Popular Inc. Q1 2023 Earnings Call
Some of these.
[laughter].
Good morning, ladies and gentlemen.
Thank you for attending todays popular Inc. Q1, 2023 earnings call. My name is Tia and I'll be your moderator for today's call.
All lines will be muted during the presentation pushing up the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to your host Paul Cardillo with popular Inc. Please proceed.
Good morning, and thank you for joining us with us on the call today is our CFO Javier for our CFO , Carlos Vazquez, and our CRO video Suriano.
I will review our results for the first quarter and then answer your questions.
Other members of our management team will also be available during the Q&A session.
Our CEO Ignacio Alvarez is unavailable today due to a medical matter, we expect him back at the office early next week.
Before we begin 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 will now turn the call over to our CFO Javier for air.
Thank you Paul Good morning, and thank you for joining the call.
We began the year with a strong quarter.
Achieving net income of $159 million.
Our quarterly net income was $30 million lower than the adjusted fourth quarter net income of $189 million.
First quarter results were impacted by lower net interest income offsetting part by lower expenses.
Non interest income and a slightly lower provision for credit losses.
Loans increased during the quarter by $261 million.
Banco Popolare generated loan growth across all segments.
Popular bank, so a commercial loan growth offset by runoff in the construction and consumer portfolios.
Our net interest margin decreased by six basis points to 323% in the quarter.
Higher deposit costs, particularly in our Puerto Rico public deposit portfolio.
Welcome to our bank.
That our margin.
This was partially offset by an improvement in asset mix due to loan growth and a reduction of the investment portfolio.
Credit quality trends remained favorable during the period.
Npls decreased and net charge offs remain well below pre pandemic levels.
During the quarter.
Bullock issued $400 million in five year senior notes with a 725% coupon.
We intend to use a portion of the net proceeds of the offering to redeem or repay the $300 million principal amount of senior notes that mature in September .
Turning to slide four.
We maintain robust liquidity anchored by our diversified deposit franchise and our high levels of cash reserves and Unpledged securities.
Our deposit franchise is made up of approximately <unk>.
42% and retail deposits.
With an average balance of less than $10000 per account.
25% of the balances are in public sector deposits.
Which are secured by collateral.
28% are in commercial deposits and the remaining 5%.
Our wholesale deposits.
Overall.
The process were down by $273 million in the quarter.
But liquidity sources were up by one 3 billion.
Our total consolidated borrowings, including our newly issued senior notes.
Main flat during the quarter.
Our customer base in Puerto Rico grew by approximately 12000.
In the quarter, reaching nearly 2 million unique customers.
Yeah.
Adoption of digital channels, among our retail customers remained strong.
Active users on our knee Banco platform exceed.
Exceeded $1 1 million or 56% of our customer base.
In addition.
We continue to capture more than 60% of our their passes through digital channels.
This trend remains significantly higher than pre pandemic levels and well above our island peers.
In the first quarter consumer spending remain healthy and we've combined credit and debit card sales up 9% compared to the first quarter of 2022.
As on the mainland mortgage originations in Puerto Rico have been impacted by rising rates and also by limited inventory of available properties.
The dollar value of mortgage originations at Banco Popolare.
Decreased by 29% compared to the first quarter of last year.
Driven by lower refinance activity due to the interest rate environment.
The local economy performed well during the first quarter.
Business activity is solid and remains in good shape.
As reflected in the continued positive trends.
In total employment and other published economic data.
While new auto sales have slowed compared to the quarterly pace of the past couple of years. They remain above pre pandemic levels evidence and continued robust demand for cars in Puerto Rico.
The tourism and hospitality sector continues to be a source of strength for the local economy.
Year to date, San Juan Airport has seen record levels of passenger traffic.
Hotel demand.
Also has been strong.
Can be seen in record high average daily rates.
And revenues per available room.
There are still approximately $50 billion of hurricane recovery funds that have yet to be disbursed.
We expect that these funds will support economic activity in many sectors in the coming years.
We are uniquely positioned to serve the needs of our customers and to benefit from such activity.
In short we.
We are pleased with our results for the quarter.
Particularly our solid loan growth in Puerto Rico, and the continued strength of our deposit base liquidity and credit quality.
We are mindful off and.
And have been monitoring the economic and market environment.
Well as the recent developments in the U S banking sector.
We will continue to manage our banks to maintain significant available liquidity as we grow responsibly.
Despite these headwinds we remain optimistic about the future of Puerto Rico, our primary market.
Our ability to manage and serve the needs of our customers through any potential challenges that may lie ahead.
I'll now turn the call over to Carlos for a more details on our financial results.
Thank you good morning.
Sorry, apologies, please turn to slide five.
Net income was $159 million compared to $257 million in Q4.
Excluding the impact of the 68 million DTA allowance reversal in Q4 net income decreased by 3 million from Q.
Net interest income was $532 million a decrease of <unk> 8 million from Q4.
$9 million of this variance was related to a lower day count during the quarter.
On a taxable equivalent basis net interest income was $817 million compared to $622 million in Q4.
Various was primarily a result of higher interest expense on deposits of $54 million, resulting from increased deposit rates, mainly from Puerto Rico public deposits and to a lesser.
Our extent popular bank.
Non interest income was $162 million, an increase of $3 million from Q4.
This included included in this result was a $7 million litigation related insurance claim reimbursement.
The provision for credit losses was $47 million compared to $48 million in the fourth quarter.
Total operating expenses were 441 million a decrease of $21 million from the prior quarter.
This reduction was primarily driven by lower professional fees by $16 million.
Lower technology and software expenses by 10 million.
Historically these costs tend to be lower due to the first quarter of every year.
This is more accentuated in the first quarter of this year due to our multiyear transformation initiatives.
In Q1, we had 6 million of transformation related expenses compared to $10 million last quarter.
That's the transformation Progressive X basis will shift from advisory and conceptual plans through the development and execution of implementation plans.
Result, we expect a slower pace of expenditure initially as in Q1.
And then acceleration as the year progresses.
We continue to anticipate principal mission related expenses of $50 million in 2023.
Other large explain variances were lower seasonal business promotion expenses by $9 million, which was somewhat offset by higher personnel cost by $9 million primarily related to the previously disclosed increase in hourly minimum wage and BV PR that took effect in January .
And Laura or a benefit of $7 million, mostly due to lower gain on sale of properties.
Our quarterly expense trajectory has historically ramped up as the year progresses, we anticipate that 2023 will be consistent with that experience.
We continue to expect expenses for the year of approximately 187 billion.
Our effective tax rate for the quarter was 23%.
For the full year 2023.
The effective tax rate to be within a range of 21% to 26% higher than the range provided during our last webcast.
In the near term, we expect to run our banks with a higher level of reserves at the fed which leads to less.
Extend tax exempt income and therefore, a higher tax rate than we had previously anticipated.
Please turn to slide six.
Net interest income was $532 million on a taxable equivalent basis was $570 million 50.
<unk> 1 million lower than in the fourth quarter.
Net interest margin decreased by six basis points to 322% in Q1.
On a taxable equivalent basis, NIM was 346% a decrease of 18 basis points.
The decrease is driven by higher interest expense on deposits due to the significant anticipated 103 basis point increase in the cost of public deposits. This was partially offset by higher loan balances and yields.
An improved mix of earning assets.
At the end of the first quarter.
Public deposits were roughly $15 5 billion or $15 8 billion, excluding $700 million in deposits held and managed by our Trust Division.
This compares to $15 8 billion and $15 2 billion, respectively at year end.
In the past, we had excluded the bonuses and trust from our discussion about Puerto Rico public deposits given that these are managed by our fiduciary services Division, where we act as custodian or equities. However, we have decided to aggregate this amount to reflect the overall relationship with government entities.
I'll provide more visibility to collateralize deposits.
These trust deposits have always been reported in our total deposit funding.
During 2023 now inclusive of trust deposits, we expect public deposits to be in a range of 14 to 16 billion essentially unchanged from our previous expectation previous expectation of $13 billion to $15 billion that excluded trusted buses.
It is important to reiterate that by law in Puerto Rico public deposits must be 100% collateralized.
Any decrease in the level of deposits will have no significant impact on our liquidity.
Excluding Puerto Rico public deposits consolidated deposit balances increased by $180 million in the quarter.
Morally time and saving deposit at popular bank, because it always direct channel.
This compares to a decrease of $1 4 billion in nonpublic deposits during the fourth quarter.
In Q1, we continued to see some commercial and heightened at workplace pursuing better yields on excess liquidity.
Moving this funds outside the banking sector. However, we have been able to capture a good portion of this movement in our broker dealer, which saw an increase in assets under management of approximately $450 million.
Since the end of Q1 overall deposit.
Deposits have increased by approximately $700 million.
Our interest rate sensitivity continues to be relatively neutral.
As a bit as the year progresses, we expect the margin to resume an upward trajectory.
The timing will depend on the interaction of our loan growth and mix.
Deposit balances and the pace of repricing of public and incrementally nonpublic deposits.
Our ending loan balances increased by $161 million compared to Q4, driven by growth on all loan segments as EVP and.
On commercial loans at PV.
We are encouraged by the demand for credit a PR NPV.
We will continue to take advantage of opportunities to extend credit, thereby improving the use and yield of our existing liquidity.
Please turn to slide 10.
Deposit beta recurring tightening Tycho are now at or above the prior cycle.
We have seen a total cumulative deposit beta of 20, 24% to date.
However in Q1, we saw an acceleration of deposit pricing.
In the PR totaled.
Total deposit costs increased by 35 basis points led by public sector deposits in PV.
Deposit cost increased by 67 points led by retail deposits as we increased the use of our online deposit channel.
In Puerto Rico, our combined retail and commercial deposit betas cycle to date have been less than 10%.
As we've discussed over the past couple of quarters, given the rapid shift to higher short term interest rates, we expected a significant increase in the cost of public deposits.
In the first quarter the cost increased by 103 basis points versus our January estimate of roughly 120 basis points.
The difference.
In lower average balances and the mechanics of the interest expense calculation.
We expect that cost opposed deposits to increase by approximately 60 basis points in Q2.
The deposit pricing agreement with the Puerto Rico public sector, if market linked with a lag.
This source of funding, resulting in an attractive spread and our market rates. Please.
Please turn to slide eight.
We have added the following two slides in our deck because of the increased focus on liquidity borrowings and deposit composition.
The sources for the corporation increased by $1 3 billion in Q1.
97% of this liquidity precise in excess funds at the fed.
Pledged securities bar.
Borrowings for the quarter were flat at $1 4 billion.
We reduced our federal home loan bank borrowings by $366 million in Q1, however, the issuance of our senior notes due in 2028, roughly compensated for debt reduction.
There were no incremental borrowings during the quarter from the federal home loan bank, the fed discount window or the bank term funding program.
On March 13 2023.
Issued $400 million of same 0.25% senior notes due in 2028.
We tend to use a portion of the net proceeds.
The offering to redeem or repaid 300 million principal amount of our outstanding senior notes that mature in September 2023.
Please turn to slide nine.
The summation of transactional accounts and time deposits with bonds is over $250000 ended Q1 at $13 8 billion or 23% of total deposit balances.
The liquidity sources, describing slide eight the prior slide totaled $18 3 billion covering 135% of deposits over $250000.
The balances of our noninterest bearing deposits have been steady.
Of our recent bonus changes had been in interest bearing accounts.
Please turn to slide 10.
Our investment portfolio is almost entirely comprised of Treasury and agency mortgage backed securities, which carry minimal credit risk, including our cash position. This portfolio has an average duration of approximately two six years.
As discussed previously during their rapid increase in rates in 2022.
What is the uncertain outlook for interest rates.
Last year, we transferred to held to maturity $6 5 billion of U S treasuries, thereby reducing the future impact of rates on tangible book value at the time. This action reduced eight youll see our exposure to interest rates by about a third.
When transfer to HCN. These positions had a pretax unrealized loss of $873 million, which will be amortized back into capital throughout the remaining life of the transfer positions.
At the end of the first quarter.
<unk> of this unrealized loss stood at $789 million.
Reduction of $43 million from Q4 and $84 million from the transfer date.
We expect this loss to be amortize back into capital through the remaining life of the portfolio.
<unk> of approximately 5% per quarter through 2026.
As a result of the timing of this transfer and given the level of rates at quarter end.
All of the unrealized losses related to the <unk> portfolio are already reflected in our tangible capital.
Therefore at the end of the quarter. There are no significant recognized marks related to our HTM book.
Please turn to slide 11.
Okay.
Our return on tangible equity was 11, 5% in the quarter.
Regulatory capital levels remained strong.
Common equity tier one ratio in Q1 of 16, 7% increased by 34 basis points from Q4.
Tangible book value per share at quarter end was $50 15.
An increase of $5 18 per share almost 12% from Q4 <unk>.
This improvement is driven mostly by a favorable variance of $192 million net unrealized losses on securities available for sale.
Quarterly net income of $169 million.
Partially offset by dividends declared in the quarter.
Finally, touching on capital, we will revisit future capital actions in the second half of 2023, our long term outlook on capital return has not changed in court and our strong regulatory capital ratios. However, in the near term we need to get more certainty on the outlook for rates in the <unk>.
Enemy and also for clarity on the potential regulatory response to recent events in the banking sector over time, we expect our regulatory capital ratios to gravitate towards the levels of our mainland peers plus a buffer.
With that I'll turn the call over to Leah. Thank you Carlos and good morning.
Overall tubular.
I continue to reflect the stable credit quality trends.
With low levels of net charge offs and decreasing npls.
We remain encouraged by the performance of our loan.
Luke will spend Eric.
Specifically early delinquency net charge off.
Performing loan inflows continue to trend significantly below.
Pandemic levels.
Turning to slide number 12.
Nonperforming assets decreased by 24 million to $504 million this quarter.
Given by NPL decrease of $27 million due to lower mortgage and consumer Npls in Puerto Rico.
Offsetting part what do you increase of $3 million.
NPL inflows increased slightly quarter over quarter.
At the end of the quarter the ratio of Npls to total loans held in portfolio.
Decreased to one 3% from one 4% in the previous quarter.
Turning to slide number 13 niche.
Net charge offs amounted to $33 million.
Our annualized 41 basis points of average loans held in portfolio.
Compared to $31 million.
Nine basis points from the prior quarter.
The results for the quarter.
We are impacted by $10 5 million charge off on a previously reserved.
Excluding this.
Our net charge off ratio were being leased.
At this point.
Please turn to slide number 14.
At the end of the first quarter.
The acos decreased by 31 million to $689 million.
During the quarter, we implemented the new accounting guidance, which eliminated accounting for <unk>.
And the requirements to measure <unk>.
For the concession from a loan modification.
This impact resulted in a release in the ACL of approximately 46 million driven.
Driven by our mortgage portfolio.
Which is presented as an adjustment to the beginning balance of retained earnings net of tax effect.
Excluding this impact the ACL increased by $14 million.
Driven by changes in the forecast.
Higher loan volume portfolio mix and the right ratio of consumer credit scores.
The provision for credit losses was 47 million.
<unk> to $48 million the prior quarter.
To summarize our loan portfolio continues to exhibit strong credit quality trends in the first quarter.
With low net charge offs and decreasing nonperforming loans.
We remain attentive to the evolving environment.
Maybe encourage might get post pandemic performance of our loan book.
We believe that improvement right now.
When rates over time in the risk profile of the corporation's loan portfolio.
So you just popular to operate successfully.
More difficult.
Our recommendations.
Before I turn the call over to Javier Let me comment on popular series often secondary exposure.
There'll be segment has received a lot of attention.
Marvin.
This was achieved through remote work and higher interest rates.
Popular.
Our office exposure is limited representing only one 9%.
Our $605 million of our total loan portfolio.
The exposure is mainly comprised of low to mid price property with average loan size of $2 million.
This will diversify across Symantec.
With that I would like to turn the call over to Javier for.
Concluding remarks, thank you.
Thank you Leo and Carlos for your updates.
Portfolio started off 2023 with a strong first quarter.
Building on the positive momentum generated in 2022.
Our diversified business model and strong deposit base robust regulatory capital and liquidity position.
A source of strength, which allow us to continue to meet our clients' needs as reflected by the growth in our customer base and loan portfolio during the quarter.
We are optimistic about the opportunities that lie ahead.
We remain vigilant.
Potential risks stemming from continued inflation and economic and market uncertainty.
Economic trends in Puerto Rico continued to be positive.
And a considerable amount of recovery funds, yet Louise burst.
I would expect it to support increased economic activity in future years.
We made progress on our transformation initiatives during the quarter.
Which over time will drive more customer connectivity operational efficiencies and greater potential for profitable growth and sustainable return on capital.
I want to recognize and express our gratitude to our colleagues.
It is their daily effort and commitment that lead to our customers' continued thrusting bubbled our on our strong results.
We are now ready to answer your question.
Yeah.
We will now begin the Q&A session.
I would like to ask a question. Please press star followed by one or you touched on keypad.
If for any reason you all like to remove that question. Please press star followed by tail again to ask a question press Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
We will pause briefly to allow questions.
Thank you.
Okay.
The first question comes from the line of Brody Preston with UBS. Please proceed.
Hey, good morning, everyone. Thanks for taking my questions.
Morning.
I was hoping maybe Carlos could we dive back into the.
So the net interest income FTE situations.
I guess I'm trying to understand so you are going to hold more cash at the fed with both the Puerto Rican sabra in the U S.
And so that's resulting in.
Lower levels of tax exempt interest income but is there.
Is there some GAAP NII impact there as well I'm just getting a few questions about it as just came across a little confusing.
No.
Yeah.
I think your description is.
It's correct Brody.
The cash would keep a deferred tax.
Well it is part of the bank in Puerto Rico by the way most of it doesn't.
Places like in the states.
Yes.
It earns taxable income.
As opposed to when we hold Treasury securities of our extent to a large extent bank in Puerto Rico, So our mix of taxable and nontaxable income shifts towards taxable so that results in a higher.
Our tax rate.
And will that and will that get I guess will that strategy of holding higher levels of cash at the Puerto Rican sabol that get reversed once we get clarity on.
Liquidity in the economy or is that like kind of like holding higher levels of cash through 2020 for the expectations.
Yes.
At least for the moment.
Choice, we revisit that choice every week in our Alco Committee.
We'll see whether it continues to be our choice ones that regulators express themselves.
Got it okay. So it seems it seems like it's more conservatism at this point.
Okay.
Yeah go ahead Jorge.
Yes, you asked a question about impacting GAAP NII.
Given that the yield on.
Cash overnight at the fed versus short term rates is not very different we wouldn't expect that a significant different than GAAP NII from that shift certainly our FTE NII will be affected because of that strategy.
Okay, and I guess, what is I guess from this strategy how much on a quarterly basis as the FTE impacted.
Okay.
That will be driven by everything everything else on there.
Deposit costs are disallowed et cetera.
So there is more complicated calculation of that one of course it also depends on.
Continuing to study in the present level.
Revalued.
Great.
Okay, but it's fair to say that like as deposit costs move higher if you kept the same level of cash at the fed that there would be an incremental drag on the FTE NII.
That will be fair, yes.
Okay and on the fee income.
Okay. Okay.
On the fee income I, just wanted to get a sense for where you thought.
That would shake out going forward and I'll stop there and I'll hop back in the queue.
For my other question on the tax rate right now.
Our fee income our fee income is.
It's reasonably steady over a year you divide by four but then there is already sitting on a quarter by quarter basis.
So thanks to fluctuate a little bit up and down.
We're happy to have started slightly ahead of our guidance of $1 50 per quarter.
But for the moment.
Still think that guidance is not applicable.
We will revise it again, depending on the results of the second quarter to see where the change so for the moment, we will keep the.
The guidance.
Three please.
We say it again.
Mostly in both directions every quarter for many.
Different reasons because of the many lines starting there.
Okay and could you just remind me Carlos it looks like there and the other service fees.
Third quarter upward seasonality that'll come through that's still the expectation right.
The insurance yes.
Yes.
We get contingent insurance commissions.
Good one.
Twice a year at Samsung.
<unk> company that we have we're dealing with it tends to be in the second half of the year I don't remember exactly a third quarter Brody.
But it tends to be in the second half of the year.
Of course.
The other thing that has to happen is the.
The insurance market has behaved nicely for them to pay with a contiguous contingencies.
We expect with Hercules.
Got it okay. Thank you very much I'll hop back in the queue.
Thank you.
The next question comes from the line up Tomorrow.
Celia with Wells Fargo. Please proceed.
Hi, good morning.
Good morning, how are you appreciate that okay.
Okay I appreciate the comments on the expected range of public funds kind of 14 to 16 billion exiting the year, maybe talking to second quarter. Specifically can you just give an update on the magnitude of seasonal inflows you're expecting in the quarter kind of timing of those and then ultimately.
Where we could expect.
GAAP NIM and NII to kind of bottom out before starting the ramp higher in the back end of the year to your comments.
Yes.
Well.
In the second quarter, we have tax revenues. So I think we mentioned before we expect the government process too.
To go up this quarter.
And we've seen some of that we already mentioned that the pluses are up $700 million so far this quarter.
So what.
It's harder for me to tell you exactly if they're going to earn higher then.
Because that depends on what the government chooses to do with their money, which is not our decision.
Historically, they have tended to be higher in the second quarter, and then gravitate down.
In the second half of the year.
Yes.
What was the question on NIM again tomorrow.
Just if you can provide any kind of magnitude on where NIM or NII could bottom in <unk> prior to resuming to ramp higher on the back end of the year.
No, we usually don't give guidance on that type of detail.
We as I mentioned in my prepared remarks, we still expect.
And then two to take an upward trend again this year.
The difficult part of that is that it.
It depends on how.
The things I mentioned interact.
It was the final just timing on when it was going to shift so it's gonna be a pace of increasing rates loan growth and loan mix and also deposit balances are mixed and how those three things interact is what results in and the ultimate NIM. So we still think is going to revert to two unexpected.
Expansion mode. This year.
But the timing we have not spoken overtime.
Okay, and then maybe one for <unk>, excluding the impact of 2022 that show to allowance levels continue to build despite the broader trends on the island improving.
Can you maybe talk about some of the levers that were pulled.
Within the portfolio changes that.
<unk> for incremental allowance and what do you need to see prior to releasing some of the incremental allowance and getting closer to a level, maybe not where mainland peers are but at least starting to trend in that direction.
Well the thing is.
A lot of different levels levers that were at play during this quarter.
As we mentioned we have been doing good in terms of volumes. So.
The volume increase.
That rule small ruling.
Using the <unk>.
The economic scenario rules wont rule in terms of the.
Increasingly are not ones that you also had volume mix.
We changed we gravitated to some of our.
Higher.
<unk> portfolio of that.
Got it.
All right.
Yeah.
Impacting the long ones.
Also I've seen some degradation in some consumer score levels.
<unk>.
Impacting the allowance was a combination of our largest more things so I think that all of that.
And they continue local hormone net charge offs that will dictate.
It is going forward.
Okay.
Okay. Thanks, and then just.
Great and just last for me.
Maybe back to Carlos can you provide an update on our merchant acquiring and the revenue share component and how thats trending and maybe an outlook for about 23 and 'twenty four there.
Well, we don't break out that number but we did.
Talk about the volume of credit and debit cards going up 9% versus the same quarter last year. It will go down versus the last quarter because it takes a while as you know.
So this keeps growing we're getting a share of that so I presume. The number is going up but we don't have and I don't think we've disclosed the details of that number.
Okay. Thank you I'll step back.
Okay.
Thank you.
Yeah.
The next question comes from the line, Alex <unk> with Piper Sandler. Please proceed.
Hey, good morning.
Good morning.
First off I was wondering if you can give us an update on expectations for loan balance outlook.
Over the next couple of quarters.
Up.
[laughter] no I mean I'm sorry.
No.
We don't give specific numbers.
Guidance.
We did say that we expect loan growth this year and we are seeing that but we also expect it to be at a lower pace than we saw last year and we're seeing that as well.
So the first quarter was was.
A good quarter.
It was a bit quieter than the first quarter of last year obviously.
Hopefully.
Economy locally, Puerto Rico, particularly continues to grow.
And more projects come online we will have.
More opportunities.
Two.
Proposals.
So.
Thank et cetera, as the year goes alone did not think even when it gets better that it will come to match last year's growth.
Okay and do you think growth comes from basically all categories as you saw in the first quarter.
Like auto.
So far that's what we've seen in Puerto Rico, and Thats actually been true since the middle of last year. So it probably will continue to be in most categories, but dollar terms, obviously the category that carries a day is commercial.
In dollars is going to be.
Most of the commercial but we probably will see most categories continue continue to grow.
Auto is growing a bit less.
This lowered.
Last year, we will see how that how the year evolves.
So there is the effect of higher rates.
How does that affect the appetite of people for loans, we'll have to see how that plays out during the year as well.
Okay and to that last point on on rates and appetite can you give us a sense for where new loan yields are relative to.
To the existing portfolio.
Consumer I mean for a commercial primarily.
I mean.
Yes.
The best we can do we can do on that Alex.
Levels on yields in the press release, you have loan yields bye bye Bye bye category and you can see the variation from last quarter to this quarter.
We don't provide so.
Any more detail on deals in that.
Okay.
And the <unk>.
Slide deck on the deposit slide.
Can you just help us understand exactly what's happening in the commercial deposits as well as the government deposits towards the end of the quarter. It looks like those rates ticked down a little bit.
Yes.
I'll I'll explain commercial and one of my colleagues here will finally public sector.
The commercial it's actually quite simple we had a large relationship with its prostate aggregator of aggregators that exited we exited in early February .
And that was a very high cost so the cost actually did that contribute to it does actually coming down.
In February and March.
So that was an actual so confection decision that we did that affected that one on the public deposits.
Hey, Alex it's Paul.
On the public deposits that are for all the charts, we actually provide the data points as part of the analysis on a monthly basis and so given.
A variety of inputs, including day, count and average balances and whatnot the calculation does.
Move around a little bit.
Along with a lagged effect of the repricing so.
If you look back prior in that chart, what you can see as it does jump around a little bit during certain time periods, even when the at least the comparative chart of the fed funds is is moving directionally.
So that's all that this is we do expect that those that that re pricing has not yet been completed and we talked about sort of another 60 basis points.
<unk> in the second quarter.
Okay. That's helpful.
And then with respect to the NIM commentary about resuming upward trajectory as that.
Is there a scenario where that could happen in the second quarter.
Yes.
If you move around in your model the three things I mentioned.
Pace of interest rate increases loan growth and mix in deposit balances of mix I'm sure. There's a number of possible combinations that will give you a higher NIM in the in the second quarter.
But it depends on how those three things.
Okay. Thanks for taking my questions.
Thank you.
Thank you.
The next question comes from the line of Kelly Motta with <unk>. Please proceed.
Hi, Thanks for the question I think I'll carry on with that up at least a portion of that NIM question.
Carlos one of the things that you had mentioned twice your.
Higher balances at the fed just out of conservatism.
Do you mind sharing what.
You guys view as an appropriate level of cash you have on hand, right now and what what are the things we should be looking for it.
Talk about either up or down you need clarity from the regulators in order to take that down I just yeah.
What we should be looking for as we think about the liquidity number ahead.
Yeah.
To a large extent.
What you see in our fed account right.
Cash position right now is although the maturities that's happened in our investment portfolio in the first quarter minus.
The loan growth that we had.
For the quarter.
The outcome of those two things.
That number in there.
We will keep watching this closely and evaluating the environment.
Ongoing basis clearly so.
Hi.
We're not running it on the basis of a target amount of cash necessarily.
We are running the business and the business results in an amount of cash.
What we did decide in the first quarter.
<unk> was to allow the portfolio to mature without pre investing or spending it again.
Again that is a discussion that we have in our weekly Alco meetings.
And we evaluate all of the parts.
And come to conclusions.
On a dynamic basis, so there isn't a target debt level, where we are.
At this.
It seems to make sense to us.
It's not a tough decision because at this point in time cash yield and cash is not bad so it's not.
A horrible decision to have cash at the fed.
So.
We'll keep looking at it.
Okay.
And that precision double unlikely.
Will that precision will be half what it is unlikely.
But it will probably revert tape around where it is and if.
If we make.
Yes.
Efficient two to reimburse or move some of the casualty investment portfolio.
<unk> not changed our characteristics of our cash position because some of that will be T bills.
But it will change the nature of our tax position.
Understood I appreciate it.
The color.
Thinking about the buyback.
In order to get more and more comfort.
With the buyback.
Keith.
Do you think the board needs.
You know the regulators to come out with.
Additional guidelines on on that front.
With what's gone on in March.
Just any sort of color as to what could.
Got you guys more.
Interested in buying.
Buying back stock here.
Yes, I mean.
What we will.
So what we've described.
However, we wanted more clarity on on rates and the economy.
Thought we could be more informed in making any decision capital return.
And that we thought that maybe I'm a little by the summer.
Frankly, I'm not sure we have significantly more clarity now than we had then.
So.
Hopefully, we'll get clarity by this summer, but I'm not sure.
There yet.
I think the more important thing is what you mentioned, which we have added to those two considerations the consideration of regulatory changes.
No.
Anybody's guess exactly what the regulators will come up with we do not know.
But we will be.
Attentive.
Two how they are.
They are moving.
We definitely don't want to be in a position, where we do something in their severity of announcement and months later and it makes our life much more difficult because we did something that moved us in the wrong direction.
So we will be.
We'll be looking at all those things.
It's hard to gauge right now whatever it is we'll come out Kelly so.
Paying attention and listening.
So it's three things now that we're waiting to get some clarity on that too.
So we'll just see how those at all.
Got it and just to speak.
Last one is on the capital Friday.
Dividend.
Had discussions about the buyback.
Usually you have.
The dividend raise in Q2, I think that part of your capital capital discussion, but wondering if.
Theres any updated you.
And if a buyback isn't in the cards necessarily are you.
Thinking about the dividend the same way in any target for a payout ratio on that.
Yes, we can.
Tend to to to work the two things together, but youre right in pointing out they don't have to be together so.
So it's something that we will continue to to consider.
Again.
I think probably step back for a minute the more important point to make is our long term view on capital Hasnt changed.
We still expect over time that our capital ratios will go with the direction of our mainland peers.
Plus a spread.
But.
Is over time that doesn't mean every quarter and it perfect sequence.
One and number two now we have the.
The other uncertainty that we have no idea wherever.
<unk> will be required to be if the rules change so we'll have to keep those things.
Okay I'll step back. Thank you so much for the questions.
Thank you.
The next question comes from the line of Brian Robinson.
I would hope group. Please proceed.
Hey, guys. Good morning, this is Brian calling in for Brett.
Just wanted to go quickly back thanks.
Thanks.
Quickly back to deposits I appreciate the detailed liquidity deposits slides you added.
It looks like demand deposits decreased similarly to what we saw last quarter.
Do you guys expect.
Steady mix shift over into interest bearing accounts from DDA.
And then on the deposit beta as well you mentioned that most of the segments are at or above.
Their prior cycle deposit beta.
You guys on the island maintainer and advantage to the mainland, but just wanted to know if you expect the betas to increase.
Notably above the prior cycle. Thanks.
Yes.
And the pulses.
I think the message is amend deposits Brian is that they've been.
Very steady actually.
And.
We have seen as I mentioned.
Some commercial clients and somebody net worth clients seek higher yields.
We have also been successful.
When the clients are in that position.
To help them achieve that without leaving the without leaving their relationship or shrinking their relationship with us.
We had increased.
Increasing assets under management of public securities or lower 400 over $450 million in the first quarter, which is exactly that.
But the fact that that happened and you see the demand deposits from the fourth to the first quarter were flat means that somebody else brought in $450 million. So.
And deposits have been.
Quite steady actually.
Most of the volatility we've seen in volume or levels have been in our interest bearing accounts.
As you know some of the big chunks are big movements happening in our public sector accounts that are large depositors right and I'm, sorry, but I missed the second part of your question Brian .
Just on the deposit betas compared to the prior cycle.
Well.
We've seen deposit betas accelerate probably every bank in the country has.
The rates have gone up so fast and so so high.
So we are above the last cycle. So I don't think we have to.
Chances are that.
Data for all banks will probably end up higher than the last cycle and this cycle, just because of the speed and magnitude of how big the fed raise rates.
So just broadly what's going to end up happening specifically in our case, it's hard to tell.
When you look at for example, a big chunk of our deposit business, which is retail and commercial in Puerto Rico continues to have a sub 10% beta.
So.
Overall betas will will accelerate.
I think that's our view.
They are already.
Above the last cycle.
There's a reasonable chance that terminal beta will be higher than the last cycle.
But there is pieces of our business.
Continued to show strength.
Particularly.
The nonpublic pricing component.
Yeah.
Alright, great. Thanks for all the color that's it for me thanks.
Thank you.
The next question comes from the line of Gerard Cassidy with RBC. Please proceed.
Hi, Good morning, everyone. This is thomas slightly calling on behalf of Gerard.
A couple of quarters ago, you guys mentioned that.
You had not seen any new entrants into the market for lending and PR. So just from mainland banks that havent historically been as active there, but you thought you might see some increased competition for some of the big pending infrastructure projects there.
Has that dynamic changed at all in light of recent events and any additional color you can provide there.
Okay.
I don't think it's changed.
Very much.
It really is.
The size of the investment is important obviously.
Not every bank can make every time zone.
But when you have.
Flooring operators that come into Puerto Rico to run a public private partnership for example.
<unk> worldwide banking relationships and those relationships are right to Puerto Rico with them.
Most every instance date one a local bank with our experience and capabilities to help them. So we ended up either either leading or being an important part of any effort to finance those kind of projects. So I don't think that it's a change from what we've experienced in the past.
And hopefully some of these projects will get going pretty soon thereafter.
A number of the public private partnerships are supposed to be.
Closer to realization now than they were a months ago and it does happen that will be welcome event.
I just want to add too okay. Thank you.
I just want to I forgot if that in fact, we are.
I can say.
In those PPP projects, so we expect to.
Have those come to fruition if environment. Most quickly this year. So we'll play we'll play an important part and those financings as we.
As expected.
Priority.
Okay, great. Thank you and then just a quick follow up high level, obviously credit quality remains pretty strong what trends in credit are you guys watching most closely today.
Those changed over the past couple of quarters.
I will say.
<unk>.
The performance in the chip and the FICO mix of our books.
Underperformance of the small and medium enterprises.
From a commercial books those would be the.
You too.
Our particular elements that we're watching closely.
Okay. Thank you.
Okay.
Thank you.
A follow up question from the line of Brody Preston with UBS. Please proceed.
Hey, guys just had a couple of quick follow ups I did want to touch on.
On the consumer line of credit charge offs that you called out.
I wanted to clarify it was called a line of credit I just wanted to ask if that was one line of credit or if that was multiple lines of credit.
It was one line of credit it is.
Legacy one off type of relationship.
Sure.
Shouldnt recur in the future.
Got it Okay, and then I just wanted to ask one on the deposit mix.
<unk>.
You guys outperformed the industry.
By a wide margin our noninterest bearing.
So just wanted to get a sense for what your conversations look like with customers around rates, particularly as it relates to like any level of excess funds that might be in DDA is or do you feel like the noninterest bearing mix can be relatively steady from here.
Yeah.
Yes.
We have the discussions.
Every day every day every day.
<unk>.
Okay.
The best way I can answer that question Brody is that we've been having those discussions for the last two quarters and the results are the results.
So so despite the fact that we're having those discussions.
We have clients moving moving cash seeking higher yields.
We still were able to successfully maintain.
Stable demand deposit balances that does not mean that some money did not move as I said.
Can track, specifically $450 million of those players that moved to our.
Our broker dealer.
So usually when we successfully found another $450 million in demand deposits.
That showed up in.
And joined the bank. So so far we've been able to manage those inter.
Interest of higher yields from our clients successfully.
The relationship with serving the client.
Hey.
We've been here before and those flows go buy back the other way with weights come down. So the important thing here is to keep the relationship so that when rates come down there's a lot of it does flow flow back into the bank. So I mean, that's the best Nymex gas.
I just want to add that we saw we saw.
Very strong new deposit account opening.
Our numbers for the first quarter in Puerto Rico, including noninterest bearing accounts.
So.
I just wanted to clarify that very high compared to prior quarters.
Our net new account opening in the first quarter was higher than it has been for a couple of years.
Tiny tiny one since the first quarter of two minutes anyway.
Okay.
Got it alright, thank you very much for the color I appreciate it.
Thank you you have a follow up question from the line of Tim Memphis, Youre left with Wells Fargo. Please proceed.
Okay.
Hello, Tim are you there.
Hey, Mark.
Yes, sorry about that had you on mute thanks for the follow up.
One last one for me on the expense base I appreciate the color on the reduction in the first quarter and the expectation for it to ramp higher as the year goes.
Any any additional commentary on the cadence of that increase to get to that unchanged guidance level and then secondarily. If you can provide any kind of color as to what type of internal budget. You are using for this year's profit sharing initiative.
Okay.
The second question.
No.
There is presently no.
No incorporation of any profit sharing in our numbers or or are forward looking.
So nothing on that.
<unk> in our numbers or our forward looking outlook at this point in time.
On your first question.
Yes.
Tough to tell because it depends on when the projects get going and when the people that are helping us in this project actually Bill us.
So.
I would assume that.
It will be straight lining up as always my best assumption right now for us.
In the next three quarters to reach the breached.
We reached the goal but.
Sure.
The best I can.
Colleagues here at a time.
Yeah.
Right.
So.
Is my Mic.
Uh huh.
Straight line and your model is it's probably going to be far from the truth.
I'll just clarify we don't we do accrue.
Service is provided and you don't wait for me.
[laughter].
Okay, but of course, and then I guess once those projects are better expenses I'm sorry.
I guess once those projects start to ramp up as the expectation going forward that those expenses remain on or is it going to be as lumpy as we seen in the first quarter.
Oh.
Well.
It will depend on the project.
Oh, sorry in favor.
It's.
It does.
It will depend on the project I don't think there is a global answer to your question.
The project and the number of projects that are ongoing at the same kind of thing.
We're just moving from the theory in the planning to execution. It's just how quickly we can get.
All of those plans going.
Okay. Thank you.
Thank you again to ask a question. Please press star one.
Hello.
I will go briefly to allow questions to Jim Ryan.
There are no additional questions at this time I would now hand, the call back over to Javier Ferrer for closing remarks.
Thanks, again for joining us and for your questions today.
We look forward to updating you on our progress in July Thank you.
That concludes today's conference call. Thank you and you may now disconnect your lines.