Q3 2022 Popular Inc Earnings Call
Welcome to today's popular I N C Q3, 2022 earnings call. My name is Julie and I'll be coordinating your call today, if you would like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad. If you change your mind. Please press star followed by Chi.
I'm not going to harm they vote to poll Codell I Investor Relations officer at popular bank to begin. Please go ahead.
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.
They will review our third 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 may find today's press release, and our SEC filings on our webpage.
At popular Dot com.
I'll now turn the call over to our CEO Ignacio Alvarez.
Good morning, and thank you for joining the call.
Our results for the quarter was solid and reflect the strength of economic activity in our markets, our diversified sources of revenue and prudent risk management.
In the third quarter, we achieved net income of $422 million or $196 million, excluding the impact of the AMETEK transactions.
At the beginning of the quarter, we closed the previously announced agreement with everything to acquire key customer facing channels and to extend important commercial agreements.
This action is already allowing us to accelerate our ongoing digital and business transformation.
As we focus on the changing needs and expectations of our clients and enhancing the omnichannel experience that we provide please.
Please turn to slide three.
Our quarterly net income excluding the impact would be able to take transactions was 16 million lower than the second quarter.
Third quarter results were characterized by positive variances in net interest income and fee income offset by higher provision for credit losses and operating expenses.
The adjusted results for the quarter do not include any equity pick up from our prior investment and everything.
During the quarter loan growth was strong and broad based both geographically and across all loan segments.
Total loan balances grew by $1 2 billion commercial loan growth in Puerto Rico was particularly healthy during the period.
Our net interest margin improved in the quarter. However.
However, we have begun to see a higher cost of deposits, particularly in our Puerto Rico public deposit portfolio and in popular bank.
Credit quality trends remained favorable during the period npls decreased in the quarter.
And Ncos are significantly below pre pandemic levels in.
In the third quarter, we continued to return capital to our shareholders. In July we completed the previously announced $400 million accelerated share repurchase program also upon completion of the sale of our ever take shares in August we entered into an additional 231 million ASR, which we expect to complete before.
At the end of the year.
In light of the rapid increase in interest rates year to date as well as the uncertain outlook for interest rates going forward.
Tober, which reference $6 5 billion and intermediate term U S treasuries from available for sale to held to maturity.
This reduces the impact of OCI on tangible capital from future interest rate fluctuations the securities at an accumulated pre tax loss of $873 million.
Please turn to slide four.
Our customer base in Puerto Rico grew by approximately 8000 in the third quarter to reach $1 97 million unique customers.
The optional digital channels, among our retail customers continues to be strong.
<unk> uses an army Banco platform exceeded $1 1 million or 56% of our customer base. Additionally.
Additionally, we continue to capture nearly two thirds of our deposits through digital channels.
This trend remains significantly higher than pre pandemic levels and well above our island peers.
Commercial loan growth was strong commercial loan balances at <unk> in popular bank increased by $489 million and $332 million respectively.
Auto loan and lease and lease balances at <unk> increased by $97 million or 2% versus the second quarter.
The dollar value of credit and debit card card sales of our customers remained stable during the quarter and were 1% above the third quarter and 2021.
As on the mainland mortgage originations in Puerto Rico have been impacted by rising rates and limited inventory of available properties.
The dollar value of mortgage originations at <unk> decreased by 36% compared to the third quarter of last year.
In September .
Puerto Rico, and Florida were impacted by Hurricanes Fiona E M respectively.
Okay, Fiona caused a complete blackout on the island and considerable damages to certain sectors in the southwest region.
While the impact to our operation was not material some customers concentrated inflow protocols for flood prone communities were significantly impacted by the disaster.
Hurricane and did not have a significant impact on our operations.
We have offered various forms of assistance to our customers in both region. This includes waiving late payment fees on certain products and waiving ATM withdrawal fees for using Atms outside of our network.
Additionally, we have offered a moratorium to eligible borrowers impacted by the storms.
We are still evaluating the impact of hurricane <unk>.
However, given the low level of assistance requests received to date the effect on credit risk should not be significant.
That said, we will continue to work with our customers that were impacted by these events.
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 third quarter.
Business activity has remained solid.
However, certain metrics suggested economic trends in Puerto Rico, while still positive maybe moderating somewhat.
The Puerto Rico economic activity Index, where August which is the most recently released data.
It's one 5% higher than August 2021, and continues to exceed pre pandemic levels.
We remain encouraged by solid employment levels.
September total nonfarm employment in Puerto Rico increased slightly from its level in June the August 2022 employment rate of five 8% is the lowest ever.
New auto sales decreased by 11% in the third quarter compared to the same period in 2021, but remained above pre pandemic levels.
The auto industry was disrupted in September by Hurricane Fiona and continues to be affected by supply chain related product shortages. Despite these challenges there continues to be a real robust demand for cars in Puerto Rico.
The tourism and hospitality sector continues to be a source of strength for the local economy as Puerto Rico is a popular destination for mainland residents.
Airport traffic has remained robust year to date through September total passenger traffic has increased by 8% compared to 2021.
Wholesale demand has also remained strong occupancy rates are up 10% year to date and the average daily room rate continues to compare favorably to historical levels in.
In short we are pleased with our results for the third quarter, particularly the strong loan growth.
We are mindful of the global economic uncertainty and market volatility, but remain optimistic about the future of Puerto Rico, our primary market and our ability to manage through any potential challenges that may lie ahead.
I'll 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.
Today's earnings press release details variances from the second quarter.
Net income for the quarter was $422 million.
Early in Q3, we completed the previously announced agreement with everyday.
The Corporation completed the sale of its remaining seven 1 million shares of common.
Common stock.
These transactions resulted in an aggregate after tax gain of $227 million.
Excluding these there were tests for sections.
Sections Q3, net income would have been $196 million.
Net interest income for the third quarter was $580 million, an increase of 46 million from Q2.
This was driven by higher yield on investment securities as well as higher income from loan growth at both banks. This was somewhat offset by higher interest expense on deposits, resulting from increased interest rates, mainly from Puerto Rico government deposits and to a lesser extent of your bank.
Non interest income increased by 269 million to $426 million.
Excluding the $558 million pre tax gain from the Hanover different sections noninterest income for the quarter was $168 million.
The remaining 11 million variance in noninterest income during the quarter resulted from an increase of $9 2 million due to the reversal of a contingent consideration related to the purchase price adjustments for.
Last year's acquisition of our U S equipment finance business.
During the quarter. We also took a charge of $9 million for goodwill impairment on the transaction eliminating the benefit of this reversal.
We also recorded an increase in other service fees due to higher insurance fee and higher merchant acquiring fees.
<unk> related to the revenue sharing agreement with everything.
These were partially offset by a reduction in mortgage banking income due to the runoff of the servicing portfolio on <unk>.
Losses on close derivative positions.
And lower deposit service charges, primarily due to the corporation's initiative to eliminate or modify account overdraft fees.
We expect non interest income to be approximately 150 million in Q2.
The reduction from our $155 million to $160 million run rate is partly due to three factors that will also have an effect on our 2023 run rate.
First reduced earnings from our portfolio of investments held under the equity method.
<unk> to the sale of our ownership stake stake in Iridex.
Second lower deposit service charges stemming from the elimination of account overdraft fees, the modification related policies and higher earnings credit rate on corporate cash management services.
Lastly in August we decided to retain in portfolio FHA insured mortgage originations rather than sell them as we have done in the past.
As a result, our mortgage gain on sale fees will be lower.
Our tax exempt interest income will be higher.
In our January webcast, we will provide updated 2023 guidance for quarterly non interest income.
The provision for credit losses for the third quarter was $40 million compared to $9 million in the second quarter.
Total operating expenses were 476 million in the quarter, an increase of $70 million from Q2.
This included 17 million of expenses tied to the transaction with <unk>.
And the previously mentioned 9 million goodwill impairment charge related to last year's acquisition of our U S equipment finance business.
First of all costs were 25 million higher mostly as a result of the previously discussed market and merit salary adjustments that were effective in July .
This was a concerted effort to enhance our ability to attract and retain talent.
Credit and debit card processing expenses increased by $3 million due to lower card network incentive in Oreo income decreased by $5 million due to lower gain on sale of properties.
Excluding the impact of the <unk> expenses and the goodwill impairment charge expenses in Q3 would have been approximately $450 million versus our prior guidance of 445.
In Q4, we expect expect expenses of $450 million.
We anticipate that expenses in 'twenty, two 'twenty three will be higher than our quarterly run rate driven by continuing increases in personnel technology digital transformation consulting and compliance cost.
Our effective tax rate for the quarter was 14% compared to 23% in the second quarter.
This decrease was mainly a result of the aortic arch.
<unk> transactions, which are subject to a preferential tax rate.
The full year 2022 effective tax rate guidance remains unchanged at 17% to 20%.
Please turn to slide seven.
Net interest income and taxable equivalent basis was 647 million 51 million higher than in the second quarter.
Net interest margin increased by 23 basis points to 332% in Q3.
On a taxable equivalent basis.
NIM was 371% an increase of 26 basis points.
The increase is driven by a higher interest rate environment improved asset mix, a 25 basis points increase in loan yields and the lag in repricing for government deposits.
Excluding Puerto Rico public deposits deposit balances declined by 900 million in the quarter, mainly from deposits manage through our Trust division.
As of the end of the third quarter, although deposits were roughly 17.
$5 billion, an increase of 400 million from Q2.
However in the first week in October the Puerto Rico government transferred approximately $1 4 billion from the bank to.
Pension obligations as part of the plan of adjustment.
Currently.
Puerto Rico public deposits RBC PR total approximately $15 8 billion.
We expect public deposits will end 2022 between 13% and 15 billion slightly higher than our previous range.
Ending loan balances increased by $1 2 billion or 4% compared to Q2.
All loan segments were higher in the quarter with commercial loan growth being particularly strong.
During the quarter, we shifted $3 4 billion of liquidity from fed funds to T bills.
That currently provide a higher tax effected deal.
We are encouraged by the demand for credit <unk> and PV, we will continue to take advantage of opportunities to extend and improve their use and yield of our existing liquidity.
Please turn to slide eight.
Year to date, our retail and commercial deposit franchise in Puerto Rico has continued to track below historical beta.
So these deposits now represent a lower portion of total deposits compared to the last rate cycle.
As we discussed last quarter, given the rapid shift to higher short term interest rates going forward the cost of public sector deposits, which account for approximately 27% of our total deposits well now move in tandem with market rates, albeit with a quarter lag.
For the fourth quarter, we expect the cost opposed deposits to be 150 basis points higher.
As a result of the increase in public sector deposit cost, we expect our reported margin to decrease in Q4.
Before were still being a positive trend.
<unk> 23.
Our interest rate sensitivity will be relatively neutral to rising rates scenarios in the coming quarters.
Majority of the increase in deposit cost is driven by public deposits in Puerto Rico and to a lesser extent popular bank.
And commercial excess cash accounts on PPP or.
We will continue to actively managed commercial deposit costs, taking into consideration. The total relationship with a client please turn to slide nine.
We have seen a decrease in fair value of the investment portfolio that is temporary our investment portfolio is basically comprised of Treasury and agency mortgage backed securities, which carry minimal credit risk. The bond portfolio has an average duration of approximately three two years.
As the positions roll down the yield curve their face value will converge to par under Mark will go down to zero.
Given the rapid increase in interest rates year to date as well as the uncertain outlook for interest rates going forward.
Tober, we transferred $6 5 billion of U S pressures in the four to six year maturity range from available for sale to held to maturity.
Thereby reducing the forward looking impact of Aoc eye on tangible book value.
This action reduced Aoc our exposure to interest rates by about one third.
At the time of the transfer dispositions had recorded in OCI, a pretax unrealized loss of $873 million, which will effectively be amortize back into capital through the remaining life of the transfer positions at a rate of approximately $40 million per quarter through 2026.
Then tapering off until final maturity.
The yield on the transfer securities remains the same.
No losses recognized as a result of this move this Stamford does not have a material effect on our liquidity. We continue to maintain a large available for sale portfolio in short term treasury and cash at the fed.
While the changes in the amount of unrealized gains and losses, you'll see I have an impact on the corporations tangible capital ratios as well as those of the wholly owned Banco subsidiary, they do not impact regulatory capital ratios.
Please turn to slide 10.
Our return on tangible equity was 31, 9% in the quarter benefiting from the game in the Aerotech transactions.
Our regulatory capital levels remain strong our common equity tier one ratio in Q3 was 16% down 35 basis points from Q2.
In July we completed the previously announced $400 million ASR and.
In total we repurchased five 1 million shares at an average purchase price of $78 94.
In August we entered into another ASR agreement to repurchase an aggregate of $231 million of <unk> common stock.
The full impact is already reflected in our capital balance that.
The combined effect of the ASR is during the year increase our EPS in Q3 40 by 41 per share.
Tangible book value at quarter end was $38 69 per share a 16% decrease driven mostly by higher accumulated unrealized loss on debt securities available for sale of $782 million.
Sort of higher interest rates and the impact of the ASR and the dividend during the quarter. These.
These were partially offset by the quarterly net income.
Given the uncertainty in markets, including the volatility in interest rates, which impacted our tangible capital levels, we have decided to temporarily delay additional stock repurchase activity beyond the current ASR, we will maintain the current level of dividends and plans to revisit due to capital actions in the second half of 2023.
Once we have more certainty around the outlook for interest rates and the economy. As a result, we do not intend to announce new capital actions in our January webcast.
Our perspective couple of return has not changed anchored in our strong regulatory capital ratios over time, we expect our regulatory capital ratios to move towards the levels or mainland peers, plus a buffer to account for our geographic concentration in Puerto Rico with that I'll turn the call over to Lee.
Thank you Carlos and good morning.
Overall portfolio continue to exhibit favorable credit quality trends with low levels of net charge offs on increasing nonperforming loans.
We continue to closely monitor changes in borrowing performance and the macroeconomic environment, given potential economic headwinds rising interest rates and geopolitical uncertainty.
However, we believe that the improvement in the risk profile of the corporation's loan portfolios positions popular to operate successfully on a more difficult economic conditions.
The impact of your gains Fiona.
It is still being evaluated.
Given the Hurricanes limited impact in the markets, we do business and the low levels of assistance requests received to date.
Federal credits.
Great risk should not be significant.
Turning to slide number 11.
Nonperforming assets decreased by $23 million.
$547 million this quarter.
Driven by NPL decrease of $25 million.
They're decreasing npls was mainly in Puerto Rico, driven by lower mortgage npls by $32 million and lower commercial npls by $9 million.
In part offset by higher auto mtl's by $6 million.
Yamana as we stopped collection activity during the last two weeks of the quarter.
In the U S npls increased by $10 million.
Mainly due to an 11 million healthcare relationship that was placed in nonaccrual status during the quarter.
Compared to the second quarter NPL inflows, excluding consumer loans increased by $6 million driven.
Driven by the U S health care relationship previously mentioned offset in part by lower mortgage inflows in Puerto Rico.
At the other quarter the ratio of Npls to total loans held in portfolio.
It was one 4% compared to one 6% in the previous quarter.
Turning to slide number 12.
Net charge offs amounted to $18 million.
Or an annualized 24 basis points of our salons healthy portfolio.
Compared to 6 million or eight basis points in the prior quarter.
The results for the quarter were impacted by a $5 million charge off of a pharmaceutical manufacturer relationship.
The lack of collection activities in Puerto Rico during the last two weeks of September .
The corporation allowance for credit losses increased by $21 million.
Or three 1%.
$703 million driven.
Driven by higher loan volumes changes in credit quality, and an 8 million specific reserve recorded for the previously mentioned health care commercial NPL inflow.
The ratio of allowance for credit losses to loans held in portfolio.
Main flat at two point to 3%.
The ratio of allowance for credit losses to Npls, helping portfolio.
I will now 55% compared to under 42% in the prior quarter.
The provision for credit losses was an expense of $40 million compared to $10 million in the previous quarter.
<unk> the changes in the allowance for credit losses.
Charge off activity.
In Puerto Rico, the provision for credit losses was $49 million.
To $9 million in the prior quarter, while in the U S. The provision was $11 million compared to $1 million.
Please turn to slide number 13.
As discussed in prior webcast Wheeler.
We leveraged Moody's analytics or the U S and Puerto Rico economic forecast.
Notwithstanding persistent high inflation.
Increasing interest rate.
Supply chain constraints and general uncertainty.
Moody's analytics.
Near term baseline outlook remains for the U S economy to continued recession free.
Our framework of filing for highest probability to the baseline scenario.
Hello closely.
By the more pessimistic recession scenario S III.
The quarter over quarter change in the ACL was driven by loan portfolio growth and increases in specific reserves offset in part by continued strength in Puerto Rico employment forecast.
Changes to the period popular utilizes to revert its microeconomic forecast to historical levels.
To summarize our loan portfolio continue to exhibit strong credit quality metrics in the third quarter.
With low net charge offs and decreasing nonperforming loans.
We remain attentive to the evolving environment, but believe that improvements over time.
Risk profile.
The corporation's loan portfolio.
<unk> portfolio to operate successfully on a more difficult economic conditions.
I would like to turn the call over to Ignacio for his concluding remarks.
Thank you Lydia and Carlos for your updates our results for the quarter and year to date have been strong driven by solid earnings robust loan growth stable credit quality and continued customer growth.
We are aware of potential challenges stemming from inflation higher interest rates and market volatility we remain optimistic.
Optimistic about opportunities in Puerto Rico, our main market.
Consumer activity continues at healthy levels and recovery funds from previous events are expected to provide additional stimulus.
With strong fundamentals put in management and diversified sources of revenue, we are well positioned to leverage these opportunities and address any potential challenges that may arise.
In addition to our financial results I'm extremely proud about our team's response in the wake of Hurricane Fiona. Thanks.
Thanks to their agility and resolve we mobilized quickly to assist communities in need and serve our customers despite operational challenges and support impacted employees.
Our colleagues performance in such event evidences, our unwavering commitment to all the important stakeholders we serve.
We are now ready to answer your questions.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by <unk>.
Our first question today comes from Alex Potter from Piper Sandler Your line is now open.
Hey, good morning.
Good morning, good morning.
First I wanted to ask about your comments on the delaying of the capital actions until the second half of 'twenty three just curious if.
The whole exercise that you go through with the fed that I think we're supposed to take place around this time that that if the whole exercise gets delayed by six months or if your ongoing that right now.
And kind of have to go through the plans and then you just won't announce anything until the second half of next year.
Yes no.
The normal process we go.
Go forward deferred is completed we have completed our stress tests and everything else.
So the.
Biggest part of that process, so that is done.
You know.
Convenient when we.
Talk a couple of extra is close to finishing the discussion because as that fresh a stress test so.
I think there's a reasonable chance.
We've talked to them about it in the second quarter that allows us to refresh it or something like that but.
But maybe not you never know.
The one we've completed already maybe might be good enough.
We respond.
Normally to two updates requests from the fed as it will be no different.
Okay and then just.
As it relates to the timing of the.
The transfer from Iaff's to HTM as that correlated to completing this stress testing.
As you think about TCE historically, it hasn't really mattered and maybe it still doesn't.
Given the amount of regulatory capital you have but I'm just wondering if there's kind of a floor that is.
Do you have internally or that that isn't as suggested upon you that we should be aware of.
No.
It is not related at all it was a separate decision.
We are working through it to get to implement that we ended up reporting thing what we did which was the beginning of the fourth quarter.
Not really whatsoever.
We have not received any comments from the fed.
Whatsoever.
Okay. Thanks for that.
Carlos I was just wondering if you can clarify the guidance on expenses I think you said $450 million for the fourth quarter, and then 2023 should be higher than the quarterly run rate is that the average quarterly run rate for 'twenty two that it should be higher than is at the back two quarters, how does the profit sharing whether we get it or not factor into that.
Guidance just so we're all on the same page and there's no big surprises in the second half of next year.
No what I said is higher than our current run rate. So its not the average quality for the year, but our car and run rate Alex.
Okay. So the average starting point should be around $4 50 going up from there and then a profit sharing comes in the second half of next year, then that will be added onto that current run rate.
Uh huh.
Yes.
Sharing as you know we have to outperform our budgeted for that to kick in.
So oh.
That normally doesn't happen until the latter part of the year. The only difference. This year is that he was presumably to clear what we're going to outperform earlier in the year and that's why we spoke about it in the second quarter is typically the fourth.
But again it is a program that is.
Intended to share outperformance so.
We always hope we get there because that means everybody's doing better including our shareholders.
But that is not part of the book.
Okay. Thanks for taking my questions.
Our next question today is from Tim Brasil <unk> from Wells Fargo. Please go ahead.
Hi, good morning.
My first question is around net interest margin maybe for Carlos in your commentary that it'll decline in fourth quarter, and then should trend higher in 'twenty three.
Should we be thinking about the government deposits repricing post the last rate hike is it going to be the same 90 day lag. So one quarter out that book kind of stabilizes or just given the larger balances there and the more turnover it might take a couple more quarters. It just seems like there's going to be hard for NIM to outperform.
While that book catches up.
I mean, it's not exactly 90 days was pretty close to 90 days. So you can see from from our commentary for next quarter.
The increase in February .
Third quarter was $1 50, so that's what we expect the increase in government deposit cost to go up next quarter.
So conceptually if the increase in in the fourth quarter is 125, then that would carryover to the first quarter of next year and so on and.
And so forth.
And that the lag did benefit this quarter, we have talked about the lag.
Helping.
As rates start to go up but then.
As long as our rate of increases is constant it will just catch up one quarter later.
Okay. So one quarter following the last rate hike that should kind of flushed through the system you got it and then that 17 5 billion in public funds is that an average number or is that end of period.
And the periods and again as of now the number is 15 point.
Sorry, $15 8 billion so its already down from from the end of quarter number.
Okay, and maybe you can provide us kind of a low point on a high point for the quarter and I'm just wondering if the increased government activity.
Growth from here translates to a larger and growing balance within those accounts or you still have good visibility that those balances are ultimately going to come down.
Yeah, I don't have the pekin low low volumes for the quarter.
But.
Again, our best estimate right now given the information we have from the government and again keep in mind that the government is not one entities, we have over 200 accounts.
Makeup.
The government deposit balances.
So sometimes it is hard for them to have visibility, but our best guess right now continues to be that will end up the year advances between 13 and $15 billion.
What has changed from that range is that last quarter, we had a range of 11% to 15.
And we just don't think that lower range is going to happen anymore. We haven't increased the upper the upper part of the range.
But our estimate is still there it's going to be somewhere between 13 and 15.
Okay, and then maybe one for for video can you provide any additional color on the U S Health Carolina went nonperforming during the quarter.
Yes.
It is.
Most systemic I mean, just one case.
Customers are having some financial difficulty would not at all systemic of.
Overall health of our portfolio.
Okay. That's helpful. And then just it looks like broader credit landscape is starting to normalize somewhat we're seeing consumer charge offs kind of go higher or are we entering a period of normalizing asset quality and then I guess in that kind of context should we be assuming a similar level of provisioning.
As we do enter that period of normalization or I guess is there additional room to kind of take down allowance, even as we're staring at a recession on the mainland.
I would say I mean, there is such a thing as a good provisioning I think this was the case this quarter because a lot of it was driven by growth.
Not necessarily.
Credit environment I think.
Early to tell me, we still have.
The impact of Fiona in terms of some of the numbers. So you have.
A little bit of a higher charge off it goes a little bit of a higher npls because you. All know so we still feel that we are the credit picture is very strong very good.
The numbers for the third quarter.
Very very good for the organization.
Okay. Thank you for the color.
Thank you.
Our next question comes from Brett Robinson from Health Great. Please go ahead.
Hey, good morning, everyone.
Okay.
Wanted to go back to the capital action question and.
I understand correctly your commentary the fed has the fed did not tell you too.
Weights and.
My question, specifically is you know, what's the let's say the bond market changes and we have some sort of.
Different environment than we presently do that would change or your tangible book.
Tom here, maybe earlier than the second quarter, well could that alter your decision process or something that I look at the adjusted tangible book here 76.
Over $76 in your stock immediately drops to 71. After you mentioned that the change in the capital plan any any color around that.
Well I. This is ignacio when it make absolutely clear that this decision was not related to deferred it was not requested by <unk>. This was a decision made by US we thought it was prudent.
Given given the environment.
Also take into account that as opposed to other banks that have actually paused buybacks, we're still buying back our shares.
The ace owners as we speak so.
It had nothing to do with that we wanted to give you a timetable because thats. What we think is a reasonable time to expect and that's what we're thinking we're going to look at the world changes dramatically you know there's nothing written in stone that we couldnt couldnt revisit that earlier.
Okay.
Fair enough.
And then.
Around the margin commentary in others.
Maybe a little more complicated relationship figuring out the.
Margin and then some banks with with the <unk>.
Government deposits so to speak can we maybe taking a different direction and just think about total NII dollars and.
As I look at it you know it kind of.
Sure.
Absolute dollars of NII decline somewhere between 30 and $40 million linked quarter do you think that's a fair way to think about.
Fourth quarter levels or would you point me to a different number.
Well that will that will depend on what you're penciling in for loan growth on what rates are you are putting in for the new loan production.
The.
NII right, but the the calculation on.
On the increased cost.
Shouldnt be very complicated it is whatever balance you have or do you expect to have in government deposits.
Plus one plus 150 basis points from where they are today.
So.
If that number comes out to be an additional $40 million and so the number is.
Okay.
Fair enough. Thanks Carlos.
And then maybe one last one.
Thanks.
Symbiotically the banks in Puerto Rico, specifically.
Specifically you have a big advantage to a lot of the mainland banks, obviously the government deposits are more price sensitive, but generally speaking your deposit betas as you even illustrate in your slide deck.
Much lower than the mainland.
That would presumably continued to be at least.
Case.
Going forward, but yes.
Just wanted to maybe.
<unk>.
Step back and just think about the balance sheet and 23 loan growth.
Do things change from here from IR.
Turning to balance sheet or will you continue to have the same sort of path.
No I mean.
Yeah.
We have seen very good loan growth this year.
Maybe even a little bit better than we expected it definitely sooner than we expected as you remember we were guiding to net loan growth wouldn't happen until the second half of the year and they actually started happening in the very first quarter of the year.
So loan growth has performed maybe a little better than we expected.
We have done on the balance sheet exactly what you would expect us to do it when that happens we saw or we go see investment portfolio and redeploy it to loans that are there.
Perfect thing for Us and we would like to do more.
We are still very positive on loan growth for the rest of this year and next year. So.
Hope, we can do more of that.
As of.
Next we'll hear from comes along.
So they.
Directionally.
What I just said pans out.
You would see in the balance sheet.
Continued gradual reduction in investment securities Okay.
Investment portfolio start to gravitate to more normal levels. If you look historically for popular our investment portfolio has represented something in the high 20% of our total assets as opposed to 50% of total assets. So I would hope that we can start the path.
In that direction next year.
We're definitely rather have lois on relationships than embarrassing interest rates, if we can have.
Yeah.
Okay I appreciate all the color.
Thank you.
Our next question today comes from Kelly Mehta from <unk>. Your line is now open.
Hi, Thank you so much for the question.
I just.
Just circle back on that slide you gave on deposit betas I found it really helpful.
Wanted a point of clarification when you gave the historical betas for.
The non the nonpublic funds, whether that is in the interest bearing deposit beta out where total deposit beta and how you expect those to.
There is an argument to be made that deposit betas could be higher than what we've seen historically given what we're seeing.
But the mainland banks, so I'm just wondering.
Hum.
What what you guys expect for kind of the core deposit paid upfront right.
Okay.
What we have here is.
On the chart is historical.
As for the latch right right.
Cycle increased.
Kelly.
It is historical.
As was mentioned earlier in the call.
Historical betas have been lower than they typically are for peer banks the virus into the states and that continues to be true this year.
What is different of course is the mix we have a lot more government deposits now than we had in the last in the last rate.
Great.
Cycle.
On your question on whether they will remain the same.
So far we're tracking well.
There is a lot of discussion from for them very well informed analysts that.
They expect betas.
And this cycle dwindle accelerating or being a bit higher than they were last thing simply because.
Our reaction to the rapid rate the rate of increases in rates being so quick.
I think there is some merit to that discussion we haven't seen it yet but of course, we won't see it until the cycle is over so.
At this point in time, we're performing well within historical trends.
If at the end of the day, the whole market and softness in inherit betas, we would.
Hope that.
Listen, our Puerto Rico Bank will still remain below.
Although the market basis.
Okay.
That's helpful and then and then with your margin guidance for.
Our margins have been tracked sequentially in Q.
Does that does that factor in that public deposit guidance, you gave of those coming down.
What would happen to your margin if for whatever reason.
Ended up hanging in.
Similar to the current rate.
I know that they are now.
Yeah well.
If you.
If you put together a couple of our comments the first comment that we expect our balance has been probably the buses to be end up between 13 and 15 for year end, so that sort of implies that we expect the balances to be sort of around where they are now so that commentary incorporates maybe some.
Reduction in balances, but not a huge reduction in balances.
It does not incorporate an increase in losses in that.
What were to happen and the commentary on margin does include.
Our expectation of increase of 150 basis points of the cost of those deposits yes.
Thanks, I'll step back.
Okay.
To reiterate if you would like to ask a question today. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by <unk>.
Our next question today is from Gerard Cassidy from RBC. Please go ahead.
Hi, Good morning, everyone. This is Thomas <unk>, calling on behalf of Gerard.
Circling back to loan growth.
Another strong quarter have you guys seen any new entrants into the market for lending perhaps from mainland banks that werent as active there may be a year ago.
As always compete with them, but maybe any changes that you can speak to.
No not really we haven't seen any new interest I think you may see some of it down the road for some of these big <unk>.
Infrastructure projects that hasn't been done yet, but in the bread and butter commercial loans, we have not seen any new entrants or significantly heightened levels of competition from non U S banks.
Okay. Thank you and you mentioned in your presentation, an increase in auto loan yields in the quarter.
The acquisition a few years back of the wells Auto portfolio you guys are obviously, a bigger auto lender on the island.
Are you on Puerto Rico, seeing the used car price inflation that we've seen in the states and then can you share with us your outlook for credit quality in that space as we head into next year.
We have seen.
An increase in use probably the same as you have seen that mainland in Puerto Rico.
And received through the lower.
Or higher realization.
Reprocessing itself.
We I mean, our outlook I mean, we continue to be performed much better than we had prior to the pandemic with lower early delinquency numbers lower npls lower charge off across most of our portfolio, but also in the in the intermodal portfolio.
I mean, we still feel that given the level of liquidity.
Time based.
With respect to economic activity in Puerto Rico continued to perform well on a going forward basis.
Yeah.
Okay, great. Thank you for taking my questions.
Our next question today is a follow up from Brett Robinson from Health Great. Your line is now open.
Hey, thanks for the follow up.
I'm going to ask you about auto, but you just address that wrong. So maybe just one follow up around the pipeline.
As you guys see it I mean loan growth continued to be.
Better than expected and you know, but looking at taking on big data.
No holding in there pretty good pipeline.
What are you or is it actually improving relative to maybe the past quarter or what would you say about the loan pipeline.
Relative to where it was earlier in the year.
This is ignacio.
I'd say that it's it's about it's about the same we've had good loan demand starting in the second quarter.
Obviously I've said this before some of our corporate business is lumpy. So you know.
You never show is going to fall one quarter or the other.
I still see good loan demand.
Across sectors in Puerto Rico.
Every every quarter.
You may get a bigger loan or a smaller one that it changes the balance and also sometimes to pay offs.
<unk> come in heavier in one quarter lighter than the other.
Terms of loan demand, we are seeing a city I mean I have not seen any.
Any decrease in per loan demand so far.
Okay.
And then maybe one last one if I could just around you talked about the Puerto Rico environment.
And it would seem like this would be a good opportunity for what's what happened with Fiona.
Really broken them out to really kind of.
Improve a lot of things and its operation, but not.
And I've heard good things.
Thoughts around one of my and just what you guys are hearing or seeing from the ground level in Puerto Rico around electricity.
Production and how that might.
Possibly improve in the next year.
I don't know the next year's cycle.
Cycle, I would say, but I think if there is ever a silver lining to something like Fiona Indians that.
I think the federal government has especially noticed the recovery efforts from Maria were much too slow and.
The task force to work on energy.
A lot more emphasis I think there's a lot more.
People understand it really we have to pick up the pace and recently seen.
The announcement not necessarily tied to electric situation, but they were gonna upfront, 25% of the cost of the project.
FEMA works.
Like an insurance company, where they reimburse you had part of the plan.
<unk> like ours, which can be can strap, it's hard to come up with a 25%. So I think we're going to see is a lot more focus loom was under a lot of pressure to perform.
And I think the federal government is under a lot of pressure also to show progress in this front. So I think the pace will accelerate.
And that's not only.
That's a silver lining for me on anything.
Okay.
Great I appreciate the color.
Our next question is a follow up from Tim Brasil <unk> from Wells Fargo. Your line is now open.
Hi.
Two more questions for me.
We can't hear you Tim.
Is that better can you hear me.
So a lot better thank you.
Sorry, Yes, two quick follow up for me, maybe starting on the fee income guidance of around 150.
Pretty large stepped down from this quarter I'm. Just wondering is that majority coming from gain on sale and then as far as the revenue sharing component that started hitting this quarter is that the full quarter's impact and kind of what does that run rate look like for that.
Protect revenue share.
Yeah, well you know.
<unk>.
This quarter.
A couple of unusual things in that number.
9 million.
The $9 million.
Connected to R. R.
Our.
U S equipment Finance company is in that number so so the.
168 is exactly run rate. So if you adjust for that if we're back to the runway we are always referring to $1 55 to 160.
The the 150 and we're talking about here.
There is a couple of differences.
First of all as one.
It's pretty clear what's happening, we don't have an equity pickup from ever take anymore.
$6 million to $7 million a year.
So a quarter sorry.
So that affects.
Affects that number and then the other factors I mentioned will affect the number.
Well moving forward so.
Okay.
Ill just disagree with the statement, it's a big it's a big change because.
The number when you take.
Unusual things happening in the number for this quarter out this.
This quarter was pretty much in line with prior guidance.
Okay.
That's a fair statement and then just last for me on the goodwill impairment for Caito.
I guess, what drove that and acquisition hasn't been on your books for that long, maybe just some color on what drove that impairment.
Yes.
Sure.
Your typical goodwill exercise.
The acquisition was not.
<unk> meeting.
The budget that we thought they would.
It leads to an adjustment in the goodwill.
To some extent Luckily we have structured a deal with such a way.
That there were some lower contingent payments linked to that performance. So those contingent payments went away as well so at the end of the day.
The effect of all of those.
Those two things penciled out and.
And it didn't have an effect on our performance for the quarter. So.
It was just a matter that they are a bit slower than we expected to meet their targets.
Luckily has picked up lately, so we hope that they'll make up some of that ground.
Got it thank you for the color I appreciate it.
Youre welcome Brian .
Our next question today is from Alex <unk> from Piper Sandler Your line is now open.
Hey, just a quick follow up question on on the loan growth I was wondering if you could give us some color on the granularity of the commercial loan growth that you saw both in Puerto Rico and in the mainland if theres any like really big chunky loans in there.
In Puerto Rico, we.
We had some we had one large loan in the hospitality sector.
Other than that I think is pretty much typical stuff. So I think the only thing that I would say that.
Those markets that come to mind right away. So we did have a large loan in Puerto Rico in the hospitality sector.
And do you have any line of sight on any of it.
Sorry.
I would say that's a sector.
Forming very well.
And there's a lot of a lot of interest both on island, all five in that sector right now.
Yes, do you have any line of sight and any other big chunky loans like that that could be.
Potentially coming on.
Quarter.
Not not perhaps that size, but we have some some nice loan process. We're following up on that one is probably bigger than normal when I just mentioned, but we have some nice nice ones in the pipeline, but that wanted to be honest.
A little bit bigger than we normally do.
Okay.
And then just I'm sorry, if I missed this but the slide slide eight that has the complexion of retail versus commercial versus public sector deposits.
Can you give us a distribution of the noninterest bearing relative to those various sectors.
We don't we don't have that here.
To work on that.
Alright.
We don't have.
Broken up exactly that way.
As you can see four in financials, we typically break up deposits by product as opposed to by segment.
No.
We will come up with the information, but we don't have a rental and rail partners.
Okay.
Is there any one of those I mean would it be fair to say that public sector deposits don't have very much interest bearing.
No.
Okay.
The opposite.
Theyre all interest bearing okay in there and then the commercial and the retail.
Guessing would it be a rough a rough equally split.
Alright.
I don't know off the top of I don't want to give you a number of the top of my head.
Basically you can do is.
Obviously you have them.
On slide in that side of the page eight gives you the melded.
<unk> is bringing in noninterest bearing so.
But we'll look into it to see.
To see if we can we can address your question.
Okay. Thanks for taking my follow ups.
There are no further questions at this time I will now hand, you back over to Ignacio Alvarez for closing remarks.
Uh huh.
Thanks, again for joining us and for your questions and we look forward to updating you on our progress in our January call have a nice day.
That concludes today's call can Inc. Q3, 2020 to your earnings call. You May now disconnect your lines.
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