To the Popular, Inc. Third Quarter 2021 Earnings Call. My name's Bethany. I'll be coordinating this call for you today. If you would like to register a question at the Q&A, please press star followed by one on your telephone keypad. I will now hand the call over to your host, Paul J. Cardillo, Investor Relations Officer at Popular. Over to you, Paul.
Good morning, and thank you for joining us, and also for your patience as we dealt with some connectivity issues. With us on the call today is our CEO, Ignacio Álvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our webpage at popular.com.
I will now turn the call over to our CEO, Ignacio Alvarez.
Good morning, and thank you for joining the call. The third quarter was another strong one in which we achieved net income of $248 million. Our results reflect the continued strength in economic activity driven by the unprecedented levels of federal stimulus. They also reflect our diversified sources of revenue and prudent risk management. Please turn to Slide 3. Our quarterly net income of $248 million was $30 million higher than the second quarter and $80 million higher than the same quarter of 2020. The sequential variance was driven by a higher benefit on the provision for credit losses, partially offset by higher expenses. Net interest income was in line with the second quarter. Our non-interest income increased primarily due to the sale of two corporate office buildings. A higher volume of credit and debit card transactions in the quarter also contributed to the increase.
Credit quality trends continued to be favorable in the period with lower NPAs and low levels of net charge-offs. During the quarter, we continued to return capital to our shareholders. On September 9th, we completed the previously announced $350 million accelerated share repurchase program. On September 30, we announced the redemption of our 6.7% trust-preferred securities, of which $187 million is currently outstanding. These actions evidence the strength of our capital position, which allows us to return capital to our shareholders while we continue to invest in our franchise. Please turn to Slide 4. On October 15th, we acquired K2 Capital Group, a national healthcare equipment leasing business with $119 million in assets. This transaction will complement and expand our existing niche healthcare lending business.
Our customer base in Puerto Rico continues to grow, increasing by 12,000 in the third quarter and by nearly 42,000 year-to-date to reach more than 1.9 million unique customers. Adoption of digital channels among our retail customers continues to be strong. Active users on our Mi Banco platform exceed 1.1 million and have grown by 18% since March 2020. We captured 66% of our deposits in the third quarter through digital channels. As expected, these trends have adjusted slightly lower but remain significantly higher than pre-pandemic levels. Within Popular's clientele, the dollar value of credit and debit card sales have continued to trend higher, increasing by 5% compared to the same quarter a year ago. Volumes are also well above pre-pandemic levels, 34% higher than in the third quarter of 2019. Auto loan and lease originations at BPPR have remained extremely strong.
While they have decreased slightly compared to the third quarter in 2020, which reflected the reopening of the economy, they were 26% higher versus the third quarter in 2019. We have continued to see strength in the housing market. While the dollar value of mortgage originations at BPPR decreased by 3% compared to the third quarter of 2020, they increased by 51% compared to the third quarter of 2019. Please turn to Slide 5 for an update on the current macro environment in Puerto Rico. In the third quarter, business trends and customer activity remained robust. We continue to see strong momentum in recent quarters as most COVID-related restrictions that were in place have either been relaxed or eliminated. Puerto Rico has continued to make solid progress on the vaccination front, and we're proud to say that we have the highest vaccination rate of any U.S. state or territory.
According to the CDC website, 81% of the population over seven years old have been fully vaccinated, and 90% have received at least 1 dose of the vaccine. New auto sales continue to reflect strong consumer demand and are on a record pace with 31,000 units sold in the third quarter. Year-to-date, auto sales are up 66% compared to the first nine months of 2020 and are up 32% from the same period in 2019. Cement sales have also remained strong. Year-to-date sales through August were higher than the level of sales seen through the same periods in 2018 and 2019 when the island was rebuilding following the 2017 hurricane. Activity levels in the tourism hospitality sector have continued to be a source of strength for the local economy. With much of world travel still somewhat limited, Puerto Rico continues to be a popular destination for mainland residents.
Hotel demand remained strong during the quarter. In August, occupancy rates in Puerto Rico have exceeded the comparable period in 2019 for the fourth consecutive month. Airport traffic has continued to improve. Year-to-date passenger traffic has more than doubled compared to last year and has now exceeded comparable 2019 levels. In September, traffic was up 130% compared to the same month a year ago, and was 20% higher than in September of 2019. This was the sixth consecutive month that passenger traffic has surpassed comparable figures in 2019. Cruise ship arrivals recommenced in August. According to the Puerto Rico Tourism Company, more than 300 trips are anticipated for the remainder of the 2021-2022 season. Employment levels have improved but are still somewhat below pre-pandemic levels. Total nonfarm employment has increased by 3% since December 2020 and by 1% since August 2020.
We are pleased with the results for the third quarter and continue to be optimistic about the prospects for the future. However, we will remain attentive to how the evolving health situation may impact the economy. I will now turn the call over to Carlos for more detail on our financial results.
Thank you, Ignacio. Good morning. Please turn to slide 6. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the second quarter. Net interest income for the third quarter was $489 million, an increase of $2 million from Q2. Non-interest income increased by $15 million to $169 million in Q3. Around $12 million of the increase came from extraordinary items, including a $7 million gain associated with the sale and leaseback of two corporate buildings, plus $3 million higher net earnings from investments held under the equity method, along with other smaller item variances. The provision for the second quarter had a benefit of $61 million. This was $44 million higher than the benefit recorded in the second quarter. Lidio will expand on credit-related matters.
Total operating expenses were $288 million in the quarter, an increase of $20 million from Q2. This increase was primarily due to higher employee compensation costs of $3 million, mostly driven by annual merit increases, higher professional fees by $4 million, a lower actuarial gain by $3 million, plus smaller increases in other categories like FDIC deposit costs and business promotion. Higher credit and debit card transactions also drove a $2 million increase in related expenses. For the fourth quarter, we expect expenses to be between $405 million-$410 million. This is consistent with our guidance for average quarterly expenses in 2021 to be between $380 million-$385 million. Obviously, if possible, we will try to improve on this number. Our effective tax rate for the quarter was 25%, the same as last quarter. In Q4, we expect the effective tax rate to be between 25%-28%.
Please turn to slide seven. NII on a taxable taxable equivalent basis was $536 million, $5 million lower than in the second quarter. The primary driver for this decrease was lower investment portfolio interest income by $7.7 million due to lower yields, which was partially offset by $1.5 million higher interest income from loans and lower deposit costs by $1.1 million. A lower mix of earned income also contributed to this outcome. The assets grew by $1.4 billion in the quarter. Most of the growth was in PPP loans, with a $700 million increase in Puerto Rico government deposits and a $500 million increase in our retail and commercial deposits. Net interest margin decreased by 13 basis points to 2.77% in Q3.
On a taxable equivalent basis, NIM was 3.4%, a decrease of 18 basis points. The lower margin was due to higher balances of low-yielding money market and investment securities. Total loan yields increased by 2 basis points in Q3, a result of higher PPP-related income of $22 million compared to $14 million in the second quarter. PPP loans yielded approximately 10.1% compared to 4.45% last quarter due to higher accelerated recognition of the income of loan forgiveness. Year to date, we have recognized $59 million in income from this program. The remaining collateralized portion of fees for the PPP portfolio is approximately $40 million, of which we expect to recognize half in Q4 and the remainder in the first half of 2022.
As of the end of the third quarter, Puerto Rico public deposits were roughly $15 billion, an increase of $700 million from last quarter. We continue to expect public deposit balances to come down over time due to the restructuring of public- sector debt and the return to current debt service. Our ending loan balances decreased by $201 million in the quarter. This decline was due to a $354 million decrease in PPP loans and a $140 million run-off in our residential mortgage portfolio. Excluding the impact of PPP, loan balances grew by $153 million, driven by higher commercial, collateral loans, and lease balances in Puerto Rico. These increases were offset in part by lower commercial balances in the U.S., driven by high prepayments.
We do not expect overall loan growth to materialize until the middle of next year, and demand resulting from expected economic growth should outpace the repayment of PPP loans. Please turn to Slide 8. Our common equity Tier 1 ratio in Q3 was 17.4%, an increase of 80 basis points from Q2, primarily due to net income. On September 9th, the corporation completed the previously announced ASR, and in total repurchased approximately 2.6 million shares at an average purchase price of $35.83. Additionally, last month, we announced the redemption of the $187 million outstanding balance of our 6.75% trust preferred securities to be executed in Q4, which will result in reduced annual interest expense of $12 million. Tangible book value increased by $2.77 per share to $66.01.
This increase was primarily driven by our quarterly net income and partially offset by dividends and lower accumulated unrealized gains on investments. Our return on tangible equity was 19.4% in the third quarter. In summary, during 2021, we have repurchased $350 million in common stock, increased our quarterly dividend by $0.05 per share to $0.45 per share, redeemed $187 million in high-cost trusts, and on October 15th, we acquired a national healthcare equipment leasing business for $155 million in cash. We have also returned to our normal capital planning schedule, which should result in an announcement of Popular's 2022 capital actions no later than our January 2022 Webex. With that, I turn this call over to Lidio.
Thank you, Carlos. Good morning. During the third quarter, the corporation continued to exhibit strong credit quality metrics and low credit costs driven by the improving economic environment. Please turn to slide number nine to discuss credit metrics. Non-Performing Assets increased by $57 million to $710 million this quarter, mainly driven by an NPL decrease of $52 million, coupled with a decrease of $9 million in non-performing loans held for sale, offsetting partial increase of $4 million in other real estate loans. In Puerto Rico, NPL decreased by $48 million, mainly due to lower commercial NPLs of $34 million. This was due to payments received and charge-offs taken on collateral dependent loans, coupled with lower mortgage NPL of $16 million resulting from lower inflows and continued improvement in the credit profile of the portfolio. In the U.S., NPLs decreased by $4 million, mostly related to a commercial loan payoff.
The $9 million decrease in NPLs held for sale was mainly due to loan sales. The ratio of NPLs to total loans held in portfolio was 2.2% compared to 2.4% in the prior quarter. Please turn to Slide 10 to discuss NPL inflows. Compared to the second quarter, NPL inflows excluding consumer loans decreased by $44 million, driven by a decrease of $37 million in Puerto Rico as the prior quarter included the inflow of a $32 million commercial relationship, coupled with a decrease of $5 million in mortgage NPL inflows. In the U.S., NPL inflows decreased by $7 million, mainly due to lower commercial inflows. Turning to slide number 11. Net charge-offs amounted to $10.1 million or an annualized 12 basis points of average loans held in portfolio compared to a net recovery of $1.3 million on negative 2 basis points in the previous quarter.
The quarter-over-quarter comparison was impacted by the recovery in the prior quarter of a $7.9 million commercial relationship in Puerto Rico. Excluding this, the net charge-off ratio would have been flat quarter-over-quarter, 12 basis points versus nine basis points. Net charge-offs continue to be significantly below pre-pandemic levels. Our allowance for credit losses decreased by $67 million or 8.6% to $719 million, driven mainly by improvements in the economic scenarios and credit quality, as we will discuss in the following slide. The ratio of allowance for credit losses to loans held in portfolio decreased to 2.49% from 2.70% in the prior quarter. Excluding PPP loans and guarantee mortgage loans, this ratio is 2.74%. The ratio of allowance for credit losses to NPLs held in portfolio was 114%, flat to the prior quarter.
Please turn to Slide 12 to discuss details of the drivers of the balance in allowance for credit losses. As we previously mentioned, the allowance for credit losses decreased by $67 million when compared to the previous quarter. Variances were driven by changes to qualitative reserves and economic outlook, as well as portfolio credit quality and mix. While a strong recovery is evident, we also consider more adverse outcomes given uncertainties around the impact of new virus strains and the Puerto Rico government's ability to utilize available federal assistance. As a result, we continue to assign the highest probability to the baseline scenario, followed by the more pessimistic case scenario. Our macroeconomic forecast uses a number of economic variables, with the unemployment rate and GDP being the largest drivers. The current baseline scenario expectations for 2022 GDP growth and the unemployment rate, expectations are flat quarter-over-quarter.
However, Moody's Analytics revisions to certain income-related variables in Puerto Rico contributed to a $17 million decrease in allowance for credit losses. During the quarter, we released $15 million from our qualitative reserves prompted by the economic environment and improvements in the outlook for the U.S. CRE portfolio. Total portfolio changes, particularly in the Puerto Rico commercial and other loan portfolio, caused the ACL to decrease by $24 million. Portfolio changes include fluctuations in credit quality, volume, and mix. To summarize, our loan portfolio exhibited improved credit quality metrics during the third quarter, with net charge-off activity significantly below pre-pandemic levels. We will continue to monitor the exposure of the portfolios to pandemic-related risks and changes in the economic outlook. With that, I would like to turn the call over to Ignacio for his concluding remarks.
Thank you, Lidio and Carlos, for your updates. Our results for 2021 to date have been strong, driven by solid earnings, improved credit quality, record deposit levels, continued customer growth, and the successful execution of our capital actions. We are optimistic about the economic outlook. In addition to the uncertain level of federal stimulus related to COVID, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be disbursed, which we expect will now start flowing at a faster pace. The combined impact of these factors and continued consumer spending should generate considerable economic activity in many sectors for the coming years, and we are well-positioned to benefit from such activity. A successful resolution of the debt situation in Puerto Rico can also be a positive factor.
Last, but certainly not least, we're looking forward to having the entire team together in our offices again. Given progress in the vaccination process, the general improvement in health conditions in our markets, and sound safety protocols in our facilities, we have begun to bring back to the office our colleagues who are still working remotely. Managers and supervisors returned earlier this month, and the remainder of our workforce will return in early November. We are entering the home stretch of 2021. Despite all its challenges, this has been a great year thus far, with solid results and significant accomplishments. Our team is energized and committed to ending the year on a strong footing. We're now ready to answer your questions.
The first question comes from Brett Rabatin of UBS. Brett, your line is open.
Oh, thanks. Thanks very much. I did manage to get in the queue. If you'd just start in terms of core loan growth expectations. I understand overall loan growth is going to take a while to overcome the PPP paydown headwinds, which you already outlined. How should we think about core loan growth over the next couple quarters?
Well, this is Ignacio. I think you got to look at it a little bit sector by sector over the next quarters. Besides PPP, we have a large mortgage loan book in the U.S. which is paying down about a 160 -
Puerto Rico, yes.
Puerto Rico. I think we expect to see continued loan growth in auto, and the commercial sector looks very strong also. Those are sectors that we expect to see growth. In the commercial, we expect to see growth both in Puerto Rico and in the U.S. In the U.S. this quarter, we had a lot of paydowns from the construction loan portfolio, especially. I think you'll see sectors like auto and commercial be coming up sooner. Overall, we continue to say, as I think Carlos mentioned in his prepared remarks, that overall, when you look at the overall loan balance, probably won't see significant net growth until the second half of next year.
Carlos, what are your thoughts on that?
Yeah. No, Brett, we're pretty pleased that post PPP both last quarter and this quarter, our loans grew. Our commentary on net growth is just to point out that in the fourth quarter, roughly half of our remaining PPP portfolio gets forgiven, and we have similar runoff in our retail portfolio, about half a billion dollars of loans, we start minus $500 million. Already. In the third half of next year, there's another half of our portfolio that is maturing, which we expect. The mortgage markets have to change. We start at -600 by the first half of next year. That is what leads to the math. In general, we're pretty happy that 6 to 15, both last quarter and this quarter, we had net loans.
Okay. Just separately on capital. I noticed you put the leasing business, not a terribly large acquisition, but certainly material given that purchase price. You're continuing to build capital. Reserves look ample given the risk contours. How should we think about capital allocations?
We keep trying to touch all the buttons or pull all the levers, whichever way you want to address or think about it. This year, I think we have successfully done so with all the different ways in which we can manage capital have been put to use. That will hopefully continue to be the way we operate in the future. We're in the middle of our capital plan for 2022 now. Again, we are hopeful that we'll have an announcement by the webcast in January. In general, given our level of capital, we will probably have to continue to pull all the levers to achieve what we want to do, which is over time to move our capital levels in the direction of our U.S. peers plus 1%.
Okay, thanks. I'll drop back in queue.
Thank you, Brett.
Our next question comes from Alex Twerdahl of Piper Sandler. Alex, your line is open.
Good morning, guys.
Hello.
Good morning.
Can you hear me?
Yeah.
Sorry about that. Wanted to just start off a little bit more on this K2 acquisition. Initially, seems like kind of small potatoes in terms of net assets being acquired. Just looking at the purchase price, certainly leads me to the suspicion that maybe this is actually a pretty good loan generation engine. I was hoping that you can expand a little bit more on sort of what kind of origination capabilities this platform has and how it's going to fit into the overall model.
I don't have the numbers exactly on those projections of originations, but I can tell you that when we looked in the space we said before, we're looking for niche businesses that can complement our existing businesses. This is a healthcare equipment leasing company which we think really will fit well and strategically complement our national healthcare lending business. We think that we really like the people behind K2. We think they have a good business, but we think that the synergies that we can create with our healthcare business are important, and we hope to try to make into a national platform the same way we've done with CAD and our healthcare vertical.
Can you talk a little bit more on sort of what type of loans these are and what kind of yields that we expect to recognize with cash flow?
The loans are basically mostly finance leases of medical equipment like machines that you put in healthcare centers. Just generally healthcare X-ray machines.
MRIs.
What's that?
MRIs.
MRIs. I'm sorry. I'm dating myself when I say, MRIs, that kind of thing. I wouldn't comment on the yields.
I don't have a number on the yield either, Alex, but when all the acquisition noise comes out, and everything normalizes in Q3, we expect it to contribute about [$15 million to $ 20 million] net income every year, and hopefully grow. As Ignacio said, one part of the beauty of this is that not only does it add an important product for our healthcare clients, it also makes our existing healthcare offering more competitive. Part of the benefit of the acquisition will not be in this period. It will hopefully largely be part of future impact.
Okay. Just in terms of the sort of a deal like this and the regulatory process, this one is relatively small, but I imagine it does play a role in sort of the overall capital allocation from a regulatory standpoint. Is it the same process? Do you have to go through the same process as you do with the buyback and the dividend?
The regulatory system is quite complex. Let's not call it Byzantine, but it's quite complex. Depending how you do an acquisition, it depends how you have to go through different regulatory structures. This case, since we're doing it through a subsidiary of Popular Bank, in fact, we only had to go through the New York DFS. It was a relatively simple, straightforward process. I don't think it would be material enough for the Fed when we present our capital plan. Obviously, they look at everything we do, but I don't think it's going to move the needle one way or the other on the capital plan.
Just another question on the bankruptcy. You sort of alluded to the end being kind of within sight. It's a little bit hard, I think, sometimes for a lot of investors, and for me to kind of boil through some of the headlines, but it seems like you're getting pretty close to a deal between the Board and bondholders, and it seems like the government may have gotten what they want with the pension. Can you help us understand exactly where we are in that process?
Well, we're actually in a critical stage. You're up to date. There were negotiations going back and forth, and both the executive branch and the legislative branch had basically said that they weren't going to sign off on any deal that had cuts to the existing pension. There was also controversy regarding the amount that was budgeted to support the public university, the UPR. They went back and forth in a couple of rounds. There appears to be an agreement in principle that the fiscal board would present a plan of adjustment with zero cuts to the pensions and with at least $500 million to the UPR. Yesterday, the House of Representatives voted on legislation to support that plan of adjustment.
One of the technical issues is that the plan of adjustment contemplates an exchange of new bonds for existing bonds, and there's an debate whether that has to go through the legislature or not. Yesterday, the House approved it. They are still a bit short in the Senate. Apparently, some of the senators are not convinced that the language regarding no pension cuts is ironclad. I think the Senate is scheduled to take this up on Thursday again. You're right, we're very close. The House has passed the enabling legislation, and now we're waiting on the Senate. The Governor has said he would sign the legislation, so really it requires the Senate's approval. The Senate is a very difficult situation in Puerto Rico because no party has an absolute majority. The party that has the President of the Senate has a plurality.
It requires more horse trading than usual, and so we're really down to the ninth hour whether this gets approved by the Senate. It could happen as early as Thursday. If that doesn't happen, they'd have to go back and renegotiate terms again. I'm hopeful it'll happen on Thursday, but we'll have to wait and see.
If it does happen on Thursday, then the presumption is that they'll be able to exit bankruptcy at some point by the end of this year. Just remind us how much of public deposits, I think in the past you said somewhere around $10 billion-$11 billion that sits on Popular's balance sheet would flow out directly related to that bankruptcy; is that correct?
That's our best estimate. Of course, the government has not told us exactly. We hold most of the public funds. There are other financial institutions that have public funds, including local institutions, including the city. That's our best estimate, yes. The process would be, if this enabling legislation is passed, the plan of adjustment will be considered by the court, and it's up to the court to approve or disapprove the plan of adjustment. Theoretically, they could disapprove it. I don't think given all the work that's gone to this, I think that's not a likely result. Hopefully, we will have something by the end of the year, in which case, I'm not clear how soon the money will go out, because it will go out relatively soon after because it's a cash payment.
In terms of the financial impact to you guys, if I'm remembering correctly, I think the language is not material to NII, certainly it helps NIM, TCE, and ROA. Is that correct?
That is correct. In the existing level of interest rate environment, it is not material to NII. It will show very significant to our margin. Our margin has basically been driven by this for the last four or five quarters. Our margin will return to be more linked to our cost business than it has been for the last year or so.
Thank you for taking my questions.
Thank you.
Thank you.
I would just like to remind participants to press star one if you'd like to register a question. Our next question comes from Gerard Cassidy of RBC. Gerard, your line is open.
Thank you. Good morning, Ignacio and Carlos.
Morning.
Maybe this question, we could send it out for Lidio, if he's still there, on credit. Obviously, net charge-offs for you folks were very low in the quarter, and granted, they're up slightly from the positive number that you had in the prior quarter. The industry is experiencing incredibly low net charge-offs in this part of the cycle. Can you give us what you think may happen in terms of how long can these low levels remain, and do we start to see some sort of normalization in net charge-offs by the end of next year into 2023, which still will be lower than a bad period, but I would think they eventually have to start creeping up.
I'll give you my perspective. Prior to the pandemic, if you look over the three prior periods, the charge-offs of Popular were in a corridor between 35 basis points - 125 basis points. Since the pandemic, we have been significantly, as you mentioned, lower than that, including in the prior quarter.
When you look at NPL formation, when you look at early delinquency, suggests that at least for the short term, that will continue to be the case. I think a lot of it is going to be dependent upon economic performance and the pace of the federal assistance that Carlos and Ignacio alluded to in their prepared remarks that we expect to come to Puerto Rico. If that were to happen, and we continue to see the level of economic activity, that might last a little bit. I agree with you also that at some point in time, things will normalize in the future.
Very good. Ignacio and Carlos, obviously you announced this acquisition recently, and you're putting your cash to work, and you've done other deals, some of like the Wells Fargo automobile portfolio and their business a couple of years back, I guess. Are there any other opportunities for you folks to put your excess capital to work in acquisitions, whether it's a non-depository or even a depository somewhere in the mainland?
We have traditionally been opportunistic buyers of assets and we continue to be so. People bring opportunities to us, and we review them. This K2 seemed like a very nice fit to bolt on. It complements our healthcare vertical, which is doing very well, and we think has great potential for the future given the demographics of the country. We will continue to look for those types of unique opportunities that are viable. We really like the auto sector, and it was there, and it came across. I have said before that especially bank acquisition is not our focus in the near future. We are opportunistic when things present themselves. We look at especially acquisitions of things that complement our existing businesses. I think our overall strategy hasn't changed. K2 came around. We looked at it carefully.
It fits perfectly with our existing strategy, so we executed.
Very good. Just as a follow-up, I know you need to keep a certain amount of cash on the balance sheet when the government finally draws down those excess deposits from your organization. Carlos, when you look out, when do you think you may want to start to lengthen the duration of maybe some of those cash assets into longer-term securities?
Well, given that rates are finally seem to be going up, investment returns seem to be starting to go up. We are looking at that more closely now. Again, as you know, Gerard, it pains me significantly to extend duration to 10 years to get a yield of 1.30 or something like that. Now we're in the 1.60, it's becoming more interesting. This is the job of our ALCO committee. We look at this every week. We did increase our investment portfolio by about $2 billion this quarter. We do it selectively when we think there's good opportunities to extend. Again, as rates move up, our willingness to extend will move up accordingly. Are we rushing to the door? No. Are we taking a good look at the door right now? Yes, we are.
Very good. I apologize, I should know this, do you have a swaps book, or if you do, is it growing or are you looking to add to it? Some of your peers are doing that now in this period of your outlook for rates.
No, we don't have a swaps book.
Okay. Very good. Okay. Thank you.
Thank you.
We have a follow-up question from Brett Rabatin of UBS. Your line is open.
Thank you. Just going back to some of the credit questions. I think everyone kind of focuses on charge-offs and the reserve level. As we look at NPLs, they've been down consistently, and they were down substantially in Puerto Rico, $48 million this quarter. Why couldn't that drop far more meaningfully? Are there sort of structural NPLs that we shouldn't expect to see go away? It just seems like with the economic trajectory, the structurally high level of problem assets that we've seen for years because Puerto Rico was in a recession should drop pretty hard.
Do you want to take that?
Sure, I can try. When you look at NPLs in Puerto Rico, the mix of NPLs over time is mostly mortgage-related NPLs. That has takes a little bit longer to resolve than maybe some other type of NPLs. That leads you to what you maybe call structural NPLs. That's going to take a longer time for it to work throughout. More so over the last since the pandemic because there have been lack of foreclosures, and then mortgage NPLs have actually not decreased as fast as other type of NPLs.
In the cycle, in this part of the cycle. I think that is what is driving the maybe higher level of NPLs that we display] using in Puerto Rico.
Okay. Just on expenses, a number of the mainland banks have called out, it's not a unique bank, just greater expense pressure, difficulty in hiring, all that general theme. Is that something you should also be aware of within your business?
Yes. We're not immune to the situation. The hiring situation has become much more difficult. There are salary pressures. In Puerto Rico, we still have an advantage against some of our mainland peers, but we are seeing salary inflation in Puerto Rico as you get competition from all kinds of sectors. That's something that we can anticipate will continue. We made some salary increases in July, as you've seen. We're going to be reviewing our minimum wage like everyone else is. We have somewhat of a beneficial position in Puerto Rico, but we're subject to the same trends.
Understood. Okay. Thanks for the call.
We have no further questions in queue, so I'll hand the call back to Ignacio Alvarez for closing remarks.
Thank you, everybody, for joining. I apologize for the inconvenience at the beginning of the call, and we look forward to updating all of you on our progress in January. Have a great week. Thank you very much.
This concludes today's conference call. Thank you for joining. You may now disconnect your line.