Q2 2023 Popular Inc Earnings Call
Good morning, everyone and welcome to stay conference co tie to the popular Inc. Q2, 'twenty two 'twenty three earnings call. My name is Ellen and I'll be coordinating the call for today.
During the presentation, if you'd like to ask a question. Please press star followed by one on your kind of think he put to join the question queue.
I'll now hand over to Paul Cardillo Investor Relations officer to begin.
Please go ahead whenever you're ready.
Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez.
Hello, Carlos Vazquez, and our CRO video suriano.
They will review our results for the second quarter, and then answer your questions.
Members of our management team will also be available during the Q&A session.
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.
They are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from these forward looking statements are set forth within todays earnings press release and are detailed in our SEC filings you may find today's press release, and our SEC filings on our webpage at popular Dot com.
I'll now turn the call over to our CEO Ignacio Alvarez.
Good morning, and thank you for joining the call.
The second quarter was another strongly which we achieved net income of $151 million 8 million lower than the first quarter results of $159 million net.
Net interest income and noninterest income remained strong.
The decrease in net income was driven by higher operating expenses offset in part by a lower provision for credit losses.
We grew loan balances by $693 million during the quarter.
Banco Popolare generated loan growth across all segments, while popular bank achieved growth in commercial and construction loans offset in part by runoff in the mortgage and consumer portfolios.
Year to date loan balances have grown by more than <unk>.
Approximately $953 million.
Our net interest margin increased by eight basis points to $3, one 4% in the quarter, primarily driven primarily as a result of a 25 29 basis point increase in deposit costs.
This was partially offset by higher loan balances and the repricing of adjustable rate loans in a higher interest rate environment as well as higher balance of money market investments driven by our strong deposit growth.
Noninterest income continued to improve excluding the $7 million insurance claim reimbursement recorded in the first quarter fee income was $5 million higher.
Revenues related to customer transaction activity were particularly strong and we also began to see some early results from our various transformation initiatives.
Operating expenses increased by $20 million as we continued to strategically invest in our people in areas, such as regulatory compliance and technology and projects related to our transformation.
Credit quality trends remain positive npls once again decreased in the period and net charge offs remain well below pre pandemic levels.
We maintain robust liquidity anchored by our deposit franchise and our high levels of cash reserves and Unpledged securities.
Overall deposits were up $3 1 billion in the quarter and liquidity sources increased by $1 9 billion.
We have a well diversified deposit franchise in Puerto Rico, with an average balance of less than $10000 per retail account.
Our total consolidated borrowings remained flat during the quarter.
Regulatory capital levels remained strong our common equity tier one ratio in the second quarter was 16, 9%.
Additionally, tangible book value per share and then the quarter at $51 37.
An increase of $1 22 per share.
Earlier this month, we announced it on August 14th we will redeem at par all outstanding 300 million aggregate principal amount of our senior notes that mature in September of 2023.
Please turn to slide four.
Our customer base in Puerto Rico grew by approximately 9500 during the quarter, reaching nearly 2 billion unique customers.
Adoption of digital channels, among our retail customers remained strong.
Active users an army Banco platform exceeded $1 1 million or 56% of our customer base in.
In addition, we continue to capture more than 60% of our deposits through digital channels.
This trend remains significantly higher than prepay NAMIC levels, demonstrating our customers' adoption of this technology.
In the second quarter consumer spending remain healthy with combined credit and debit card sales up 3% compared to the second quarter of 2022.
Our auto and lease originations increased by 29% compared to the first quarter as demand for cars has continued to be strong in Puerto Rico.
Mortgage production in Puerto Rico appears to have stabilized in the second quarter.
The dollar volume of mortgage originations and bankable are increased by 20% compared to the second quarter of last year, driven primarily by home purchase activity.
The Puerto Rico economy performed well during the second quarter business activity is solid and remains in good shape as reflected in the continued positive trends and total employment and other economic data.
The tourism and hospitality sector continues to be a source of strength for the local economy year.
Year to date, San Juan Airport has seen record levels of passenger traffic.
Hotel demand has also been very strong.
Year to date occupancy average daily rates and Revpar are all at the highest level seen in nearly a decade.
There are still approximately $45 billion of hurricane disaster recovery funds yet to be dispersed.
We expect that these funds will support economic activity in many sectors in the coming years. In fact, we are beginning to see these funds being dispersed into local construction construction projects.
This infrastructure investment and the economy expands.
We are well positioned to serve the needs of our customers and benefit from such activity.
In short we are pleased with our results for the quarter, particularly our strong loan growth in both Puerto Rico and in the U S. As well as the continued strength of our deposit base liquidity and credit quality.
We're encouraged by the resiliency of the U S economy, and strong economic activity in Puerto Rico.
We remain optimistic about the future of Puerto Rico, our primary market and our ability to manage and serve the needs of our growing customer base.
Now I'll turn the call over to Carlos for more details on our financial results. Thank you Ignacio. Please turn to slide five we reported net income of $151 million compared to $1 59 in Q1.
Net interest income was $932 million in line with Q1.
On a taxable equivalent basis net interest income was $558 million down $12 million from Q1 due to a higher disallowed interest expense in the calculation of taxes in Puerto Rico.
Noninterest income was $160 million, a $2 million decrease from Q1, which included a 7 million insurance claim reimbursement.
Excluding the Q1 reimbursement during the quarter non interest income increased by $5 million driven by customer activity.
Service charges on deposit accounts increased by $3 million, mainly due to higher cash management fees on commercial customer accounts. Additionally, although service fees increased by $4 million, primarily driven by higher credit and debit card fees due to higher volume of customer transactions.
Going forward, we expect noninterest income to be approximately $155 million to $160 million per quarter.
The increase from our prior 150, new quarterly guidance is partly due to transformation related initiatives that have yielded early results first we have enhanced pricing segmentation.
Commercial cash management business in Puerto Rico, and second last year, we introduced our commercial credit card product for Puerto Rico SME businesses, both initiatives have contributed additional fee income.
The provision for credit losses was $37 million compared to 48 million in the first quarter.
Total operating expenses were $640 million in Q2, an increase of $20 million from the prior quarter. This.
This increase was primarily driven by higher professional fees by $17 million related to regulatory compliance and cyber security initiatives as well as technology and software expenses that increased by $4 million.
During Q2, we incurred 7 million of transformation related expenses compared to 6 million last quarter.
We continue to anticipate transformation related expenses of approximately $50 million in 2023 as these efforts are expected to accelerate in the second half of the year.
Other large expense variances were higher business promotion expense by 6 million, mostly related to credit card customer loyalty programs.
Alright processing intersexual services expenses by $4 million due to retail credit and debit card replacement cost and finally lower personnel cost by 7 million primarily related to lower equity based compensation expenses.
So that will cost historically exhibit a seasonal decrease in the second quarter.
Typically increase for the remainder of the year in part due to the impact of annual Merit increases which are effective on July one.
On a quarterly expense trajectory has historically ramped up as the year progresses, we anticipate that 2023 will be consistent with that experience and continue to expect expenses for the year of approximately $1 $87 billion.
We'll strive to come in below this expected level of expenses.
Our effective tax rate for the quarter was 22%.
For the full year 2023, we now expect an effective tax rate to be between 22 and 25%. This range is somewhat tighter than the 21% to 26% range provided during our last webcast. Please turn to slide six.
Net interest income was $532 million.
Well equivalent basis, it was $558 million million lower in the first quarter.
Net interest margin decreased by eight basis points to 314% in Q2.
Taxable equivalent basis, NIM was 329% a decrease of 17 basis points versus Q1.
The decrease is driven by higher interest expense on deposits due to the increase in bonds or cost of poly sectors deposits as well as growth in high cost deposit accounts at popular bank.
This was partially offset by higher loan yields and balances across all major lending categories.
At the end of the second quarter public sector deposits were roughly $18 5 billion, an increase of $3 billion compared to Q1.
The increase in Q2 was consistent with historical trends and as such by the end of 2023, we still expect deposit.
The buses to be in the range of 14% to $16 billion.
It is important to reiterate that by law in Puerto Rico Pollute, the buses must be 100% collateralized while changes in the level of these deposits may impact profitability. They do not have a significant impact on our liquidity.
Excluding Puerto Rico public deposits customer deposit balances were essentially unchanged in the quarter.
However, see some mix shift as non interest bearing deposits decreased by $624 million in the quarter. This was offset by increases in time and saving deposits at popular bank gathered through a direct online channel in.
In Q2, we continued to see commercial and high net worth clients pursuing.
Pursuing better yield on excess liquidity moving these phones outside the banking sector. However, we have been able to capture a good portion of these in our broker dealer, we saw inflows from deposit customers of approximately $350 million in Q2.
Our ending loan balances increased by $693 million compared to Q1, driven by growth in all loan segments, IBP, PR and bank commercial and construction loans at PV.
This growth is net of a transfer to help for sale of a $46 million private label credit card portfolio.
That portfolio was sold at par or par value in early Q3.
We are encouraged by the demand for credit and DVR NPV, who will continue to take advantage of prudent opportunities to extend credit and improve their use and yield of our existing liquidity.
Our interest rate sensitivity continues to be relatively neutral.
As this year progresses, we expect the margin to resume an upward trajectory.
Timing will depend on our loan and deposit growth and mix investment portfolio strategy and the pace of repricing of public and incrementally retail and commercial deposits.
Deposit betas in the current tightening cycle are now above the prior cycle.
We have seen a total cumulative deposit beta of 31% to date in this cycle.
In Pvp, our total deposit costs increased by 34 basis points compared to an increase of 35 basis points in Q1 led by public sector deposits exclude.
Excluding public sector balances deposit cost at <unk> increased by 14 basis points.
NPV deposit cost increased by 55 basis points versus 67 basis points in Q1 led by retail deposits gathered primarily through our online channel.
In Puerto Rico, our combined retail and commercial deposit betas cycle to date continue to be less than 10%.
Given the increase in short term interest rates, we expect a continued increase in the cost of public sector deposits.
Deposit pricing agreement with the Puerto Rico public sector is market linked with a lag.
This source of funding, we soldier and an attractive spread on their market rates.
In the second quarter because of politics of deposits increased by 39 basis points compared to our April estimate of 60 basis points.
Different risks imbalanced fluctuations and the mechanics of the interest expense calculation we.
We expect the cost to oppose the process to increase by approximately 50 basis points in Q3.
Please turn to slide eight.
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 three years.
As at the end of the second quarter.
Of the unrealized loss in our HTM portfolio stood at $746 million, a reduction of $43 million from Q1.
We expect this loss will be amortize back into capital throughout the remaining life of that portfolio on a rate of approximately 5% per quarter through 2026.
Please turn to slide nine.
Our return on tangible equity was 10, 6% in the quarter.
Regulatory capital levels remained strong our common equity tier one ratio in Q2 of 16, 9% increased by 14 basis points from Q1.
Tangible book value per share at quarter end was $51 37.
An increase of $1 22 per share.
Given the continued uncertainty on the outlook for rates the economy and the potential regulatory response to events in the banking sector. We did not expect to engage in a share repurchase during the remainder of 2023, we do plan. However to consider a dividend increase later this year, we'll review of future capital actions as market.
Continue as conditions evolve.
Our long term outlook on capital return has not changed and courts and our strong regulatory capital ratios over time, we expect on our regulatory capital ratios to gravitate towards the level of our mainland peers plus a spread.
With that I'll turn the call over to Leah. Thank.
Thank you Carlos and good morning.
Overall I continue to exhibit strong credit quality trends with low levels of net charge off on the <unk>.
Leasing nonperforming loans.
Belief that the improvements over the last few years and the risk profile of the court.
Operations loans portfolio.
Officials popular to operate successfully in the current environment. However, we continue to closely monitor changes in borrower performance and the macroeconomic environment, even inflationary pressures and geopolitical risk.
Before discussing the credit metrics for the quarter I would like to address the risk profile of three loan segments office CRE.
Credit cards, and auto and lease financing portfolio. We have also included additional information for this segment in the appendix to today's presentations.
The office segment is receiving a lot of attention in the current environment.
The shift to remote work and higher interest rates popular consolidated office CRE exposure is limited represented representing only one 8% or $600 million of our total loan portfolio.
And it's mainly comprised of low to mid rise properties located in suburban areas as well.
Diversified across payment type with an average loan size of $2 million.
We have no exposure to large office tenant CRE.
Inland urban city centers, the portfolio has a favorable credit risk profile with low levels of Npls and classified loans.
In terms of our credit card and auto and lease portfolios.
Credit risk profile of this portfolio is anchored on the strength of the Europe market economic activity and input and Puerto Rico.
With the credit quality of our originations over the last few years.
In terms of credit cards 30, plus delinquency is at two 8% compared to an average of three 7% in the 2019.
811019, pre pandemic period and year to date net charge offs are at two 4% compared to an average of three 7% in the pre pandemic period.
In terms of auto loans 30, plus delinquency is up three 7% compared to an average of six 2% in the 2011 2019 period and.
And year to date net charge offs are at 60 basis points compared to an average of one 9% in the pre pandemic period for lease financing 30, plus delinquency is up one 3% compared to an average of two 1% in the 2011 2019 period and year to date net charge offs.
20 basis points compared to an average of 70 basis points.
The pre pandemic period.
Turning to slide number 10.
Nonperforming assets decreased by $32 million.
$472 million this quarter.
Driven by NPL decrease in Puerto Rico of 20 $27 million.
Due to lower mortgage npls by 30 million offset in part by higher consortia Npls due to a single 9 million relationship.
Balances also decreased by $6 million.
NPL inflows decreased by $10 million quarter over quarter, driven by lower commercial npls in Puerto Rico by $13 million.
And lower mortgage npls in Puerto Rico by $7 million.
Offset in part by the previously mentioned construction Npls relationship.
In closing the U S remained flat quarter over quarter.
At the other quarter.
Of Npls to total loans held in portfolio.
Decreased to one 2% from one 3% in the previous quarter.
Turning to slide number 11.
Net charge offs amounted to $24 million.
Annualized 39 basis points of our loans held in portfolio.
Prior to $33 million.
One basis point, 31, 41 basis points in the prior quarter.
The quarter over quarter improvement was driven by a $10 5 million lineup.
Your line of credit charge off in the prior quarter.
Let's turn to slide number four.
At June 32023.
The ACL increased by $11 million to 700 million.
Driven by portfolio changes due to higher specific reserves higher volume and changing if iconix of consumer portfolios.
Changes in the macroeconomic scenario of course, the ACL to increase by $8 million, which were offset in part by a change in the mix and the probability weight of microeconomic scenarios by $6 million during.
During the second quarter, we lowered the probability weights assigned to a pessimistic scenario.
We increased the probability weight upside to the baseline scenario.
Changes to qualitative reserve reduced ACL by $5 million.
Originally for credit losses was $37 million compared to $48 million in the prior quarter in Puerto Rico, the provision was $28 million.
For it to $45 million in the prior quarter the provision for the U S was $7 million compared to $2 million.
<unk> operational ratio of Icl's, two long serving portfolio remained flat at two 1%, while the ratio of ACL to NPL stood at 182% compared to 167% in the previous quarter to.
To summarize our loan portfolio continue to exhibit strong credit quality trends in the second quarter with low net charge off and decreasing nonperforming loans.
We remain attentive to enable the environment will remain encouraged by the.
Post pandemic performance of our loan book with that I would like to turn the call over to Ignacio.
For his concluding remarks, thank you.
<unk> and Carlos for your updates our results for the first half of 2023 were strong driven by solid earnings robust loan growth positive credit quality and continued customer growth our.
Our diversified business model robust levels of capital and most importantly, the talent and dedication of our people.
<unk> as well to support and meet the evolving needs of our growing customer base. We are optimistic about the opportunities that lie ahead.
Economic trends in Puerto Rico continued to be positive and a considerable amount of recovery fund yet to be dispersed.
Expected to support increased economic activity in the coming 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 sustained return of capital.
In June we released our annual corporate sustainability report.
We continue to focus on providing opportunity for progress protecting the environment and promoting leadership.
We are mindful of the responsibility we have to Puerto Rico, as the leading banking institution and to all of the communities that we proudly serve.
We are now ready to answer your questions.
As we head into the Q&A session I would like to remind everyone that if you wish to ask what's your question. Please press star followed by one on antenna.
Pat.
Your question. Please ensure that your devices on muted lately.
We'll take our first question from Tim <unk> from Wells Fargo. Your.
Your line is now open. Please go ahead.
Hi, good morning.
Maybe.
On the loan growth.
Starting on the loan growth that's remained quite strong now for many consecutive quarters I'm. Just wondering as you look ahead is is this kind of where we're at for the foreseeable future or just given the remaining idiosyncratic tailwind for the island does loan growth actually.
Accelerate at somebody's construction projects you referenced come online.
Well.
This is ignacio alluded in the.
Past, it's always hard to project and forecast loan growth in Puerto Rico is coming in.
It's very lumpy, especially the larger loans that drive some of the growth, but what I can say is that we continue to have.
Good good pipeline good demand from our customers, we're not seeing that decrease.
So again I don't want to put a percentage level on it but we have strong.
Loan demand, both in Puerto Rico, and the U S. So I wouldn't put a number on it but we certainly don't see it decelerating at this point.
Okay, and then as far as appetite for mainland credit the growth in construction I'm, assuming that's contractual loans funding up and then just maybe speak more broadly about appetite and growing the mainland portfolio in the face of what is expected to be an uncertain credit environment in the back end.
Yeah.
Yes.
To add more to that but I want to point out that we've always been a construction lender, especially in the New York Metro area, but we are not very involved in the office sector. So we're mostly most of our construction is around multifamily.
So.
I think we're continuing to be prudent.
And lending to existing clients.
But.
I don't see us push.
Pulling back from our traditional.
Our traditional markets that we serve again, we're not in the office sector I don't know if you want to add anything.
Perfect.
Okay, and then maybe switching to the funding of this loan growth just given the seasonal trends in public funds and those coming down in the back end of the year, coupled with a loan to deposit ratio that still has plenty of room to move higher.
Is there is there are wanting this to fund upcoming loan growth through incremental deposits or are you OK borrowing at this level.
Funding the new growth.
Yeah.
Hi, Carlos.
So at this point in time, we do have a very strong liquidity position. So.
Those being equal our first port of call will be our cash.
To fund.
Loan growth.
We are we are very lucky that.
The yields on our loan book are quite attractive.
So there are even more attractive.
We can achieve in some of our investment portfolio.
So that will be first call at this point in time I don't ambition.
No.
No.
Having significant borrowings to fund loan growth.
Okay.
Okay. That's helpful. And then last for me just on the expenses any color you can provide.
The profit sharing component.
Pretty big quarter relative to street expectations, and I know the street is kind of the proxy that you have used in the past are determining whether or not we're going to have profit sharing contribution, but your comments on hoping to come in better than that 187, I'm. Just wondering what the outlook is for profit sharing in relation to that comment.
Yeah.
But at this point in time there is no.
No consideration of profit sharing in our.
Our numbers.
Yes.
Okay got it thank you I'll step back.
Okay.
Thank you. Our next question comes from Brian <unk> question from UBS Brady. Your line is now open. Please proceed with your question.
Hey, good morning, everyone.
I wanted just to ask.
On the FTE adjustment.
I guess I was a little bit perplexed.
This quarter, the FTE adjustment in Keystone.
A bit lower but the tax rate.
It was kind of flattish and it looks like you've kind of narrowed the.
<unk> range, a little bit I guess can you.
Thanks Blaine.
The dynamics between what's happening with the with the FTE adjustment and the tax rate at this point.
Hi, This is Jorge Garcia good morning.
It is a complicated question I don't blame you know the first thing I will say is that this allowance.
Our interest expense, which is really what drives that FTE adjustment is increasing given that the cost of deposits are increasing.
The first impact that youre, seeing essentially or tax free income.
Coming less.
Your other question is why isn't why aren't we seeing a change necessarily in our effective tax rate.
And that has to do with GAAP accounting.
Have you tried to anticipate changes in that effective tax rate throughout the year and you make adjustments for that on a quarter by quarter basis. So you normalize it.
Okay.
Okay.
Maybe just shifting to deposit costs.
I think.
You provided the beta is accumulative betas for the interest bearing portions cycled the date.
For the retail commercial and public deposits I know the public is going to be 100% with a lag, but just on the commercial and.
Retail side, just wanted to get your thoughts if you have any on where you thought those betas would would end the year.
By the fourth quarter of this year.
Yes.
<unk>.
It depends on in part on what the fed does today and what the fed does the rest of the year.
Frankly.
I mean.
I think the trends are.
Our trains that can be expected to continue meeting our betas in Puerto Rico will continues to be lower in our retail and commercial businesses commercial side of the heart retail a lot lower.
And then then the.
Market Betas and then.
I will have a beta they're slightly higher of course closer to.
Two two.
So mark and I were just in our bank in the U S. So I think those trends will probably continue.
To the extent that the fed is done this afternoon.
And then.
That will affect how it looks for the rest of the year.
Yeah.
Okay and then just.
Last one for me for right now is just on the Securities book Im Sorry, if you already touched on it.
And I missed it.
Just wondering your thoughts on how that's.
Ebb and flow and uses of securities cash flows at this point for the remainder of the year.
Negative growth the first two quarters of this year I'm just wondering if we're going to continue to use that as a source of liquidity going forward.
Okay.
Yes.
We have been cautious.
With and actually have been building cash.
Because of the uncertainty on the last couple of quarters.
Already.
I think we will feel a lot better than a lot of that is behind us now so.
You should see starting this quarter is that we will start to.
Redeploy some of the cash we will probably end up with lower cash balances hopefully because we have a lot loans first.
But even even without that.
To redeploy some of that cash.
It may not change.
The profile of the best portfolio of too much because so without redeployment will probably be in T bills.
The yield is going to be similar.
Liquidity will be basically cash like but it will provide us a tax benefit so.
Got it thanks for that.
Thank you. Our next question comes from Alex <unk> from Piper Sandler. Your line is now a Tim. Please proceed with your question.
Hey, good morning, all.
Good morning.
Thanks.
Just keeping on that last question on the tax rate on the T bills. It does the tax rate the tax rate range that you provided in the 20% to 25 does that anticipate any additional investment entity builds as the year progresses.
Yes.
That range incorporates our best guess of what we're going to do with the balance sheet. The rest of the year yes.
Okay.
And then.
I got a dig into just the comments on the buyback a little bit.
Can you just sort of I know, there's obviously a lot of uncertainty in the banking environment, but isn't specifically uncertain around new capital rules for CCAR banks is specifically around waiting to see how credit kind of develops or kind of what are the trigger points and then maybe just remind us how the process works. If you do go through and raise the dividend as it is similar.
Process to your normal capital plans or is it <unk>.
Not in any way from what you're normally going through each year.
Okay, Let me try to walk through so.
Some thoughts on capital too.
I think that.
Can address a lot of your questions.
As we mentioned in the prepared remarks.
We expect to consider a dividend increase in 2023, probably late in the third quarter of this year.
And at this time, we no buyback its plan for the rest of this year. Obviously the final decision on any dividend increase express with our board of directors. So they will have the final call on that.
We've described sort of our thinking process in the past.
As we look at capital actions it depends on us getting we're looking for three things.
To inform our actions number one clarity on the path of interest rates number two clarity on the path for the economy and lastly, a clarity on the path toward regulation.
Those aren't sort of the inputs that help us make and make decisions.
It is still uncertain I mean, what we are getting some information from the fed tomorrow on capital, which would be a nice first step to start adding some clarity to the process by the way, we're getting a provisional comfortable sooner getting haven't gotten anything on one liquidity framework. They may change, which is also pretty important.
Think this through.
But we will start getting some information from from on that front at least hopefully tomorrow.
I'll start informing.
Some of the uncertainty here.
No.
It's unclear exactly when we get.
Clarity is matters, but those are the inputs that we're looking for additionally.
It is not a required regulatory ratios TCE and therefore, our UCI our consideration in our decision making process. So that is a consideration.
What I can say today as far as the process, which is the second part of your question is personally we do not plan to return to our historical cadence of a yearly capital actions announcement in January .
Instead, while still not decided moving.
Moving forward, we will probably shift to capital management process.
That is closer to what most other banks too.
We will periodically announced stock repurchase authorization that may be executed from time to time.
So.
So we can tell you so far.
And.
The process.
We always advice.
Regulators in anything we're doing with regards to capital would be no different this time.
And.
Hopefully you get back to you.
Late in the third quarter was our decision on the dividend.
Okay.
That's good good information in there.
In terms of that process. So I suppose we got some clarity on rates as early as today and some clarity on regulation tomorrow and.
Economy, we're never going to get clarity on but.
How long would it take you to actually go through that.
Like the whole process with the fed is that something that is a pretty pretty.
Pretty quick thing I remember when you guys did the ever Tech thing and it seems like the approval happened basically almost overnight I'm just curious if that's evolved and gotten any easier over the years.
I mean.
The fed always has the option of decided everything under timetable, but the fact is that we'd be working very effectively with our regulators over the last few years frankly, you've seen it in.
You mentioned the approval on the Aerotech is a reflection of it that we've tried to work closely with them.
We're trying to never surprise them.
They are always informed about what we're trying to do.
They have to be involved.
They have been very responsive and working with us if we have a timetable that we're trying to meet so so.
Our relationship is very good.
Over the years.
They've got an better understanding what we're doing we've got them better or asking the right questions.
Got it and then.
One final question for me I wanted to.
Just to sort of dig into conversation, we haven't talked about it and it's probably a couple of conference calls about M&A and in the North American franchise and it just seems to me like we're hearing anecdotally and seeing more announcements of loan sales.
Some of them related to specific asset classes that you may or may not want to be into some of them related to rates, but it seems like there's going to be potentially a bunch of loan sales coming up even some from the FDIC theyre going to be potentially coming in pretty big discounts.
I'm curious you guys have tons of capital in North America, If you have appetite to do some loan purchases and if so what the criteria might be.
Yes. This is Ignacio I think we've said it before.
We ourselves we view ourselves as opportunistic buyers of assets. So theres pools of assets that interests us. We will we will definitely go there I think the assets that would interest us will be mostly those things that we are.
We have a certain level of expertise in so we have certain expertise in CRE or health care financing. The condominium Association financing those are things that would be that would be of interest to us. So we're not we're not going to buy office portfolios at a discount that kind of thing.
Even if it's a very attractive price, we're not going to do some Nicholas Thats something.
We have a particular expertise.
I don't think we would probably go after mortgage assets either so I think it would be more in the commercial area.
But if they are attractive assets in those areas, we feel we know well.
We would be interested to look at it I'm sure.
Yes.
Okay. Thanks for taking my questions.
Yes.
Thank you as a reminder, if you'd like to ask a question. Please press star followed by one thank you Pat to join the question queue on that.
Question comes from Kelly Motta from Colby Debbie Kelly. Your line is now open. Please go ahead.
All right. Thank you so much for the questions and good morning.
I don't know.
Closed the loop on the capital discussion.
The commentary that you are reviewing the dividend now can.
Can you remind us like.
What you guys can sort of target in terms of your dividend payout ratio.
We see thinking about that as we review the dividend.
Yes.
There is.
What we target is what we hear from regulators, which seems to be something.
Wondering around 30% of income.
That's what we're trying to target.
A couple of.
Recent announcements have taken banks of slightly above that.
So we're attentive to that we also don't know what their forecasts are so they may end up at 30%.
Depending on what they have.
They're how they're looking at the year, but that's the broad guide.
What we understand to be the regulatory preference dividends being around that level, yes.
So we try to we're trying to make the dividends.
A little bit every year.
We don't have a big ramp up in one year. So we tried to do it incrementally and I think we've been very successful in the past.
In doing that.
Understood I appreciate the color.
I just wanted to flip to the deposit base, specifically the core deposit base, excluding the government deposits.
It looked like there most of the growth came from the U S. Can you can you kind of walk us through your strategy, there and any deposit campaigns are running and as we look ahead with them.
Excess liquidity, Puerto Rico to high, but and really funny.
Money coming in but obviously, where we are in the cycle kind of outlook for.
How much.
Higher liquidity balances or whatever you want to call it at last and.
<unk>.
What we should be thinking about that.
The deposit outlook.
Putting that those dynamics together.
Yes.
As I mentioned.
Earlier question.
I think it's fair to assume that our cash balances will be coming down.
<unk>.
And the rest of the year from where they are today.
The biggest part of the deposit increase this quarter was still public sector deposits in Puerto Rico.
And then there is a good chunk at popular bank.
We continue to to.
To try to strengthen the deposit business.
We're a bank so that is a focus.
Of of the company.
The effort sector. The most all of these efforts are.
The increase in deposits through our online channel because that react quickly with us I know a.
A bunch of other business efforts.
<unk> tended to actually improve the deposit this is a poker bank as well.
The problem with those is that they are less visible because they move slower. So if that is not the only the only tool we have to improve.
The parts of the business, which is our goal we are moving different levers.
This lever happens to be the most obvious one obvious because.
Wanted to move the quickest.
Yes got it.
Peter.
Alright, sorry, I'll, just say in terms of your loss.
Yes.
While deposits have gone down somewhat.
Average balances of our retail and small business clients, especially there are still way above prevent that make level. So.
We don't I don't think we view the necessity.
Is starting.
Aggressive marketing campaigns in Puerto Rico at this point given all your deposit levels.
I appreciate I appreciate the color that was my follow up.
Step back then thank you.
Thank you.
Thank you all final question comes from Gerard Cassidy from RBC capital.
Your line is now open. Please go ahead.
Thank you good morning, and National and Carlos.
Ignacio.
Can you guys.
Give us some color on.
Obviously, Puerto Rico over the years has had a healthy manufacturing components of your economy I know in your prepared remarks that you've talked about tourism and how well that's going.
Yes.
State side, there is clear evidence of the onshoring of manufacturing coming back to Ohio, or Indiana et cetera are you guys seeing any evidence of the benefit of that possibly coming to Puerto Rico.
The manufacturing sector based on the economic activity index is relatively healthy in Puerto Rico has been growing sometimes it goes up a few quarters and it goes.
It goes down a bit but.
Frankly, it's been mostly in our traditional sectors.
The medical device sector, which has been very strong in Puerto Rico.
Also the aerodynamic.
Yeah.
The technology relating to airplanes and motors and that kind of thing is very popular in the west coast I haven't seen to date many brand new.
At the beginning of last year, we saw a couple of foreign firms come in in India, and Indian Company I believe a Mexican company. So we've seen some foreign people foreign firms that don't have.
Perhaps at any presence in the U S using Puerto Rico is as our initial point, especially in the pharmaceutical the generic pharmaceutical side.
But to be honest I haven't seen a big big.
Impact from the onshore and yet we had a big promise for that but it's been mostly mostly.
Dynamism has been in the into our traditional sectors that have been growing.
Very good and then as a follow up I believe the PREPA bankruptcy schedule was suspended in June do you guys have any updates on what's going on there with the <unk>.
Bankruptcy.
And the resolution that is.
Not really we don't know really more than we read in the press I mean, we're optimistic.
The most recent proposal will get approved obviously it means cutting the debt down more than the rates. We will obviously have to go up less than under the prior plan. So we're optimistic that we can get this behind us, but really we don't have a lot of inside baseball on what's going on there behind the scenes.
Got it and I apologize if you addressed this I came late onto the call, but did you guys Carlos give us the burn down read for the next couple of years of the bond portfolio.
What percentage of it will pay off.
Right now and the end of 2024.
Yes, it's on page eight of the deck Gerard.
So that kind of gives you an idea.
So I mean, it's a pretty.
Some pretty aggressive roll down in the treasury portfolio for the next two years.
<unk>.
We kind of present, there they're paying very slowly so that's something that as Carlos mentioned, if you have a rate reversal in prepayment speeds starting to pick up again.
You could see some acceleration there, but we're not necessarily forecasting that.
You have.
About $8 billion or so that has that's NFS and treasuries and that has an average life of around a year and a half so.
Kind of give you an idea of how that rolls in.
As Carlos mentioned, just complementing that.
Currently at least for now reinvesting some of those proceeds in T bills treasury curves inverted so actually picking up yields are busy doing that and maintaining a relatively shorter portfolio as well.
Very good and then just lastly.
The balance sheet is positioned today.
When we're on this call a year from now let's say.
Next July .
Kind of an interest rate environment would be ideal for popular over the next 12 months, both long and short end of the curve.
I guess I can answer that.
You basically.
Like a reduction in short term rates, that's going to reduce the what we pay on the public sector deposits as Carlos mentioned as well as a market linked with a lag.
You can see some pressure coming down from our cost of deposits from that standpoint, and a steepening so any kind of.
Intermediate level asset as kind of a repricing at a higher spread to short term rates is a naturally what typically back legs.
Our positioning is relatively neutral right now so we don't we're not really expecting major swings due to interest rates.
At least in our current balance sheet positioning.
Very small.
<unk> Bank.
Well, yes.
A normal yield curve lower short term level tends to be good for the business.
Very good I appreciate the color. Thank you.
Yeah.
Thank you.
Other questions on the line. So at this time I would like to hand back to Ignacio Alvarez for any closing comments.
Thank you everyone for joining us today and for your questions.
We look forward to updating you on our progress in October have a great day.
Okay.
This concludes today's conference call. Thank you very much for joining you may now disconnect your lines.
Okay.
Okay.
This concludes today's conference call. Thank you very much.