First BanCorp. Q1 2023 Earnings Call
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Corporate strategy and Investor Relations Officer, <unk> Bancorp to begin selling Ramon. Please go ahead.
Thank you Jason Good morning, everyone and thank you for joining first Bancorp's conference call and webcast to discuss the Companys financial results for the first quarter of 2023 joining.
Joining me today from first Bancorp are Aurelio Aleman, President and Chief Executive Officer, and Orlando Beta has executive Vice President and Chief Financial Officer.
Before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the Companys business.
The company's actual results could differ materially from the forward looking statements may due to the important factors described in the Companys latest SEC filings.
The company assumes no obligation to update any forward looking statements made during the call.
If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at FCB Investor Dot Com at this time I would like to turn the call over to our CEO Aurelio demand.
Thank you I'm on.
Good morning to everyone and thanks for joining our earnings call today.
Let's turn to page four to go over the highlights for the quarter.
Very pleased to say that we began the year with very encouraging results for our franchise.
The resiliency of our business model was evident during the quarter as we earned 77 million and net income or <unk> 39 per share, which translated into a strong return on assets of 155% on.
On a non-GAAP basis pre tax pre provision income was $180 million.
Up 6% when compared to the same quarter last year, and 3% below last quarter multi.
Mostly driven by a reduction in net interest income during the quarter the margin contracted slightly by three basis points, primarily due to higher cost of funds.
Say that credit metrics remain very stable total loans in early delinquency decreased by 10% during the quarter nonperforming assets decreased to just 68 basis points of total assets.
The provision for credit losses remained relatively flat at $15 $5 million on the Acos four loans increased four basis points to 29%.
During the quarter, we decided to take prudent actions to further strengthen our liquidity asset precautionary measure obviously, considering the recent volatility in the banking sector.
End of the quarter.
Ended with $4 8 billion, England insured deposits, while having news available liquidity of $5 5 billion.
114% of the uninsured portion.
In terms of capital deployment, we continue our journey, we purchased we purchased $50 million in shares of common stock.
<unk> increased the common stock dividend by 17% to <unk> 14 per share.
We opted to pass additional buyback during the second quarter.
Honestly, given recent market events, but we do expect to resume buyback activity in the second half of the year.
Just to remind we still have pending $75 million.
In our authorized by buybacks under the 2022 approved plan.
We also expect to announce our updated capital plan. When we report our second quarter earnings in July we were expecting to do that this quarter as we announced last time, what we decided was brought in to move it up with just one quarter as.
As we have said in the past we continue to aim to return approximately 100% of earnings to shareholders during 2023.
Through buyback and dividend as part of our capital Capital Management, Florida.
Please let's move to the balance sheet section on page five.
We registered our fifth consecutive quarter of loan growth driven by healthy loan origination activity, primarily Puerto Rico consumer loan balances increased by $80 million during the quarter of two 4% linked quarter in line with our loan growth guidance for consumer loans.
Even though commercial longer in Puerto Rico, Warsaw by 90, Damelio, 4% to 6% linked quarter. The commercial loan book decreased during the quarter by $19 million.
It was driven by large unexpected payoffs or paydowns of certain commercial loans in the Florida region.
<unk> $108 million.
Finally residential mortgage loans were down 33 million slightly below our growth guidance for 2023, we do remain optimistic about loan growth prospect in our main market. We reiterate our overall mid single digit loan growth guidance for 2023.
I would like to spend a moment discussing the composition of our commercial book, we added some additional information into this light, particularly our exposure to office real estate in Puerto Rico, and the U S, which has been a key area of focus for the industry in recent months.
At the end of the first quarter, we had $2 4 billion or 45% of our commercial portfolio in commercial real estate out of this total.
440 million is in the office real estate exposure or 8% of the total commercial book, we believe credit quality of our CRE book is strong with just 92% on loans nonperforming.
And minimal to no losses recognized over the last few years, we believe refinance refinancing risk for office real estate is nominal with just $85 million and $80 million of loans in Puerto Rico, and the U S respectively scheduled to mature or reprice over the next two years.
We know oversee a well diversified commercial loan portfolio growth of multiple industries on property types multiple regions.
With adequate reserve that we believe are sufficient to cover expected losses and has performed well.
Multiple business cycles.
Please let's move to page six to discuss deposit trends on liquidity.
Core deposit narrow broker and government deposit decreased by $143 million during the quarter.
Reflecting reduction of $139 million in Florida $50 million in the Virgin Islands, partially offset by an increase in Puerto Rico region of $11 million.
Over to settle the deposit reduction actually took place in the first two months of the quarter.
It was primarily driven by customers looking for ideal deposit alternatives in the Florida market.
Traditionally outside of the banking sector.
And also some liquidity was due to pay downs on commercial loans.
On the government deposits side, which are fully collateralized amounted to <unk> 7 billion decreasing by $96 million during the quarter.
I have to say that our deposit base remains very stable. Following the March industry events, we actually opened more new deposit accounts really March Diana the prior 12 months.
Our diversified deposit franchise is comprised with an attractive mix of commercial and retail customers.
Over 70% of our FDIC insured or are fully collateralized.
In addition, the growing variety of deal deposit basis is evidenced by average deposit balances per account retail clients of approximately $10000 in our deposit balance per account for government commercial a level of $97000.
And obviously, we still carry a healthy noninterest bearing ratio deposit ratio of 38%.
Now lets cover some highlights of the operating environment, where main markets.
Pleased to say that macroeconomic conditions in our main market remained stable.
Total non payroll employment continues to improve over 60000 jobs have been added to our workforce since February 2026% increase.
Economic activity index continued to trend above pre pandemic levels.
Even though auto sales have decreased somewhat compared to last year, which was a record year higher retail sales environment that collections are evidence or a strong consumer sentiment increased economic activity.
The fiscal board Publishable plan on April 3rd it outlines recent projections for disbursements of disaster abundant with really funding.
Okay.
Now, let's cover some highlights of the operating environment, where main markets.
During the first two months of the year over 600, mainly in disaster relief funds have been disbursed already.
Pleased to say that macroeconomic conditions in our main market remained stable.
This is an 83% increase when compared to the same period last year.
Total non payroll employment continue to improve over 60000 jobs have been added to our workforce since February 2026% increase.
And the board is actually projecting over $5 billion additional disbursement to take place during the year. We believe these funds will continue to play.
A key role supporting Puerto Rico economic stability.
Economic activity index continued to trend above pre pandemic levels, and even though auto sales have decreased somewhat compared to last year, which was a record year hygiene retail sales environment that collections are evidence or strong consumer sentiment increased economic activity.
And are very encouraged by the potential impact they will have on the island infrastructure.
Finally.
The franchise continued to perform well our omnichannel strategy continued to advance during the quarter.
With current interact with over 55% of our customers through digital.
The fiscal board Publishable as we said plan on April 3rd it outlines recent projections for disbursements of disaster, a pandemic really funding.
<unk> service channels, primarily to our digital banking applications.
We have reached this quarter 400000 raised our users in March an increase of three 5% versus prior quarter and we continue to invest in our capabilities to continue enhancing the experience of our clients now.
During the first two months of the year over 600, mainly in disaster relief funds have been disbursed already.
This is an 83% increase when compared to the same period last year and.
And the board is actually projecting over $5 billion additional disbursement to take place during the year. We believe these funds will continue to play.
Now I will turn the call to Orlando to offer some more details on the financial results.
Good morning, everyone.
As disclosed this morning net income for the first quarter was $77 million 39, a share that compares with a $73 2 million or <unk> 40, a share last quarter.
A key role supporting Puerto Rico economic stability.
And are very encouraged by the potential impact they will have on the <unk> infrastructure.
Finally.
The franchise continued to perform well our omnichannel strategy continued to advance during the quarter with clarity interact with over 55% of our customers through digital asset service channels.
Pretax pre provision for the quarter decreased slightly to $118 1 million, which are 3% lower than last quarter, but it is 6% higher than what we achieved in the same period in 2022.
It will be our digital banking applications.
We have reached this quarter 400000 raised our users in March an increase of three 5% versus prior quarter and we continue to invest in our data capabilities to continue enhancing the experience of our clients now.
Profitability metrics were strong with a 155% return on average assets and a 49% efficiency ratio.
The provision for credit losses for the quarter was basically flat.
Now I will turn the call to Orlando to offer some more details on the financial results.
We did achieve increases of $5 million on the allowance for credit losses.
I'll touch upon that a little bit later in the presentation.
Good morning, everyone.
As disclosed this morning net income for the first quarter was $70 7 million 39, a share that compares with a $73 2 million or <unk> 40, a share last quarter.
Net interest income is a key component here.
<unk> $4 7 million during the quarter.
<unk> may lead to under $5 million of this reduction.
The impact of two fewer days in the quarter.
Pretax pre provision for the quarter decreased slightly to $118 1 million, which is 3% lower than last quarter, but it is 6% higher than what we achieved in the same period in 2022.
Overall interest income was higher by $8 9 million while interest expense.
$13 6 million.
On commercial loans interest income grew $4 8 million.
Profitability metrics were strong with a 155% return on average assets and a 49% efficiency ratio.
Yield improved 43 basis points.
On the average portfolio also grew by $58 million for the quarter in the case of <unk>.
The provision for credit losses for the quarter was basically flat.
Consumer loans interest income grew $2 1 million, primarily related to a 100 million higher average balances for the quarter, but we did achieve 17 17 basis points improvement in <unk>.
We did achieve increases of $5 million on the allowance for credit losses.
I'll touch upon that a little bit later in the presentation.
Net interest income is a key component here.
In the deal on consumer loans for the quarter.
<unk> $4 $7 million during the quarter approximately $205 million of this reduction.
Interest expense on deposits grew $8 8 million or 38 basis points increase.
The impact of two fewer days in the quarter.
Overall interest income was higher by $8 9 million while interest expense.
During the quarter, we clearly saw a shift in deposit mix with time deposits growing 168 million, while non interest bearing deposits decreased $89 million.
$13 6 million.
On commercial loans interest income grew $4 8 million in the year.
The interest expense on retail and commercial time deposits increased $4 8 million for the quarter and the costs went up from 110 basis points last quarter.
Yield improved 43 basis points.
On the average portfolio also grew by $58 million for the quarter in the case of <unk>.
Consumer loans interest income grew $2 1 million, primarily related to a $100 million.
187 basis points this quarter.
In fact, new originations are being issued at a higher rate.
Higher average balances for the quarter, but we did achieve 17 17 basis points improvement.
The cost of public funds that we touch upon data and last quarter and the impact it's having increased $2 4 million in the quarter.
In the deal on consumer loans for the quarter.
Interest expense on deposits grew $8 8 million or 38 basis points increase.
And the bad on this public funds.
With over 95% in the quarter as compared to the 75% we saw last quarter.
During the quarter, we clearly saw a shift in deposit mix with time deposits growing a 168 million, while non interest bearing deposits decreased $89 million.
However, the future movement on this about it obviously will be a function of.
Ever happened on rates.
And they will move up or down much.
The interest expense on retail and commercial bank deposits increased $4 8 million for the quarter and the costs went up from 110 basis points last quarter.
<unk> faster than all of the deposits.
Rates move.
On the other hand, when we look at are there.
The cost of the remaining interest bearing deposits. They only increased seven basis points with beta of just under 11%.
187 basis points this quarter.
In fact, new originations are being issued at a higher rates.
For the quarter.
Interest expense for the quarter also reflect.
The cost of public funds that we touch upon data and last quarter on the impact, it's having increased $2 4 million in the quarter.
The increase in wholesale funding.
<unk> increased $4 8 million.
Mainly in NHL <unk> advances in part to provide for the additional liquidity that Aurelio mentioned.
And the bad on this public funds.
Our 95% in the quarter as compared to the 75% we saw last quarter.
Margin again decreased three basis points in the quarter.
As expected to some extent with some impact related to the.
However.
The future.
Future movement on this about it obviously will be a function of of what ever happened on rates.
The original funding we took.
Compared to last quarter the margin was 434.
They will move up or down much.
Versus.
437, we had at the last quarter of 2022.
Much faster than other deposits.
<unk> move.
The impact in margin, it's a lot related to it.
On the other hand, when we look at.
The cost of the remaining interest bearing deposits they only increased seven basis points.
Change of mix of the funding structure.
We expect to continue to see the net interest income pressure in the near term.
Beta of just under 11% for the quarter.
Interest expense for the quarter also reflect.
Right.
Writes on deposits.
The increase in wholesale funding.
With some normalization later in the year.
<unk> increased $4 8 million.
And as I mentioned on the last call that based on the current balance sheet structure.
Mainly in NHL FHA advances in part to provide for the additional liquidity that Aurelio mentioned.
We expect.
Net interest income to remain closer to current levels.
Margin again decreased three basis points in the quarter.
<unk>.
Lower yielding assets, such as investment portfolio being repaid being replaced by higher yielding assets.
As expected to some extent with some impact related to.
The original funding we took as.
Any improvements will come with the future growth on the loan portfolio.
Compared to last quarter the margin was 434.
Versus.
On the non interest income side, we did have a pickup of $2 9 million.
437, we had at the last quarter of 2022.
The impact in margin, it's allowed related to a change.
We collected $2 million and unwilling contingent insurance commissions commissions and we did have some improvements in fee base based on the adjustments done last quarter.
Change in mix of the funding structure.
We expect to continue to see the net interest income pressure in the near term.
Expenses.
For this quarter were $115 3 million, which compares to $112 9 million in the prior quarter.
The interest rate.
Rates on deposits.
With some normalization later in the year.
And as I mentioned on the last call the based on the current balance sheet structure.
$2 4 million increase.
This quarter, we were able to achieve a $2 million gain on the disposition of Oreo property properties, which is which was higher than we expected.
We expect.
Net interest income to remain closer to current levels.
With lower yielding assets, such as investment portfolio being repaid being replaced by higher yielding assets.
And we also received $1 million in.
Credit card incentives that happened at the beginning of the year.
Any improvements will come with the future growth on the loan portfolio.
If we were to exclude these items expenses for the quarter were $118 4 million, which compares to $115 5 million last quarter.
On the noninterest income side, we did have a pickup of $2 9 million.
It's basically just under $3 million increase as compared to last quarter.
We collected $2 million and unwilling contingent insurance commissions commissions and we did have some improvements in fee base based on the adjustments done last quarter.
The expense growth includes a $4 2 million increase in payroll expenses.
Expenses.
Basically related to payroll taxes and bonus accruals.
For this quarter were $115 3 million, which compares to $112 9 million in the prior quarter.
Had been anticipated.
It also includes increases on on the FDIC insurance costs related to the higher assessment rate that was effective this quarter.
$2 4 million increase.
This quarter, we were able to achieve a $2 million gain on the disposition of Oreo property properties, which is which was higher than we expected.
And we did have some additional increases in some operational reserves.
On the other hand business promotion expenses were lower in the quarter based on the seasonality of marketing efforts.
And we also received $1 million in annual credit card incentives that happens at the beginning of the year.
Expenses for the quarter, excluding the Oreo were below our $120 million guidance.
If we were to exclude these items expenses for the quarter were $118 4 million, which compares to $115 5 million last quarter is basically yes.
But we continue to believe that spent strength will be in the $120 million range in the next quarters as we continue to execute on on the additional investments we're putting out.
Under $3 million increase as compared to last quarter.
The expense growth includes a $4 2 million increase in payroll expenses basically related to payroll taxes and bonus accruals.
On our franchise, particularly.
Related to improvement of the delivery of banking services to customers.
I had been anticipated.
Ah patients the ratio remains very low at $49 549, 4%, although slightly higher than the 48% we achieved.
But it also includes increases on on the FDIC insurance costs related to the higher assessment rate that was effective this quarter and we did have some additional increases in some operational reserves.
Last quarter.
In terms of credit quality as Aurelio mentioned and credit metrics continue to be very stable.
On the other hand business promotion expenses were lower in the quarter based on the seasonality of marketing efforts.
On performing assets again.
Rick just slightly by 200000 to $129 million and represent 68 basis points of total assets.
Expenses.
Expenses for the quarter, excluding Oreo were below our $120 million guidance.
Reduction in NPA. It includes $6 $3 million decrease in nonaccrual residential mortgage loans mainly.
But we continue to believe that spent strength will be in the $120 million range in the next quarters as we continue to execute on on the additional investments we are putting out on.
Mainly loans that were restored to accrual status in the quarter.
And that was partially.
In our franchise, particularly.
Offset by $4 4 million, reaching nonaccrual commercial loans.
Related to improvement of the delivery of banking services to customers.
Which basically relates to one case the inflow one case in the Florida region $7 1 million commercial loan participation. We have on on a loan to a borrower in the power generation industry.
Ah patients the ratio remains very low at $49 549, 4%, although slightly higher than the 48% we achieved.
Last quarter.
In terms of credit quality as Aurelio mentioned credit metrics continue to be very stable.
Inflows to Npls increased $5 6 million to $29 seven.
Compared to the $24 million in inflows last quarter again, driven by this case, otherwise inflows would have been slightly up year.
Performing assets again.
It's just slightly by 200000 to a $129 million and represent just 68 basis points of total assets.
Early delinquency, meaning 30 to 89 days past due loans decreased $10 million as Aurelio mentioned.
Reduction in NPA. It includes $6 $3 million decrease in nonaccrual residential mortgage loans mainly.
It was across all different portfolios.
Mainly loans that were restored to accrual status in the quarter.
Net charge offs for the quarter were $13 3 million, which represent 46 basis points of loans.
And that was partially.
Offset by $4 4 million nonaccrual commercial loans.
Basically the same as last quarter and again, mostly related to the consumer portfolios.
Which basically relates to one case the inflow of one case in the Florida region at $7 1 million commercial loan participation. We have on on a loan to a borrower in the power generation industry.
Consumer loan charge offs were 154% of loans in the quarter, which is still lower than pre pandemic levels.
In terms of the allowance for credit losses.
Inflows to Npls increased $5 6 million to $29 seven.
And there are about $278 million, which is $5 million higher than last quarter.
Compared to the $24 million in inflows last quarter again, driven by this case, otherwise inflows would have been slightly up year.
The allowance on <unk> loans, and finance leases with $266 million of M same five affiliate million increase as compared to prior quarter.
Early delinquency, meaning 30 to 89 days past due loans decreased $10 million as Aurelio mentioned.
The increase in the allowance inclusive.
It was across all different portfolios.
<unk> of the previously mentioned case.
Case in the <unk> region.
Net charge offs for the quarter were $13 3 million, which represent 46 basis points of loans.
Sure.
Turning to Npls as.
As well as.
We are anticipating some.
Less favorable longer term outlook on several macroeconomic variables, which affect the allowance calculations.
Basically the same as last quarter and again, mostly related to the consumer portfolios.
Consumer loan charge offs were 154% of loans in the quarter, which is still lower than pre pandemic levels.
Also this quarter, we did adopt the new accounting standard for <unk> and elected to discontinue the use of the discounted cash flow methodology for restructure accruing loans that resulted in $2 1 million increase in ACR in the allowance for credit losses for residential mortgage loans.
In terms of the allowance for credit losses.
And there are about $278 million, which is $5 million higher than last quarter.
The allowance on <unk> loans, and finance leases was $266 million an St five affiliate million increase as compared to prior quarter.
The ratio of the allowance.
Two loans.
Held for investment was $2, 29% at the end of the.
For the quarter, which compares to $2, 25% in the prior quarter's healthy coverage.
The increase in the allowance inclusive.
Fact of the previously mentioned case.
Case in the Florida region.
On the capital front, our regulatory capital ratios continue to be very strong as you can see on the chart.
Turning to Npls as.
As well as well.
We are anticipating some.
The changes are very small compared to last quarter.
Less favorable longer term outlook on several macroeconomic variables, which affect the allowance calculations.
<unk> revenues have offset all capital actions that have been executed in the quarter.
Also this quarter, we did adopt the new accounting standard for <unk> and elected to discontinue the use of the discounted cash flow methodology for restructure accruing loans that resulted in $2 1 million increase in ACO in the allowance for credit losses for residential mortgage loans.
The tangible book value per common share increased eight 8% during the quarter from 683% to 750 all related.
Mostly basically all related to $87 million improvement in the other comprehensive loss adjustments.
As the fair value of the Securities increase based on the changes in market rates.
The ratio of the allowance.
Two loans.
Held for investment was $2, 29% at the end of the quarter, which compares to $2, 25% in the prior quarter was healthy coverage.
Tangible common equity ratio increased to $7 12, compared to 681 last quarter.
As of March 44, you.
Your information the other comprehensive loss adjustments included in capital was $711 million.
On the capital front, our regulatory capital ratios continue to be very strong as you can see on the chart.
Came down from about $800 million last quarter.
The changes are very small compared to last quarter as basically revenues have offset all capital actions that have been executed in the quarter.
That represents a reduction of about $3 95 in the tangible book value per share.
Right.
The tangible book value per common share increased eight 8% during the quarter from 683% to 750 all related.
The tangible common equity ratio by approximately 336 basis points.
Again, as we have mentioned before.
Mostly basically all related to the $87 million improvement in the other comprehensive loss adjustments.
Other comprehensive loss adjustments affecting these ratios we will reverse over time.
As the fair value of the Securities increase based on the changes in market rates.
And we have been <unk> and <unk>.
Based on our liquidity position, we have the ability to hold these securities until maturity.
Tangible common equity ratio increased to $7 12, compared to <unk> hundred 81 last quarter.
In reality the investment portfolio has been growing.
Our most recent.
As of March four.
Estimates.
Repayments expect.
Formation. The other comprehensive loss adjustments included in capital was $711 million.
$1 8 billion repayments in 'twenty three 'twenty four.
Just over 30% of the portfolio and another $1 6 billion in 2025, which is an additional 27% of the portfolio.
It came down from about $800 million last quarter.
That represents a reduction of about $3 95 in the tangible book value per share.
So in essence, a 57% of the portfolio will pay off.
And.
The tangible common equity ratio by approximately 336 basis points.
Over this timeframe duration remains it remains at the three.
Three six or so we had mentioned in the last call.
Again, as we have mentioned before the other comprehensive loss adjustments affecting these ratios we will reverse over time.
Before we finish I just wanted to expand brief.
Briefly on the liquidity discussion Aurelio mentioned before.
And we have been intent.
Based on our liquidity position, we have the ability to hold these securities until maturity.
As he said in light of the recent banking sector events. During the second half of March we decided to tap on some of our available funding sources to increase our cash position as a precautionary measure.
In reality the investment portfolio has not been growing.
In our most recent.
Estimates.
Our repayments expect.
We took an additional $250 million in advances from the federal home loan Bank and increased third party short term repos by another $98 million ending March with approximately $824 million in cash on hand at the fed account.
$1 8 billion repayments in 2000, and 324, which is over 30% of the portfolio and another $1 6 billion in 2025, which is an additional 27% of the portfolio.
So in essence, a 57% of the portfolio will pay off.
We also had a base level at the end of the month additional funding sources in the form of $2 4 billion in <unk>.
Over this timeframe duration remains it remains at three.
Three six or so we had mentioned in the last call.
Good quality securities that could be pledge.
Before we finish I just wanted to expand brief.
We have $882 million of a level for credit at the federal home loan Bank.
Briefly on the liquidity discussion Aurelio mentioned before.
And we had one 4 billion of rate level and the fed discount window.
As he said in light of the recent banking sector events. During the second half of March we decided to tap on some of our available funding sources to increase our cash position as a precautionary measure.
All of this combined with our cash make up the $5 5 billion.
Our liquidity sources Aurelio mentioned before.
We also.
Enrolled on the short term funding program.
We took an additional $250 million in advances from the federal home loan Bank and increased third party short term repos by another 98 billion ending March with approximately $824 million in cash on hand at the fed account.
But so far we have to use this funding source.
In general we feel very comfortable with the level of liquidity that we have.
The deposit.
<unk>.
Behave over the over this timeframe.
We also had available at the end of the month additional funding sources in the form of $2 4 billion in <unk>.
With this I would like to open the call for questions.
Good quality securities that could be pledge.
Thank you.
As a reminder, and we would like to register a question. Please press star followed by one on your telephone keypad.
We have $882 million available for credit at the federal home loan Bank.
And we had one 4 billion level and the fed discount window.
Preparing to ask a question. Please ensure you Amit it likely and if you would like to withdraw your question. Please press star followed by <unk>.
All of this combined with our cash make up the $5 5 billion.
So that star followed by one on your telephone keypad to register a question.
Our liquidity sources Aurelio mentioned before.
We also.
Enrolled on the short term funding program.
Our first question today is from Tim Priscilla from Wells Fargo Tomorrow. Please go ahead. Your line is open.
But so far we have to use this funding source.
In general we feel very comfortable with the level of liquidity that we have.
Hi, good morning, everyone.
Good morning.
The deposit.
Maybe just following up on the last line of commentary from Orlando on our liquidity position I'm, just wondering how youre thinking about liquidity going forward.
<unk>.
<unk>.
Behave over the over this timeframe.
With this I would like to open the call for questions.
Not only in the borrowings that were added but then also in some of the cash flows from the bond book.
Thank you.
As a reminder, and we would like to register a question. Please press star followed by one on your telephone keypad.
I guess, how long are you planning to keep those borrowings on the balance sheet and with some of the planned maturities over the next couple of quarters, what the plan is for those as well.
I'm preparing to ask a question. Please ensure you Amit it likely and if you would like to withdraw your question. Please press star followed by <unk>.
Yes.
So that star followed by one on your telephone keypad too much Jacques question.
Jim.
There are two uses for the funding it's a one off.
Our first question today is from Tim <unk> from Wells Fargo Tomorrow. Please go ahead. Your line is open.
Some of it it's more longer term, which is based on needs on our priority on market based on what.
<unk> AVR for customers.
Hi, good morning, everyone.
The short term components, we took for this.
Good morning.
What's an immediate.
Maybe just following up on that last line of commentary from Orlando on our liquidity position I'm, just wondering how youre thinking about liquidity going forward.
Turning gears to increase cash.
As I mentioned with our eight $800 million in cash on hand at the fed clearly, we don't need that much cash to operate.
Not only in the borrowings that were added but then also in some of the cash flows from the bond book.
So.
We are tracking deposit behavior through throughout April has been very consistent.
And I guess, how long are you planning to keep those borrowings on the balance sheet and with some of the planned maturities over the next couple of quarters, what the plan is for those as well.
And in fact, we have already started to to cut down on some of those short term funding components and get back to normal levels. If we don't see any any significant variance on behavior like like its been the case on the month of April .
Yes.
<unk>.
There are two uses for the funding it's a one off.
So in essence.
Some of it it's more longer term, which is based on needs on our priority on market based on what.
It would be very short term based on the current circumstances.
We have the flexibility to move that up or down fairly fairly fast. It made it. So so thats why we don't think its necessary just to keep those levels sitting there for a long time frame.
There has been any AVR for customers.
The short term components, we took for this.
What's an immediate.
And just to increase cash we ended up as I mentioned with our eight $800 million in cash on hand at the fed and clearly we don't need that much cash to operate.
Okay, and then on the bond book It looked like the average balances were higher than the period and I'm. Just wondering what your thoughts are on the bond book and what your planned actions are on some of those planned maturities coming due over the next couple of quarters.
No.
We are tracking deposit behavior through throughout April has been very consistent.
And in fact, we have already started to to cut down on some of those short term funding components and get back to normal levels. If we don't see any any significant variance on behavior like like its been the case on the month of April .
The bond book is at a higher the.
Movement on the bond book.
Function of the <unk>.
The repricing of their fair value.
Hi, Betty side, obviously as the market value came up.
So in essence.
It would be very short term based on the current circumstances.
We had that pickup of $87 million of market value.
We have the flexibility to move that up or down fairly fairly fast if needed. So so thats why we don't think its necessary just to keep those levels sitting there for a long time frame.
But but in reality the book that's only the only move that we've had recently on the investment side has been on.
Federal home loan bank stock that we have to buy as we take some some advances we do buy some federal home loan bank stock.
Okay, and then on the bond book It looked like the average balances were higher than the period and I'm. Just wondering what your thoughts are on the bond book and what your planned actions are on some of those planned maturities coming due over the next couple of quarters.
Yes.
As a requirement.
But other than that the book came down our 105 million.
Yes.
$105 million over the course of the quarter.
The bond book is at a higher the movement on the bond book its a function of the of the repricing of the fair value. So what happened inside obviously as the market value came up.
In terms of repayments that we have so we do expect that book to continue to come down as I mentioned on the estimate we.
We had done for it with our $650 million this year for the full 2023.
We had that pickup of $87 million of market value.
And the remainder of the remainder of what I've mentioned before in terms of repayments of one one point.
But but in reality the book that's only the only move that we've had recently on the investment side has been on.
8 billion. So it would be about $1 2 billion coming in 2024. So that's that's the estimate we have one repayment and we don't have any plans to.
Federal home loan bank stock that we have to buy as we take some some advances we do buy some fair.
Thanks, Doug.
Which is a requirement.
To put anything on the investment portfolio at this point it would be used for funding the lending side.
But other than that the book came down our 105 million.
Bill.
Over $105 million over the course of the quarter.
Okay got it that's good color. Thank you.
Maybe switching to the deposit side, it's very encouraging to see the stability of the deposit base more broadly in Puerto Rico and <unk>.
In terms of repayments that we have so we do expect that book to continue to come down as I mentioned on the estimate.
Kind of the lack of panic that we saw maybe in some of the more localized banks on the mainland I guess more specifically on the government deposit book in Puerto Rico.
We had done for it with our $650 million this year for the full 2023.
And the remainder of the remainder of what I mentioned before in terms of repayments of one one point.
It seems like the first quarter should be seasonally stronger, but we did see lower balances for both you and then the smaller competitor that reported earlier I'm. Just wondering was there some flight to the larger bank and the government deposit book or I guess, what was the dynamic that drove those balances lower this quarter.
$8 billion. So it would be about $1 2 billion coming in 2024. So that's that's the estimate we have won repayment and we don't have any plans to.
To put anything on the investment portfolio at this point it would be used for funding the lending side.
Yes, there is.
No real slide is just some of these accounts have a level of activity in and out is a timing issue we have to say that they are stable.
Okay got it that's good color. Thank you.
Maybe switching to the deposit side, it's very encouraging to see the stability of the deposit base more broadly in Puerto Rico and kind of the lack of panic that we saw maybe in some of the more localized banks on the mainland I guess more specifically on the government deposit book in Puerto Rico.
They use some of the liquidity for either projects capital investments or.
Rent payments that we process.
As part of the accounts that we have then when it comes to that goes out.
On average.
I would say it's stable.
No.
And also keep in mind that.
It seems like the first quarter should be seasonally stronger, but we did see lower balances for both you and then the smaller competitor that reported earlier I'm. Just wondering was there some flight to the larger bank and the government deposit book or I guess, what was the dynamic that drove those balance was lower this quarter.
There is a large component thats the comps again.
On the government side during the month of April not before that because of.
Property tax I mean municipal taxes and property taxes on income taxes. They all gain so that big movement, we normally expect in the second quarter, if it's going to happen.
Yes, there is.
No real slide is just some of these accounts have a level of activity in and out is the timing issue we have to say that they are stable.
Other than the first quarter, but as Aurelio mentioned.
A lot of it was related to some of the agency accounts that had movement in the quarter.
They use some of the liquidity for either projects capital investments or does.
As they normally do upward or down.
Great. Thanks, and then just lastly for me just looking at the Florida component of the story.
Current payments that we process.
As part of the accounts that we have and then when it comes to that goes out.
It seems like that's a little bit more under pressure than maybe the Puerto Rico component, we saw and charge off there we see incremental deposit pressure the loan origination activity is slowing down can you just maybe talk about Florida and the longer term is this kind of the cost of doing business and getting more.
On average.
I would say it's stable.
And also keep in mind that.
There is a large component thats the comps and on the government side during the month of April not before that because of.
Property tax I mean municipal taxes and property taxes on income taxes. They all gain so that big movement, we normally expect in the second quarter, if it's going to happen.
Traffic diversity, you have to kind of take that as a good times of the bad or is this enough to kind of make you tap the brakes, maybe a little bit more on what youre doing on the mainland.
Other than the first quarter, but as Aurelio mentioned.
Well I think first of all our our concentration in Florida is really a Miami Dade Broward County, and if Youll see the economic economic trends are very very positive in terms of inflow of residence.
A lot of it was related to some of the agency accounts that had movement in the quarter.
As they normally do upward or down.
Great. Thanks, and then just lastly for me just looking at the Florida component of the story.
Demographics are just positive trends.
When you look at the behavior of the customers are different and I think you can see that in some.
It seems like that's a little bit more under pressure than maybe the Puerto Rico component, we saw and charge off there we see incremental deposit pressure the loan origination activity is slowing down could you just maybe talk about Florida and the longer term is this kind of the cost of doing business and getting more.
Some of the neighbors banks that operate with us.
To say that we're doing similar we've seen similar trends of growth, while we can see that our peers. There is a market situation, where some of the money is moving out to treasuries to really nonbank competitors.
Graphic diversity, you have to kind of take that as a good times of the bad or is this enough to kind of make you tap the brakes, maybe a little bit more on what youre doing on the mainland.
We do have we had in each business with.
Commercial clients, primarily some of this money was sitting there for a long time started to move last year.
Well I think first of all our our concentration in Florida is really Miami Dade Broward County, and if Youll see the economic economic trends are very very positive in terms of inflow of residence.
And it's moving and move I have to say the impact actually was prior to the March event.
Which we saw and it was really yield driven.
And actually some of that money was used there is a lot more sensitivity in the market to pay while we can see in our current market rates for loans.
Demographics are positive trends.
When you look at the behavior of the customers are different.
Especially on some of the CRE.
You can see that in.
<unk>.
And some of the neighbors banks that operate with us I have to say that we're doing similar we're seeing similar trends.
The facilities some customers are just paying down with their own liquidity, there will significant excess liquidity accumulated over this year. So so I think we monitor ourselves it's a cycle, we're moving with it.
What we can see that our peers. There is a market situation, where some of the money is moving out to treasuries to really nonbank competitors.
We are committed to the market as you say you had really good times, they're good asset quality, we feel we have a solid book.
We do have and we had it in each business with.
Commercial clients, primarily some of this money was sitting there for a long time started to move last year.
And obviously margins margin is compressed in differently to what we see in our main market. So it's part of the <unk>.
And it's moving.
I have to say the impact actually was prior to the March event.
Diversification is important.
Which we saw and it was really yield driven.
And we expect to sustain our franchise than the current levels.
And naturally some of that money was used.
A lot more sensitivity in the market to pay while we can see in our current market rates for longs.
Great. Thanks for all the questions and nice quarter.
Thank you.
Especially on some of the CRE and <unk>.
Thank you.
Our next question today is from Kelly Motta from <unk> <unk>. Please go ahead. Your line is open.
Facilities. Some customers are just paying down with their own liquidity there was significant excess liquidity accumulated over this year. So so I think we monitor ourselves it's a cycle, we're moving with it.
Hi, good morning, Thanks for the question.
Yes.
Maybe I'll go back.
We are committed to the market you don't want to say you had really good times theyre good asset quality, we feel we have a solid book.
The funding side of things.
You mentioned that you have.
Account openings were actually higher in March and they had been.
And obviously margins margin is compressed in differently to what we see in our main market. So it's part of the <unk>.
In the prior 12 months I'm, just wondering if you could take us back to the month.
As of March.
You saw there was.
Regional diversification is important.
Yes.
Kind of a defensive move on your part.
And we expect to sustain our franchise than the current levels.
Yes.
Well Mark.
Market uncertainty, what's going on or if there was any sort of special that irrespective.
Great. Thanks for all the questions and nice quarter.
Thank you.
The March volatility.
Thank you. Our next question today is from Kelly Motta from <unk>.
Very interested in.
Hi, Charles.
Okay.
Please go ahead your line is open.
<unk> been over the weekend, we prepare ourselves with.
Hi, good morning, Thanks for the question.
Communication and scripts to blank questions in.
Maybe I'll go back.
We do have a high end portfolio.
Funding side of things.
Relief.
You mentioned that new account openings were actually higher in March than they had been.
Hi balances portfolio.
Obviously, we expected some contraction is concerned.
The prior 12 months.
Some of that happen.
Just wondering if you could take us back to you.
Very limited number of clients.
<unk> of March.
Move out to other other sources, because specifically concerns very limited numbers.
What you saw there was.
Proactive.
Kind of a defensive move on your part.
On the other hand.
Yes.
We have been building capacity to grow the deposit franchise.
Well like all.
Market uncertainty, what's going on or if there was any sort of special.
We were very busy last year Kelly.
Irrespective.
The March volatility.
And consolidation of branches in and things that they strive managing the atresia managing the vacancies. So on so that is in the past. So so we have we have built the capacity to increase to the to our targeted levels of new accounts, new customers coming into the bank so laterally.
Very interested in.
What drove that.
Okay.
<unk> been over the weekend, we prepare ourselves with.
Communications and scripts to blank questions in.
We do have a high end portfolio.
March was the month that we achieved the highest number of accounts opened.
Hi balances portfolio.
That obviously, we expected some some some contractual concerned.
Very close to our goal based on our capacity plan.
Some of that happen.
Very limited number of clients.
And then they were that we have so so noise I think we will have to do.
Move outs to other other sources, because specifically concerned very limited numbers.
Proper relocation explain.
The other hand.
We have been building capacity.
Why the franchise is different to the bank debt.
Two grow the deposit franchise.
Phil.
In the U S. During those during that.
Remember, we were very busy last year, clearly doing consolidation of branches in and things that they strive managing the atresia managing the vacancies. So on so that is in the past. So so we have we have build the capacity to increase to the to our targeted levels of new accounts new customers.
<unk> is a very different profile, we are taking a variety of excess liquidity that protection of uninsured deposits.
So I think we were brought in managing it.
The results.
Thanks, and then on.
On the other side of the balance sheet.
Coming into the bank so laterally.
Repaired remarks.
Reiterated to mid single digits.
March was the month that we achieved the highest number of accounts opened.
Loan growth as the outlook and I believe on last quarter's call you talked about the potential of public private partnerships.
Very close to our goal.
Based on our capacity plan.
And then they were that we have so so noise I think we will have to do.
Towards that.
Just wondering if you had an update on.
How potential projects like that we're trending and that's contemplated in your.
The primary location.
Blaine.
The franchise is different to the bank debt.
Your loan growth outlook ahead.
Fail.
Yes.
In the U S. During those.
Yes that continues to be on top of that.
That event is a very different profile, we are taking a variety of excess liquidity.
They are they are those.
Both trials there is a couple of transactions in the market today.
Thanks, Shlomo when insured deposits. So I think we were brought in managing it and these are the results.
I'll say most banks in Puerto Rico are looking at them.
We believe those are some of that would be second half of the year.
Thanks.
Even taking traction during the process.
On the other side of the balance sheet.
<unk> remarks.
Then in bids and Rfps.
Reiterating the mid singles to jet.
<unk> been working in the financial markets.
Loan growth is the outlook.
For any large deals have to say so.
I believe on last quarter's call you talked about the potential.
They continue to progress and yes.
That partnership.
Towards that.
As I mentioned before that would be on top of.
Just wondering if you had an update on.
<unk> of our mid single digit.
How potential projects like that we're trending and that's contemplated in your.
At target.
Yes.
Got it I appreciate that and maybe last question for me.
Your loan growth outlook ahead.
Yes.
On the capital front.
Yes that continues to be on top of that.
I appreciate the commentary that you would revisit the buyback and that the second half of the year.
They are they are those.
Both trials there is a couple of transactions in the market today.
Obviously with what's going on in the banking industry.
I'll say most banks in Puerto Rico are looking at them.
Looking closer at.
We believe those are some of that would be second half of the year.
Capital capital fully baked for unrealized losses, just wondering if any of these.
Even though they're taking traction during the process.
They need bids and rfps.
This change in the way you view optimize capital levels and how you are managing.
<unk> been working in the financial markets.
For any large deals have to say so.
From the balance sheet ahead.
They continue to progress and yes.
Well definitely.
As I mentioned before that would be on top of.
We decided to box.
In this quarter to reassess what are the new risk.
<unk> of our mid single digit.
Target.
Yes.
That are in the environment.
Got it I appreciate that and maybe last question for me.
What could be potential changes to regulatory ratios. We don't know that people are we talking about so we are reassessing all the potential new risk on the other hand, we do have a lot of capital.
On the capital front.
I appreciate the commentary that you would revisit the buyback and that the second half of the year.
Obviously with what's going on in the banking industry and people are looking closer at.
And obviously remain our hour hour.
Ah.
Capex capital fully baked for unrealized losses.
Our goal is to is to distribute 100% will be basically stay at the same capital even though you are today.
Just wondering if any of these.
Changing the way you view optimize capital levels and how you are managing.
As we move on through the year. So there is plenty events like this happen.
On the balance sheet ahead.
The most prudent action is to pause when theyre stand the items.
Well definitely.
We decided to box.
Redo your stress testing, considering new Newport digital scenarios, we feel if we are where we are today and these trends continue.
In this quarter to reassess what are the new risk.
That are in the environment.
On a flat scenario, where we are today things will continue to perform well. So so we believe that we will conclude on that in wound form the market in July unless new things that should be that should be the outcome.
What could be potential changes to regulatory ratios. We don't know that people are talking about so we are reassessing all of the potential new risk on the other hand, we do have a lot of capital.
And obviously remain our our hour.
Great. Thank you so much for all the color.
Congrats on a great quarter.
Our goal is to is to distribute 100% will be basically stay at the same capital even though you are today.
Thank you Kelly.
Thank you before we take our next question I would just like to remind everyone to ask a question. Please press star followed by one on your telephone keypad.
As we move on through the year so.
When events like this happens.
Is the most prudent action was to pause when theyre stand the items.
Our next question is from Alex <unk> from Piper Sandler Alex. Please go ahead. Your line is open.
Redo your stress testing, considering new Newport digital scenarios, we feel if we are where we are today and these trends continue.
Good morning, guys. This is beta im just filling in for Alex for at all today.
I just wanted to touch on loan growth I know you've mentioned previously.
On a flat scenario, where we are today things will continue to perform well. So so we believe that we.
We've seen commercial and construction growth in Puerto Rico, and as you mentioned.
We'll conclude on that in wound from the market in July .
Unexpected Paydowns and Florida could you give us more color maybe by geography or by segment. If we should expect to see more of that in the coming quarters, where we see growth in Puerto Rico, more and some declines in Florida or any color on that would be helpful. Thanks.
New things that should be that should be the outcome.
Great. Thank you so much for all the color.
Congrats on a great quarter.
Thank you Kelly.
Thank you before we take our next question I would just like to remind everyone to ask a question. Please press star followed by one on your telephone keypad.
First of all.
Pipelines continue to look healthy.
And in both those regions.
Our next question is from Alex <unk> from Piper Sandler Alex. Please go ahead. Your line is open.
And actually in the in the ECR region also.
So we obviously our hour.
Good morning, guys. This is beta im just filling in for Alex for at all today.
Our guidance on loan growth will be single digit it varies by by sector and by region, we calculate the guidance based on the overall portfolio and when we say.
I just wanted to touch on loan growth I know you've mentioned previously.
We've seen commercial and construction growth in Puerto Rico, and as you mentioned unexpected.
Consumer 10% will develop the overall franchise in.
Independent regions.
Unexpected Paydowns and Florida could you give us more color maybe by geography or by segment. If we should expect to see more of that in the coming quarters, where we see growth in credit Rico more and some declines in Florida or any color on that would be helpful. Thanks.
<unk>, 5%, making it the commercial.
Across the regions. So so and then and then.
The mortgage we guided flat, obviously, we would might get where rates were during the quarter that was still a challenge.
We still believe that tumor that can be recovered.
First of all.
Pipelines continue to look healthy.
<unk>.
By region, I think Florida is be more sensitive to rates. So it's going to be more difficult to grow in Florida, but on the other hand, when we look at the when we look at the pipeline.
And in both those regions.
And actually in the in the ECR region also.
So we obviously our hour.
Portfolio to be sustained and we don't expect.
Our guidance on loan growth will be single digit it varies by by sector and by region, we calculate the guidance based on the overall portfolio.
<unk>.
We were surprisingly high the number of Paydowns, so hopefully that doesn't happen going forward because of rates.
When we say.
We do expect more stability.
Consumer 10% would develop neuro franchise in.
In Puerto Rico, we do we do we have more certainty on the growth because of less less volatility on the on the beta on site. So so I think we look at it overall.
Independent regions.
<unk>, 5% mid single digit in commercial.
Across the regions. So so and then and then.
Bye bye portfolio by asset class, we don't necessarily look at it individually by region in terms of how we provide provided detailed but that's what I can share with you.
The mortgage we guided flat, obviously, where might get where rates were during the quarter that was still a challenge.
We believe that can be recovered.
<unk>.
By region, I think Florida has been more sensitive to rates. So it's going to be more difficult to grow in Florida, but on the other hand, when we look at the when we look at the pipeline there.
Got it and then one more question.
I know you guys said that you expect more pressure on the deposit side.
Do you have any update I know you guys said that you expect the cycle to date betas.
Portfolio to be sustained and we don't expect.
The betas to be 18% to 22% or in that range.
<unk>.
We will surprisingly high the number of Paydowns, so hopefully that doesn't happen going forward because of rates and we do expect more stability.
Does that still stand or do you have it.
Expectation for what you think betas could peek at this cycle.
In Puerto Rico, we do we do we have more certainty on the growth because of less less volatility on the on the beta side. So so I think we look at it overall.
Well.
Yes.
The 18% to 22 was the average on all the other deposits excluding public funds during the last quarter.
Bye bye portfolio by asset class, we don't necessarily look at it individually by region in terms of how we provide provided detail, but that's what I can share with you.
We split it in this quarter in three components basically because of what we have seen in terms of shift too.
200 Bucks is that a change a bit the mix.
Got it and then one more question.
The bus.
Portfolio.
I know you guys said that you expect more pressure on the deposit side.
Its behavior has been.
Happening lately.
Do you have any update I know you guys said that you expect the cycle to date betas.
The noninterest bearing accounts, excluding the time deposits and the government was only 11% beta this quarter.
The betas to be 18% to 22% or in that range.
That should be.
Is that sort of thing or do you have it.
More or less like that.
Expectation for what you think betas could peek at this cycle.
The only thing that's been.
Difficult to predict it's the fact that we saw that large movement into time deposits.
Well, what what are the 18 to 22 was the average on all the other deposits excluding public funds during the last quarter.
Reality, the time deposit levels came down dramatically.
From 19 to 'twenty to 'twenty, one 2021.
We split it in this quarter in three components basically because of what we have seen in terms of shift too.
With rates being so low we saw people.
Time deposits mature just keeping the money on their regular transaction accounts.
To time deposits is that change a bit the mix.
And many of those people are starting to go back with higher rates and put in put into buckets.
Our deposit.
Portfolio.
Behavior has been.
Time deposits.
Happening lately.
So that that the acceleration of betas on the time deposit side.
The noninterest bearing accounts, excluding the time deposits and the government was only 11% beta this quarter.
<unk> has been more difficult to anticipate because of.
The shift in mix.
On terms and the kind of funding or is it coming from some of it is coming from from noninterest bearing which obviously has a bigger impact.
That should be.
More or less like that.
The only thing that's been.
It's difficult to predict it's the fact that we saw that large movement into time deposits.
Some from other lower yielding.
In reality, the time deposit levels came down dramatically.
The interest bearing accounts, so so again the government side.
From 19 to 20 to 21 2021.
Should be in that 90% to 95% range.
Time to.
With rates being so low we saw people.
Time deposits is a different story on all accounts should be in that 11% to 12% range.
Time deposits mature just keeping the money under regular transaction accounts.
That I mentioned.
<unk>.
And many of those people are starting to go back with higher rates and put in put into buckets.
Okay.
Got it.
Thats all from me Thanks for taking my questions. Thank you.
Time deposits.
So that that the acceleration of betas on the time deposit side.
Thank you as a final reminder, if anyone would like to make just a question. Please press star one on your telephone keypad now.
It has been more difficult to anticipate because of.
The shift in mix.
On terms and the kind of funding voices coming from some of it is coming from from noninterest bearing which obviously has a bigger impact.
Some from other lower yielding.
We have no further questions. So I'd like to hand back to remain for any closing remarks.
The interest bearing accounts, so so again the government side.
Thanks to everyone for participating in today's call, we will be attending wells Fargo's financial services Investor Conference in Chicago on May 16th and look forward to seeing you on number of you at this event. We greatly appreciate your continued support at this point, we will end the call. Thank you.
Should be in that 90% to 95% range.
Time to.
Time deposits is a different story on all accounts should be in that 11% to 12% range.
That I mentioned.
Yes.
Got it.
Thank you.
That's all for me thanks for taking my questions.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Thank you.
Thank you as a final reminder, if anyone would like to make just a question. Please press star one on your telephone keypad now.
We have no further questions. So I'd like to hand back to remain for any closing remarks.
Yes.
Thanks to everyone for participating in today's call, we will be attending wells Fargo's financial services Investor Conference in Chicago on May 16th and look forward to seeing you on number of you at this event. We greatly appreciate your continued support at this point, we will end the call. Thank you.
Yes.
Thank you.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
[music].