good morning and thank you for joining us. Please turn to page three of our conference call presentation. We had an outstanding performance in the second quarter, generating $0.78 per share. This reflects our larger scale and our focus on digital utilization and customer service differentiation. From a big picture perspective, it also reflects several key factors that are coinciding at this time that puts OFG in an excellent strategic position. One, Puerto Rico's economy is clearly benefiting from the massive amount of federal reconstruction funds now starting to be received, as well as COVID stimulus funds. It's important to note that these funds are more meaningful here as compared to mainland states, given how reconstruction funds and the amount of stimulus payments compared to average income levels on the island, as well as the size of our economy.

Two, Puerto Rico has managed well the COVID pandemic and today vaccination levels are in the top quartile of US states and territories with 55% of the population fully vaccinated and 63% with at least one dose.

And three, OFG's operating in a much different competitive environment than years past, with only three commercial banks serving the market. All these continues to validate the comments I made last quarter regarding our optimism on Puerto Rico's economy and OFG's future. Our second quarter results confirm this across all businesses.

Let's take a look at our income statement as compared to the first quarter. Total core revenues were $133 million, an increase of more than 4%, results were enhanced by a 12% reduction in cost of funds. Interest income grew more than 2%. Banking and financial services revenues rose more than 5% due to increased economic activity. Asset quality trends continue to improve. As a result, provision for credit losses was a net benefit of $8.3 million. Earnings also benefited by our recent deployment of excess capital to redeem all three of our outstanding series of preferred stock, which eliminated $1.6 million in quarterly preferred dividends. We will continue to explore ways to deploy this excess liquidity.

Looking at the June 30 balance sheet. Customer deposits increased $350 million to $9.1 billion, reflecting even greater liquidity on the part of both commercial and consumer customers. As a result, both cash and assets grew. Loans declined 1.2% to $6.4 billion mainly due to pay-downs in our residential mortgage portfolio and forgiveness of our first round of PPP loans. Most of that decline was offset by growth in commercial and auto loan balances. New loan origination increased 28% from the first quarter to $674 million. We're starting to see optimism on the part of our commercial clients. Originations now total more than $1.2 billion as of the first half of the year. All this bodes well for the second half of the year.

Please turn to Page 4. At OFG, we believe better banking is built upon fulfilling our purpose. Namely helping our customers, our people and our communities achieve their financial goals. During the second quarter, for our customers, we quickly process forgiveness for about 75% of our first round of our PPP loans, once again, using our proprietary all digital solutions. Our business model is putting us closer to existing and potential commercial clients to help them finance their operations and strategies. As part of this effort, we launched a series of online educational videos to help small businesses improve their capabilities and optimize our business potential. Even though the pandemic is subsiding here, digital utilization of our banking services has continued at high levels among both our commercial and retail customers. Online and mobile banking 30 and 90 day utilization continue well above pre-pandemic levels. This validates our long-standing digital strategy and its growing acceptance by our customers and the market in general.

For our people, we continue to facilitate COVID vaccinations. As of Monday, 81% of our team members are already fully vaccinated. We expect to reach 90% vaccination levels during the third quarter. In 2015, we started a college scholarship program for the children of our staff. This year, we are proud to announce that we increased the average scholarship awarded by 19%. In our communities, we have been working on several new corporate social responsibility programs. One program launched on the second quarter helps high school students in lower income communities to improve their personal and technological development. We are extremely proud of all of these achievements. At the end of the day, there is nothing more rewarding them being part of a team that delivers on its purpose. This quarter's overall performance energizes us at OFG to work harder and to aspire for more.

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

Maritza Arizmendi -- Chief Financial Officer

Thank you, Jose. Please turn to Page 5 to review our financial highlights. Total core revenues were $133 million. That's an increase of about 4% from both the first and year-ago quarters. Most of the increase from the first quarter was due to higher income from non-PCD loans. This reflects higher revenues from commercial and auto loans, which more than offset lower interest income from pay downs in residential mortgages and forgiven PPP loans. Net interest income also benefited by approximately $7,000 due to one extra day compared to the first quarter. In addition, total core revenues also reflected growth in banking services from financial services. Revenues from banking services grew 11% from the first quarter and 34% year-over-year. These were due to expanding economic activity. Revenue from financial services increased 12% from the first quarter and 30% year-over-year. This was largely due to increased asset values and higher commercial insurance income.

Non-interest expenses totaled $83 million. That is an increase of $5 million from the first quarter and a decline of $2.9 million year-over-year. Second quarter expenses reflect that our previously announced cost savings; a $2.2 million technology write down and a higher variable expenses related to increase cost savings. Adjusting for the write-down, our efficiency ratio would have been similar to the first quarter. We continue to see expenses in line with our previously announced plans for the year. Our goal by the end of 2022 is to continue to improve our efficiency ratio to the mid to lower 50% range. Return on average assets was 1.58%. This was significantly higher than the first year and a year-ago quarters. This also exceeded -- it also exceeded our baseline target of more than 1%. Return on average and tangible common equity was 17.8%. This was also up significantly from the first year -- for the first and year-ago quarters and also exceeded our baseline target of more than 12%. We continue to build capital. Tangible book value per share was $18.13. There is an increase of 4% from the first quarter and 13% from the year ago quarter. This is the highest increase sequentially over the last five quarters.

Please turn to Page 6 to review our operational highlights. Average loan balances total $6.6 billion. That's a decline of $37 million from the first quarter, due primarily to residential mortgage pay downs and PPP forgiveness as I have mentioned before. This was mostly offset by new commercial and order loans. The change in mix enable us to expand loan yields to 6.69%, eight basis point higher than in the first quarter. Higher levels of residential mortgage breakdown reflect increased liquidity on the part of the -- of consumers. Our residential mortgage portfolio consists of legacy oriental [Phonetic] mortgage loans and mortgage loan from the UVA and the Scotiabank acquisition. Almost all our new residential mortgage loan originations are confirming USA agency [Inaudible]. So, we don't typically add new production to our residential loan portfolio, instead we convert more production into Fannie Mae's and Freddie Mac's and sell them. And we converted the FHA loans into the Ginnie Mae's and retain them in our securities portfolio.

During the second quarter, we added $54 million of these Ginnie Mae securities into our investment portfolio. Total new loan origination was $674 million. That is an increase of 28% from the first quarter. There are gains in all major categories. This was led by commercial and auto, followed by consumer and residential mortgage. Approximately 50% of new commercial orders were for new money to expand business operations; building new store, warehouses, buying inventory, or making acquisitions, Our core deposits totaled $8.96 billion. That's an increase of 5% or $427 million from the first quarter. Increases in non-interest bearing accounts, savings accounts and non-accounts were partially offset by the declines in customer CDs [Phonetic]. Core deposit costs continue to fall. They were 38 basis points in the second quarter. That is a reduction of nine basis points from the first quarter. This reflects rate reductions and the continued maturing of older, higher price CDs. As a result of the increase in deposits average cash balances totaled $2.5 billion. That is an increase of 14%, offset $350 million from the first quarter.

Our current strategy is to continue to look for opportunities to deploy this asset liquidity through lending, capital actions, or into investment once interest rates move up. Net interest margin was 4.22%, a decline of only four basis points from the first quarter. They increased amount of cash, reduce NIM by 13 basis points. Most of that was offset by nine basis points from the lower cost of deposit. We believe NIM is still in the range of our expectations for remaining approximately level this year. This tends to pay [Indecipherable] review our quality and capital strength. Asset quality trends continue to improve. Reconstruction and the stimulus funds provided significant liquidity to businesses and individual. Some use this to pay down their loans and lines of credit. Our net charges hit a historical low of only 13 basis points. The yearly and total delinquency rates at 1.86% and 3.90% respectively were at their lowest level in five quarters. Non-performing loan rates at 2.06% was also its lowest level in five quarters if you exclude the effects of our pandemic related deferral program. As a result of these provision for credit losses, was a net benefit of $8.3 million. This is based on $2.1 million in net charge-offs and $10.4 million net reserve reviews. [Technical Issues] forward as continuous elevated. There are still concerns about COVID uncertainty for our consistent robust economic recovery. Our [Technical Issues] service was 2.95% on a reported basis and 3.06% excluding PPP loans. The CET ratio continues to climb, reaching 13.95%. The stockholders' equity was $1.8 billion, a decline of $28 million from the first quarter. This was due to the redemption of preferred stock, Series A and B, and a good portion of which was offset by the increase in retainer. The tangible common equity ratio continues to trend to 9.06%.

Now here's [Inaudible]

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Thank you, Maritza. [Technical Issues]

Operator

Ladies and gentlemen, please standby.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Please turn to Page 8 for our conclusion. Our performance this quarter reflects what we had anticipated to see a year after the Scotia acquisition. Our larger scale, business approach and improved strategic positioning is coming to fruition adding to our franchise value. Following the first quarter and now this quarter we're seeing incremental optimism on the part of the business sector to invest for the future, slowly but surely giving us confirmation of Puerto Rico's economic revival. We at OFG are more than ready. We have a lot of dry powder in the form of cash to deploy for growth on the loan side, but we will also continue to look closely at capital management strategies. Thanks to all our team members who have helped our customers achieve their goals. That ends our formal presentation. Thank you for listening. Operator, please open the call for question and answer.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question is from Alex Twerdahl of Piper Sandler.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, good morning.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Good morning, Alex. How are you?

Alex Twerdahl -- Piper Sandler -- Analyst

I'm well, and you guys?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Good.

Alex Twerdahl -- Piper Sandler -- Analyst

First question for me, I just want to hone in on the commercial loan growth that you had this quarter. Based on some of your commentary, I think I know the answer, but do you think that we've now reached and are past the inflection point on commercial loan growth?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

So, when we look, we're -- definitely, we're very happy with the commercial loan growth that we've seen in this quarter. I think when we look at our pipelines and the activity that we're seeing on both the small and the middle commercial businesses, we are encouraged with the activity that we're seeing. And as I said on my remarks, we're seeing incremental optimism from the business sector getting ready for -- we're starting to expect, which is a more robust economic revival. So, I think the business optimism certainly supported by the reconstruction funds coming in and the economic revival. And last but not least is our business model. I think the fact that we kind of focus on doing it fast, easy and well done, and we have a business model that that gets us a lot closer to our commercial clients, is actually getting good traction and we are benefiting from that too. So, if this is the inflection point, I wish I could give you the convincing answer that this is the moment, who knows. We'll probably see it with the rearview mirror, but it certainly starts to look incrementally more positive and hopefully will continue for the years to come as the economy continues to move from to expansion.

Alex Twerdahl -- Piper Sandler -- Analyst

And then, if we just dig into the commercial growth a little bit more, can you break out what was construction versus C&I or CRE?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

I would say most of it is C&I. When we look at our business model, there are some loans, commercial loans that are construction mostly, business constructing new warehouses or building new stores, as demand has grown and they need the capacity. Those are the larger kind of clients. The smaller clients are mostly C&I lines to operate their businesses and do some small or medium-size acquisitions. So, when we look at it, I would say 50% of our originations are for what we call new money, meaning new money by businesses to be deployed into their own businesses. And the other 50%, it's more a refinancing and just going through their cycle -- their business cycle. So, again, that's how we break it down. And when we look at the large commercial, apart from what I just mentioned on construction, most of it is C&I lending businesses that are expanding their operations as the economy grows.

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. And then, just switching gears to the NIM. Maritza, maybe you could just quickly break out the contribution from PPP and NII this quarter? Well, yes. At the PPP loan [Technical Issues] it is going down as we continue to forgive loans. And for this quarter, there were only an incremental effect of two basis point as we have some forgiveness increase our fees there. It was about $400,000 only. So, it's not that significant during this quarter. Only two basis points. Did you get the answer, Alex? Are you there?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Operator, can you help us out?

Operator

One moment. And Alex, your line is open.

Alex Twerdahl -- Piper Sandler -- Analyst

Can you hear me?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, we can.

Maritza Arizmendi -- Chief Financial Officer

Yes, we can.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay. Yes, I did get the answer, Maritza. Thank you. And then, you guys are now sitting on 27%, your balance sheet is just cash, is there any update to the strategy with respect to activating some of that huge cash position?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, the update is we're going to take a look at it now at the end of the month of July. We are going to review our capital deployment options and we'll certainly communicate any decision made to the street accordingly. So, yes, we are clear, Alex. We have a significant cash position. We have strong earnings and strong earnings momentum. So, we're building a lot of capital also. We get it and we'll convey the message to our Board and we'll come back with a decision on how to continue to move forward on our capital deployment strategies in a more consequential way then probably earlier anticipated.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay. So, when you talk about capital and just to continue on that theme, I think earlier this year you sort of alluded to reassessing the dividend for a second time this year, as well as -- I mean are you now saying there's maybe some other possibilities on the table like a buyback for example?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes. We always have everything on the table. When we look at this -- so, we'll look at everything again, and as I said, we'll -- we know how things are moving along in terms of our performance and in terms of our capital growth. So, we'll be more focused, if you want to call it, to look at all options at this at this time.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay, understood. And then, back on to the margin. Just when I look at the cash position, sort of capital deployment aside, Is there any update to the strategy of maybe activating some of that cash with additional securities purchases and a loan growth as kind of what we're hoping for [Phonetic] or repaying some -- being more aggressive on reducing the cost of funds with some of that cash, anything like that?

Yes. So, the way we look at deploying cash to investment portfolio, we're going to be very patient, given where levels of interest rates are today. We mentioned in the call that we're -- the FHA loans that we originate, we're converting them to Genie's and we keep them on our books, on the investment portfolio. So, we're just not going to just go out there and deploy cash into long duration low yielding mortgage-backed securities. So, we'll be patient there. We are definitely looking into deploying our cash into lending activities. We see momentum certainly on the commercial side, as I mentioned. We also see good momentum on the consumer, and we've seen for a while now higher levels of origination on the auto side. So, we'll continue to deploy there. And then, we'll look at the mortgage origination business also and see if we can, with home prices, not only stabilizing, but starting to increase in price across all areas.

We might start looking more seriously into non-conforming lending strategies for us to keep in the books. So, those are all in play from the lending side. And I mentioned the capital management strategies that we're going to take a look at it now. Cost of funds, yes, we will continue to look at it. You saw the effect this quarter. We'll see additional effects in the next quarter. And it's something that we continue to look. I think you guys need to understand that we are also operating in a three-bank market and that's new for us in Puerto Rico. It's new for everybody out there looking at the island banking market. And I think we have great opportunities here to generate both above average returns across the board. Right. And then, just as I think about cash on the balance sheet with the child tax credit starting to hit people's bank accounts, I think in the last week, at least here, is that the same in Puerto Rico and would that suggest that cash balances should actually just continue to grow until at least early over the next couple of months?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

So, it has significant benefits for Puerto Rico but it's not necessarily immediate. The way it's going to be processed -- remember, we don't pay federal taxes, so the way it's going to be processed is probably going to have an effect later in 2022, but it definitely has an impact in Puerto Rico because the limitations in terms of the caps in dollar amounts, and the amount of kits that will qualify, it was eliminated for Puerto Rico, and it was paired to the US states. So, from that perspective, the dollar amount that will benefit the island will be higher than in years past, because more kids qualify, and certainly the income levels in Puerto Rico make it pretty widespread in terms of the impact, in terms of the families. It's just that the process is not going to be equal in terms of the cash deposits. It's not going to be equal to the one in the States. So, there's a little bit of a change there. But otherwise, it will have an eventual important impact.

Alex Twerdahl -- Piper Sandler -- Analyst

Understood. And then, just switching gears to the -- [Multiple Speakers]

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Alex, I think that you're not only looking for the consumer to start deploying the cash also. And I think we -- this quarter got benefits from the second, third or fourth wave of COVID stimulus, right? For the individuals. And we're also seeing on the commercial side how they're paying their lines of credit and bringing them down to zero balances because of the excess liquidity they have. Our expectation is in the second half of the year. We will see some of that excess liquidity on the consumer and commercial to be deployed incrementally into consumers or into consumption or in the businesses that they operate in. So, our expectation is not for continued deposit growth from the consumer and commercial as we've seen in the several quarters past.

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. And in terms of sort of the macro commentary, is their expectation for the expanded unemployment benefits to expire in September? Has there been any talk down there about that deadline changing, either bring it forward or anything we should be thinking?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

I haven't heard anything. I suspect it's going to end now at the deadline, and I have not heard anything specific on that. I really try to stay away from listening to too many positions.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay. And then, just switching gears to the ACL a little bit, you're still over 3% excluding PPP. Charge offs look a lot like any other bank, quite frankly, very low, historical low for you guys, how are you thinking about the ACL right now? Are there still some quantitative or rather qualitative factors that you guys are incorporating? Still anything you're sort of waiting to see before releasing reserves? How do you think that is going to sort of gradually grind lower?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Let me give you my big picture. I'll let Maritza give you the details. But I agree with you. And we've said it in the past. Now that Puerto Rico has kind of turned the corner from two decades of economic contraction and we're seeing the start of the revival, our banks financial performance also over the last two decades has been pretty, pretty good in spite of that economic contraction. Now that we have the revival, I think credit trends are going to trend toward the peers in the States. And I agree with your assessment that our numbers for this quarter certainly are equal or better than some of the states, the banks in the States. We look forward to continue to confirm that that's the trend in the quarters to come, given what we're seeing on the economy. Regarding the ACL, I'll let Maritza give you the details.

Maritza Arizmendi -- Chief Financial Officer

As we mentioned, Alex, I think the level of allowance that we have at this point are still elevated and as we continue to see great trends at this level and the economic revival continue being tangible for everybody, we see our allowance coverage gravitated toward the level of day one and with a good probability be better than that, lower than that day one accounting. But we need to continue and see consistent [Technical Issues] be sustainable through the time to start releasing [Technical Issues] qualitative adjustment that we still have within the allowance. [Technical Issues]

Alex Twerdahl -- Piper Sandler -- Analyst

Okay. And then, when I look at fee income and I look especially at the level of the banking service revenues, struck me as high this quarter, but then I also realized we've never really seen a clean quarter post Scotia. So, 18.2, is that kind of the right run rate to start out? Is that a normalized level?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

So, again, right on point on your comment, Alex. The COVID pandemic delayed the full momentum that we brought in with the Scotia acquisition. So, this is the first quarter, where we're seeing all systems go with the Scotia acquisition. When we look at banking service revenues, that is also the case, and that's what encourages us. Because it has a lot to do with business [Phonetic] activity, but it also has to do with the larger scale. We also need to get accustomed to those levels, I don't want to go out on a limb and say this is the going rate but it certainly starts to look like it is.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. And then, just last question for me. When you think about the efficiency ratio target of kind of mid to low 50 as by the end of 2022, does that -- do we need to see some rate hikes to kind of help that out or is that something that can be sort of achieved in the current environment?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, we certainly need the rate hikes. In a growing environment and growing business environment, it's very, very difficult to just bridge the low 50s efficiency ratio by just bringing down expenses. And as I said in quarters past, we're making some investments in technology and digital, and that will certainly have an impact there. So, yes, we do need -- we need some help from interest rates going up. And that's why I mentioned earlier on the question regarding deployment of liquidity, we expect -- even though we've been wrong so far, we expect interest rates to inch up and be more compelling for us to invest in the investment portfolio, and also get a little bit better returns on our variable rate commercial loans that we have in the books. And that should impact and help improve our efficiency ratio to the mid to low 50s. That's our expectation.

Alex Twerdahl -- Piper Sandler -- Analyst

Perfect. Thank you for taking my questions.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Thank you, Alex. Have a great day.

Alex Twerdahl -- Piper Sandler -- Analyst

You too.

Operator

Thank you. [Operator Instructions] And your next question is from Jon Krautmann of Rubric.

Jon Krautmann -- Rubric Capital -- Analyst

[Foreign Speech].

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Hi, good morning.

Jon Krautmann -- Rubric Capital -- Analyst

You mentioned there is only three commercial banks on the island, how would you characterize the competition for deposits and what does that mean in your opinion for interest rate sensitivities for us in the future?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Okay. Competition for deposits is strong and we were -- particularly on the commercial side. So, when I -- when we look at the consumer side, it's a -- the expected competitive landscape, both making sure that we serve our customers on the individual. On the commercial side, it's keen, and there is some, I would say, above level, aggressive levels of pricing on the commercial side. What does that mean for sensitivities into the future? I think we will have lower for longer when interest rates go up. That's how I see it.

Jon Krautmann -- Rubric Capital -- Analyst

And switching the commercial loan growth, you had a good discussion there with Alex around some of the inputs there. But with respect to [Technical Issues] production, which [Technical Issues] to be some of the biggest multipliers in terms of economic activity, construction is. When do you think we see larger scale construction projects really start to take shape on the island?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Well, it's all dependent on how CDBG phones are deployed in the island. They are starting to be deployed. There's some federal contracts that are being approved in time. And so my expectation is in the second half of the year. We'll start seeing those and incrementally growing going forward, but hard to be specific to your question.

Jon Krautmann -- Rubric Capital -- Analyst

Third question is on loan loss provisions. Obviously, we saw some progress there. Can you help us out with just understanding some of the macroeconomic changes if those were incorporated into the model that helped drive some of the release there in reserves and do things continue where we are right now? Should we expect that to continue with reversals in the back half?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

There are no changes in macroeconomic assumptions. The changes that you're seeing on the provision is basically based on the credit performance of our loan portfolios. And since they improved we -- our model just spits out a release. We take care of the charge-offs, and then we run the model and it spits out the provision number, which is, in this case was a negative provisioning, because of, as Alex mentioned, we are having a low level of credit losses and we see our delinquency levels at very low levels also, historically, as well as NPL. So, that's how it works out, but we do not tinker with the economic assumptions. That is something that -- we do that when we have a shock to the system and that shock happened last year.

Jon Krautmann -- Rubric Capital -- Analyst

So, is it fair to say then if third parties like Moody's economics were to upgrade the island, their economic forecasts, whether it's because of a debt deal resolution or other macroeconomic areas that are improving on the island that would as that's incorporated into our model that that would potentially accelerate loan loss provision reversal?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

I think you're looking too much into it, honestly. I think the third parties, in this case, Moody's or whoever, they just run their macroeconomics for the island and we discuss it with them and we include those assumptions into our model and we run the allowance calculation, but don't make too much about all these modeling and all these economic assumptions and all that stuff because there has to be a complete shift in the economic reality for those assumptions to change dramatically one quarter to other. So, at the end of the day it's about primarily how your loan portfolio, from a credit perspective, is performing. And that's how we -- that's what moves the needle.

Jon Krautmann -- Rubric Capital -- Analyst

Got it. Okay. And then, a bigger picture question. With some of the efforts around the G20 and the global minimum corporate tax rate. If that were to proceed, and there seems to be some barriers within various countries within the G20 and blessing, something like that, but if that were to proceed and we were to see a minimum corporate tax rate, how does that affect investment on the island? Does that impact prospective investment from say pharmaceuticals as they talk about reinvesting in the island?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

That's for a higher IQ. I am a normal level IQ guy. I don't have the answer for that. Sorry.

Jon Krautmann -- Rubric Capital -- Analyst

Got it. Okay. And then, just last question. Again, bigger picture on the island. What do you sort of see in out of the local, the Puerto Rican legislature and the Governor's office in efforts to promote a climate that's conducive for Mainland and foreign investment in Puerto Rico?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, I said earlier, I don't -- I try to stay away from the political landscape as far away as possible, but the short answer to it is nothing.

Jon Krautmann -- Rubric Capital -- Analyst

Okay, thank you.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, thank you for your questions.

Operator

Thank you. [Operator instructions] And your next question is from Anne Wickland of Easterly investment.

Anne Wickland -- Easterly investment -- Analyst

Good morning.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Hi, good morning. How are you?

Anne Wickland -- Easterly investment -- Analyst

I'm good. I wanted to circle back to the CET ratio. So, last quarter you gave us a target of more 11% to 12% and you're currently sitting at about 14%. So, first, can you quantify how much excess capital we will have and sort of the timing on it garnering that excess capital? And then, second, and Alex kind of touched on this question, but I wanted to ask other possibilities. You talked about loan growth and non-performing loan growth -- or non-performing loans, is M&A on the table at all or maybe a small financial technology bolt-on to help build out your customer service offering?

And then another thing you haven't talked about in a while is your US investments and the syndicated loan. So, if you just can just kind of provide some color on that?

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Yes, sure. So, you asked me three questions. I hope I can remember all three. If I don't, please, please remind me of the question. So, I'll start with the CET question first. As I said earlier, we know we are building capital quite fast given our results and so far in the first half of the year. So, yes, we do recognize that we have excess capital. It's around 2.5 basis points to 300 basis points of excess capital that we can manage on so we know what we need to do. And in terms of deploying that capital, and I don't want to go into the specifics here, but what I can tell you that the Board -- we're going to be looking at this very closely from a capital management perspective and strategies to deploy that capital.

So, the second question was regarding M&A and if there is any opportunity for us to do M&A, I don't see any M&A opportunity here in Puerto Rico. Opportunities in the States, it's something that we're not right now focused on in terms of M&A. So, that's not something that we have on our cards. And then, I think the third question you asked me was regarding the US loan program that we have launched on 2017. And kind of give you an update. So, we continue to build that book as part of our deferred diversification, geographic diversification. I think it's the right thing to do. We have, I would say right now, 50% of the book is middle market loans, the other 50% are small commercial loans that that we have a partnership with back in the States. So, that's kind of how we're going at it. We're slowly but surely building that.

Certainly the numbers in this quarter, from that bucket, did not do any dent on the -- did not affect significantly the balance of our loan book or the commercial book. Most of the originations are small commercial loans that are mostly lines of credits and really did not affect the loan balances in this quarter. But that's how we see that and we continue to methodically build that business as part of our longer-term strategies. Did I miss any of your questions?

Anne Wickland -- Easterly investment -- Analyst

No, that was great. Thank you. And great quarter.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Thank you. Thank you. You're welcome.

Operator

Thank you. [Operator Instructions] And at this time there are no further questions. I will now turn the call back over to Jose for closing remarks.

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Thank you, operator. Thanks again to all our team members who have helped our customers through the pandemic and done a great job in the first half of the year. And thanks to all our stakeholders, who have all have listened in. So, have a great day. And looking forward for the next quarter call.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

Duration: 47 minutes

Call participants:

Jose Rafael Fernandez -- Chief Executive Officer and Vice-Chair of the Board of Directors

Maritza Arizmendi -- Chief Financial Officer

Alex Twerdahl -- Piper Sandler -- Analyst

Jon Krautmann -- Rubric Capital -- Analyst

Anne Wickland -- Easterly investment -- Analyst

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