Q1 2022 Popular Inc Earnings Call
Okay.
[music].
Hello, everyone and they've warm welcome to the popular Inc. Q1, 2022 earnings call. My name is some minor and I'll be coordinating your call. Today. If you would like to register a question in preparation for the Q&A session. Please press star followed by one on your telephone keypad with that I have the pleasure of hunting I vote to poll cards.
<unk> Investor Relations Officer at popular Inc. Please go ahead Paul.
Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our CFO Javier for our CFO , Carlos Vazquez, and our CRO video Suriano.
I will review our results for the first 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.
Actors that could cause actual results to differ materially from these forward looking statements are set forth within todays earnings press release and are detailed in our SEC filings.
Find today's press release, and our SEC filings on our webpage at popular Dot com.
I will now turn the call over to our CEO Ignacio Alvarez.
And thank you for joining the call.
We began the year with a very strong quarter, achieving net income of $212 million.
Our results reflect the continued recovery in economic activity, our diversified sources of revenue and prudent risk management. Please turn to slide three.
Our quarterly net income of $212 million was 6 million higher than the fourth quarter and 51 million lower than the same quarter of 2021, which included significant reserve releases.
The sequential variance is driven by lower expenses and a lower tax rate.
Partially offset by lower benefited in the provision for credit losses.
Lower net interest income and lower fee income.
During the quarter loan growth was solid and broad based both geographically and across all loan segments.
Loans grew during the period at both Pvp are NPV. Despite because he ran all of PPP loans.
Our margins in Puerto Rico continued to be impacted by our asset mix.
However, we are well positioned to benefit from higher market rates.
Credit quality trends continue to be favorable during the period with a low level of net charge offs and decreasing nonperforming loans.
With increasing expectations to digitize and.
Improve our customer experience.
We are constantly assessing investing in our capabilities.
In February we entered into an agreement with <unk> to acquire key customer facing channels and to extend important commercial agreements.
We expect this transaction will allow us to enhance our client experience and provide us with greater flexibility to meet our customers' needs.
During the quarter, we continued to return capital to our shareholders.
In March we entered into a 400 million accelerated share repurchase program.
On April 1st we paid a dividend of 55 cents per common share an increase of 10 cents per share.
Please turn to slide four.
Our customer base in Puerto Rico.
By more than 6000 in the first quarter to reach 196 million unique customers.
Adoption of digital channels, among our retail customers continues to be strong.
Active users of army Banco platform exceeding $1 1 million.
Have grown by one 5% since March 2021.
And by 19% since March 2020.
We captured two thirds of deposits during the quarter through digital channels.
This trend remains significantly higher and doing pre pandemic levels.
Commercial loan growth was solid during the first quarter, excluding PPP loans commercial loan balances MBV PR increased by $302 million or 4%.
Auto loan and lease balances.
<unk> increased by 1% versus the fourth quarter and consumer demand remains robust.
The dollar value of credit and debit card sales for our customers has continued to trend higher.
Increasing by 5% compared to the same quarter a year ago.
The housing market continues to be strong however, mortgage originations had been impacted by rising rates.
Value of mortgage originations at PPP or decreased by 28% year over year in the first quarter.
But was more than 60% higher than the same periods in 2019 and 2020.
Please turn to slide five.
Based on the current macroeconomic environment in Puerto Rico.
Puerto Rico economy performed well during the first quarter with business trends and customer activity remaining solid.
Sales increased by 1% in the first quarter compared to the same period. In 2021. This was the highest level of new auto sales seen during the first quarter and more than a decade.
The Puerto Rico economic activity Index, which includes total employment.
Cement sales electricity generation and gasoline sales.
Has it been steadily improving and has exceeded pre pandemic levels were more than the past five months.
We are particularly encouraged by the positive employment trends.
March total employment in Puerto Rico reached its highest level in recent history.
Additionally, the March 28, 2022 unemployment rate of six 5% is the lowest since records began nearly 60 years ago.
It is especially encouraging that the decrease in unemployment levels was accompanied by an increase in the participation rate.
Airport traffic also continued to improve passenger.
Passenger volume during the first quarter increased 35% compared to the same period, a year ago and also exceeded the very strong traffic as seen in the first quarter of 2019.
The tourism hospitality sector continues to be a source of strength for the local economy.
He was a popular destination for mainland residents and the recent increase in Covid cases does not appear to be having the same impact on consumer demand for travel as prior surges are bad.
We believe that the recently completed their degrees.
They completed debt restructuring should be important catalysts for Puerto Rico's fiscal and economic recovery in short we are very pleased with the results for the quarter. We continue to be optimistic about the prospects for the future remain attentive to how the evolving geopolitical inflation and health situations may impact the economy.
And our clients I now turn the call over to Carlos for more detail on our financial results.
Ignacio Good morning, Please turn to slide six as usual additional information is provided in the appendix to the slide deck.
<unk> earnings press release details variances from the fourth quarter.
Net interest income for the first quarter was $494 million a decrease of $7 million from Q4.
<unk> was driven by lower PPP related income and lower income from PCB loan repayments that'd be PPR, along with the impact of two fewer days in the quarter.
This was somewhat offset by higher income from the from loan growth B C. P R and PV as well as a higher balance of investment securities.
Noninterest income decreased by 10 million to $155 million the.
The decrease in other service fees was mainly related to seasonality in credit and debit card fees, which were lower by $3 million due to higher purchase activity in Q4.
And 4 million contingent insurance commissions that typically happen in the last quarter of the year.
Income from mortgage banking activities was 4 million lower mainly driven by lower gains on securitization activities, resulting from lower volume of transactions and unrealized unrealized premiums.
These negative variances were partially offset by $3 million in higher income from investments held under the equity method.
We continue to expect that the average quarterly level of noninterest income will be around $155 million to $160 million.
The provision for the first quarter was a benefit of $16 million.
Was $18 million lower than the benefit recorded in the fourth quarter.
Total operating expenses were $402 million in the quarter, a decrease of $15 million from Q4. This was driven by three factors first an $11 million decrease in business promotional expenses, primarily impacted by lower expenses associated with seasonal advertising charitable donations.
Credit card rewards.
Second on 11 million decrease in other operating expenses driven by sundry losses, lower sundry losses by 5 million mainly related to the termination of a white label credit card contract and the fight made any permanent losses on undeveloped properties taken in Q4.
Finally, a 5 million decrease in amortization of intangibles due to the write down of a trademark in Q4.
These decreases were partially offset by a 7 million increase in employment compensation cost, mostly driven by higher incentives and commissions as well as seasonality in payroll taxes that increased by $4 million.
84 billion, an increase in credit and debit card processing expenses due in part to lower volume incentives and a 3 million increase in professional fees for.
For 2022, we continue to expect our average quarterly expenses to be around $415 million.
We will of course strive to come in below this expected level of expenses are.
Our effective tax rate for the quarter was 19% in 2022, we expect the effective tax rate to be between 18% and 20%.
Please turn to slide seven.
Net interest income on a taxable equivalent basis was $548 million 4 million higher during the fourth quarter.
Net interest margin decreased by three basis points to 275% in Q1.
On a taxable equivalent basis NIM was three 5% an increase of three basis points.
Increase in FTE margin was driven primarily by higher yields on our investment portfolio by 17 basis points due to asset composition or improve market rates.
During the quarter.
Average bonds of U S. Treasury Securities increased by $4 2 billion, while the average bonds are money market investments decreased by $3 1 billion.
The FTE loan yield decreased by 20 basis points in Q1 to 6.6% driven by lower PPP amortization.
PPP income in Q1 was $11 million down from $23 million in the prior quarter due to lower recognition of fees upon forgiveness on lower balances.
The yield of the portfolio of 17% compared to 17, 9% in Q4.
The outstanding Florida rebounds of PPP loans was 173 million the remaining unamortized portion of fees for this portfolio is 8 billion most of which we expect to recognize during the second quarter.
Excluding pollak deposits deposit balances grew by $4 1 billion in the quarter.
I felt at the end of the first quarter public deposits were roughly 15 billion a decrease of 5 billion from Q4.
Well the aggregate deposit outflow associated with the completion of the paired recalls the debt restructuring was approximately $10 billion. We sold five additional public deposit inflows during the first quarter.
We now expect public deposit balances to fluctuate between 11, and 15 billion slightly higher than our prior estimates.
The outflow of public deposits and the deployment of a portion of our cash position into loans and investments have reduced our sensitivity.
But we will continue to benefit from rising rates.
March 2022, each 25 basis point change in fed funds.
With how I respond to $6 million to $8 million in NII per quarter.
Our ending loan balances increased by 344 million.
This increase occurred despite a decrease of $180 million in PPP loans.
Excluding the impact of PPP loan balances grew by $524 million in Q1, reflecting higher commercial loan balances at BCP.
In popular bank higher construction balances and to a lesser extent higher auto and personal loans.
These balance increases were offset in part by continued runoff of the mortgage loan portfolio in Puerto Rico.
We are encouraged by the demand for credit at BP PR and PV.
That growth has occurred earlier than expected.
We will continue to take advantage of the evolution of the economy and the opportunities to extend credit. So we can continue to improve the use and yield or existing liquidity. Please.
Please turn to slide eight.
Capital levels remained strong our common equity tier one ratio in Q1 was 16, 3% compared to 17, 5% in Q4.
Tangible book value per share in the quarter was $51.16 for a 22% decrease driven by driven by four factors.
1.1 billion higher accumulated unrealized losses on debt securities available for sale as a result of rising interest rates.
The impact of the 400 million accelerated share repurchase program. The corporation entered into in February and declared quarterly common stock dividends.
This was partially offset by the quarterly net income of $212 million.
The lower mark to market valuation of our investment portfolio will not have an impact on our regulatory capital ratios.
Well this is a large various intangible book value the decrease in fair value of the investment portfolio should be temporary.
Our investment portfolio is nearly entirely comprised of Treasury and agency mortgage backed securities, which carry minimal credit risk the bond portfolio had a duration of approximately four years and as it positions roll down the yield curve there.
There are fair value will converge to par under mark down to zero.
Despite extension of some cash into the investment portfolio over the last few quarters, we continue to have large cash balances.
Consider extension or available liquidity into the investment portfolio will lead to higher earnings and improved tax efficient effective markets in this interest rate environment.
Our return on tangible equity was 16, 4% in the quarter.
As a result of the ASR, we recognized in shareholders equity approximately $320 million in Treasury stock and 80 million, that's a reduction in capital surplus.
The final accounting treatment of the program will depend on the average price of the shares during the term of the ASR scheduled to close in Q3.
Our EPS in Q1 increased by three <unk> as a result of this transaction.
Our capital planning schedule should result in an announcement a popular 2023 capital actions no later than our January 2023 webcast.
The announced intention to redeploy the net gains expected from the sale of our stake is subject to the closing of the transaction and regulatory approvals as of now because it's still expected for midyear.
We will continue to explore opportunities to manage our capital structure through the remainder of 2022 and in future periods with that I'll turn the call over to leave you.
Thank you Carlos and good morning.
Overall.
Overall, I continue to exhibit strong credit quality trends and low credit costs.
Low levels of net charge offs and the increasing npls.
We continue to closely monitor.
Changes in borrower performance and the pace of economic recovery.
Given the rising interest rate environment and geopolitical uncertainty.
However, we remain optimistic given recent credit performance.
The economic outlook and improvement in the risk profile of the corporation's loan portfolio.
Turning to slide number nine.
Nonperforming assets decreased by 22 million to 610 million this quarter.
Mainly driven by an NPL decrease of 28 million.
Offset in part by an Oreo increase of $5 million.
The decreasing npls was mainly in Puerto Rico.
This was driven by lower mortgage npls of $26 million.
Primarily due to the combined effects of collection efforts.
Great for promotional activity.
And the ongoing low levels of early delinquency compared with pre pandemic trends.
In the U S npls remain flat quarter over quarter.
Compared to the fourth quarter of last year.
NPL inflows, excluding consumer loans remained flat.
In Puerto Rico, total inflows increased by $5 million.
Driven by higher commercial by $4 million and higher mortgage by $2 million.
In the U S inflows decreased by $5 million.
Driven by a.
Reduction in the mortgage portfolio.
As the prior quarter included the impact of loans that they never.
Payment after the end of the current related moratorium.
The overall increase in the quarter was driven by the resumption of activity in the Puerto Rico mortgage portfolio.
At the end of the quarter the ratio of Npls to total loans held in portfolio.
Well its one eight pension compared to one 9% in the previous quarter.
Turning to slide number 10.
Net charge offs amounted to $4 million.
Or annualized five basis point of average loans held in portfolio.
Compared to a net recovery of 8 million in the previous quarter.
The variance in net charge off was mainly driven by the resolution in Puerto Rico.
Of certain commercial nonperforming loans in the prior quarter.
The corporation allowance for credit losses decreased by $18 million.
Or two 5% to.
678 million.
Driven mainly by reductions in qualitative research.
Two substantial improvements in employment levels in Puerto Rico.
The ratio of allowance for credit losses to loans held in portfolio.
Slightly to two point, 29% compared to two point, 38% in the previous quarter.
The ratio of allowance for credit losses to Ipl's, helping portfolio.
Well, so I'm down 30% compared to 27% in the prior quarter.
The provision for credit losses was a benefit of $14 million.
Compared to a benefit of 31 million in the previous quarter.
In Puerto Rico, the provision for credit losses was a benefit of $12 7 million was in the U S.
There was a benefit of one 7 million.
Please turn to slide number 11.
They are arguing the allowance for credit losses.
And by changes to quality did research and economic outlook as well as portfolio credit quality and mix.
During the quarter, we released $26 million from our qualitative reserves driven by improvements in employment levels in Puerto Rico.
In accordance with its usual practice the bureau of Labor statistics completed its benchmark revision.
So the establishment survey employment serious regime that significant improvement in payroll employment.
As a result, we released qualitative reserves associated with uncertainties due to the employment situation in Puerto Rico.
Got it.
Changes in economic scenario, driven by physical assumptions caused the ACL to increase by $4 million.
However.
Mccormick said Irish for Puerto Rico, and the U S continued to show a positive outlook for the economy.
Portfolio changes driven mainly by credit quality portfolio growth and volume mix cost ACL to increase by 8 million.
To summarize our loan portfolio activity is strong credit quality metrics.
Net charge offs and decreasing nonperforming loans.
We are optimistic given recent credit performance economic outlook and improvements in our risk profile.
The corporation's loan portfolios with that I would like to turn the.
Got over to Ignacio for.
Concluding remarks. Thank you. Thank you Leo and Carlos for your updates.
Started off 2022 with a strong quarter building on the positive momentum seen in 2021.
Our results were driven by strong earnings improve credit quality and continued customer growth.
Our planned capital actions reflect the strength in addition to the unprecedented level of federal stimulus related to Covid.
Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed and which now have begun to flow at a faster pace.
We expect that the combined impact of these factors along with the continued progress on the resolution.
<unk> fiscal issues should generate considerable economic activity in many sectors for the coming years, and we are well positioned to benefit from such activity. We are optimistic about the economic outlook, you're cognizant of the possible challenges to the environment, resulting from the war in Ukraine inflation and the ongoing health.
Situations.
I am thankful to our entire team who have continued to perform at a high level and deliver results under a myriad of changing conditions.
Continued investing in our people and in January increased the minimum wage paid to employees across all our geographies.
Our employees are popular is greatest source of strength.
We aren't ready now to answer your questions.
Thank you Ignacio.
I would like to ask a question. Please press star followed by one on your telephone keypad now.
Your mind. Please press star followed by <unk> when comparing to ask a question. Please ensure you'll find is I know you said lately and just curious do you Wanna Speakerphone. Please pick up your handset before asking your question.
Our first question comes from Brock Vandervliet of UBS. Your line is open. Please go ahead.
Thanks for the question good morning.
Good morning.
I may have just missed that but yeah.
Constantly hunting for economic unemployment data in particular about the island could you review that the actual number.
That you're citing in terms of the employment improvement.
Yeah, the unemployment rate was six 5%.
And the participation rate I didn't I didnt say, it specifically, but it is 44 and change and to increase about.
Two unchanged from our prior reading.
Okay got it.
In terms of the government deposits I guess, just two questions one.
You had framed out the impact of that run off as I believe four to five basis points of NIM.
Benefit for every billion.
Is that still reasonable and should we see that in Q2, and I guess secondly, what what would drive that range.
In terms of 11 to 15 down to the lower.
Sticking at 15.
Yeah.
The the range still applies birth that we mentioned earlier.
What what's going to drive the change in debt.
The balances within that range as you know normal operation operational activity of the government, which means that for the second quarter. For example, they get older tax receipts in the second quarter.
And up into higher end of that range normally during the rest of the year and spend more money on.
And they have less inflows so the balance should come down during.
And the rest of the year. They will have now for the first time in five years six years, our debt payment at the beginning of July that is a new as well. So our best guess right now Oh is that it should go should be higher and higher end of that range in the second quarter and then come down.
After that the.
Thing that meet their effects that balance in ways that it's very hard for us to predict is the arrival of some federal funds.
Sometimes you know well, we get some price in the in the upside when a particular program is triggered and a big slug of federal funds arrive well a normal flow of business should be we should be around the highest at this point in the year and should gravitate down from here.
Yeah.
Okay. Thanks, I'll go back to the queue.
Thank you Buck.
Our next question comes from Tim All parts a lot of Wells Fargo. Please go ahead Tonight.
Hi, good morning.
Good morning, starting on the <unk>.
Starting on the loan growth.
Two quarters in a row of positive net growth I heard your comment that this is coming sooner than than what you had been expecting which was for kind of net growth in the back end of the year I'm guessing how does the loan growth outlook change if at all given these last two quarters.
Should we expect accelerating growth as some of the stimulus money.
<unk> to find its way into the economy and some of its existing growth in the fourth and the first quarter here kind of preemptive in anticipation for increased economic activity and rolls off I guess, how do you think about loan growth going from here with these two good quarters and here we're talking now.
Yeah, you know I think that.
Definitely loan growth has allowed to do with confidence in the economy, and I think theres a lot of confidence in the economy right now, especially in the larger players. So loan growth we saw in the larger commercial loans both in in the U S and in Puerto Rico. So it's hard to predict because those loans are lumpy, but we do.
We have not seen any deceleration of the interest from our clients.
There's a lot of activity going on there's a lot of.
There's a lot of people.
People looking at different possibilities acquisitions investment so it's been lumpy because these loans are large.
But we certainly don't see any deceleration.
Loan demand at this point.
Okay.
And then just looking at the swinging Aoc I can you just maybe talk through some of the internal discussions about potentially having moved some of the portfolio into held to maturity status during the quarter and then the duration. You said is it's four years, it's a pretty straight line should we assume about it.
Quarter over the portfolio runs off annually and kind of extrapolate that on a quarterly basis or is there some.
It's different than in the pace of cash flow on that book.
Yep.
There was no substance of discussions about moving the portfolio to held to maturity during the quarter, we have historically all of the portfolio.
For sale, so no significant unexpected change there.
The portfolio maturities are pretty well balanced.
As we move forward.
So and when we add to the portfolio as well to where we we we tend to layer in all our future maturities a little bit as opposed to add a big chunk in any given maturity. So so we have a quite balanced portfolio.
Our guess of of a quarter of every year are lumpy.
We will we will comment on one thing.
Yeah. This is Juan Pablo.
In terms of maturity structure, I'd say around 38, and 40% mature within the next three years.
And then another 30% between years three and five.
So again as Carlos mentioned portfolios laid out all the way up to six or seven years, but again the bulk of the exposures are and kind of like in the belly of the curve.
Yeah.
Understood. Thank.
Thank you.
Two.
Thank you Tamara.
Our next question comes from Brett Robinson of Hope the group. Please go ahead Brett.
Hey, good morning, everyone.
Good morning, good morning.
Wanted to ask about.
Ian column and mortgaging, specifically it seemed like the.
The MSR Mark didn't.
Rates, given where rates have move would have been more significant.
Can you maybe talk about mortgage.
S R and I think if I heard you correctly 155 to 160 million kind of guidance for quarterly fee income.
You know it wouldn't seem like.
You've got some movement there in other with the equity equity piece. So it would seem like there could be some pressure to lower end of that but wanted to make sure I understood.
How you're thinking about the guidance for fee income.
As well.
Yeah, I mean, the the guidance for fee income is unchanged as you know there's a lot of moving parts that add up to that number of 155 to $1 60 in any given quarter, you'll have things come up and down.
The one of the reasons, we keep the guidance that'd be aggregated level is that a lot of those things that happen tend to cancel out from quarter to quarter. So you end up in similar levels given those specific lines, maybe a lot more volatile.
We still feel comfortable that this is it.
The correct range moving forward.
In this environment.
Uh huh.
When the transaction with Aerotech clauses.
We will make some adjustments to that range yes.
We that Hasnt happened yet until we haven't made any adjustments yeah, yeah, there will be some adjustments.
Through the rate moving forward.
Okay.
That's helpful any thoughts on the MSR and mortgage overall.
Yeah on mortgage I mean, where we are seeing trends that are not dissimilar from what everybody else is seeing in the country. When rates go up the refi rate goes down. So we still have a very healthy housing market in Puerto Rico are but one of the challenges is finding how to buy.
Theres very little offer of units in the island and that makes the the new market somewhat challenging.
So lower there will be we expect to have as we did in the first acquired lower volumes in that quarter. As a result will be securitizing less loans and the fees from that.
Well, we'll be will be lower.
The MSR.
My view on the MSR write up the MSR goes what Amazon does.
Hum.
There's there's a the effective rates is also the effect of extension on it so different things will affect it at any point in time.
So.
I take that more so.
So that's a fact.
It's something that we try to forecast or hedge.
Okay.
Okay fair enough.
The other thing I really wanted to talk about was you know I've been looking at all of the data economically and it's been very strong.
And you pointed out some of the numbers on the call. So far this quarter. So far this year and I mean, it looks really to me like this is gonna be yeah, the first year, where Puerto Rico and in many many years has had its going to have.
<unk> low single digit positive GNP growth and there doesn't seem to be anything on really not even despite.
Higher energy prices potentially impacting retail funding et cetera employment continues to be stronger.
Yeah. It doesn't sound like you guys are taking a very bullish.
Bullish view on the economy more of a wait and see or cautious approach can you give me any color around that and how you're viewing the year and you know if it's just.
Everybody sort of nervous about the yield curve, what vacations et cetera, you know global stuff or maybe you can provide a little color on that.
Yeah.
I mean, maybe we didnt expresses Gary but I think we're very optimistic about where the economy is.
The Puerto Rico economy. These days is as good as.
And he was a senior for a long time.
And again to me the most important one of the most important is employment and it really is we had more people employed today with a lower population that we had a decade ago. So I think the biggest headwinds the economy weakens.
Certain about is external to Puerto Rico, it's not internal.
What happens in the Ukraine, and what that does too.
Our supply chain, but you don't really I think if a regular economy. He said it is positioned to grow.
More solid than it has a long time and right now the consumer.
Gains are healthy our customers have a lot of liquidity.
Really you know the biggest problem. We have is I think many people is hiring.
Across the board in Puerto Rico is staffing people for the growth.
Yeah, I think we're very optimistic about the Puerto Rico economy.
There are some real legitimate concerns about external factors, you know Ukraine inflation logistics all of that kind of stuff.
In terms of Puerto Rico, we are very optimistic.
But our average retail client balances up 50% from where it was pre pandemic. So the consumer seems to be still a very strong position.
Keep in mind that Puerto Rico will benefit from a from an extended application of the federal child tax credit and that should add some additional liquidity to the market.
Earlier this month, so there's still positive.
The peaks.
Giving us a tailwind.
So we are positive.
Okay.
Hum.
I think you mentioned that on on health care or any thoughts on Supreme Court decision to disallow the.
Several hundred thousand people the Medicare benefits this year.
Well, yeah, it's very disappointing.
Keep in mind, though that we didn't have that benefit until very recently when the appellate court in fact, I don't know they never implemented so it's not a benefit that we lost that we hadn't lost its benefit and obviously would have been a very important until it is disappointing.
You know, we're hopeful that the administration will be able in the next two years that they have left or at least before the mid terms before the Congress changes.
Against some of those benefits through legislation, but again remember that that is not something we hadn't lost that is something that that you know that.
The courts.
The Congress had never given us and of course, the lower court has ruled that it was unconstitutional.
The screaming against Puerto Rico, and the Supreme Court reversed that.
We have had a lot of additional benefits. So the child tax credit, which is something Puerto Rico only participating marginally that has been a very large benefit to Puerto Rico. So.
I think that's very important and I think that has helped.
Households, in Puerto Rico, So D a little bit with the inflationary pressures.
It's a lot of money.
Visa V. The average annual salary in Puerto Rico.
Again, theres a lot of money out there I mean.
Stimulus is not a problem, but I was wondering to get it out.
<unk> the hurricane recovery funds as more than 50 billion yet to be spent there was no.
The different legislation for Covid relief. Some estimates have about 10 billion left to be spent and the infrastructure Bill It had about $2 seven in the next five years. Another one point to add to that so there's a lot of money out there yet to be spent how much will be spent I don't know.
This is more the supplemental Medicare is more of a human human rights issues.
Economic impact issue.
Okay I appreciate all the color.
Yeah.
Thank you Brett.
Our next question comes from Gerard Cassidy of RBC capital markets. Please go ahead, Sir your line is open.
Thank you good morning nationally on good morning Carlos.
Good morning, good morning.
Carlos you mentioned in your prepared remarks that at the end of March.
You indicated that a 25 basis point increase in fed fund rates would lead to about a $6 million to $8 million increase in net interest income in it.
As part of that.
Comment if the fed raises fed funds rates 50 basis points, let's say next month and possibly a second time can you share with us what that would do it.
Automatic doubled to that number or is it not that linear and then second as you look out to the remainder of the year and if the forward curve is accurate.
I assume the $6 million to $8 million for every 25 basis points is not linear and because the deposit baiters in other things that that benefit might diminish a bit.
Yeah.
Think it's in the short term you can assume that it's reasonably linear it will it will not necessarily be as you move later in the year in part because there may be other changes in your balance sheet as well.
Adjusted but in the short term.
If it takes once it is 50 instead of 35.
Could be something in that ballpark of twice the range, we gave yes, but.
But if you if you're trying to think about how that may affect the <unk>.
Our rate chases September or October .
Not that number maybe may be somewhat different but we will update. This this commentary in every webcast. So you'll get another university.
Very good and then you were talking earlier about the investment securities portfolio and the duration.
I know in the average balance sheet, you give the yield for both the in the money markets and trading in investment Securities together I think it was 135 basis points, what what is the yield in the investment securities portfolio today, and what are you now seeing as you invest money into that portfolio once the new <unk>.
That you are receiving.
Yeah.
Juan Pablo I'm, sorry that one right.
Right now no.
Portfolio of the bond portfolio, excluding the cash is around a one.
135 basis points.
At the margin.
You got to think that right now depending on where your purchasing stuffs anywhere.
You know about.
I think $2 50 and 275.
Our margin on funds are being deployed at this point in time.
Very good and then finally I E.
Treasury.
I think that for us so the actual after tax yield is quite higher than that.
Got it.
You guys talked about the growth in commercial lending in the quarter and can you give us a little further color.
Is it C&I lending commercial and industrial lending as a commercial real estate mortgages that you're seeing the growth in and is it primarily on the islanders and here in the mainland.
I think we saw it in both markets I don't know maybe you want to put some more color on it but we saw strong lending in the hospitality sector in the <unk>.
LT family sector in the U S.
So it was really really across the board we had construction lending was up also.
So it was really really good.
Across the board.
<unk>.
In both geographies.
It's pretty balanced to Gerard commercial growth in Puerto Rico was about $1 61 and in the states was 135, so it's actually a pretty pretty balanced last quarter. It was much more heavily weighted to the corporate bank in Puerto Rico, but this quarter was a little more bones.
Very good and then just finally in the commercial mortgage portion.
With the tenure backing up the way it did in the month of March was there any change in what your guys on the frontline are seeing meaning.
<unk> real estate mortgage folks or are not looking to do as much activity right now or is that no it hasn't really affected them.
We haven't seen any significant change so far.
Yes.
Okay, great. Thank you.
Thanks, Thank you Jared.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
Comes from Alex <unk> of <unk>.
Alex Your line is open. Please go ahead.
Thank you and good morning all.
Good morning, good morning.
A couple of questions here so.
With the new range on the government deposits of $11 billion to $15 billion does that change and with obviously this bankruptcy kind of now in the rearview mirror does that change your willingness to actually activate some of those deposits I know that you were kind of sitting on a big chunk of them for a long time.
Unsure of what was going to flow out, but now that we have a little bit more clarity could.
Could you take some of that kind of $5 billion of cash on the balance sheet and maybe you know at least invest.
A little bit more on the securities portfolio.
Well, we have been adding to the group portfolio every one of the last three or four quarters I think onyx. So we've been doing some of that you are correct that some of the uncertainty about forward looking balances is now has now gone away.
So we will we will continue to look at.
Our cash position and investment opportunities.
Investment opportunities are obviously, a lot more attractive now than they were.
A few quarters ago. So.
Our willingness to extend as.
Probably getting better because we are finding more attractive now.
So this is a.
As one of our Alco Committee it goes on a weekly basis. So.
So we will definitely continue to extend.
And with less uncertainty on our balances and better investment opportunities.
We will consider extending more than we have in the last few quarters on average.
Have you have you done any so far during the second quarter that you can share with us.
Okay.
Hum.
I don't recall on.
On the second quarter, Alex, but we should assume that we will we will do some in the second quarter as well.
Okay.
And then what.
When we talk about loan growth and we can talk about the the hurricane money that still as you know it's kind of been slow to come to the island you can kind of really parse out from some of the programs big chunks of money that's been allocated to things like affordable housing and just.
Just some of the our three program and the investment portfolio for growth and you look at the numbers that are publicly available and you just you.
You can see the projections have been pretty strong going forward, but you know there's.
A lot of that money is really yet to be spent.
You know in the past you've talked about kind of planning and permitting you know it was maybe last year and now this year, you're starting to see a little bit of commercial growth are you seeing any of that related to some of these HUD programs.
And if not do you think that there is do you have a line of sight on to sort of when some of those programs might come online.
It's hard to get a line of sight, because a lot of internal.
Negotiations and processing going on between.
Quarter three in the federal government.
We are starting to see it you're right, it's starting to come out slower than we hope I mean, they just announced the first recovery project for the acronym consumer authority.
$2 billion project. It was finally built there is a lot of proposals I think last time, we ran.
Ed.
Luma in the power authority have 16 projects in front of FEMA to be approved so it's going to the project.
I think the housing what the C. D E funds is moving a little bit faster they have disbursed some money.
Again.
Yeah, we can.
It's been slower than we would have hoped.
The one thing that I do think the political realities are that.
As divided administration and the halfway Mark I think theres going to be you know.
Real pressure on the administration to get more money out because obviously they were very critical of the way the Trump administration handle the funding for Puerto Rico.
And really the first two years it really hasnt dramatically increase that much. So I think just the.
Timing in the process of yet further along a lot of work has been done I think there'll be political pressure on the federal government to show some results.
Especially they were they were highly critical of the Trump administration.
They should.
Should make some progress.
That's the positive side, a little bit on the negative side is all of the all these logistic logistical challenges and inflationary challenges complicate the process.
Buying the stuff of projects some of these specialized equipment I read somewhere it can take two to three years for deliveries.
So you know.
The listed logistical challenges are real.
Yeah Ted.
Starting to flow not as fast as we want but again the economy is doing very well sort of without that big inflow. So keep it a little bit of that reserve is not necessarily a bad thing.
As an example.
The government announced today that.
They are trying to negotiate with wood.
Set on authorities for them to allow them the.
The equipment that is involved in some of the projects that will be built in to rebuild the electrical sector to be purchased ahead of the final.
Granting of public contracts because the way. It is now you actually have to wait for the contract to be granted to order the equipment necessary and that equipment may have a lead time normally of eight to 10 months, maybe nowadays it may be two years. So trying to get ahead of some of that so that's the kind of logistical discussions.
Going on hopefully they will be resolved positively so we can get more of those projects.
Going quicker.
And theoretically if someone wanted to purchase a big piece of equipment with a two years ahead of when the contract might be executed is that something that you need a bank loan too.
To help facilitate that purchase.
Well it depends what you're talking about again, the equipment that will be the let's say power stations.
That's going to be bought by luma or that the power authority with federal funds.
However, a lot of the work.
It would be done by private contractors and those private contracts will have to buy trucks and equipment. They use to install this stuff now the infrastructure itself is going to be funded by a federal funds, but again much of the work will be done by private contracts, So who will have to buy equipment and that kind of thing.
That's helpful.
Just a couple of sort of follow up questions.
25 basis points equals $6 million to $8 million per quarter kind of what's the difference between that six and the $8 million is it isn't really liquidity from the government that are done.
Those two kind of.
<unk>.
Yes, largely the difference with two n's was.
$20 billion in balances versus what we thought was 10, which is now it looks like more like 11% to 15 as we mentioned so that is the biggest delta. There's all of the things that will swing the input that is the biggest delta.
Okay. So if it's if it's 15 million then you're probably looking at around $7 million per rate per quarter and that just correct me if I'm wrong. That's just the short end rate that makes no assumption assumptions on on.
On the long end of the curve.
That is correct.
And as I mentioned earlier.
It is.
Fairly linear in the very short term, but as we get out a quarter or two that number will probably change.
Okay. Thank you and then on.
On the expense guide, which is unchanged from last quarter is that reflective of the renegotiation of the ever Tech contract.
No. The expense guide it does not include that yet because that transaction has not closed once that transaction closes we will update our guidance to reflect any changes are necessary.
And that takes the CPI escalator from 5% backend of zero percent for this year right. So that that could have some some decent savings in the back half of this year that am I thinking about that correctly.
Assuming that everything close as we are assuming right now that.
To provide some savings in the back end of the year, yes.
Okay, and then how should we think about the $100 million of buyback.
Authorization that you left out of the ASR.
Can you give us some thoughts on how we should be thinking about how that will be utilized over the remainder of the year.
We are still going through that Oh.
And making decisions on it.
We are sort of considering this.
Together with our expressed intent to redeploy some of the gains from ever Tech so the.
The size and timing will depend on a number of things so oh.
We're still working through that we haven't made any decisions.
Okay, and then just you know.
Clarify the capital ratio that really matters for you guys. In your mind is the common equity tier one and when we see the leverage ratio or even the tangible common equity ratio kind of decline as a result of the size of the balance sheet or are things like the Aoc I hit does that have any.
Is that something you guys pay attention to it all when you're thinking about capital actions.
Remember the Aoc I have no effect on our on our regulatory ratios.
No.
They didn't change the regulatory ratios.
We continue to have very healthy regulatory ratios.
And at this point in time, we have no reason to think that the.
That would change the way we look at our capital return.
Okay, great. Thanks for taking my questions.
Thank you thank.
Thank you Alex.
We have a question from Kelly Motta of <unk>. Please go ahead Paul.
Hi, Thank you so much for the question.
Carrying on.
The topic.
The buyback remaining when you announce ever tax.
Repurchase goal post day one.
Gains on the remaining sales have ever thought sorry.
Is that incremental on top of the 100 million you already committed or is that right.
Or are they.
Kind of like one in the fall.
No that would be incremental yes.
Yeah.
Okay. Thank you for the clarification.
And then I guess with credit I mean things have yet.
Another negative provision and things have continued to strengthen and get better at the qualitative reserve.
As we kind of look out.
That charge offs have been really almost negligible.
Have you guys considered at all what a normalized charge off ratio looks like now.
On a go forward basis, given all the money that they've got to be dispersed.
And kind of thoughts around that.
Kelly, that's I would say a difficult question to answer.
I will say the prior to the pandemic and all the money that is coming to Puerto Rico. The normal range of charge off for the corporation was between 75 basis point to one.
25 basis point.
Hum it seems like the new normal or in the short to medium term would be ours, a little bit lower than that range. So that's.
Well review.
Part of.
And the new normal.
Okay.
I. Thank you that's helpful. And then maybe just a last one for me I really appreciate all the color around asset sensitivity just wondering on kind of what you're baking in for your expectations for deposit.
Do you expect it to follow a similar cadence.
The last time around or given the fact that you're back.
So much liquidity.
Okay.
Pro forma that battery that goes into that.
Right.
For each 25 basis points.
Yes.
Remember that we have two pieces sort of person beta deposit beta in the U S Bank and deposit beta in the Puerto Rico Bank deposit beta in the U S Bank.
As much looks more like any other.
$10 billion bank in the eastern shore, the United States. So it is a.
Closer to market change in market rates in the case of Puerto Rico historically, the possibilities have been.
Lower in both directions, and they had been in the mainland you're correct that there is long liquidity.
So you know.
Just thinking that they will look like last time is not unrealistic now what we do not know Kelly is especially how clients are going to react to a very fast increasing rates, especially commercial appliance are the most sensitive and most attentive to that so if commercial clients.
Looking at our opportunities to invest reinvest that cash.
Different way, then that could affect the betas negatively but as a starting point is not unreasonable to think that they will look like last time.
Thanks, that's really helpful and just a.
I'll follow up for me do you have a.
Or just like an approximate breakout of.
Their deposit base of retail versus commercial.
Yes give me a second and we will.
I will give you the last question.
Okay.
Okay.
Okay.
Okay.
Right.
And the bank in Puerto Rico retail is 23.
60% of the $39 six almost 40 that we have with them.
Excluding public deposits okay.
So.
Got it.
And then I'm sorry, the U S. We have the U S to the U S is no.
No no im sorry, I don't have the U S on my head.
Right Hander LIBOR.
Chocolate in the U S and get back to you on that.
Great. Thank you so much appreciate all the time today. Thank you.
Thanks Kelly.
Thank you Kelly.
We have a follow up question from Brock Vandervliet of UBS. Please go ahead.
Oh, Thanks, just a follow up to that credit.
Just trying our questions.
Is there any.
Just.
Try to dimension, where the reserve could go is there any reason to expect given this tailwind that its not returning to.
175% to 2% as a percentage of loans over time.
I'm not sure what you mean return to 175%.
Again, there's also a difficult question to answer as you know under Cecil.
Another important factor is the economic forecasts.
When you look at the trend it seems that the.
Everything else being equal the we're seeing lower releases of research on a month to month basis. So we are sort of like.
We're getting close to a plateau, but then you have the factor related to the economic forecast changes then there could be significant impact.
And reserves.
Okay.
Nothing new there.
Non accruals.
A lot of that.
75% as resi mortgage is there.
<unk>.
Some guidance, where we should expect.
A.
Ever present large component of rising mortgage just because of the way the market is on the island.
I'm just trying to dimension the potential increases.
And in non performers.
Well I mean.
That's always been the case of our business in Puerto Rico, Npls have mostly or largely being residential mortgage loans and that is.
In part.
Fact that the foreclosure process in Puerto Rico takes very very long.
So I would expect going forward that will continue to be the case.
Okay, but the commercial could.
Could trend lower.
Okay.
Alright, thank you.
Thank you.
Thank you Pat.
We currently have no further questions. So I'll hand back to popular Ignacio for any closing remarks.
Thanks, again for joining us and for your questions. We look forward to updating you on our progress in our July conference call take care.
Yeah.
This concludes the popular Inc. Q1, 'twenty earnings call. Thank you all for joining we hope you have a great rest of your day you may now disconnect your lines.
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