Oriental Financial Group (OFG) Q2 2022 Earnings Call Transcript

Oriental Financial Group (OFG 1.29%)
Q2 2022 Earnings Call
Jul 21, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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 home page 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. [Operator instructions] I would now like to turn the call over to Mr. Fernandez.

Please go ahead.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

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 legacy branch buildings.

Net interest margin was 4.8%. Provision was $6.7 million. Noninterest expenses were $85 million. And pre-provision net revenues totaled $66 million.

Looking at our balance sheet, when we compare it to the prior quarter, total assets amounted to $10.2 billion. Customer deposits increased both from retail and commercial accounts and totaled approximately $9 billion. Our liquid balance sheet enable us to continue to deploy cash into higher-yielding loans and investment securities which improve 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 continued 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 continued 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 to go over the financials in more detail.

Maritza Arizmendi -- Chief Financial Officer

Thank you, Jose. Please turn to Page 4 to review our financial highlights. Looking at total core revenues, they increased $13 million year over year and $10 million quarter over quarter. As part of that, interest income totaled $122 million.

This was $9 million higher than the first quarter. Interest income benefited from increased yields on higher balances of loans and investment securities. It also benefited from improved yields on cash. Noninterest income was $36 million.

This increased $5 million from the first quarter. Core noninterest income at $31.2 million reflected higher banking service and wealth management revenues and lower mortgage banking revenues. Noncore noninterest income benefited from the $4.7 million gain on sale of our legacy branch buildings. Looking at the efficiency ratio.

It was 58.27% in the second quarter. That's an improvement from both previous and year-ago quarters and reflects revenues growing at a greater rate than expenses. Expenses totaled $85 million. That's $4 million higher than the first quarter.

The increase primarily reflected higher compliance-related professional expenses due to greater levels of business activity. It also reflected higher technology expenses due to our ongoing investment in our digital capabilities. Looking at our return metrics. They improved year over year and quarter over quarter.

They also continue to be in line with our target range. Return on average asset was 1.58%. That is up 10 basis points from the previous quarter. Return on average tangible common equity was 17.70%.

That is up more than 180 basis points from the first quarter. Looking at tangible book value per share. That was $18.86. That is a decrease of 4 basis points from the first quarter.

This reflects three factors: one, the repurchase of common stock; two, the reduction in other comprehensive income; and in turn, this was partially offset by the increase in returned earnings. Please turn to Page 5 to review our operational highlights. Looking at average loan balances, they totaled $6.64 billion. That is an increase of $121 million from the first quarter.

End-of-period loans held for investment increased $155 million. We have now had two consecutive quarters where loans have grown at almost a 10% annualized rate. The second quarter increase reflected new Puerto Rico and U.S. commercial loans and new auto and consumer loans.

This was partially offset by a decline in mortgages and PPP loans. Looking at loan yield. That was 6.73%, that's a 4-basis-point increase from the first quarter. As we have mentioned in the past, it takes a while for Fed rate increases to work their way into our portfolio through new and variable rate loans.

Looking at average cost -- average core deposits. They totaled $8.95 billion. That is an increase of $138 million from the first quarter. And end-of-period deposit grew $50 million.

Looking at core deposit costs. It was 24 basis points. That is a reduction of 1 basis point from the first quarter. To date, we have seen virtually no deposit beta.

Looking at new loan originations. Originations continued at a high level at $587 million. This reflects continued high levels of auto and consumer lending. Auto loan origination at $193 million reached a historical high level.

Now looking at net interest margin. That was 4.80%. That is an increase of 33 basis points from last quarter. It also -- it is also an increase of 58 basis points year over year.

The higher net interest margins reflected three key factors: one, growth of the loan portfolio at a slightly higher yield. This accounted for 38% of the increase in net interest income. Two, the increase in investment securities at higher yields. This accounted for 35% of the increase.

During the second quarter, we continued to opportunistically increase our investment portfolio. And three, higher yield on a lower volume of cash. This accounted for 21% of the increase. Please turn to Page 6 to review our credit quality and capital strength.

Looking at net charge-offs, they totaled $4.5 million in the second quarter and $577,000 in the first quarter. The second quarter included $2.5 million in net charge-offs -- on a net charge-off from a previously reserved commercial loan sold during this quarter -- during the second quarter. The second quarter also reflected significantly lower net charge-off in the auto loan portfolio and a nice recovery in the mortgage portfolio. First quarter net charge-offs benefited from $3.9 million in recoveries from an acquired PCD loan and the final settlement of the sale of nonperforming loans in the fourth quarter of 2021.

Looking at the provision for credit losses. Total provision for credit losses was $6.7 million. Let me break it down into its component to facilitate the analysis. Two main factors affected the non-PCD portfolio.

One was the increase in volume -- in loan volume. This added $6.7 million to the provision. The other was two commercial loan entries into NPLs. They added $6 million.

There were also two main factors that affected the PCD loan portfolio. One was a reduction in loan volume. This reduced provision by $1.6 million. And the other was a $3 million reduction in qualitative adjustment and loss factors as credit continue and -- as credit quality continues to trend positively.

Economic model adjustment of $1.7 million. This primarily accounts for higher probability of recession in the U.S., adding reserves to the U.S. loan portfolio. In the end, second quarter allowance coverage was 2.37%, relatively flat with the first quarter.

Looking at nonperforming loans. Total nonperforming loan rate was 1.61%. That is up 12 basis points from the first quarter and down 50 basis points from a year ago. Looking at CET1 ratio.

That was 12.80%. That compares to 13.24% in the first quarter. This reflects three factors: one, the repurchase of common stock; two, the increase in risk-weighted assets; and three, it turns -- this was partially offset by the increase in retained earnings. Now here is Jose.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Thank you, Maritza. Let's turn to Page 7 for our outlook. Starting first with OFG, we see continued increased 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, consumer and businesses in Puerto Rico continued 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.

Questions & Answers:

Operator

[Operator instructions] Our first question will come from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning, everyone.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Hi, Brett.

Brett Rabatin -- Hovde Group -- Analyst

I 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, but you did have two credits migration to nonaccrual. 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Sure. So as I said on the remarks earlier, we see credit in Puerto Rico continue to trend very positively and consumers continue to have high levels of liquidity and so do businesses. So we are not feeling any change in how the Puerto Rico credit situation is behaving at this point. Regarding the two credits, these are two isolated commercial loans.

One is a small business loan in Puerto Rico. It's a $2 million loan. And really, it's just in a business -- it's in the telecommunication business, and they provide services to telecommunication companies. And they've been suffering a bit from the supply chain issues in terms of the importing of all the materials that they need to get things done.

So we feel that it's completely isolated regarding the credit and we're working with it. So it's not a big issue. The other loan is a U.S. loan participation.

And this, again, is a -- it's in the packaging business. So the manufacturing and the supply chain also have caused some disruptions and that's why we are provisioning for it. But we do not see at all any change on the credit profile here in the island. And frankly, I think the global inflation and disruption that has occurred, certainly, we do have some of those effects in the island, particularly in the electricity cost and the gasoline.

But as I travel through the island, and I do that quite often, visiting the different businesses and as well as our branches and employees, there's a lot of business activity in the island. And I definitely will probably cannot keep up with the same level of growth we've had in the first part of the year in Puerto Rico. But I think Puerto Rico is in a pretty good position right now economically.

Brett Rabatin -- Hovde Group -- Analyst

OK. And you mentioned inflation, Jose Rafael. I guess one of the pushbacks I get when I talk about Puerto Rico is that, well, 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 could 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's pressure from the inflation?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

So we frankly have not. We continue to see the consumer pretty strong. We saw our levels of auto lending this quarter was really a record for us. So we see the consumer is still very much going out there and buying big-ticket items, too.

So we are not seeing any deterioration so far. But we are cognizant of what's going on in terms of the cost of living in the island, as it has affected the rest of the world. And logically, we should expect a slowdown of that. We are not modeling going forward to remain the level of activity that we're seeing because interest rates are going up and inflation.

Brett Rabatin -- Hovde Group -- Analyst

OK, 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 trends similar to last year from here? Or do you think it continues its current trend?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

My gut tells me that it's hard to keep the pace, Brett, so in terms of the sales of new autos in Puerto Rico in general. So I know that there's been some disruptions in the near -- in the recent past in terms of inventories and all that, given -- driven by the chip manufacturers and all that stuff. Surprisingly to us, the dealers continue to have enough inventory to sell cars. And I just feel that it's not going to be able to sustain -- be sustainable going forward.

Having said that though, the new car sales in Puerto Rico are going to remain at a high level, given what I said earlier in terms of the strength of the consumers and businesses in the island. And Brett, you also mentioned the stimulus funds and you mentioned the reconstruction funds. Just want to give you a little bit of additional color there. We are seeing a lot of activity on the reconstruction part.

And we're seeing a lot of projects going out there that are more government-driven, but are really creating an additional layer of momentum for the island, particularly for the middle class and low middle class in Puerto Rico. And I think that's really encouraging. And it should be sustainable for the next several years given the magnitude of those reconstruction funds. And in terms of the stimulus fund from COVID, those are still coming in.

And I want to stress the Child Tax Credit is something that Puerto Rico has never been significantly a beneficiary of it in any significant way. And now this new law allows Puerto Rico to receive Child Tax Credit equal to any -- with the same formula as any other state of the union. And that has a significant impact. It has also some qualitative impacts, too.

And that is in order for you to get that credit, you need to file your tax returns. So Puerto Rico government is seeing higher tax return filings in many, many years where that has not occurred. So it's bringing more people to the economy and coming out of the underground economy. So there are lots of underpinnings going on in Puerto Rico right now, apart from the dollar number that are building.

What I think is it's going to be a good forward outlook for the island in the next several years.

Brett Rabatin -- Hovde Group -- Analyst

Yeah, that's helpful, Jose Rafael. I certainly think that Puerto Rico could decouple from the 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Sure. Thank you.

Operator

Thank you. Our next question will come from Timur Braziler with Wells Fargo. Your line is open.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi. Good morning.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Hi.

Timur Braziler -- Wells Fargo Securities -- Analyst

Maybe following up on one of the statements you had made, Jose, with the loan growth. You're still expecting good loan growth but probably can't keep the pace with what you saw in the first half of the year. Can you talk through which line items? Is that mainly a consumer statement kind of in reference to your gut feeling on auto slowing? Or is there something that you're seeing more broadly that makes you believe that the pace of lending activity is not sustainable as a follow-up?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. Thank you for your question. Yes, we see loan growth in 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 two 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 second half of the year.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. 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, utilized 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 you plan on using? Maybe just talk about the funding strategy going forward.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Sure. We are beneficiaries for the first time in many, many decades in Puerto Rico. The banking sector has excess core funding, so we certainly are going to take advantage of that opportunity. And as you saw this quarter, we also -- we grew deposits even further this quarter.

We feel that loan growth is going to be funded by those core deposits that we have, that excess deposits. And so at the end of the day, when you look at the Puerto Rico banking market today, it's very different than it was 20 years ago. And it's very different from the same dynamics that you see in the banking market in the States. But I think in a way, that it's benefiting us at OFG, and that is we only have three players, three main players.

And I think we all have excess deposits and we are all being very rational in our deposit strategies. So I feel that as we grow further our loan book, it will be done through our core deposit balances.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. Thank you for that color. Next for me, on the bond purchases this quarter, can you just talk through what some of those reinvestment yields were 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yeah. I would say in the three handle, 3% or so kind of a handle for both, for the mortgage-backed securities, as well as for the treasuries. There's 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 is -- has been quite slow. So -- but anyway, the purchases we've done, it's around 3% -- north of 3%.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK, OK. And then just last for me, again, following up on the credit quality and understanding your comments about the macro trends and how it's going to be much better than where we had seen Puerto Rico in 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 that popped up this quarter as one-off?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

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 businesses 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's quite a strength on the businesses in Puerto Rico and we don't foresee any deterioration forward.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK, OK. Thank you for the color.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. Thank you.

Operator

Thank you. Our next question will come from Alex Twerdahl with Piper Sandler. Your line is open.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, good morning.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Hi. How are you, Alex?

Alex Twerdahl -- Piper Sandler -- 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 gotten so far, what would be the expectation for the NIM and for NII, more importantly, heading into the third quarter?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. So. Alex, as you point out, this quarter does not yet reflect what happened during the quarter in terms of interest rate increases by the Fed. So there's a two-, three-month lag for us to reflect the full effect of those interest rate increases.

So what I would say is that this third quarter, you will see the full effect of the rate increases that you saw in the second half of the -- in the second quarter. And you'll see partial effect on the forthcoming rate increases by the Fed. So at the end of the day, we can all do the math and it's pretty straightforward. We have pretty good outlook out there in terms of net interest income and the margin, given the core deposit strength that we have on our balance sheet and looking at our betas being relatively 0 or negative so far this quarter.

So we feel very confident about the impact of interest rates into our loan book and how we will be benefiting from it the rest of the year and into 2023. That is why we feel now more comfortable saying, given the investments that we're making in our technology and digital and improving our customer experience, that is why now we're feeling more confident in saying the efficiency ratio should be in the mid-50s for the rest of the year and 2023. I wish I had a little crystal ball two quarters ago to be able to feel as positive as I feel today regarding efficiency ratio, but it is what it is.

Alex Twerdahl -- Piper Sandler -- Analyst

Just as a quick housekeeping item, do you have the PPP fee contribution from the second quarter in the NIM and NII?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

I don't, but I'm sure Maritza has the number.

Maritza Arizmendi -- Chief Financial Officer

Alex, I don't have it with me. It should be much lower than we saw last quarter, but we can -- I can give it to you off-line, OK?

Alex Twerdahl -- Piper Sandler -- Analyst

OK. Thank you much on that. And then you mentioned that in the second quarter, you're seeing really nothing in the way of deposit betas so far. Is there any inclination that customers are looking for higher deposit rates? Are you seeing any pressure thus far with all the hikes we've seen?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

So I'll do what I did earlier, I'll split the answer in two. Consumers, we are starting to see some high-balance consumers starting to move money to the wealth management side of the business. So you saw a little bit of an increase in fees on the broker-dealer and the trust business. That's a little bit of what we're seeing.

Certainly, there's no -- we don't get all of it, but we certainly are seeing some of it. So on the consumer side, high balances, some of the CDs that are coming due, they were being redeployed into savings accounts at a higher rate earlier in the year. Now they're being deployed to wealth management and we're seeing that happening. On the commercial side, we're seeing some of the large commercial balances also having -- putting a little bit of pressure in terms of interest rates.

So they're competing forces in the island that we need to be cognizant of. So there might be some pressure for us on the commercial large balance deposits in the next several quarters. But again, we feel that we are in pretty good shape in Puerto Rico, OFG, and Puerto Rico as well, given the competing marketplace we operate in, which has a significant player here with excess deposits and as well as the other two players. So we're, I think, optimistic about deposit betas for us here at OFG going forward.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. And then can you give us some color on the mortgage market in Puerto Rico? Have you seen a slowdown? I mean, it 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. So two things that I can give you color on. One is certainly interest rate increases have basically brought to 0 all the refinancing on the residential mortgage side. So from that point of view, that type of business is pretty much 0.

But on the other hand, Puerto Rico's real estate market has 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's still quite a bit of a purchase market here in the island, and there's 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 some of the things that are being taken care of by the reconstruction funds. 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's still some good opportunities for purchase market here.

Alex Twerdahl -- Piper Sandler -- 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

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 late June, early July. So we're actually retaining some of the -- some of the residential loans that we originate because they have a better yield. So yes, we're doing that.

So you'll see mortgage banking activities slightly trending down simply because we're retaining and not selling.

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. Perfect. Thanks for taking my questions.

Operator

Thank you. [Operator instructions] Our next question will come from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin -- Hovde Group -- Analyst

Hi. 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, in the U.S.?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. 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-some million of middle-market loans. So that's the composition.

Brett Rabatin -- Hovde Group -- Analyst

And then, Jose Rafael, any thoughts on your appetite for production?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Oh, yeah, sorry. I think what you've seen so far in the last several quarters, that's what you're going to be seeing going forward. As I said, this is a geographic diversification strategy that we've been pursuing since 2017. And so what you will see from us is continue to be nationally diversified, mostly focused on the small businesses in the States and building our team here in the island, too.

I mean -- I'm sorry, not in the island, building our team for the U.S. business also. That's also part of what we're doing because, again, I think it makes sense for us to diversify geographically. So that's kind of how we see the U.S.

business today.

Brett Rabatin -- Hovde Group -- Analyst

OK. And then you're mostly through the current authorization on the share repurchase plan. Do you have any thoughts on share repurchases from here and how you see that money in the back half of the year?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. So we've done pretty -- we've been pretty opportunistic in the last two years, since 2021 when we did -- we announced the first repurchase. So we're going to continue to be opportunistic going forward. We also look at the dividend and we will continue to -- we recognize that we have a very strong position in terms of capital.

We have great momentum in the business. So we always look at both and we will update the market accordingly.

Brett Rabatin -- Hovde Group -- Analyst

OK. And then just, lastly, I saw in the news and in a publication, that there was 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 you think the outlook might be for that?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. Hospitality, in general, in Puerto Rico, it is trending very positively. All our commercial loans that we have on the hospitality business are performing significantly better than what we had projected when we originated the loans. We are seeing very lower levels of vacancy than historically.

We're seeing a lot of business activity on the travels tube. And I think Puerto Rico is also doing a much better job at marketing the island abroad. So I think we're seeing the hospitality business as a growth business in the island. And certainly, there's a lot of Airbnb as you pointed out.

But there's also -- in the last several years, there's been quite a buildup on rooms, hotel rooms in the island in -- not only in the metropolitan area but also around -- across the entire island. And all those hotels are performing very well and should continue to serve the tourism business in the island.

Brett Rabatin -- Hovde Group -- Analyst

OK. 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

So I think the Oversight Board has a mandate, and that mandate is to get balanced budgets and to make sure that they restructure the debt and all that stuff. They've been doing -- in my mind, they're doing a good job at keeping discipline, fiscal discipline in the island. And it's -- you see it in the States. You see it here in Puerto Rico.

It's hard to keep fiscal discipline for governments across the United States, as well as across the world. So I think the fiscal board is serving as a good vehicle with all its deficiencies, right? But it is a good vehicle to keep the fiscal discipline. And it's definitely not perfect, but it's something that -- it's going to take, I think, two or three more balanced budgets for them to complete their mandate. They have to restructure the PREPA debt, which is still on the works.

So I think the dynamics are, after a while, it's kind of working as it should be.

Brett Rabatin -- Hovde Group -- Analyst

OK, great. Appreciate the additional color.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. Thanks for your questions, Brett.

Operator

Thank you. Our next question will come from Kelly Motta with KBW. Your line is open.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Hi. Good morning. Thanks so much for the question. I got disconnected a little while ago, so I apologize if this has already been asked.

But I noticed your efficiency guidance was taken down to the mid-50% range with this quarter. So I was wondering if that's 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 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yup. So thank you, Kelly, for the questions. On the efficiency ratio, yeah, we're modeling a mid-range 50s -- mid-50s range efficiency ratio driven by higher net interest income. We will continue to invest on technology and the digital efforts that we're doing and all that stuff that we've talked about in the other -- in the previous quarters.

So that's kind of the impetus behind us guiding on a mid-50s efficiency ratio. We also saw on the expense side this quarter that we saw an increase due to business activity, primarily on the compliance side. We don't expect those expenses to be recurring. We do expect some of that expense to flow out, so we're going to be very focused on keeping our expenses in check as we continue to invest in our franchise.

But again, efficiency ratio in the mid-50s. Regarding net interest income, I think your question was addressed earlier and the answer basically is interest rates are driving higher net interest income. And certainly, as we grow the loan book, we will have a double benefit, right? We grow the volume and the balances and we improved because of the higher net interest income on the loan side, as well as on the investment side and the cash. So we have the -- we are very well-positioned for what the Fed is doing in the next several quarters in terms of interest rates.

So that's kind of our outlook on the net interest income. Did I miss any of your -- you mentioned about the customer experience, I think you did. So we -- yes, we launched this quarter two self-service kiosks, which is a part of our strategy to try to take out of the -- of our flagship branches the transactions that can be done on a self-service basis, either digitally, mobile. And we're providing these kiosks as a way for customers to take care of all their issues in a fast and efficient way.

Also, that will provide more time and more better ability for our employees at the branches, at our flagship branches, to really learn what are the customer needs and be able to help them walk through their financial needs and resolve those issues. So we will be in a better position as we continue to transition our banking network in that direction. So we will continue to invest in our technology to get our strategic differentiation executed in place.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Got it. Thank you so much for the help. I appreciate it.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Thank you for your questions, Kelly.

Operator

Thank you. Next, we have a follow-up with Timur Braziler with Wells Fargo. Your line is open.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi. Just two quick follow-ups. The dollar of U.S. participation loans, if you have that on hand?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

I'm sorry, could you repeat the question?

Timur Braziler -- Wells Fargo Securities -- Analyst

The dollar amount of participation loans on the mainland?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

I said $600 million split in two: $130 million, plus or minus, on middle-market loans; and the difference in small commercial businesses.

Timur Braziler -- Wells Fargo Securities -- Analyst

And that's all participation? Or is participation just the chunk of it?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yeah. These are all participations with key partners that we have.

Timur Braziler -- Wells Fargo Securities -- Analyst

OK. Understood. Just a modeling question, and I'm sorry if I missed this in the documents, but the number of shares repurchased this quarter?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

We'll disclose -- I don't have them with me, but we can disclose that. It's around 1.1 million shares or so. I don't have that specific number, but it's around there.

Timur Braziler -- Wells Fargo Securities -- Analyst

Thank you.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yeah, you're welcome.

Operator

Thank you. Next, we have Alex Twerdahl with Piper Sandler. Your line is open.

Alex Twerdahl -- Piper Sandler -- 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 went away? 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

I'll let Maritza get an answer for that one.

Maritza Arizmendi -- Chief Financial Officer

So the qualitative adjustment reduction that we disclosed and shared with you does not include the $1.7 million that we also disclosed on the economic model. The $1.7 million is excluded from that quality adjustment. That qualitative adjustment is part of the modeling. We have had more better trends in recoveries, as we were saying in the mortgage portfolio, particularly in the PCD loan portfolio.

Actually, on Page 19 of the presentation, you can see how this release of reserve, of this $4.9 million, you can see that PCD is about $3 million of that adjustment and the non-PCD is about $1.9 million. And it's because of the positive trends in the portfolios, in the deal delinquencies, and in the charge-offs.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. 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 it seems like one of the commentary -- or one of the things I'm hearing from banks here is that the 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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Line utilization, Alex, is -- 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's been some delays and postponement of some transactions that we might have booked for this quarter, and maybe they never get booked. So yes, we're 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 -- Piper Sandler -- Analyst

OK. And then just a final follow-up. You mentioned some of the expenses, the compliance-related expenses being nonrecurring. Are you able to break that out for us and maybe explain what they were?

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

So as I said, business activity increased. It has increased for the last four quarters, five, six quarters. And so we need to catch up and we need to do the things that we need to do to make sure that we are up to date with all the consumer compliance issues and also in preparation for CFPB. We are above $10 billion.

We expect to remain above $10 billion. So those -- all those things are in place. It's part of running a bank.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. So when you say that they won't recur, it's not like there's a one item. It's kind of a little bit of catch-up, a little bit of planning for --

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

There is -- what I try to say when I said it's nonrecurring is that, yes, there is a catch-up here. And we don't expect that same level of expenses to be deployed into that item, particularly in the next several quarters. That doesn't mean it's eliminated to 0. It's just that it's -- the level is not recurring.

The level, the amount of.

Alex Twerdahl -- Piper Sandler -- Analyst

OK. Thank you for clearing that up for me. That's it for me. Thank you.

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Yeah, you're welcome.

Operator

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 Rafael Fernandez -- Vice Chairman and Chief Executive Officer

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 signoff]

Duration: 0 minutes

Call participants:

Jose Rafael Fernandez -- Vice Chairman and Chief Executive Officer

Maritza Arizmendi -- Chief Financial Officer

Brett Rabatin -- Hovde Group -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

Alex Twerdahl -- Piper Sandler -- Analyst

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

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