Q4 2021 Popular Inc Earnings Call
I will now turn the call over to our CEO Ignacio Alvarez good morning, and thank you for joining the call.
Before I begin I would like to acknowledge our recently appointed Chief operating officer at <unk>.
Javier joined <unk> as Chief legal officer in 2014, and has made important contributions to our strategic initiatives. These past years.
We will continue to bring in strategic and operational guidance to our senior management team.
We are past is illegal baton to Jose Coleman, who has assumed the position of chief legal officer.
Jose has been with <unk> since 2017.
We are confident that each of these appointments will strengthen our senior management team.
Today's results reflect another solid quarter and an outstanding year in which we achieved record earnings.
Our results reflect the continued recovery in economic activity.
Our diversified sources of revenue and prudent risk management.
I am very pleased to report that in January we announced a series of planned capital actions that we intend to execute this year.
These actions include an increase in the Companys quarterly common stock dividend of 22% to.
<unk> <unk> 55 per share beginning in the second quarter and a common stock repurchase program of up to $500 million.
Additionally, we completed our 2021 capital plan in November with the redemption of $187 million of our six 7% Trust preferred securities.
These actions evidenced 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 three.
Our net our annual net income of $935 million reflects an increase of $428 million above our 2020 annual net income of $507 million.
The increase was largely driven by lower provision expense higher fees and higher net interest income and was partially offset by higher expenses.
2021 results also benefited from strong deposit growth and a higher level of earning assets in both Puerto Rico and the U S.
Credit quality continued to improve throughout 2021.
Npls decreased by $190 million or 26%.
And net charge offs were seven basis points in 2021.
Compared to 66 basis points in the prior year.
We are pleased with how our portfolios outperform.
Particularly with net charge offs below that 10 basis points for the year.
Our capital levels are strong with a year end common equity tier one ratio of 17, 5%.
Our tangible book value ended 2021 at $65 39.
A 4% increase year over year.
Please turn to slide four.
Our quarterly net income of $206 million was $42 million lower than the third quarter and $30 million higher than the same quarter of 2020.
The sequential variance was driven by a lower benefit in the provision for credit losses.
Higher expenses and.
And lower fee income, partially offset by higher net interest income.
Loan growth was solid in the quarter, particularly at popular bank, which saw commercial loans increased by 12%.
Our module our margins continue to be impacted by the low rate environment and our asset mix.
However, we are encouraged with the margin expansion in the U S business.
Credit quality trends continue to be favorable in the period with lower npls and net recoveries and charge offs.
Please turn to slide five.
Our customer base in Puerto Rico grew by 43000 in 2021 of which 800 was in the fourth quarter to reach nearly 195 million unique customers.
Adoption of digital channels, among our retail customers continue to be strong.
Active users on the vehicle platform exceed $1 1 million and have grown by 3% since December 2020, and by 20% since December 2019.
We captured two thirds of our deposits during the period through digital channels.
This trend remains significantly higher than pre pandemic levels.
The dollar value of credit and debit card sales, where our customers have continued to trend higher increasing.
Increasing by 7% compared to the same quarter, a year ago and by 25% in 2021 as compared to 2020.
Auto loan and lease originations that VR have remained very strong.
While the decrease compared to the fourth quarter of 2020, they were 23% higher year over year and 2021.
The housing market also continues to be robust.
Our volume of mortgage originations to be PBR decreased by 11% sequentially in the fourth quarter, but the full year originations increased by 28% as compared to 2020.
Please turn to slide six with an update on the current macro environment in Puerto Rico.
In the fourth quarter, the economy performed well as business trends and customer activity remained solid.
You auto and used auto sales reflects strong consumer demand.
For the for the year of 120000 129000, new units were sold compared to 95000 units in 2020.
And it is the highest annual level of reported sales.
2005.
The Puerto Rico economic activity Index, which includes total employment.
Cement sales electricity generation and gasoline sales has been improving and as of November 2021, and has returned to pre pandemic levels.
Employment levels have also continued to improve.
According to a recent study by the Federal Reserve Bank of New York and.
<unk> levels in Puerto Rico's have recovered more quickly than in many other jurisdictions and have now surpassed pre pandemic levels.
Cement sales have remained strong in 2021 sales were 13% higher compared to 2020.
Airport traffic has also continued to improve passenger volumes doubled in 2021 compared to last year and increased by 3% compared to 2019, which itself was a strong year.
Activity levels and the tours in the hospitality sector have also been a source of strength for the local economy in 2021.
While the recent surge in Covid cases may impact the industry in the near term for.
Puerto Rico continues to be a popular destination for mainland revenue.
The recent court approval of the plan is to adjustment should be an important catalyst for Puerto Rico's fiscal and economic recovery.
The plan eliminates uncertainty and provides necessary clarity to covenant confidently planned investments toward Puerto Rico's sustainable growth.
A significant amount of time and effort has been invested to get us to this point.
And we look forward to refocusing these resources on the island long term economic development.
We are very pleased with our results for the fourth for the fourth quarter, because DDB optimistic about the prospects for the future yet we'll remain attentive to how the evolving health situation. It may impact the economy.
I'll now turn the call over to Carlos for more details on our financial results. Thank you Ignacio good morning, before we turn to fourth through.
Through the fourth quarter results, let me expand on popular 2021 full year performance, which is included in the appendix Blues presentation and today's press release, our net interest income increased by 5% year over year to $1 96 billion.
Due to the growth in earning assets in 2021, we reported a provision benefit of $194 million compared to a provision expense of $293 million in 2020. The provision benefit was driven by the current recovery the continued strength of economic predictions and low level.
Charge offs non.
Noninterest income increased by 25% year over year with both segments segments higher in 'twenty or 'twenty, one versus 'twenty 'twenty.
Operating expenses increased 6% for the year to $1 55 billion higher personal metal technology and regulatory costs were the primary drivers.
Our comparable position is robust we ended the year with annual book value, increasing by more than $2 per share to <unk> 65, 39, notwithstanding the repurchase of $350 million of common stock.
Please turn to slide seven.
As usual additional information is provided in the appendix to the slide deck today's earnings press release details variances from the third quarter.
Net interest income for the fourth quarter was $501 million, an increase of $12 million from Q3.
Noninterest income decreased by 5 million to $165 million in Q4, the impact of two items in Q3 contributed to these results.
$8 million gain associated with the sale of two corporate office buildings and income from investments held under the equity methods that are $5 4 million of lower in Q4.
These negative variances were partially offset by $4 million higher seasonal contingent insurance commissions and.
And $2 million higher credit card fees.
Going forward, we expect that the average quarterly level of net interest income will be around $1 $55 million to $160 million.
The provision for the fourth quarter was a benefit of $33 million. This was 48 million lower than the benefit recorded in the third quarter.
Total operating expenses were $417 million in the quarter, an increase of 49 million from Q3.
This increase was impacted by higher employee compensation cost by 3 million, mostly driven by salary increases higher incentives and commissions equipment.
Equipment expense by 3 million.
Seasonal business promotion expenses of $8 million.
Including $2 million higher credit card rewards expenses.
Other operating expenses increased by $50 million due to higher sundry losses by $10 million, which includes $4 million related to the termination of a white label credit card contract.
Higher impairment losses on undeveloped properties of five minutes.
Also amortization of intangibles grew by $5 million due to the write down of a trademark.
Excluding the $10 million of impairments and write Downs just mentioned our expenses will have been within our prior guidance for Q4.
For 2022, we expect average quarterly expenses to be around $415 million.
The increase from 2021 is driven by higher expenses in the following categories.
Now as we continue to invest in training and compensation with the related benefit cost also increasing.
This is driven by a tight labor market in Puerto Rico and in the regions, where we operate in the mainland.
Technology as we continue to modernize our digital capabilities cure obsolescence and address regulatory cyber and compliance needs.
And finally business promotion, especially in expenses related to reward programs for our client.
Some of these.
Higher technology and reward expenses are related to our expectation of higher levels of client activity.
Honestly, we will strive to come in below this expected level of expense.
Our effective tax rate for the quarter was 27%.
For the full year 2021 was 25%.
In 2022, we expect the effective tax rate to be between 18 and 20%.
The higher tax rate in 2021 was related to the tax effect of the provision releases during the year.
Please turn to slide eight.
Net interest income on a taxable equivalent basis was $544 million.
<unk> been higher during the third quarter.
The increase in net interest income on a taxable equivalent basis was mainly related to the repayment of PPP loans and higher PPP fees as.
As well as the acuity recognized in the quarter from our recently acquired lease financing business.
Deposits grew by $1 billion in the quarter the growth was in <unk> with a $700 million increase in our retail and commercial deposits and a 300 million of increase in public deposits.
Net interest margin was essentially flat.
The total loan yield increased by 11 basis points in Q4, again, mostly on PPP fees and repayment of <unk> loans.
PPP loans yielded 17, 9% in this quarter compared to 10, 1% in Q3 due to higher accelerated recognition of fee income for both forgiveness.
In 2021, we opened $82 million of income from this program.
The outstanding year end balance of PPP loans is $353 million <unk>.
The remaining on amortized portion of fees for this portfolio is approximately $18 million, which we expect to recognize during the first half of 2022.
As of the end of the fourth quarter, Puerto Rico public deposits were roughly $21 billion.
Given the approval of the final adjustment, we anticipate that approximately $7 billion to $10 billion of public deposits will leave the bank by the end of the first quarter or early in the second quarter.
This will reduce low yielding assets on our balance sheet.
As of 12, 31 every $1 billion decrease the volume of deposits would have increased our net interest margin by 4% to five basis points.
It is important to reiterate that this anticipated outflow deposits will not be a liquidity event for the bank as by law in Puerto Rico Vista process must be collateralized.
We continue to be asset sensitive due to our large cash position driven by elevated pollo deposit balances.
Even with the expected outflow of some of these deposits, we will continue being asset sensitive.
As of December 2021, each 25 basis points change in fed funds would correspond to a 6% to $8 million change in net interest income per quarter.
Our ending loan balances increased by $389 million in the quarter.
This increase occurred despite $317 million decrease in PPP loans.
Clearly the impact of PPP loan balances grew by $706 million in Q4, reflecting higher commercial loan balances of popular bank and to a lesser extent higher auto personal credit card and commercial balances in Puerto Rico.
The increase in the U S included the acquisition of <unk>, which added $105 million in loans.
These balanced increases were offset in part by lower construction balances both in the U S and Puerto Rico as.
As well as continued trend like runoff in the mortgage portfolio in Puerto Rico of $112 million.
We are encouraged by the demand for credit at BV, PR and already seeing growth in most segments.
Despite these positive trends, we do not expect overall loan growth to materialize in Puerto Rico until the middle of this year when demand, resulting from expected economic growth should outpace the forgiveness of PPP loans on the mortgage front.
Please turn to slide nine.
Capital levels remain strong our common equity tier one ratio in Q4 was 17, 5% flat with Q3.
Tangible book value decreased in the quarter by approximately 1% to $65 39, primarily driven by the higher accumulated unrealized losses on investments or.
Our return on tangible equity was 19, 4% in the fourth quarter.
To review, our 2021 capable of elections last year, we repurchased $350 million common stock increased our quarterly dividend by.
By <unk> <unk> per share to <unk> 45 per share redeem our $107 million and highest cost Trump's I'll finally acquired international health care equipment leasing business for $153 million.
I think that Joe mentioned at the start of today's call. Our announced 2022 capital plan includes two actions first an increase in both of those quarterly common dividend by <unk> 10.
255 per share starting in Q2.
Secondly, we will be executing a common stock repurchase program of up to $500 million.
While our recent buyback firms have been executed via ASR implementation plan for this buyback is still under consideration.
We have returned to our normal capital funding schedule, which should result in an announcement of upward our 2023 capital elections. No later than January our January 2023 webcast. We will continue to explore opportunities to manage our capital structure. During the remaining of 2022 and in future periods with that I'll turn the.
Over to media.
You Carlos and good morning.
Overall from a lager opinion to exhibit strong credit quality trends and low credit costs with net recoveries and decreasing nonperforming loans.
Continue to closely monitor COVID-19 pandemic related risk of borrower performance and changes in the pace of economic recovery of new variants to continue to emerge.
However, we are optimistic given our recent credit performance economic outlook and improvement in the risk profile of the corporation's loan portfolios.
Turning to slide number 10.
Nonperforming assets decreased by 77 million to $633 million this quarter.
Only driven by NPL decrease of $85 million.
Set in part by an Oreo increase of 8 million.
The decreasing Npls was mainly in Puerto Rico driven.
Driven by lower commercial npls of $63 million, primarily due to payoffs and paydowns related to troubled loan resolution.
Also contributing contributed to the decrease were launched a return to accrual status during the quarter.
Coupled with lower mortgage npls of 21 million and lower construction npls of $40 million.
In the U S npls increased by $10 million.
Mainly due to mortgage loans that the numbers resumed payment at the end of the pandemic deferral period.
Year over year, Npls decreased by $190 million or 26%, mostly in Puerto Rico due to improvements in economic performance.
Compared to the third quarter NPL inflows, excluding consumer loans increased by $3 million.
Driven by an increase of $10 million in the U S.
It was a higher mortgage inflows as discussed before offset by lower commercial and mortgage NPL inflows in Puerto Rico.
The Oreo increase in the quarter was driven by the resumption of our grocery activity in the Puerto Rico mortgage portfolio.
At the end of the quarter the ratio of Npls to total loans held in portfolio.
It was one 9% compared to two 2% in the previous quarter.
Two 5% in the year ago period.
Turning to slide number 11.
Net charge offs amounted to a net recovery of $8 million.
Our annualized negative 11 basis points of average loans held in portfolio.
Compared to <unk> 9 million or 12 basis points in the previous quarter.
<unk> net charge off was mainly driven by the resolution of the.
The previously mentioned commercial nonperforming loans.
For the year, we made charge off ratio improve by 59 basis points from.
From 66 basis points in 2020 to seven basis points this year.
Driven by improvements in both regions our growth all major loan categories.
The corporation allowance for credit losses decreased by $23 million to $695 million.
Driven mainly by improving credit quality.
<unk> and mortgage related indices operating values, coupled with releases from our qualitative reserves.
The ratio of allowance for credit losses to loans held in portfolio.
<unk> grew slightly to $2, 38%.
From 249% in the third quarter.
And it's down from 289% as of <unk> one.
The ratio of allowance for credit losses to Npls held in portfolio.
127% comp.
Compared to 114% in the prior quarter.
The provision for credit losses.
Was a benefit of $31 million compared to a benefit of 59 billion in the previous quarter.
Please turn to slide number 12.
The variance in the allowance for credit losses was driven by changes to qualitative reserves and economic outlook as well as portfolio credit quality and mix.
<unk> offset in part by changes economic scenario weights.
During the quarter, we released $70 million from our qualitative reserve prompted by the economic environment and improvements in borrower performance.
Portfolio changes driven mainly by credit quality and volume mix across the ACL to increase by $28 million.
This quarter in response to uncertainty caused by omicron.
Setback and the impressive in spite and build back better plan.
We increased the pessimistic scenario of wheat, which contributed to an increase of $13 million and returns.
However, the macroeconomic scenario for Puerto Rico, and the U S.
Continue to show a positive outlook for the economy.
To summarize our loan portfolio excuse the strong credit quality metrics with net recoveries in the charge offs are decreasing nonperforming loans.
We are optimistic.
Recent credit performance economic outlook of improvements in the risk profile of the corporation's loan portfolio with that I would like to turn the call over to Ignacio for his concluding remarks. Thank you.
Thank you Lydia and Carlos for your updates.
2021 was an outstanding year for <unk>, driven by record earnings improved credit quality record deposit levels continued customer growth and the successful execution of our capital actions.
We are optimistic about the economic outlook.
In addition to the unprecedented level of federal stimulus related to Covid.
Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed.
I have now begin to flow at a faster pace.
The combined impact of these factors along with the continued progress on the resolution of Puerto Rico's fiscal issues should generate considerable economic activity in many sectors for the coming years, and we are well positioned to benefit from such activity.
I'm very proud to report and both PBR in popular bank each now offer bank on certified deposit accounts.
Bank on certified accounts were created by the city's for financial Empowerment Fund a national nonprofit organization to promote financial inclusion for Underbanked and Unbanked consumers to standard account features that ensure low cost while offering robust transactions capabilities input.
In Puerto Rico, we are the only bank that is offering a bank on product.
And part of our the mention of financial inclusion and equal access to banking.
Closely aligns with our core values of our organization, we are committed to improving access to financial services for members of our committee that have for numerous reasons, we made outside the traditional banking system.
We are also proud to have been included in this year's Bloomberg gender equality index.
We will continue to make strides in gender parity at both golar and across the financial industry.
Our commitment to fostering a workplace that values inclusion respect and accountability.
Isn't just make us a better employer it makes us a stronger organization.
And last but certainly not least I'd like to thank our entire team for their patients and resilience and helping us achieve our record results.
It goes without saying that our employees continue to be our greatest source of strength.
We are now ready for your questions.
Thank you if you would like to ask a question. Please do so now by pressing star one on your telephone keypad.
Our first question today comes from Brett Robinson from Husky, Great. Brett Your line is open.
Hey, guys good morning.
Good morning, good morning, Greg.
Wanted to FERC SaaS congrats on the loan growth in the U S bank and that changed the tenor on the path of a loan portfolio can you talk maybe a little bit about that.
Continued momentum if possible on the U S side and K too.
The trends we saw in the fourth quarter.
<unk> continued to translate during 'twenty two.
And if the Puerto Rico Bank starts to maybe have stronger trends is while that kind of contributes to maybe some.
A better trend for positive net growth than maybe you were thinking a quarter or so ago.
Yes, I think the fourth quarter was actually a great quarter for the U S operation, but it did followed to be fair.
A slower third quarter, so I wouldn't project in the fourth quarter would be the normal rate of growth, but we are anticipating solid growth in the U S and Puerto Rico I think we've been very consistent saying, we are starting to see loan demand pick up and we.
We continue to see that.
And as Carlos mentioned in his remarks.
We expect that by the second half of the year that loan growth in Puerto Rico will outpace our our mortgage run off in our PPP repayments. So we continue to be optimistic but I.
I think I wouldn't project, the fourth quarter U S as their run rate but.
They have a strong book and I think we will.
We're looking forward to that production, but I wont predict the fourth quarter as a normal rate of growth.
Okay.
Fair enough.
The deposit outflow.
Well I have this right if you're if your deposits are down $7 billion.
But your margins will be up around 35 basis points.
If I heard you correctly it was four to five basis points per.
For $1 billion of deposits was that the correct number.
That is correct.
Okay.
Okay.
And then on the expense guidance for.
For 2015.
Would there be a progression during the year of that or is that more of how you kind of view the.
Yeah.
Quarters.
In general in either kind of flat throughout the year.
Yes.
There usually is some some volatility in our expense.
Total expenses on a per quarter basis, because they very rarely are flat during the year.
So I tend to go up during the year actually.
So that is the reason we've described for 15 average quarterly for the year. It may be that we have a couple of quarters will be lower and then we may end up with a couple of quarters there'll be higher.
But again there has historically been some seasonality in our expenses as you know.
Probably will repeat itself next year, but we're not sure.
This year I'm sorry, okay.
Okay.
And then.
Lastly, as kind of a housekeeping issue I don't have I've seen a couple of different numbers and so.
You mentioned the funds dispersed still to come for Puerto Rico, and I've seen a few different.
<unk> numbers and the number I guess I've seen a lot 40 billion would you.
You guys have a better number for the funds that are yet to be disbursed to Puerto Rico.
Yes, yes, I think.
I agree with you it's hard to figure out, but if you take the FEMA Cte.
<unk>.
You add that.
So COVID-19 relief and then the infrastructure Bill we think there is following.
$50 million to $60 million left to be dispersed.
Okay.
Yes.
Great. Thanks for all the color and congrats on the quarter.
Thank you.
Our next question comes from Brock Vandervliet from UBS.
Your line is open.
Great. Thanks Emily.
Morning, guys.
Good morning.
Good morning.
Let's see.
Capital return talk about the ASR under consideration is that just the timing issue where.
It's technically always under consideration at this point or.
Might you really do a.
A different structure, there and secondly can you talk about.
Whether it's refinancing sub debt or other other items kind of other organic uses of capital.
Right.
On.
Hum.
On your first question.
We have.
Mentioned the ASR in the last few years, but we actually have no no.
We have no pre decision made every year, we actually sit down and look at the market and we look at.
What we think is going to happen and consider all the alternatives. So the answer the realized to your question is on alternatives to execute the buyback are still open.
As soon as we make a decision.
So the market knows where at this point in time alternatives are open.
On your second question.
Yes.
As I've mentioned in the prepared remarks.
Look at opportunities.
And during the rest of the year and next year.
Again this week.
If we make any decisions or when we make decisions over appropriately announced them to the market.
Okay and.
Separately on the non interest revenue guide at $1 55 to 160, if I caught that correctly that looks just.
A bit below your current.
Run rate and especially showing.
Our momentum on the fee side, just wanted to dig into that.
Yes.
The run rate has been a bit higher.
If you breakdown.
Speaker 1: break down the summation of all those lines of fees, Brock, for the last couple of quarters. There's been a number of things in those quarters that are unusual. So my commentary was more directed to sort of the run rate of the normal fees as opposed to trying to incorporate unusual items.
Summation of all of those lines of fees.
For the last couple of quarters, there's been a number of things in those quarters are unusual.
So my commentary was was more directed to two so the run rate of the normal fees as opposed to trying to incorporate a new side items in it.
Speaker 1: But it has been a bit higher in the last two quarters, you're correct.
Okay.
Hey, guys carry a bit higher in the last quarter correct correct.
Speaker 2: Got it. And is any of that guidance due to elimination of NCF fees? That's a constant.
Got it and is any of that guidance due to the elimination of NCS fees.
Constant question I guess.
Speaker 1: Right. We are in the, as every other bank is, I guess, we are in the process of
Right.
We are in.
As every other bank is I guess, we are in the process of a cold.
Concluding our analysis.
Overdraft on overdraft related fees. There is a lot of lines that are broadly described as overdraft fees.
Not necessarily the same activities by the clients. So we are in the process of going through analyzing our what our.
Our breath and practices are and what we could make sense.
Not conclude that analysis.
But what I can tell you is that in our case the summation of all of those fees is about $20 million a year.
And of course, not all of those lines of fees will be affected because of some of those people will continue moving forward.
But we havent concluded on us this year.
Okay. Thanks.
So questions.
Thank you.
Our next question comes from team at Brasilia from Wells Fargo. Your line is open.
Hi, good morning.
Good morning, good morning.
Hi.
Maybe just circling back on expenses, maybe another way of asking that question. So you pointed to personnel expense technology and business promotion activity in 'twenty, two driving that average rate higher I guess of the plant personnel technology and business promotion spend how much already is accomplished and maybe give us.
Timeline as to some of the bigger projects that are slated to come online during 2022.
Yes, I mean, we.
Our expense lines tend to be rather volatile so thus.
That's one of the reasons, we have shied away from giving guidance on a per mine basis.
Sure.
And we keep our guidance on the aggregate expense level.
What I can tell you is that b.
A significant part of the increase will be in the personnel line as well.
Breo very real pressure on competitive.
Competitive pressure.
On the personnel side.
We've made public for example.
The beginning of this year, we increased our minimum wage in Puerto Rico from 11 to $13 an hour.
So that will obviously affect the full year.
2022, we also increased our minimum wage in the Virgin Islands, and both of our U S markets.
So that is a big part of it.
The technology, one is broken up in our expense lines in a whole bunch of different lines.
A little bit unusual for us.
In our case, although the technology experienced personnel, our professional fees because of our relationship with every tick or the equipment line.
Broken up all of the expense lines and again Thats one of the reasons, we try to stay away from from line by line guidance I will give you a general guidance.
Okay. Thank you for that and then.
Maybe looking at the residential run off.
Puerto Rico book there.
It looks like the pace of runoff slowed in the fourth quarter a little bit.
I guess, what's your expectation with higher interest rates to the pace of refi activity and could we actually get a normalization and stability in the resi book sooner than expected with the help of rates.
Yes, I mean youre right.
The runoff rate was slightly lower than I think it was around $1 30 or something like that in the third quarter is $1 12. This quarter I would expect with rates going up the runoff rate may slow down somewhat yes.
But even in an environment, where rates were and changing as much.
The runoff rate.
We're still 20 $25 million a month I am sorry, a quarter. So yes, it could it could becomes.
Lower than $1 12.
I'm not sure.
We're just going to become immensely as one of the 111 112, but it should wait for higher rates should become smaller yes.
Okay. Thank you and then just lastly for me maybe a bigger picture question can you just provide us with an update.
Update on the other tech.
Situation and kind of what your ongoing plan is what that investment could we see something.
In the near term or are you really reluctant to do much with it I think.
Service agreement runs until 2025, if I'm not mistaken.
Likely to do something prior to that or do you want to go through that process first before making any decisions.
Yes, we have we have three five years to go on that obviously, we would try and reach an arrangement would ever think before the end of the period for the benefit of both going forward, but still.
It's too early to really.
To say much more than that.
Understood. Okay. Thank you.
Yeah.
Our next question comes from Alex <unk> from Piper Sandler Alex Your line is open.
Hey, good morning.
Good morning, Brian .
First off just wanted to clarify Carlos your comments on the rate sensitivity in the six to 8 million per hike per quarter, which is definitely above what you saw coming down that just assumes a static balance sheet correct.
Correct, yes.
Okay. So then just dig in a little bit more into that if we do get some loan growth.
Later in this year, which we're all very much hoping for can you just remind us what kind of the new loan yields are that you'd be deploying cash at.
If that growth comes down to in the various categories.
Yes.
All depend on the mix, Alex I think the best diverse.
So you can do is look at the other years.
We closed every one of the different business lines in the <unk>.
This release and.
Start thinking about that and hopefully if rates go up some of it.
So of the business as we do a little bit better, but remember it is hard because if we ended up for example, originating a lot more higher FICO credit cards, the higher FICO auto loans, then the yield may not go up even the luxuries are going up simply because the risk profile is changing.
Okay, but in terms of the.
Sort of the expected yield that you'd see on like a commercial loan today those are pretty close to that sort of five 5% range that we're seeing on the average balance sheet.
Yes, I mean, if you actually look at the yields in our in our loan book.
Move as much as market rates. So they are they are beta is.
Lower so they are probably going to be around that ballpark again.
The thing that could swing it is a big change of mix, though if we end up doing.
Bigger loans.
As different sector or something.
Okay, Great and then in the past you've been hesitant to the cloud.
Thanks.
One third of the.
Of the book is floating rate.
Okay.
So one third of the commercial book or the total portfolio the.
The total portfolio.
Okay.
And then in the past you've been hesitant to deploy liquidity into securities just given where the 10 year wise, we are up about 50 basis points. Since we last had this conversation I know you did some purchases in the fourth quarter can you give us some color on the timing and what you actually deployed in terms of liquidity in the fourth quarter, and then kind of how your outlook is.
From here in terms of the security purchases early in 2022.
Yes.
For the last I think four quarters, we've been moving cash into the securities portfolio every one of the last four quarters the increase in the fourth quarter was our.
$500 million roughly a bit more.
So.
It's something that we have been doing.
Last few quarters as we found.
Rates are a little bit more and more interesting.
This is literally a decision that we make on our weekly local committees and we have a very capable of treasury, whose job it is to below.
So though that this is for us so.
We'll keep looking at alternatives to the extent that rates continue to go up on a more attractive we will be.
Our positive probability that we will redeploy cash will go up but there is no specific plan that gets described to you right now.
Okay can you give us some color on that.
Do remember that.
When we hold the Treasury securities in our investment portfolio, Puerto Rico, the income from those securities tax exempts.
And not to forget them.
Yes.
And that's an important point, but just in terms of what you did in the fourth quarter would that been done late in the quarter early in the quarter. Just so we can kind of get a sense for what's already impacted the NII line.
In the fourth quarter.
It was a late in the quarter.
Okay.
And then just switching to loan growth.
And you talk about some of the Maria money coming in and if you drill into some of those programs. There is a pretty large component in some especially some of this.
CDG money that really requires bank lending.
Just wondering if you can give us an update on kind of what that pipeline could look like I heard from them.
Another bank down there that a lot of those applications. If there is a huge number of applications for some of the programs that are kind of.
Awaiting government approval at this point.
And maybe you can just give us a little bit of color on sort of what that process is like and when you could actually see some some disbursements.
For those types of loans.
And hopefully whether or not it's in 2022.
Yes.
It's a kind of a complex answer because it's a complex situation we have different sources of funds right. So you've got the FEMA funds you got the <unk> funds.
Covid relief money and now you have the infrastructure.
I think the CDG has gone through a process.
Requesting proposals and they are pretty advanced a lot of a lot of people have filed proposals.
And then the process of analyzing them so.
I would expect that.
By the end of the year.
Yes.
It's a process right because the proposed is going to prove that you have to get the plan the permit but the money is starting to flow.
Let me.
Not massive amounts of real anticipated, but money is starting to flow, especially in the Covid relief funds had very few restrictions so that money youre seeing already enrollments and things like that in a lesser extent I think the <unk> will begin to flow this year certain of their programs and team up those at a slower pace, but it's also moving in.
The right direction.
<unk> awarded a number of projects now and then the design phase so.
This year won't be the year, where the speaker will be wide open you will see and it's hard to predict because.
Trying to be elusive it is very hard for anybody to predict how fast it says.
They are beginning to move so.
I would expect we'll see mortgage president this year the <unk>.
Infrastructure Bill has a lot of money for highways and roads and bridges also so.
I think we'll begin to see this year, especially in the second half and next year picking up again in the next year begin again, I mean, some of the big Big money projects like the rebuild of the energy sector take longer because thats, a very complex process with Atmos Energy Board and you have to go to the to the review process, but but I think some of the money for housing.
<unk>.
And for other projects for economic development and the CABG will start to flow this year.
Right.
Can you just kind of Peel back the onion, a little bit on the loan growth Guide PPP has obviously gone away in the next couple of quarters. We know that residential runoff is going to be persisting issue. If we just look at the commercial portfolio just the commercial standalone portfolio in Puerto Rico.
Which I guess would include commercial real estate and construction would you anticipate that portfolio to grow.
So of course, the PPP over the next couple of quarters, and maybe talk a little bit about what the pipeline could look like utilization rates and whether or not you have any construction loans that maybe had been approved but haven't really seen disbursements yet.
I wouldn't get into senior construction projects. Our book is big enough, but I think as we've said before we do expect our portfolio to grow the second half of the year. So we do expect the commercial loan portfolio to grow.
There have been lined granted for a different construction projects.
Those lines of utilization rate, probably isn't as high as they've been in the past because for example, the ones that are used to build residential units are being sold much faster than in the past and people now are more prudent in how they build also they built in stages. So they don't go the whole project at a time to build the stages to get repaid.
Yes, we expect I think there'll be infrastructure projects there'll be commercial projects. So we do expect loan growth in the commercial sector in the second half.
We're seeing a lot of interest in different things as you know the king of Spain with any of the day and they want a commercial mission a lot of interest from U S. Investors, but also we have a lot of.
Spanish investors are very interested in different types of projects.
Again, we do think construction cabinet construction commercial in general is going to be is going to see growth in the second half.
We don't do this particular pipeline because our purpose is to bring in I think two complex against that but generally we are optimistic and positive and what we're seeing in terms of clients coming in.
<unk> commercial book, a vertical growth last quarter.
So.
We're positive in the cost structure is going to be a little bit more volatile depending on the projects on this page is open.
Understood and then just one more question that I wanted to make sure you guys address on this call.
When I look at the press release, you guys put out a couple of weeks ago on the capital return.
Help us to notice that the language that you put in last years press release about the I.
I think last year, you said that that announcement of the buyback was it for the whole year.
That language missing from this years.
Press release Am I reading too much into that or is the door just opened for kind of everything at this point, we know that we're going to have a $500 million buyback in <unk>.
Growth really picks up maybe that's all you get this year, but if the growth doesn't materialize and you don't see M&A as a potential that there could be some more buyback later in the in the year.
As other uses of capital either do or don't materialize.
We stand by what we say and Alex will continue those footwear choice of ours or our capital structure during the remainder of 'twenty two.
Okay.
I'll try to I'll say it for Nathan.
Okay.
That's it for me.
Our next question comes from the line of Gerald Cassidy from RBC. Your line is open.
Good morning, <unk> good morning Carlos.
Good morning Gerard.
I have to ask before I ask a real question with being one degrees up here and I'm seeing see smoke off the ocean how long is it down there today.
It's a beautiful day today.
Laurie this.
He is not <unk>, but not <unk>.
But Thats award.
There you go there you go.
Are you today.
Thank you.
Taking the questions and stuff Carlos you talked about the deposits with the.
The government I think you said they totaled $21 billion, youre expecting 7% to $10 billion to be dispersed to them over the first and second quarters.
Will there be more disbursements later in the year or next year or what's the outlook for that.
The remaining amount.
Yes.
They haven't conclude all of the transactions. Okay. There is still some restructuring expected electric company a company that are pending.
So there could be some more outflow related to those those are those are smaller I think.
Windows.
Amount of liquidity moves out.
The government will.
We'll finally get back into a normal course of business of running the government. So I think the flow of funds will probably get.
Money coming in and coming out.
We will increase as well.
So.
I think what's going to happen is that we will end up.
Normalizing for some level of balances that will vary during the year as you know it always goes up into the first quarter when the second quarter with tax savings come in and then it goes down during the year.
But.
As far as we know it might be slightly slower than the 11, nobu left or Tennessee or <unk>. After this but it's hard for us to figure out exactly exactly what the new number is going to be.
As you know Gerard allows these accounts were not with US before so we don't have a long history with them there used to be a GDP before but so yes, there could be some additional outflows there should not be of this magnitude.
We will end up with a more normalized level, probably the buses moving forward again, probably less than the net amount of this outflow, but exactly where we are not sure.
Okay. Thank you.
And then.
In your slide deck, you guys showed the credit senior credit rating unsecured credit ratings, you have and I noticed the S&P. One is on positive outlook now granted there is slightly below Moody's and Fitch do you guys have any idea of when they may come out with there.
Determination, whether theyre going to reach that credit rating.
Alright.
Very clear.
I am not sure if they will wait till they really look at the government before they really look at the rest of us.
They don't tend to move very fast yards. So.
No very clear, we're very hopeful these developments will.
The catalyst for some.
Changes in our ratings.
And already get closer to what we think the company really is but we don't have a clear view of timetable here.
Okay.
I think in National you talked about the commercial loan growth here in the United States.
In your slides as you showed that your total deposit costs at popular bank are about 40 basis points, which I know thats on an absolute level low relative to history.
Relative to the current period were in into your peers. It seems to be on the high side and any thoughts on.
What's driving that number and what could that what could happen to that number once the fed starts raising interest rates as they are just that they're going to do in March.
Right.
We.
Tremendous loan growth that we've had to balance our desire to reduce our interest cost of funding of our loans. We've been very successful. This year I think we have nine consecutive quarters, where we lower our funding costs.
Obviously, if rates go up we'll have to manage that but remember that part of our strategy in New York, especially was too high.
Our commercial strategy.
Strategy. So we are orienting our branches or for commercial business, where you're attending a more stable deposits. So that's part of our strategy. So far it's paying off.
So.
Raising range will obviously, we will have to watch the market.
One of our strategy.
And especially in the New York market to go to the commercial loan growth was to rely more on commercial deposits.
And retail deposits, which tend to be more volatile.
Very good.
I assume the Q2 numbers are obviously there.
There was quarterly commercial loan numbers, but I'm thinking maybe missed it I apologize.
In response to an earlier question about what drove the commercial loan growth in the U S.
Middle market commercial real estate is at C&I lending.
Type of commercial lending drove.
Core growth in the quarter.
Yes. It is.
Yes.
Of the growth what I mentioned.
About $105 million was just the fact that we added the company within in the quarter. So ex the leasing company.
What's the number.
High six hundreds what drove it was mostly are.
Sure.
Our historic lines of business is healthcare.
Paul.
The association of Nike.
And on CRE, which is a typical triangle business, we do so in touch in all the lines of it was really growth across the board in our historical businesses drove the growth.
Very good and then just lastly, Ignacio a lot of positive.
Numbers coming out of Puerto Rico, which you highlighted on.
The auto sales et cetera.
I don't.
Don't know if there's any specific numbers you can cite but can.
Can you share with us what's going on with the immigration patterns have reversed yet.
Our folks from Puerto Rico, maybe coming back onto the island or has that not happened yet.
There's a lot of anecdotal evidence.
I don't have the net inflows from the airport at hand, which we used to use.
I can tell you that even the fiscal board.
Optimistic Lynch has in their most recent fiscal plan.
We do still projected level.
Of.
Declining population so they had declining about one point something a year now they have it at 0.9%.
That matches, what we're seeing anecdotally.
We are seeing.
More people coming back to the island.
So I think theres no doubt that the migration trends have improved.
I think one area, where we have to work us as a society and as many other societies at work it I'm not so worried about migration anymore, because the economics have reversed.
I don't believe that the push factors when you talk about migration and talking about the pull and the push I think the push factors in Puerto Rico are much less now the economies.
Frankly, anybody who wants a job we should be able to get a job in portions of the knee.
I worry more about the birth rate and how we can get the birth rate up because at the end of the day and to me that is more important than the migration axiom migrations will work itself out growth rates are very hard to change.
So that.
But definitely the demographic situation has improved its still a challenging but again the only empirical numbers I've seen are the projection in population growth decline, which now have improved in the most recent fiscal plan, which has been submitted by the board.
Great I appreciate the color. Thank you gentlemen.
Thank you.
Lastly, we have a follow up question from Brock Vandervliet from UBS. Please go ahead.
Thanks.
Just in terms of.
The credit quality it seems like.
Credit quality is continuing to improve really across the board.
How should we think about the appropriate level.
Our reserving.
And it related to that.
Do you think there is something special.
And capping that net charge offs.
In the past year because it just.
This doesn't.
Look like the credit quality of.
The bank that we used to know it looks like the credit quality of our traditional.
U S U S bank mainland bank and that would point to or suggest.
Materially lower preserve over a period of time.
Okay.
I think.
I think we still have room for another.
I mean, obviously the allowance going to continue to be driven by credit quality economic outlook.
The charge off experience.
Over the last two years of momentum we have seen significant improvements or was the traditional charge of.
The rate of the organization, we are used to being a corridor between 75 basis points to 125 basis point is going to be one of seven basis points in 2012.
Okay.
66 basis points.
As that continues to be the case.
Continuous releases of the provision.
I'm not sure if I answered your question.
Well close enough.
So.
He is.
Those things just continued.
Net charge offs.
Okay.
Yes, obviously create a wellness.
The FERC.
Remember the FERC because a big part of your question now.
Yeah, Okay, alright, thank you.
Okay.
Yes.
Yes.
At this time, we have no further questions registered I'll now hand back to Ignacio Alvarez for any concluding remarks.
Thank you. Thank you everyone for joining the call for your questions.
And we look forward to updating you on our progress in April .
Good day.
Thank you everyone for joining us today. This now concludes our co. Please disconnect your lines.
Okay.
Yes.
Okay.
Yes.
Yes.
Yeah.
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