Q2 2022 Popular Inc Earnings Call
Good morning. Thank you for attending todays popular Inc. Second quarter earnings call. My name is Frances and I'll be your moderator today, all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one.
One on your telephone keypad.
I would now like to pass the conference over to our host Paul Cardillo Investor Relations officer at popular.
Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our CFO , Carlos Vazquez, and our CRO videos Oriental.
We will review our second quarter results and then answer your questions.
Other members of our management team will also be available during the Q&A session.
Before we start I would like to remind you that on today's call. We may make forward looking statements that are based on management's current expectations and are subject to risks and uncertainties factors that could cause actual results to differ materially from these forward looking statements are set forth within todays earnings press release and are detailed in our SEC filings you.
You may find today's press release, and our SEC filings at our web page at <unk>.
<unk> Dot com.
I will now turn the call over to our CEO Ignacio Alvarez good morning, and thank you for joining the call.
Second quarter was another strong one in which we achieved net income of $211 million.
Our results reflect the strength of economic activity in our markets, our diversified sources of revenue and prudent risk management.
Our core net income was in line with the first quarter, a $7 million lower than the same quarter of 2021.
Compared to the first quarter second quarter results were characterized by positive variances in net interest income and fee income.
Which were offset by higher provision for credit losses operating expenses and tax rate.
During the quarter loan growth was solid and broad based both geographically and across most loan segments.
Loan growth was particularly healthy during the period at both Banco bubble over and popular bank.
Our margin in Puerto Rico improved in the second quarter, but continues to be impacted by our asset mix.
We are positioned to benefit from higher market rates.
Although to a lesser extent.
Due to lower asset sensitivity.
Credit quality trends continue to be favorable during the period with a low level of net charge offs and decreasing nonperforming loans.
On July 1st.
We closed the previously announced agreement to AMETEK.
<unk> key customer facing channels.
The extent important commercial agreements.
This transaction will allow us to continue to accelerate our ongoing digital and business transformation as we continue improving our client experience.
With the ability to manager manage our key customer channels and greater flexibility to choose our technology partners, we will be able to enhance the service and customer solutions that we offer with greater agility we.
We will continue to enhance our omni channel experience to meet the changing needs and expectations of our clients. Finally, we continue to return capital to our shareholders.
Slide 12, we completed the previously announced $400 million accelerated share repurchase program.
Please turn to slide four.
Our customer base in Puerto Rico grew by approximately 6000 in the second quarter to reach $1 96 million unique customers.
Adoption of digital channels, among our retail customers continues to be strong.
Active users an army Banco platform exceeded $1 1 million or 57% of our customer base.
Additionally, we are now capturing nearly two thirds of our deposits to digital channels.
This trends remains significantly higher than pre pandemic levels.
Commercial loan growth was strong.
Building PPP loans commercial loan balances at BBB are NPV increased by $327 million and $275 million respectively.
Auto loan and lease balances at <unk> increased by $114 million or 2% versus the first quarter.
The dollar value of credit and debit card sales of our customers remained at very healthy levels. During the quarter, just 1% below the high watermark said during last year's second quarter.
While there continues to be strong demand for housing in Puerto Rico mortgage originations have been impacted by rising rates and limited inventory of available properties.
The dollar value of mortgage originations at BBB are decreased by 42% compared to the second quarter of last year.
Please turn to slide five for an update on the current macro environment in Puerto Rico.
The local economy continued to perform well during the second quarter.
As business activity and customer spending remained strong.
The Puerto Rico economic activity Index, which includes total employment cement sales electricity generation and gasoline sales has been steadily improving and has exceeded pre pandemic levels for the last seven months.
We remain encouraged by the strong employment levels.
In the second quarter total non farm employment in Puerto Rico reached its highest level in a decade.
The June 2022 unemployment rate of six 1% is the lowest for at least the past 60 years.
It is especially encouraging the decreasing the unemployment and the unemployment rate was accompanied by continued stability in the participation rate.
New order sales decreased by 10% in the second quarter compared to the same period in 2021, but remained above pre pandemic levels.
The auto industry continues to be affected by supply chain product shortages. Despite these challenges there continues to be where most demand for cars in Puerto Rico.
The tourism and hospitality sector continues to be a source of strength for the local economy.
Puerto Rico is a popular destination for mainland residents.
The airport traffic has remained robust year to date total passenger traffic has increased by 17% compared to 2021.
Hotel demand has also remained strong in June occupancy rates in Puerto Rico, where 77%.
Year to date, the average daily room rate is nearly $300.
Which is the highest level in more than a decade.
In short we are very pleased with our results for a second quarter.
While incentive to the evolving geopolitical and inflation risk and their impact on the economy and our clients. We continue to be optimistic about the prospects for the future I will now turn the call over to Carlos for more details on our financial results.
Thank you 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 first quarter net.
Net interest income for the second quarter was $534 million, an increase of $40 million from Q1.
The variance was driven by higher yield on investment securities as well as higher income from loan growth as both banks.
This was somewhat offset by lower PPP related income and slightly higher interest expense on deposits.
Noninterest income increased by $3 million to $157 million.
Although service fees increased due to higher credit and debit interchange in fees, resulting from growth in purchase activity during Q2.
This was partially offset by lower income from investments held under the equity method by $3 million.
We expect that the average level of quarterly non interest income will remain at around $155 million to $160 million for the rest of 2022.
The provision for credit losses for the second quarter was an expense of $5 million compared to a benefit of $16 million in the first quarter.
Total operating expenses were $406 million in the quarter, an increase of $4 million from Q1.
Increase was driven primarily by three factors.
Higher professional fees by $6 million due to higher processing and service charges.
Credit and debit card processing expenses were up by $4 million due to increased customer activity.
Personnel costs were 2 million higher driven mostly by property sharing plan accruals.
These expense increases were partially offset by a 6 million decrease in other operating expenses, primarily due to lower legal reserves.
And lower Oreo expenses by $5 million to due to gains on the sale of Oreo properties.
For the remaining two quarters of this year, we now expect expenses to average 444 million $45 million per quarter.
This brings the total average quarterly expenses for 2000 $22 million to $425 million.
Up from the previous guidance of $115 million.
The increase is driven by the following first.
Our results year to date, we anticipate a full year 2022, net income will exceed the threshold required to trigger employee profit sharing.
As such we are now, including the anticipated expenses for the year into our outlook.
Second during the quarter, we undertook a broad based market review of employee compensation to ensure that we remain competitive.
Outcome of this process led to higher employee salaries across the corporation, which will increase our personal expense run rate starting in the second half of this year.
Third the evolution of a market of regulatory expectations as well as increased customer activity will require us to continue to increase expenditures in certain areas, such as compliance fraud and cyber security.
And finally, given the pace of change in the financial services sector, we will incur additional expenses as we invest in our data offerings on lunch other early stage initiatives to enhance our customer experience.
Our effective tax rate for the quarter was 23% compared to 19% in the first quarter. This increase was primarily due to higher mix of taxable income.
For the full year 2022, we expect the effective tax rate to be between 17 and 20%.
This range includes the impact of Mark to market accounting on Earth holdings, resulting from the expected reduction in our boarding interest in ever take.
The gains, resulting from mark to market our tax preferential rate.
Please turn to slide seven.
Net interest income on a taxable equivalent basis was 596 million 47 million higher than in the first quarter.
Net interest margin increased by 34 basis points to three 9% in Q2.
On a taxable equivalent basis, NIM was 345% an increase of 40 basis points.
The improved net interest margin is driven by the higher interest rate environment and by improved asset mix, specifically, a lower proportion of money market investments and the increase in higher yielding loans.
Higher yields on money market and investment.
<unk> portfolio by 44 basis points.
An increase in loan yield by eight basis points to 614%.
PPP income in Q2 was $5 million down from $11 million in the prior quarter.
Due to lower recognition of fees upon loan forgiveness and lower balances.
The yield of the portfolio was 15% compared to 17% in Q1.
The outstanding quarter end balance of PPP loans was $89 million.
The remaining unamortized portion of fees for this portfolio is $3 3 million most of which we expect to recognize during the third quarter.
Excluding Puerto Rico public deposits deposit balances grew by $255 million in the quarter.
As of the end of the second quarter public deposits were roughly 17 billion an increase of <unk> 2 billion from Q1.
At this time, we continue to expect that public deposits will return to a range of 11% to 15 billion by year end.
While we remain asset sensitive this position has been reduced significantly by our deployment of cash balances initially to the bond portfolio are more recently to fund loan growth.
Given the rapid shift to higher short term rates.
Moving forward, we expect the cost of public sector deposits to start moving in tandem with market rate, albeit with a lag.
As a result of these factors each 25 basis point change in fed funds rate now corresponds to an increase of approximately $2 million in NII per quarter.
We expect our interest rate sensitivity to become relatively neutral to higher rate scenarios in the coming quarters.
Our ending loan balances increased by $787 million or 3% compared to Q1.
And are up by $1 1 billion or 4% year to date.
The quarterly increase occurred despite a decrease of $85 million in PPP loans.
All segments, except for mortgage in Puerto Rico were higher with commercial loan growth being particularly strong.
We are encouraged by the demand for credit <unk> and <unk>.
At PB.
We will continue to take advantage of opportunities to extend credit to improve their use and yield of our existing liquidity.
Please turn to slide eight.
Our return on tangible equity was 16, 7% in the quarter.
Capital levels remained strong our common equity tier one ratio in Q2 was 16, 4% roughly unchanged from Q1.
On July 12, the Corporation completed the previously announced $400 million ASR in total we repurchased approximately $5 1 million shares at an average purchase price of $78 94 per share.
Tangible book value at quarter end was $46 18 per share.
11% decrease driven mostly by higher accumulated unrealized losses on debt securities hurdle for sale of $563 million.
A result of pricing interest rates.
This was partially offset by net income in the quarter.
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 has a duration of approximately four years.
As it positions roll down the yield curve.
It will converge to par and the mark down to zero.
During the quarter, new purchases of debt securities in the investment portfolio, what kind of a guy.
As held to maturity.
The lower mark to market valuation of our investment portfolio does not have an impact on our regulatory capital ratios.
On July one we completed the previously announced agreement with <unk> to acquire key customer facing channels and to extent important commercial agreements.
As consideration for the transaction.
<unk> delivered to ever Tech approximately $4 6 million shares of our stock valued at the closing of $169 million.
This resulted in an after tax gain of approximately $112 million.
In terms of capital.
<unk> resulted in a negative impact to tangible book value of approximately $55 million due to the net effect of the after tax gain.
Shares used as consideration for the transaction.
Minus approximately $167 million in goodwill and other intangible assets recognized in connection with the transaction.
Finally, the effect of purchase accounting related adjustments.
As a result of the transfer of the shares used as consideration popular ownership in Aerotech was reduced from approximately 16, 3% to approximately 10, 6% at closing.
<unk> has agreed to further reduce its floating interest you never take.
So no more than four 5%.
Through selling shares of <unk> common stock or a conversion of such shares into nonvoting stock by the end of the third quarter.
We expect to sell down the stake in aerotech to no more than four 5% depending on market conditions.
Subject to the receipt of regulatory approvals.
Then planned to return to shareholders via stock repurchases any after tax gains, resulting from such sale.
We also intend to complete the remaining $100 million worth of buybacks under our 2022 capital plan by year end.
Our normal capital planning scheduled to result in an announcement of popular 2023 capital actions no later than our January 2023 when.
We will continue to explore opportunities to manage our capital structure during the remainder of 2022 and in future periods with that I'll turn the call over to leave your thank you Carlos and good morning.
Yeah.
Overall for product continued to exhibit strong credit quality trends.
No credit costs with low levels of net charge offs and decreasing nonperforming loans.
We continue to closely monitor changes in borrower performance and the macroeconomic environment.
Potential economic headwinds rising interest rates and geopolitical uncertainty.
However.
We believe that improving over the last few years and the risk profile of the corporation's loan portfolios or sufficient buffer to.
To operate successfully on the more difficult economic conditions.
Turning to slide number nine.
Nonperforming assets decreased by 40 million to $570 million this quarter.
Only driven by an NPL decrease of $42 million.
The decreasing npls was mainly in Puerto Rico.
It was driven by lower mortgage npls of $22 million.
Primarily due to the combined effects of collection efforts increased promotional activity and the ongoing low levels of early delinquency compared with pre pandemic trends, coupled with lower commercial npls of $21 million, primarily due to the return to accrual status 11 million commercial.
Relationship.
In the U S Npls remain flat.
Product quarter over quarter.
Compared to the first quarter improved to npls, excluding consumer loans decreased by $5 million.
In Puerto Rico, total inflows decreased by $6 million, driven by lower commercial inflows of $4 5 million.
Lower mortgage inflows of $1 5 million.
The U S inflows remained flat quarter over quarter.
The 2 million increase in the quarter.
Driven by the resumption of activity in the Puerto Rico mortgage portfolio.
The another quarter the ratio of Npls to total loans held in portfolio was.
It was one 6% compared to one 8% in the previous quarter.
Turning to slide number 10.
Net charge offs amounted to $6 million or annualized.
Annualized eight basis point of average loans held in portfolio.
Compared to $4 million or five basis points in the prior quarter.
In Puerto Rico, net charge offs were $5 million flat quarter over quarter.
In the U S net.
Net charge offs reflect a negative variance of $2 5 million.
The prior quarter was a net recovery of $1 7 million.
<unk> expense of 8000 this quarter 800000 this quarter.
The corporation allowance for credit losses increased by $4 million.
682 million the increase was mainly in Puerto Rico.
Remember by portfolio growth and changes to macroeconomic scenarios.
In the U S.
<unk> was flat quarter over quarter.
The ratio of allowance for credit losses to loans held in portfolio.
Creased by five basis points to 224%.
The ratio of our allowance for credit losses to Npls held in portfolio.
143% compare.
30% in the prior quarter.
The provision for credit losses.
A $10 million compared to a benefit of $14 million in the previous quarter.
In Puerto Rico, the provision for credit losses was an expense of $9 million.
Compared to a benefit of $13 million one in the U S. The provision expense of 1 million compared to a benefit of $2 million.
Please turn to slide number 11.
As discussed in prior webcast.
We leveraged Moody's analytics for U S and Puerto Rico economic forecast.
Moody's baseline forecast expects growth to continue in 2022 and three.
With some slowing occurring as the economy reaches full employment.
Sorry policy becomes tighter.
COVID-19 fiscal stimulus and on the Roche I walked in on Crane affects energy and food prices.
However, Moody's analytics plus the odds of the economy the economy will suffer a downturn beginning in the next 12 months one in three weeks.
Near even odds of a recession in the next 24 months.
As a result, we continue to find the highest probability baseline scenario.
To cross like a more pessimistic scenario.
To summarize.
Our loan portfolio continued to exhibit strong credit quality trends in the second quarter.
Low net charge offs and decreasing nonperforming loans.
We continue to closely monitor changes in borrowing performance on that on the macroeconomic environment.
However, we believe that improvements over time and the risk profile.
The corporation loans portfolios.
She was popular to operate successfully under more difficult economic environments. We've got I would like to turn to turn the call over to Ignacio for his concluding remarks. Thank you.
You <unk> and Carlos for your updates our results for the first half of 2022 were strong.
Driven by solid earnings robust loan growth improved credit quality and continued customer growth.
Our capital and liquidity position provides us the flexibility to invest for growth, while we continue returning capital to our shareholders.
Despite the possible negative impact of inflation higher interest rates and the war in Ukraine.
We're seeing growth in the U S and Puerto Rico, with a historically strong employment market and healthy consumer deposit and spending levels in.
In the case of Puerto Rico. In addition to the unprecedented level of federal stimulus related to Covid.
There is still a significant amount of hurricane recovery funds that are yet to be disbursed.
We expect the combined impact of these factors will generate considerable economic activity in many sector for the coming years, and we are well positioned to benefit from such activity.
In June we released our corporate sustainability report, which is available on our website.
We have continued to further our ESG efforts with a focus on promoting sustainable finance supporting our communities and fostering a strong culture of diversity equity and inclusion.
We are mindful of the responsibility we have to Puerto Rico as the leading banking institution.
And to all of the communities that we serve.
I am thankful to our entire team who have continued to perform at a high level and deliver results on an adverse conditions.
We recently completed a comprehensive market analysis that resulted in a significant investment in compensation.
Our employees are popular is greatest assay.
It is a priority for us to invest in their continued growth and success.
We are confident in our ability to continue to deliver results for our shareholders at the same time as we invest in our people businesses and communities. We are now ready to answer your questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you'd like to remove your question press star followed by Kim.
Again to ask a question please press star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
The first question comes from Brett rapid 10 with <unk>.
Ed Group. Please go ahead.
Hey, good morning, everyone.
Good morning, Brian Good morning, Brent.
Congratulations on the double digit loan growth.
I'd be playing that bought the Puerto Rican.
Environment, but obviously strong growth economy continues.
Move along wanted to make sure I understood what the outlook was in the back half of the year for prolonged growth I never was that year over year auto sales were down 9% in June but they continue to be pretty robust.
Marshall activity was notable this quarter.
Maybe Carlos any thoughts on.
So any thoughts on back half loan growth from here.
Right.
The commercial loan growth, we said it before it's kind of lumpy. So it's hard for us to predict it but I can definitely say that.
To see strong interest from our clients in the commercial sector regarding demand for loans. So we're not seeing any decrease in that as you saw the consumer.
Our balances increase across most lines also so we're not seeing any negative impact there in terms of auto I'd like to point out that.
Although they are down.
The previous year.
Local dealer association still predicting new auto sales on 111000.
Vehicles for the year, which is very high number for Puerto Rico, and we had in June was our highest.
Months of originations in history for auto and lease financing. So we continue to see strong demand for auto Puerto Rico, obviously, the supply chain issue is an issue here and there isn't any places in the states.
But we.
We still have to be very healthy.
Okay. That's that's helpful color.
And wanted to make sure I understood.
<unk>.
Decline in the asset sensitivity of the balance sheet.
It would seem to me like the margin and I appreciate the $2 million guidance for 25 basis points, but it would seem to me like the margin would continue to move upward I am not sure if I fully understand how it's becoming.
And the balance sheet, becoming neutral in terms of interest rate sensitivity.
I was hoping maybe you can give some color on deposit betas from here.
<unk>.
What's making the balance sheet more neutral.
Well.
A couple of things.
Are affecting it.
We're putting a lot of the EMEA live repricing assets to work right.
Pending so our cash into the investment portfolio.
Importantly, we are now also extending the cash into the loan portfolio, which is what we preferred to do.
So that will naturally reduce our asset sensitivity.
The other factor that affects this is.
As I mentioned.
As you know government deposits in Puerto Rico, which is a big chunk of our deposit book if market linked but its not necessarily market linked instantaneously.
As market linked with their lag so we have not seen that market linkage.
And yet necessarily in our cost of deposits, but it will become more evident over the next three months or so in the next four months.
To the point, where they will become fully market linked we mean that we will have.
Lib.
You stopped the law.
<unk> in repricing.
At some point in time and that will reprice or move to re pricing a big chunk of our deposit book.
<unk> market leading basis.
We will continue to to to be able to earn a nice.
Margin on those deposits. So they will still be accretive, but that margin will not continue to increase as it might increase for deposits are not linked to market.
That was probably the other two the two biggest drivers.
Okay.
That's helpful. Carlos and then maybe just lastly, if I heard it right $444 million of expense.
<unk>.
<unk> guidance in the back half of the year was curious how much of that might be the stock based incentive compensation versus other okay. Other pieces.
Sure.
Let me walk you through that.
Yes.
As you know we have we.
We had guided to average quarterly expenses of $4 50.
Quarterly quarterly expenses tend to be seasonal so they usually tend to be lower in the first two quarters of the year and higher in the second two quarters of the year. So.
And that's what happened this quarter, we're running lower than our guidance of $4 15, which means by definition that the last two quarters of the year, we're gonna be higher anyway for us to hit that $4 15.
So that is somewhat what's happening is just the normal.
Seasonality in our expenses.
The change here is.
First it was the first thing you mentioned that we now believe given our performance year to date.
It's sharing payment will be triggered so we have added that to our outlook that is normally not part of our outlook. Because we don't assume profit sharing will be triggered rehab to actually perform for that to happen and that will add something that looks like $30 million.
So the outlook.
And the other piece of that addresses the increase is.
Ignacio mentioned and I mentioned, the review of compensation, a cooler that we've done a very comprehensive review of compensation.
Ended up increasing.
Compensation expenses.
Something that looks like.
Ballpark of $7 million, a quarter or something like that.
Well, we will be fully effective starting on this quarter in the third quarter of the year.
Moving forward and the combination of those two things are what.
Explain the delta between the $4 15, and the new average harder the expenses of 425. So the average part of the expenses are going up by 10.
But the nominal expenses in the last two quarters will be up by a higher number but it's just math I always say they havent gone up anyway, even if those two these last two events I mentioned had not happened.
Okay, Great. That's good color I appreciate it.
Okay.
Thank you Brad.
The next question comes from Tamar, Brent dealer with Wells Fargo. Please go ahead.
Hi, good morning.
And I'm wondering if it maybe.
Maybe just following up on the expense line of questioning the backend include the.
The ever Tech transaction, and I guess, what does that in and of itself due to the expenses.
Yes, it does.
Hello, if is that kind of I'm getting my mind.
My numbers here.
Yes.
Yes.
Yes. It does include the <unk> transaction.
And the effect of that is.
Sure.
Redemption.
Turning to expenses is already included in that outlook.
Sure.
That reduction of 10 million. Okay. And then you had made a comment that a component of the increased spend was to fund compliance fraud cyber security type of initiatives is there any anything specific that kind of drove that narrative or is that just the cost of doing business and as economic activity to continue.
As to ramp high or you need to ramp those initiatives to kind of keep pace.
Your explanations were as good as mine, we're going to be yes. It is the cost of doing business I mean, the regulatory environment. As you know is not getting any more.
Complacent or any more flexible number one and number two we simply have more clients doing more transactions with us which means that there's going to be more event is going to be more alerts is going to be more front of alerts that need to be investigated is going to be more more chances of more clients that tire criminals can try to use.
Their credentials to get into our system. So the growth of the business is the other part that's driving it. So your explanation was on point.
Okay.
And then just lastly on expenses, what does that assume as far as Oreo outlook.
Sure.
It assumes or is it.
Breakeven.
Alright, guys breakeven, okay, great and then just.
And the remaining ever tech transactions, the sell down four 5% that gain that's going to be returned to shareholders is that a two.
2022 events that happened in the fourth quarter or does that need to go through the same type of capital plan and that should be included kind of incremental in the 'twenty three plan.
No.
I mean.
It.
We'll make the decision on whether we want to go or not go depending on what's happening with the market first of all.
And that is the first part of what has to happen, which is for us to actually sell the shares once we have sold the shares then.
And then we need regulatory approval to actually.
The additional.
Redeployed those gains.
The buyback.
The regulatory approval approval. It takes the time that it takes.
I think there there is.
And.
All of that can happen in this quarter I don't know it.
Unlikely so more more than not.
It looks like something that's probably more of a fourth quarter event.
Okay.
And then just lastly, just following up on the government deposit.
That lag that you referenced is that a lag.
Hikes or is that just the lag on timing when those hikes are passed along to the customer and maybe if you could just talk through kind of how long that lag is.
Any kind of color you can provide on that.
The beta that you're expecting there.
Yeah I mean.
The way the Formula works on how we how we reflect market rates.
On the rate that applies to the customers. So again, they're again your comment was correct.
And it applies over time and the lag it's something that looks like three months something in that ballpark.
It doesn't isn't it you've done.
Is that a.
That function three months, let's say more soluble it will sort of gradually.
Average into.
Through a period of about three months.
Okay and do you have the exit deposit cost at the end.
June yes.
Yeah, that's about right.
Yeah.
Yes.
So what what deposit customers.
The cost of deposits at the end of June .
We have it but we don't disclose it.
Okay.
Alright.
Do you have any public deposits now.
No just total total deposit costs.
Yes.
Yeah, it's all of the policy because we haven't give me if I have it for the quarter were for the quarter give me a second I think it was 17 basis points to music.
I think a 17 basis point consumer total deposit cost.
For the quarter.
<unk>.
You may affect us.
Actually I have it for <unk> PV separately.
Alright.
<unk> It was 14 basis points at appropriate Brian .
Okay.
So Kevin.
Number for <unk>.
Okay.
Okay.
Thank you thank.
Thank you.
Thanks for your questions.
Question comes from Gerard Cassidy with RBC. Please go ahead.
Hi, Charles.
Hello Gerard.
Can you guys share with US is obviously a number of cross currents going on in the economy today as we saw with real GDP print the small.
And.
One of the.
Okay.
Concerns are one of the topics of conversation as end of cycle loan growth.
And the industry.
You folks as well so good loan growth this quarter can you somehow give us some color reassurances, but.
A year from now we're not going to be looking back and seeing maybe.
Maybe some regrets.
Loan growth was too strong early part of 'twenty two.
Again, the crosscurrents in the economy is starting to show up maybe a slowdown.
Yes.
I think right.
We feel very confident that we as opposed to perhaps other people, we have never really relaxed our credit standards.
So really the growth that we're coming from we're being we're continuing to be I think very prudent and very disciplined assist the economy, especially here in Puerto Rico is strong and we're starting to see economic activity, which we haven't seen for a long time since a lot of pent up demand.
But we really never relax our underwriting standards to.
To create that loan growth sort of artificially so we feel we're very well positioned as <unk> mentioned various times the industry through in <unk>.
Thanks.
Our industry is it withstand some deceleration of growth well.
Our FICO scores in the consumer book are strong so again.
We're looking out for these.
Tailwind that everyone knows and possibly out there, but I'm not very concerned I mean, we have not done anything that would.
Lead us to believe we unduly relax and now we have to tighten I think we've been very consistent and the loan growth. We've seen it's just a reflection of the demand and economic growth, especially in Puerto Rico.
The other thing to consider with your.
<unk> John is on it.
Is the concept of end of cycle.
There is.
A number of very well respected local economies here in Puerto Rico that believe that you're using credit things are affected Puerto Rico economy, which this time tend to be in our favor actually versus the last 10 years that were against us meaning that.
The effect of all of the final foreign expansion, but also the fact that we have the extra lever of hurricane assistance, the rest of the country I shouldn't have.
<unk> differential could mean.
Puerto Rico may perform.
It'd be better than the national average moving forward.
So some of the local economists believe that there is a reasonable chance that even if the U S goes into recession as long as that recession is short and shallow.
Just read a Puerto Rico never gets into recession because of the positive effects from that investment. So we'll have to see of course it depends on if there is a recession in the U S and how long and how deep it is.
There is a perception that we may perform slightly better.
In the island and that is.
We haven't been able to say that for about 12 13 years now so it depends really.
Welcome to the channels that we are actually.
Have a possibility of performing slightly better than the U S economy for once.
Very good and then as a follow up to that.
Are you seeing any new entrants into the market for lending mainland banks that might be coming in that werent, there 12 months ago.
No not really I think we have seen some of the bigger banks, JP morgans or the world and in the Goldman Sachs being interested in them.
Some of these big transactions that they are hopeful will happen sort of like perhaps the privatization of the ports, which is ongoing and things like that.
I haven't seen any new activity of U S. Players some of the local players like when <unk> got a lot of money from that.
That statue benefited minority institutions, which there'll be a little bit more aggressive in the small and medium sized but theyre very small institution, but not really I mean, they've always been here.
Certain deals but.
Nothing unusual other than I do think you're seeing more of the people that do project finance being interested in Puerto Rico.
Keep in mind that for large commercial transactions Gerard we have always competed with.
Mainland bank mainland pension funds on mainland hedge funds.
Fund them, so theres actually there's not a lot of delta from how we've done business. All the time any transaction that has significant large orders or the underlying.
Client as a U S based client we have to compete with U S banks for them anyway.
Okay. Thank you and then just finally, yes.
With the acquisition back in three years ago, the wells auto portfolio Youre, obviously, the bigger auto lender on the island.
Can you tell us what percentage of the auto loans are for used cars versus new cars, if you break that out.
We have a couple more.
You already mentioned, so let's say there is about half and half half new half youth.
But in the portfolio.
Right.
I don't think we have the portfolio number right now job, what we can get done but it is an important market in Puerto Rico.
We can get that but we don't have it right now.
And are you in Puerto Rico has seen the used car price inflation similar to what we've seen in the states, which may if the new car market comes back in two years used car prices could be lower two years now been today.
You have seen the elevation in okay.
Thank you same level.
Can you just clarify.
Used car prices have gone up in Puerto Rico, So pardon.
Obviously, we are maintaining our.
Our discipline regarding.
Again, I say, our underwriting standards. We are we are not.
We're very happy with.
We're very happy with the the originations, we're getting with our existing underwriting standards. So we have found a necessity to too low to keep in mind that one of the things that is a bit of an offset in part because we have very high <unk>.
Taxes on cars, especially new cars so that.
That helps a little bit the used car because when you go buy a new car you have to have very high we call. It.
The attacks.
Therefore, his car market's still.
It has a little bit of a cushion in that sense in Puerto Rico.
But we're watching it very good.
You.
Thank you for your question.
The next question comes from Alex <unk> with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Alright.
First off can you just maybe help us get a sense for.
The ebbs and flows in the government deposits now that we're out of bankruptcy and sort of the expectation.
The seasonality there that gets you back to that 11% to 15 range by the end of the year.
Great.
Yes.
Ill, let Carlos to talk about it more but.
We put out estimates it usually based on our conversations with the Treasury Department and what their estimates are.
It's been they've been all over the place on a positive side.
The economy in Puerto Rico are better so they have January a lot more tax revenues that they were anticipating.
On the expense side as well you know there are some funds that we estimate around maybe $2 billion.
Covid related funds that had classified public funds that have been.
Did we dispersed than we would have anticipated maybe that they would have anticipated.
So.
The ebbs and flows traditionally we live in a very unique world now with the pandemic and all of these funds.
The taxes come in in April and then they pay the bonds in July July for US is that principal payment.
Those are the big ebbs and flows but it will depend NAMIC, we've had big inflows of.
Money for Covid relief in other situations. So it's very hard for the government to predicting when you sort of rely on them to predict flows but.
Over time it was covered funds have to be spent.
We're going to lose them for example.
Okta cloud.
And.
I think the government will have a better idea again, we haven't been out of Banco proof of that long so they try to stabilize there there.
The answers, but I don't know quarters or do you want to add anything to that we have been.
We have been very consistent on our forecast for government buses by being wrong every quarter for last nine quarters is really like that.
So again, it's not a lack of trying it is as Ignacio said.
Everything we've communicated is our best guess given all the information we have from our clients remember that the balance is not not a single client who as I said there is hundreds of clients in there as well so it's our best guess given the information.
But sometimes the client themselves don't have major.
<unk> zinc.
The tax revenues being much higher this year is a good example of that.
So.
Our best guess given all the all that we know today is that again, we'll be back to the range that we expected by.
By year end.
I have no idea whether the the agreement that was announced today for some climate legislation will have money attached to it and whether some of that money will come to us and we've changed the forecast. So there's all kinds of things like that.
Unaffected.
It is our best informed estimate given everything we know as of today.
But again, we missed it a few times.
Got it and then I guess sort of.
A corollary or follow up question to that is how do you think about your normalized level of liquidity.
Obviously, you've got this chunk of deposits that could be anything in any given quarter, but how much of that.
Actually we invested in a way that.
The loan growth or into longer duration securities and you feel comfortable.
Well.
<unk>.
No.
It's easier to focus on the government deposits because they are they are the biggest chunk in the deposit book, but I think the answer to your question is similar holistic answer on what's going to happen with deposit flows moving forward.
Sure.
We fully expect that commercial that buffer and youll see it already most banks in the mainland <unk> seen deposits go down already so we're a little bit of an outlier electric buses going down this quarter.
Thank you.
On the commercial front.
We'll probably see.
Pressure on deposits moving forward mean that deposit outflows.
Commercial clients.
Have active treasury activities will look for better better yield on their liquidity.
The commercial sector might actually see some outflows moving forward that we haven't seen it yet but that might be coming I think that's going to be much slower in the retail side.
So size tends to respond to those quickly.
Some high net worth clients move some deposits to higher yielding.
Alternatives.
The majority of <unk>.
Clients will who will who will move slowly given the changing the retail clients move slowly.
The big pieces are going to be.
Quite ends up happening with commercial.
Again, we shouldn't ignore you've seen the positive commercial deposits coming down and many banks in the mainland already.
And then the government.
If we happen to be correct. This time in our bonds prediction.
Yeah, it will probably be down.
Between two and $4 $5 billion by by year end.
Okay are you able to.
Breakout.
The portion of your deposits that you would consider to be not super sensitive to rates.
Taylor of the stuff is not going to have that deck Treasury management.
Well.
Most of the races.
The government deposits again, with a lag, but thats going to move in tandem to market. So again keep in mind as I mentioned earlier.
We do earn a margin on that.
The difference so three three months from now is that margin will not continue to increase.
It will stay has increased.
A couple of months, but it will not continue to increase once we reach that point, where the deposits are are are pegged to market changes in the market. So again there'll still be accretive will make.
Margin on them, but the margin will will get tapped when when when the linkages.
It's fully in place.
Got it okay. When I think about the rate sensitivity and sort of the change in the guide this quarter. I mean, there is another way to think about it just relative to last quarter that you've just pulled forward.
And then around five rate hikes by deploying 1 billion and a half into into held to maturity securities.
Yes.
We.
Sure.
Is there as increasing rates.
So the question of whether you do about it if you're a bank you try to capture that that those higher rates into your balance sheet and we've done quite a bit of that.
By extending the bond portfolio.
And more importantly, now also growing.
We're in the loan portfolio.
So we've taken the action that we.
We think it makes sense to capture that increased margin moving forward.
Well you kind of do it twice right once you did it.
Got it.
So.
So does that reduce their cell therapy, moving forward and so I think your description is.
It's accurate Alex that is.
Part of what has happened already yes.
Okay, Great and then.
If I remember correctly part of the <unk> transaction was actually to recognize some revenue shares as well and I couldn't remember if that was something that was going to take impact this year or if there's a 23 event. Maybe you can just remind us kind of on the fee side. However, Tac.
Packed the complexion of the fee income and your guide for the next two quarters as well as how that's going to change next year with that revenue share component.
Yes.
<unk> the result immediately.
But the flip side of that is by reducing our equity stake. We also gave up equity.
Right.
Investments through the equity income income that also contribute to that line. So you don't see the change in the line Alex but yes. There is a positive the miners they happened to be about the same size this year.
Honestly part of the logic behind the transaction is that we don't think they'll stay the same size.
We think that the.
The revenue linked.
Is linked to the to the.
Merchant business will actually outpace in growth.
The other side of the equation.
Okay, Great and then just a final question for me just back to the margin.
The new loan yields that youre getting today lani.
Loan yields in Puerto Rico, it seemed to be a decent margin above.
U S yields or they should have been when rates were zero are you seeing loan betas or how is higher rates actually impacted new origination yields on commercial product.
Well, we've seen overall loan yields go up by eight basis points in the quarter. So we are.
We are trying.
You were referring to reflect the.
The change in rates into our origination.
The loan yield also.
So it depends on mix and number of other things obviously.
We are we are trying to reflect in the new market initiatives are in lower loan yield.
The new origination will change that.
Yield slowly, though because again, we have a big base portfolio and sold it.
That changes the changes, though world yield only on the margin side.
Alex If your question was more directed.
These increases so a decreased demand for commercial loans, we haven't seen that yet.
Oh.
Okay.
We are getting.
If you're a commercial loan was at a five handle.
A year and a half ago.
Is it coming on today with still a five handle or is that coming on today with the seven handle.
Neither.
Yes.
Is that probably a higher handle but but.
I'm not sure if it's a.
The babies are 100% or not.
The.
Declines are sensitive to this as well so.
It is.
Is.
Instead of a five to seven handle.
They chose to make the loan a bit shorter so that handles become sick right.
Okay.
Thanks for taking my questions.
Thank you.
Thank you Alex.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
The next question is from Kelly Motta with <unk> you. Please go ahead.
Okay.
Hi, Thank you so much further questions and good morning.
Got it.
How firm are answered, but I did want to.
Now that you have ever Tech closed asked a question about what Youre doing on the technology investment side no one of the strategic rationale for the deal was the flexibility it opens up.
Can you talk about some of the things you look to do now that you have that deal closed.
I think you cited.
Tech spend as well.
One of the areas of increase for expenses.
That was.
Within what you had been planning to do or if theres new projects on board that warrant.
Previously in the guidance before.
Okay.
I'm not sure in terms of which projects are in the guidance or not definitely taking the.
These client facing platforms take them over and bring them back in we now see we have greater <unk>.
<unk> to work on things that we had before.
In general we're looking to do is improve the origination process the digital origination processes both on the consumer.
And on the commercial front, that's something to work on we're also going to be spending some money on our cash management systems, which we think we need to upgrade to remain competitive.
Some of them.
Big projects, we're working on there so.
I don't think that the <unk> transaction as such as increased our spending but it has it has allowed us to have greater flexibility to look at things that we wanted to do anyway and do them. So I don't know Carlos you want to add any color.
We may have.
Most of the stuff.
And.
Got it.
Having closed the transactions.
Gives us the possibility of maybe choosing to do some of the things we haven't planned a bit quicker.
But again, we've only closed the transaction for months now so all you have to give us a bit more time to to put.
More more numbers around that.
But it is a possibility that things that we thought might take.
We may start in the year and a half or two we may now.
The possibility or the option to start a bit faster or roommate changed around when we wanted to do things. So we may move a project.
How to expand of X.
And do it later and then move for a product that had a spend of half X or two weeks, so but that is still early days in that process.
Got it. Thanks, so much and then I do appreciate all the color on the puts and takes.
Thank you.
But noise around.
The higher <unk>.
If you get out Brian from that how should we be thinking about what a normalized run rate looks like now that you took a step up on.
Hum.
Like that.
I will pass the second half of the year.
After an excellent question.
You don't have the answer to that question yet.
So we gave you what we can I think get our.
Arms around.
We've found a degree of confidence which is the next two quarters. We will provide you in the market with new average quarterly expense guidance for 2023 in our webcast in January .
Of next year.
We're not trying to be evasive or cute about this.
Driving our our expense guidance is all of the projects and efforts that we decided to embark on next year that is a result of our budgeting and planning process and that process is pretty it also on npls sometime in late November . So we will actually not know that number until we decide which price, we're going to do or pursue and which ones were not and things like that.
And that will decide later this year.
So.
Don't have the number yet we will give you guidance in January for full 2023.
Understood. Thank you so much for the color.
Thank you.
Thank you Kelly.
We now have a follow up question from Timur <unk> with Wells Fargo. Please go ahead.
Hi, Thanks for the follow up maybe just adding on to Kelly's question and asking it a little different are you expecting kind of this $2 45 range for both third quarter and fourth quarter or is that kind of ramping up towards the fourth quarter and how are you thinking about kind of the.
Fourth quarter exit rate.
Yeah.
No.
It could move around a little bit between the two quarters and our best guess as the quarters will look very similar to our 445 Timur.
But it could be that it's.
440, or 50, or 50 M portfolio or something like that.
Hands on when some things get going and get paid and that sort of stuff.
So we have a.
Bruce a whole a degree of confidence on the average for both quarters.
You actually monitor the opinion down to one quarter or the other I have a lesser degree of comfort on that.
Okay and is there an expectation that in.
Earnings credit rate is.
<unk> of the higher expense base and then maybe if you can just provide any color on what component of the public funds we'll.
We will see higher rates through an ECR versus just higher deposit costs.
Yes.
Some some of.
There's a lot of questions.
Not all of the cost shows up through the.
The interest expense line some of the cost is.
So in the <unk> section.
We have never broken it up.
That way at all.
So it will depend how they use how many services they use from US right. That's part of the equation that goes in the contract. These services and then the mix between what goes into interest expense line and what goes in the <unk> portion of the.
Changes I don't have the number we'll try to figure out if there is something.
We can do something that makes sense on that but I don't have a number of months.
Okay.
Thanks again for the follow up thank.
Thank you.
Thank you for your question.
I would now like to pass the conference back over to Ignacio Alvarez for any further remarks.
Thanks, again for joining us and for your questions and we look forward to updating you on our progress in October .
Have a great day.
Yes.
That concludes the popular Inc. Second quarter earnings call. Thank you for your participation you may now disconnect your line.
Sure.