Q3 2024 Popular Inc Earnings Call
I don't want to do.
Okay.
[noise].
Okay.
Okay.
Okay.
Okay.
Okay.
Beautiful.
[music].
Okay.
[music].
Okay.
Unknown Executive: Hello and welcome to the Popular Incorporated third quarter.
Alex: Hello, and welcome to the popular incorporated third quarter earnings call. My name is Alex and I'll be coordinating your cold stacked.
Unknown Executive: My name is Elliott, and I'll be coordinating your court statement.
Unknown Executive: If you would like to register a question during today's event, please press start followed by one on your telephone e-pad.
Speaker Change: If you'd like to register a question John Thanks, Vince. Please press star followed by one of your telephone keypad.
Paul Cardillo: Now, when I'd like to hand over to Paul Gardillo, Investor Relations Officer at Popular, please go ahead. Good morning, and thank you for joining us.
Speaker Change: I would now like to hand over to Paul Taylor.
Speaker Change: Best Relations officer.
Please go ahead.
Paul Taylor: Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our president and COO Javier for our CFO, Jorge Garcia and our CRO video story on that.
Paul Cardillo: With us on the call today is our CEO, Ignacio Alvarez, our President and COO, Javier Ferrer, our CFO, Jorge Garcia, and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session.
Paul Taylor: Our results for the third quarter, and then answer your questions. Other 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 regarding popular such as projections of revenue earnings expenses taxes and capital structure as well as the statements regarding popular its plans and objectives.
Paul Cardillo: Before we begin, I would like to remind you that on today's call we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, expenses, taxes, and capital structure, as well as statements regarding Popular plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and RSEC filings.
Paul Taylor: Statements are based on management's current expectations and are subject to risks and uncertainties.
Paul Taylor: Factors that could cause actual results to differ materially from these forward looking statements are set forth within todays earnings release, and our SEC filings.
Paul Cardillo: You may find today's press release and RSEC filings on our web page at popularlar.com.
Paul Taylor: Find today's press release, and our SEC filings on our webpage at popular Dot com.
Ignacio Alvarez: I will now turn the call over to our CEO, Ignacio Alvarez. Good morning, and thank you for joining the call. In the third quarter, we achieved net income of 155 million, a decrease of 23 million from the second quarter. These results were primarily driven by a higher provision for credit losses, which was partly a result of loan growth at BPPR. Credit quality trends remained stable in the period. An interesting income increased by 4 million compared to the second quarter. While this was below what we had anticipated, it was a larger result of a 1.8 billion reduction in deposit levels at BPPR, which impacted the balance and mix of earnings assets.
I will now turn the call over to our CEO Ignacio Alvarez.
Good morning, and thank you for joining the call.
Ignacio Alvarez: Third quarter, we achieved net income of $155 million, a decrease of $23 million from the second quarter.
Ignacio Alvarez: These results were primarily driven by a higher provision for credit losses, which was partly a result of loan growth Abitibi or.
Credit quality trends remained stable in the period.
Ignacio Alvarez: Net interest income increased by $4 million compared to the second quarter.
Ignacio Alvarez: This was below what we had anticipated it was largely the result of a $1 8 billion reduction in deposit levels, the PPR, which impacted the balance and mix of earning assets.
Ignacio Alvarez: That said, average retail customer deposit balances may approximate 30% of both pre-pandemic levels, and we continue to add new deposit clients during the quarter. Going forward, we expect to continue to benefit from the repricing of our investment portfolio and loan originations. We achieved strong loan growth in the quarter, with balances increasing by 603 million, or nearly 2%. BPR's loan portfolio grew by 5 into 83 million, primarily in the commercial segment, but reflecting growth of costs almost all lending categories. Popular banks, our $21 million increase in loan balances driven by commercial loans. Our net interest margin expanded by two basis points to 3.24%, mainly driven by higher average loan balances and the repricing of loans and reinvestment of securities in a higher interest rate environment.
Ignacio Alvarez: That said average retail.
Ignacio Alvarez: Our deposit balances, we made approximately 30% above pre pandemic levels and we continue to add new deposit clients during the quarter.
Ignacio Alvarez: Going forward, we expect to continue to benefit from the repricing of our investment portfolio and loan originations.
Ignacio Alvarez: We achieved strong loan growth in the quarter with balances increasing by $603 million or nearly 2%.
Ignacio Alvarez: <unk> loan portfolio grew by $583 million, primarily in the commercial segment, but reflecting growth across almost all lending categories.
Ignacio Alvarez: Of our bank, sorry, $21 million increase in loan balances driven by commercial loans.
Ignacio Alvarez: Our net interest margin expanded by two basis points to 324%, mainly driven by higher average loan balances and the repricing of loans and reinvestment of securities and a higher interest rate environment.
Ignacio Alvarez: This was partially offset by higher deposit costs and a lower average balance of investment securities. Operating expenses decreased by 2 million to 467 million. During the quarter, we repurchased 600,000 of our shares for approximately 59 million. We continue to believe that our shares are attractively priced through repurchase at current prices.
Ignacio Alvarez: Was partially offset by higher deposit costs, and a lower average balance of investment securities.
Ignacio Alvarez: Operating expenses decreased by 2 million to $467 million.
Ignacio Alvarez: During the quarter, we repurchased 600000 of our shares for approximately $59 million. We continue to believe that our shares are attractive to repurchase at current prices.
Ignacio Alvarez: Can you book value per share and please buy 10% to $69 in 4 cents, driven by lower unrealized losses in our investment portfolio?
Ignacio Alvarez: Tangible book value per share increased by 10% to $69 in <unk>.
Ignacio Alvarez: Driven by lower unrealized losses in our investment portfolio.
Ignacio Alvarez: Please turn to side 4. Business activity in Puerto Rico remains solid as reflected in the favorable trends in total employment, consumer spending, and other economic deaths. The consumer spending remained healthy; combined credit and debit card sales for BPR customers increased by approximately 4% compared to the third quarter of 2023. Our auto loan and lease balances increased by 105 million compared to the second quarter, as demand for new cars continues to be strong in Puerto Rico. Mortgage loan balances at BPR increased by 104 million in the third quarter. Driven primarily by home purchase activity and our existing strategy, a retaining FHA loans in Puerto Rico, the tourism and hospitality sector continues to be a source of strength for the local economy.
Ignacio Alvarez: Please turn to slide four.
Ignacio Alvarez: Business activity in Puerto Rico remained solid as reflected in the favorable trends in total employment consumer spending and other economic data.
Ignacio Alvarez: Consumer spending remain healthy combined credit and debit card sales with PPR customers increased by approximately 4% compared to the third quarter of 2023.
Ignacio Alvarez: Our auto loan and lease balances increased by $105 million compared to the second quarter as demand for new cars continue to be strong in Puerto Rico.
Ignacio Alvarez: Mortgage mortgage loan balances at BCP or increased by $104 million in the third quarter drew.
Ignacio Alvarez: Driven primarily by home purchase activity in our existing strategy.
Ignacio Alvarez: <unk> FHA loans in portfolio.
Ignacio Alvarez: The tourism and hospitality sector continues to be a source of strength for the local economy.
Ignacio Alvarez: Fashioned traffic at the San Juan International Airport increased by 5% in the third quarter compared to the third quarter of 2023, and hotel occupancy continues to be healthy. There is a significant amount of committed federal funds that have yet to be dispersed. This person of these funds will continue to support economic activities for several years. We remain optimistic about the future of our primary market and our well position to support our clients during the coming years.
Ignacio Alvarez: Passenger traffic at the San Juan International Airport increased by 5% in the third quarter compared to the third quarter of 2023 and hotel occupancy.
Ignacio Alvarez: Occupancy continues to be healthy.
Ignacio Alvarez: A significant amount of committed federal funds that have yet to be dispersed. This first one of these funds will continue to support economic activity for several years.
Speaker Change: We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years on that note I'll turn the call over to Jorge for more details on our financial results.
Paul Cardillo: On that note, I turn the call over to hold it for more details on our financial results.
Paul Cardillo: Thank you, Ignacio. Good morning, and thank you all for joining the call today. Please turn to slide five. As Ignacio stated, we reported net income of 155 million in the third quarter. 23 million lower than the prior period's results. Net interest income increased by 4 million. This increase was below what we had expected. The lower NII was driven primarily by an anticipated decrease in the positive in Puerto Rico, which impacted the balance of higher yielding tax exempt T-bills in our investment portfolio. Ending customer deposit balances at BPPR, excluding Puerto Rico public deposits, decreased by 856 million in ending balances, and by approximately 1 billion in average balances during the quarter.
Jorge Garcia: Thank you Matthew good morning, and thank you all for joining the call today.
Jorge Garcia: Let's turn to slide five.
Jorge Garcia: Okay can I just stated we reported net income of $155 million in the third quarter $23 million lower than the prior period's results.
Jorge Garcia: Net interest income increased by $4 million this.
Jorge Garcia: This increase was below what we had expected the lower NII was driven primarily by an unanticipated decrease in deposits in Puerto Rico, which impacted the balance of higher yielding tax exempt T bills in our investment portfolio.
Jorge Garcia: Ending customer deposit balances at <unk>, excluding Puerto Rico public deposits decreased by $856 million in ending balances by approximately $1 billion in average balances during the quarter primarily.
Paul Cardillo: Primarily in low-cost interest-bearing deposit accounts. From the beginning of March and through most of the second quarter, retail deposit balances in BPPR benefited from tax refunds of more than 1.2 billion. During Q3, in addition to continued outflows of deposit balances, driven by rate-seeking behavior among our commercial and affluent retail deposit customers, we also saw a significant increase in spending and use of these balances across our retail client base, reversing the increase in average deposit balances we saw in Q2. At quarter's end, average retail deposit balances at BPPR are still approximately 30% higher than pre-pandemic levels, down from a peak of roughly 50% that we saw in Q2 2022.
Jorge Garcia: Primarily in low cost interest bearing deposit accounts.
Jorge Garcia: From the beginning of March and through most of the second quarter retail deposit balances and BBB are benefited from tax refunds of more than $1 2 billion.
Jorge Garcia: During Q3. In addition to continued outflows of deposit balances driven by rate seeking behavior, among our commercial and affluent retail deposit customers. We also saw a significant increase in spending and use of these balances across our retail client base reversing the increase in average deposit balances we saw in Q2.
Jorge Garcia: At quarter's end average retail deposit balances at BV PR are still approximately 30% higher than pre pandemic levels down.
Jorge Garcia: Down from a peak of roughly 50% that we saw in Q2 2022.
Paul Cardillo: At the end of the third quarter, Puerto Rico public deposits were 18.7 billion, down 1 billion compared to Q2, and slightly above the upper end of our year in guidance range. Average public deposit balances were higher during the quarter, as the bulk of the reduction occurred on the last day of the quarter. Going forward, we expect public deposits to be in a range of 17 to 19 billion. While we do not anticipate this level of contraction on our deposit balances, the benefits of investment repricing, stable non-public deposit costs, and long growth in the quarter contributed to a 4 million increase in net interest income, despite the reduction in the investment portfolio.
Jorge Garcia: At the end of the third quarter, Puerto Rico public deposits were $18 7 billion down $1 billion compared to Q2 and slightly above the upper end of our year end guidance range average public deposit balances were higher during the quarter as the bulk of the reduction occurred on the last day of the quarter.
Jorge Garcia: Going forward, we expect public deposits to be in a range of 17% to $19 billion.
Jorge Garcia: While we did not anticipate this level of contraction on our deposit balances the benefits of investment repricing stable nonpublic deposit cost and loan growth in the quarter contributed to a $4 million increase in net interest income despite the reduction in the investment portfolio.
Paul Cardillo: Folio. Our net interest margin expanded by two basis points on a gap on a gap basis during by long growth and by the reprising of loans and securities. NIM on a tax equivalent basis contracted by one basis point, primarily resulting from lower balances of tax exempt securities and higher levels of disallowed the profit expense. Lone growth was solid, increasing by nearly all categories, led by commercial, lending, auto, and mortgage originations. Non-interest income was $164 million, a decrease of $2 million from Q2, primarily by lower income from mortgage banking activities as a result of a decrease in the fair value of MSRs.
Jorge Garcia: Our net interest margin expanded by two basis points on a cat on a GAAP basis, driven by loan growth and by the repricing of loans and securities.
Jorge Garcia: NIM on a tax equivalent basis contracted by one basis point.
Jorge Garcia: Primarily resulting from lower balances of tax exempt securities and higher levels of disallowed deposit expense.
Jorge Garcia: Loan growth was solid increasing by $603 million in the quarter.
Jorge Garcia: And by activity at BBB, or where we saw increases across nearly all categories led by commercial lending auto and mortgage originations.
Jorge Garcia: Noninterest income was $164 million a decrease of $2 million from Q2, driven primarily by lower income from mortgage banking activities.
Jorge Garcia: As a result of a decrease in the fair value of Msr's.
Paul Cardillo: We continue to expect non-interest income to be approximately $160,165 million and Q4, where please, to see that credit metrics remain stable during the third quarter. The provision for credit losses of $71 million, although $25 million higher than the second quarter, increase in part due to long growth during the quarter in addition to charge of activity in the consumer loan portfolio. Total operating expenses were $4.67 million or $2 million lower than last quarter, driven by lower professional fees and reserves for operational losses. Offset in part by higher technology costs related to our transformation efforts and higher personal expenses due to annual merit increases.
Jorge Garcia: We continue to expect noninterest income to be approximately 160 $165 million in Q4.
Jorge Garcia: We're pleased to see that credit metrics remained stable during the third quarter.
Jorge Garcia: The provision for credit losses of $71 million, although $25 million higher than the second quarter increase in part due to loan growth during the quarter. In addition to charge off activity in the consumer loan portfolio.
Jorge Garcia: Total operating expenses were 467 $67 million or $2 million lower than last quarter, driven by lower professional fees and research for operational losses offset in part by higher technology costs related to our transformation efforts and higher personnel expenses due to annual merit increases.
Paul Cardillo: We expect total full year expenses of approximately $1.91 billion within the range of original 2024 guidance of $1.89 to $1.95 billion. Our effective tax rate was 22%, compared to 19% in the prior quarter, during by the lower tax exempt income. We now expect an effective tax rate for the year of 23%, at the top end of our prior guidance range of 21 to 23%.
Jorge Garcia: We expect total full year expenses of approximately $1 91 billion within the range of our original 2024 guidance of $1 89 to $1 95 billion.
Jorge Garcia: Our effective tax rate was 22% compared to 19% in the prior quarter driven by the lower tax exempt income.
Jorge Garcia: We now expect an effective tax rate for the year of 23%.
Jorge Garcia: And the top end of our prior guidance range of 21% to 23%.
Paul Cardillo: Please turn to slide 6. During the quarter, we began to reinvest investment maturities in 2-3-year U.S. Treasury notes, buying approximately $1.1 billion at an average yield of 3.75%. We expect to continue this strategy as a way to hedge against lower rates. In BPPR, the deposit cost increased by 6 basis points to 1.89%. The deposit cost of BPPR continued to be impacted by the proportion of public deposits to total deposits. As discussed last quarter, approximately $800 million of low-cost government-related accounts managed by our fiduciary services group were reprised during the last month of the second quarter to market-linked rates.
Jorge Garcia: Please turn to slide six.
Jorge Garcia: During the quarter, we began to reinvest investment maturities in two to three year U S. Treasury notes by an approximately $1 1 billion at an average yield of 375%.
Jorge Garcia: We expect to continue this strategy as a way to hedge against lower rates.
Jorge Garcia: And BBB, our deposit cost increased by six basis points to 189%.
Jorge Garcia: Deposit costs of Pvp are continued to be impacted by the proportion of public deposits to total deposits.
Jorge Garcia: As discussed last quarter, approximately $800 million of low cost government government related accounts managed by our fiduciary services group were repriced during the last months of the second quarter two market linked rates.
Paul Cardillo: The full effect of that adjustment is reflected in our Q3 deposit cost, run rate, and margin. At Popular Bank, the deposit cost decreased by 8 basis points during the quarter. This changed reflected reduction in the cost of intercompany of deposits. The underlying economic activity and demand for credit in Puerto Rico remains strong. In our U.S. markets, we have begun to see a pick-up in the demand for credit. As a result, we now expect unsolidated long growth in the fourth quarter of approximately 1%. This will result in total long growth in 2024 of approximately 4%. Within the original, 3-6% guidance range for the E.
Jorge Garcia: The full effect of that adjustment is reflected in our Q3 deposit cost run rate and margin.
Jorge Garcia: At popular bank deposit costs decreased by eight basis points during the quarter. This change reflected a reduction in the cost of intercompany deposits.
The underlying economic activity and demand for credit in Puerto Rico remained strong in our U S markets, we have begun to see a pickup in the demand for credit.
Jorge Garcia: As a result, we now expect consolidated loan growth in the fourth quarter of approximately 1%. This will result in total loan growth in 2024 of approximately 4% within the original 3% to 6% guidance range for the year.
Paul Cardillo: here. We anticipate 4th quarter NII will increase by approximately 1.5 to 2% compared to Q3, during by continued reinvestment of securities and loan originations coupled with the beginning of the repricing of Puerto Rico Public Deposit and Online Deposit at Popular Bank. This will result in a year-to-year growth in 2024 NII of approximately 6 to 7%. Below our previous 8 to 10% guidance. Additionally, we expect NIM expansion to re-accelerate in Q4 and continue into 2025. Our deposit makes and our ability to reduce the cost of deposits in the U.S. and the volume and cost of deposit deposits in Puerto Rico will continue to present the biggest risk to achieve in the expected level of expansion in NIM.
Jorge Garcia: We anticipate fourth quarter NII will increase by approximately one 5% to 2% compared to Q3, driven by continued reinvestment of securities and loan originations coupled with the beginning of the repricing of Puerto Rico public deposits and online deposits at popular bank.
Jorge Garcia: This will result in a year over year growth in 2020 for NII of approximately 6% to 7%.
Jorge Garcia: Below our previous 8% to 10% guidance.
Jorge Garcia: Additionally, we expect NIM expansion to Reaccelerate in Q4 and continue into 2025.
Jorge Garcia: Our deposit mix and our ability to reduce the cost of deposits in the U S and the volume and cost of public deposits in Puerto Rico will continue to present, the biggest risk to achieving the expected level of expansion in NIM.
Paul Cardillo: This turns to slide 7. Regulatory capital levels remain strong. Our CP1 ratio of 16.4% decreased by 6 basis points from Q2, mainly due to an increase in risk-weighted assets. Tendable value per share at the end of the quarter was $69.4, an increase of $6.33 per share from Q2. Most are resulting from the decrease ALCI and our quarterly net income, often in part by dividends and stock repurchase activity during the quarter. During the last two months of the quarter, as part of the previously announced common stock repurchase authorization, we repurchased approximately 600,000 shares for roughly 59 million, or an average price of about $90 per share.
Jorge Garcia: Please turn to slide seven.
Jorge Garcia: Regulatory capital levels remained strong our CET one ratio of 16, 4% decreased by six basis points from Q2, mainly due to an increase in risk weighted assets.
Jorge Garcia: Tangible book value per share at the end of the quarter was $69 four.
Jorge Garcia: An increase of $6 33 per share from Q2.
Jorge Garcia: Mostly resulting from the decrease a OCI and our quarterly net income offset in part by dividends and stock repurchase activity during the quarter.
Jorge Garcia: During the last two months of the quarter as part of the previously announced common stock repurchase authorization, we repurchased approximately 600000 shares for roughly $59 million or an average price of about $98 per share.
Paul Cardillo: Return in tangible common equity for the quarter was 10%, a reduction from the 11.8% last quarter due to the higher provision expense and higher effective tax rate.
Jorge Garcia: Return on tangible common equity for the quarter was 10% a reduction from the 11, 8% last quarter driven by the higher provision expense and higher effective tax rate.
Paul Cardillo: As we look forward to 2025, given a variety of drivers including the impact of the reduction in deposit balances experienced this year, the mixed shifts to higher cost deposits, along with the limited long growth year-to-date in the US, we no longer expect to achieve our target of 14% RODC by the end of Q4 2025. We now anticipate that we should be able to generate at least 12% RODC in the fourth quarter of 2025. Longer term, we as a management team continue to be focused on achieving a sustainable 14% return on tangible common equity. We are confident that our transformation efforts, the reprising of our investment portfolio, and loan demand in all of our markets will be important catalysts to achieve this target over time.
Jorge Garcia: As we look forward to 2025, given a variety of drivers, including the impact of the reduction in deposit balances experienced this year the.
Jorge Garcia: The mix shift to higher cost deposits, along with the limited loan growth year to date in the U S. We no longer expect to achieve our target of 14% ROTC by the end of Q4 2025.
Jorge Garcia: We now anticipate that we should be able to generate at least a 12% ROTC in the fourth quarter of 2025 <unk>.
Jorge Garcia: <unk> term, we as a management team continues to be focused on achieving a sustainable 14% return on tangible common equity we are confident that our transfer transformation efforts.
Jorge Garcia: Rising of our investment portfolio and loan demand in all of our markets will be important catalyst to achieve this target over time.
Lidio Soriano: With that, I turn the call over to the media. Thank you, Jorge, and good morning. Credit quality metrics remain stable during the third quarter. The corporations, mortgage, and commercial portfolios continue to reflect credit metrics significantly below pre-pandemic levels. Consumer portfolios should be collected, increase the link with these and net chart jobs during by the auto loan portfolio. The link with these and net chart jobs in this portfolio have gradually increased; what remains slightly below pre-pandemic levels. We are closely monitoring changes in the macroeconomic environment and on bar world performance, given higher interest rates and impressionary pressures.
Speaker Change: With that I'll turn the call over to Leo.
Leo: Thank you Jorge and good morning.
Leo: Credit quality metrics remained stable during the third quarter.
Leo: The corporation's mortgage and commercial portfolios continue to reflect credit metrics significantly below pre pandemic levels.
Leo: Consumer portfolio reflected increased delinquencies and net charge offs driven by the auto loan portfolio.
Leo: Delinquencies and net charge offs in this portfolio.
Leo: Is it really increase what remained slightly below pre pandemic levels.
We are closely monitoring changes in the macroeconomic environment.
Leo: Borrower performance, even higher interest rates on the inflationary pressures.
Lidio Soriano: We believe that the improvements over recent years in risk management practice services, and the risk profile of the Corporation, Lones portfolios, positions popular, due to a race successfully under the current environment.
Leo: We believe that the improvements over recent years and risk management practices and the risk profile of the corporation loans portfolios for sale.
Leo: Popular to continue to operate successfully under the current environment.
Lidio Soriano: Turning to slide number eight, non-performing assets and non-performing loans increased during the quarter at the popular bank. MPLs in popular bank increased by 18 million, related to higher-more Asian PLs by 70 million, impacted by a single loan that we enter MPL status after becoming current in the second quarter. MPLs in BVPR increased by 2 million, mainly driven by a 9 million increase in auto, partially offset by a 6 million reduction in mortgage and a 2 million reduction in commercial. Obviously, BPR decreased by 7 million during by sales of residential real estate properties. Improves of MPLs decreased by 7 million.
Leo: Turning to slide number eight.
Leo: Nonperforming assets and nonperforming loans increased during the quarter driven by popular bank.
Leo: Npls in.
In popular bank increased by $18 million.
Leo: Related to higher mortgage npls by $70 million impacted by a single loan that we enter NPL status after becoming current in the second quarter.
Leo: Npls and <unk> increased by $2 million.
Leo: Mainly driven by a $9 million, increasing audio partially offset by a 6 million reduction in mortgage.
Leo: 2 million reduction in commercial.
Leo: Obviously CPR decreased by $7 million driven by sales of residential real estate properties.
Leo: Inflows of Npls decreased by $7 million.
Lidio Soriano: In BVPR, the decrease was 3 million by mortgage. In popular bank, the 19 million reduction in commercial was offsetting part by the 17 million mortgage loan that we enter MPL status. It is important to note that this residential property is well located, as a loan to value below 50 percent, and that we have no additional lending exposure to this client. The ratio of MPLs to total loans helping portfolio remains flat at 1 percent.
Leo: <unk> the decrease was driven by mortgage in popular bank.
Leo: $19 million reduction in commercial.
Leo: Was offset in part by the 17 million mortgage loan that.
Leo: We entered NPL status.
It is important to note.
Leo: At this residential appropriate will locate it has a loan to value below 50% and we have no additional lending exposure to this claim.
Leo: The ratio of Npls to total loans held in portfolio remained flat at 1%.
Lidio Soriano: Turning to slide number nine, net charge of amounted to 59 million or analyzed 65 basis point of average loans helping portfolio compared to 54 million or 61 basis point in the prior quarter. Net charge of in BVPR increased by 5 million during by higher consumer by 9 million offsetting part by lower commercial and construction by 3 million. In popular bank, net charge of remaining flat quarter quarter.
Leo: Turning to slide number nine.
Leo: Net charge offs amounted to $59 million or annualized 65 basis points of average loans, helping portfolio.
Compared to 54 million or 61 basis points in the prior quarter.
Leo: Charge offs increased by $5 million.
Leo: Driven by higher consumer by 9 million offset in part by lower commercial and construction by June.
Leo: In popular bank net charge off remained flat quarter over quarter.
Lidio Soriano: Given the credit performance in the first 3 quarters of the year and our outlook for the fourth quarter, we expect net charge of for the fourth year at the low end of our initial guidance of 65 to 35 basis points.
Leo: Given the credit performance in the first three quarters of the year.
Leo: Our outlook for the fourth quarter.
Leo: We expect net charge off for the full year at the low end of our initial guidance of 65% to 85 basis points.
Lidio Soriano: Please, please start to slide number 10. The allowable credit office increased by 14 million to 34 million. In BVPR, the ACL increased by 23 million, mainly due to a combination of growth in the commercial portfolios and changes in credit quality trends in the auto and credit cards portfolio. In Popular Bank, the ACL decreased by 8 million mainly due to my lower reserve in the commercial and construction portfolios due to improvements in risk ratings. The corporation ratio of ACL to loss health in portfolio was 2.06 percent versus 2.05 percent in the prior quarters. The ratio of the ACL to MPL was 206 percent compared to 214 percent in the previous quarter.
Leo: Please turn to slide number 10.
The allowance for credit losses increased by $14 million to $744 million.
Leo: In the PR, the ACL increased by $23 million, mainly due to a combination of growth in the commercial portfolios and changes in credit quality trends in the auto and credit cards portfolio.
Leo: In popular bank.
Leo: This yield decreased by $8 million.
Leo: Mainly driven by lower reserve in the commercial and construction portfolios.
Leo: Due to improvements in risk ratings.
Leo: The corporation ratio of ICL to loans held in portfolio was two 6%.
Leo: Versus two 5% in the prior quarter.
Leo: The ratio of ACL to Npls was 206% compared to 14% in the previous quarter.
Lidio Soriano: The provision of a credit losses was 73 million compared to 44 million in the prior quarter, reflecting higher balances, higher losses, and changes in credit. Quality. In VR, the provision was $77 million compared to $49 million, while in Popular Bank, the provision was a benefit of $4 million, similar to the prior product.
Leo: The provision for credit losses was $73 million.
Leo: Compared to $44 million in the prior quarter, reflecting higher balances higher losses on changes in credit quality.
Leo: Okay.
Leo: The provision was $77 million compared to $49 million, while in popular bank. The provision was a benefit of $4 million similar to the prior quarter.
Lidio Soriano: To summarize, very quality metrics remain stable during the third quarter. We are attentive to the evolving environment, but remain encouraged by the performance of our numbers.
Leo: To summarize credit quality metrics remained stable during the third quarter.
Leo: We are attentive to evolving environment, we remain encouraged by the performance of our loan book.
Ignacio Alvarez: With that, I would like to turn the call over to Ignacio for each concluding remarks. Thank you. Thank you, Lidio, and Jorge for your updates. While the increasing revenues is lower than we anticipated, the underlying drivers of our business continue to be favorable, as demonstrated by the progression of net interest income and margin, loan growth, and stable credit trends. We are making headway in our business transformation with meaningful progress in modernizing our customer channels and improving the customer experience. We have streamlined the process of rolling out top updates to our various customer-facing applications. For example, our consumer digital banking application in Puerto Rico has improved the time-to-prediction production of releases by 30 percent over the past two years.
Speaker Change: With that I would like to turn the call over to Ignacio for his concluding remarks. Thank you.
Ignacio Alvarez: Thank you Lydia on holiday for your updates well.
Ignacio Alvarez: The increase in revenues is lower than we anticipated the underlying drivers of our business continue to be favorable as demonstrated by the progression of net interest income and margin loan growth and stable credit trends.
Ignacio Alvarez: We're making headway in our business transformation with meaningful progress in modernizing our customer channels and improving the customer experience.
Ignacio Alvarez: We have streamlined the process of rolling out updates to our various customer facing applications. For example, our consumer digital banking application in Puerto Rico has improved the time to prediction production releases by 30% over the past two years.
Ignacio Alvarez: Additionally, we are increasing the personalization of our offering to provide customers the right solution at the right time and to the right channel to deepen our relationships with them.
Ignacio Alvarez: Additionally, we are increasing the personalization of our offering to provide customers. The right solution at the right time until the right channel to deepen our relationships with them I am optimistic about our prospects for the remainder of the year and beyond business trends in Puerto Rico continued to be positive and we are well positioned to participate in the economic activity.
Ignacio Alvarez: I am optimistic about our prospects for the remainder of the year and beyond. Business trends in Puerto Rico continue to be positive, and we are well-positioned to participate in the economic activity that is expected to be generated in the coming years.
Ignacio Alvarez: It is expected to be generated in the coming years, we are now ready to answer your questions.
Unknown Executive: We are not ready to answer your questions. Thank you.
Speaker Change: Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two one.
Unknown Executive: If you would like to ask a question, please press the file by one on your telephone keypad. If you would like to withdraw your question, please press the file by two. When preparing to ask a question, please ensure your device is unmuted locally.
Speaker Change: When preparing to ask a question. Please ensure your devices on mute locally.
Brett Rabatin: Our first question comes from Brett Rapazan with Hope Group. Your line is open. Please go ahead.
Speaker Change: Our first question comes from Brett Robinson with Hovde Group. Your line is open. Please go ahead.
Brett Rabatin: Hey guys, good morning. Wanted to start with the deposit trends on the retail side that you discussed in your prepared commentary. Was there just a, maybe not an all of a sudden move, but was there just a concerted move this quarter with maybe some activity?
Brett Robinson: Hey, guys. Good morning wanted to start with the deposit trends on the retail side that you've discussed.
Brett Robinson: In your prepared commentary was there just a.
Brett Robinson: Maybe not in all of a sudden move but was there just a concerted move this quarter with maybe some activity.
Ignacio Alvarez: Can you talk a little bit more about what happened with how high net worth retail and clients were moving deposits, et cetera, and just trying to get a sense of where you think that might go from here? Sure, Brett. When we look back last seven or eight quarters, what we have seen is a pretty consistent trend focused on our high net worth and corporate clients looking for yield enhancements. We've seen a lot of movement into our popular security subsidiary. It's pretty normal; this is consistent with what we have seen in the U.S. It's a restrictive monetary policy.
Brett Robinson: Can you talk a little bit more about what happened with with how high net worth retail.
Brett Robinson: Clients were moving deposits et cetera.
Brett Robinson: Trying to get a sense of where you think that might go from here.
Speaker Change: Sure Brian.
Speaker Change: So when we look back last seven or eight quarters, we have seen is a.
Speaker Change: Pretty consistent trend focus on our high net worth and corporate clients looking for yield enhancements, we've seen a lot of movement into our popular security subsidiary.
Speaker Change: Hum.
Speaker Change: Pretty normal this is consistent with what we have seen in the U S is a restrictive monetary policy people will move.
Ignacio Alvarez: People will move. What was new during this quarter, and we have said, you know, city money wakes up. We did see a little bit of an acceleration of more money moving out and into those higher yielding assets. But what surprised us was the level of expenditure across our retail network. As I mentioned in my prepared remarks, from the period of March through June, our retail clients received roughly 1.2 billion in refunds from their tax refunds in Puerto Rico. That was about 200 million more than last year. Traditionally, that money, you know, stays longer and circulates within our client base and structure.
Speaker Change: What was new during this quarter and we have said sleepy money wakes up and.
Speaker Change: We did see a little bit of an acceleration of more money moving out and into those higher yielding assets, but what surprised us was the level of expenditure across our retail network.
Speaker Change: As I mentioned in my prepared remarks, the from the period of March through June.
Speaker Change: Our retail clients receive roughly $1 2 billion in refunds from their tax refunds in Puerto Rico that was about $200 million more than last year.
Speaker Change: Traditionally that money stays longer than it circulates within our client base and structure. We did not see that there is nothing to pinpoint I think there when we look at that.
Ignacio Alvarez: We did not see that. There's nothing to pinpoint. I think when we look at the market, there's nothing to pinpoint of the positive moving within the banking system. It's really moving out. Expenditure: we have seen an increase in our debit card purchases, increases in the payment levels on credit cards. It's just a- the aggregate impact of everything. As we look through, as I mentioned, our average balances are about 30% higher than pre-pandemic levels. We certainly would not expect at this stage people to go back to those levels; obviously, a passage of time, people are making more money in Puerto Rico, etc.
Speaker Change: The market Theres nothing to pinpoint of deposit moving within the banking system is really moving out expenditures, we have seen an increase in our debit card purchases increases in the payment levels on credit cards.
Speaker Change: It's just.
Speaker Change: Yeah.
Speaker Change: The aggregate impact of everything.
Speaker Change: As we look through as I mentioned, we have our averages average balance of about 30%.
Speaker Change: Then people endemic levels.
Speaker Change: We certainly would not expect at this stage people to go back to those levels. Obviously, a passage of time people are making more money in Puerto Rico et cetera.
Ignacio Alvarez: But we've tried to kind of say, well, what do we think is at risk? It's very hard when you're talking about the broad base retail network. We're 1.7 million clients; we're talking about people's psychology, what they're doing. We start a little bit unprecedented times in terms of the amount of stimulus that Puerto Ricans have received through the pandemic and beyond.
Speaker Change: We've tried to kind of size what do we think is at risk.
Speaker Change: It's very hard when youre talking about the broad based retail network Youre talking over one 7 million clients, you're talking about People's psychology, what Theyre doing these are a little bit unprecedented times in terms of the amount of stimulus that Puerto Ricans have received through the pandemic and beyond.
Ignacio Alvarez: But we do believe that best estimate right now is that maybe there is still risk of somewhere in the 6 to 800 million in our deposit base, but in terms of timing or ability, we are not sure. But we are very focused on this. The other thing I would say, obviously, the NII, we talked about NII being a catalyst of our growth both in terms of achieving our goals for this year and for next year. That hasn't changed. In terms of the dynamic, the reprising of investment portfolio continues, loan origination and the reprising of our portfolio also continues.
Speaker Change: But we do believe our best estimate right now is that maybe there is still risk of somewhere in the 6% to $800 million and our deposit base.
Speaker Change: But in terms of timing our ability.
Speaker Change: We are not sure.
Speaker Change: But we are very focused on this.
Speaker Change: The other thing I would I would say I mean, obviously the NII, we have talked about NII being a catalyst of our growth both in terms of achieving.
Speaker Change: Achieving our goals for this year and for next year.
Speaker Change: That hasnt changed in terms of the dynamic the repricing of the investment portfolio.
Speaker Change: Continues loan origination and the repricing of our portfolio also continues when we look at.
Ignacio Alvarez: When we look at, not ready to give you guidance for 2025. We will do that in more detail in January and our call. But I think at this stage, we would expect that at least in 2025, we would see that same level of growth of 7% or so that we're seeing this year in 2024. But we'll give you more information in January when we have a little more visibility and we see how the fourth quarter trends in our clients behave.
Speaker Change: Not ready to give you guidance for 2025.
Speaker Change: We will do that in more detail in January on our call, but I think at this stage, we would expect that at least in 2025, we would see that same level of growth of 7% or so that we are seeing this year in 2024, but we will give you more information in January when we have a little more visibility and we see how the fourth quarter trends.
Speaker Change: And our clients behave.
Brett Rabatin: Okay, that's really helpful. And then wanted to dive a little further into the expense growth guidance specifically for the fourth quarter, with the full year at 1.91 billion, which would intimate about 45 million of growth in the fourth quarter.
Speaker Change: Okay.
Speaker Change: That's really helpful and then wanted to.
Speaker Change: Dive a little further into the expense growth guidance, specifically for the fourth quarter with the full year.
Speaker Change: 191 billion, which would which would ensue.
Speaker Change: And about $45 million of growth in the fourth quarter can you guys talk about.
Paul Cardillo: Can you guys let me talk about that? Is there some consulting going on into the end of the year? I know you're probably not ready to give guidance for 25, but any early thoughts on how the fourth quarter levels might retriculate into next year. Yeah, Brian, we're going to make sure that when we give the guidance of the 1.91, it's on a gap basis. I just want to make sure that you're looking at FEC-related costs, and I think we had some, you know, the late penalties on the taxes in the first quarter. I think those two are, I think they combine to maybe like 22, 23 million.
Speaker Change: Is there some consulting going on into the end of the year.
Speaker Change: I know you are probably not ready to give guidance for 'twenty five.
Speaker Change: Any early thoughts on how the fourth quarter levels.
How might matriculate into next year.
Speaker Change: Yes, Brian.
Speaker Change: To make sure is that when we give the guidance of the $1 91.
Speaker Change: GAAP basis, I, just want to make sure that youre looking at okay.
Speaker Change: FDIC related costs.
I think we had some late penalties on the taxes in the first quarter I think those two are combined to maybe late 'twenty two 'twenty 3 million. So.
Brett Rabatin: So I think the target probably is closer to $5 to $30 million range rather than the 45 that you mentioned. It's still an increase, and to your question, yes, it is related in part to the efforts of transformation, professional fees, consulting related expenses, as well as seasonal expenses that occur every year towards the end of the year. You know, local holiday spending, promotions, donations, and different things that, if you look at our historical, the fourth quarter always tends to have an uptake in expenses. Of course, we, you know, we are conscious of controlling costs, particularly given the NII missed this quarter, and we'll do our best to control that.
I think what kind of.
Speaker Change: Target probably.
Lower closer to 5% to $30 million range, rather than the 45 that you mentioned, it's still an increase okay and so your question yes. It is.
Speaker Change: Related in part to the efforts of the transformation professional fees consulting related expenses as well as seasonal expenses that occur every year towards the end of the year local.
Speaker Change: Holiday spending promotions donations.
Speaker Change: Things that if you look at our historical fourth quarter always tends to have an uptick in expenses of course.
Speaker Change:
Speaker Change: We're conscious of controlling costs, particularly given the NII missed this quarter and we will do our best to to control that as far as next year, we'll provide you that guidance in January.
Brett Rabatin: And as far as next year, we'll provide you that guidance in January. Okay, if I can just follow up on that, is, you know, how much of the fourth quarter increase, you know, might be repeatable with, you know, now that you could think about 25, IE, the year in bonuses on Christmas. Yeah, we'll give you guidance in January. You know, okay, very nice. Same thing. You know, if you can look back, you see some seasonality in our, in our expenses. Okay. There are enough appreciate all the color guys.
Speaker Change: Okay.
Speaker Change: If I can just follow up on that is yes.
Speaker Change: How much of the fourth quarter increase.
Speaker Change: Might be repeatable.
Speaker Change: <unk>.
Speaker Change: Now that you can think about 25.
Speaker Change: I E. The yearend bonuses on Christmas.
Yeah.
Speaker Change: We'll give you guidance in January.
Speaker Change: Okay Fair enough same thing.
Speaker Change: But if you can look back you see some seasonality in our in our expenses.
Speaker Change: Okay Fair enough appreciate all the color guys.
Unknown Executive: Okay.
Speaker Change: Okay.
Frank Sheraldi: We now turn to Frank Sheraldi with Piper Sandler. Your line is open.
Speaker Change: We now turn to Frank Schiraldi with Piper Sandler. Your line is open. Please go ahead.
Frank Sheraldi: Please go ahead. Good morning. Just wondering if you can, or maybe talk a little bit about the ability to reprice deposits here. You know what you're seeing are given the 50 basis point cut in September. I imagine maybe just given some of the, you know, the numbers you talk about is potentially being at risk on the positive side, maybe makes it a little bit more difficult to, to reduce costs just, just want to give us an update on thoughts of, of deposited really here I guess, in the near term. Sure, so we like to think of that in different buckets.
Speaker Change: Good morning.
Speaker Change: I was just wondering if you can alright.
Frank Schiraldi: Alright, maybe talk a little bit about the ability to reprice deposits here.
Frank Schiraldi: What youre seeing or given the 50 basis point cut in September.
Frank Schiraldi: I'd imagine maybe just given.
Frank Schiraldi: Some of the.
Frank Schiraldi: No.
Frank Schiraldi: The number you talked about potentially being at risk on the deposit side, maybe makes it a little bit more difficult to too low.
Frank Schiraldi: <unk> cost just.
Speaker Change: Wondering if you give us an update on <unk>.
Frank Schiraldi: Thoughts.
Frank Schiraldi: Deposit betas are really here I got some near term.
Frank Schiraldi: Sure so we'd like to think of that in different buckets. So let's first talk about the public deposits in Puerto Rico. Those as you know our market linked to short term index as we we didn't disclose the index for their short term index is not tied to fed funds.
Ignacio Alvarez: Let's first talk about the public deposits in Puerto Rico. Those, as you know, our market linked to short term indexes. We, you know, we don't disclose the indexes, but they're short term indexes and it's not tight to set funds. We're already seeing the benefits of that. Those are priced with a lag, but you know, some of the short term index are, you know, maybe moving ahead of projected or expected movement by the Fed. So we're already seeing the benefit of that in the fourth quarter on the public deposits, and we would expect that to continue.
Frank Schiraldi: We're already seeing the benefits of that those are priced with a lag, but some of the short term index.
Frank Schiraldi: Maybe moving ahead of.
Frank Schiraldi: Projected or expected movement by the fed so we're already seeing the benefit of that in the fourth quarter on the public deposits and we would expect that to continue.
Ignacio Alvarez: The second group is the retail and commercial network in Puerto Rico. As you know, we've had very low betas on the way up in Puerto Rico. We don't expect to see a lot of opportunities to move down, particularly in the early stages of movements, so that we don't; we expect that to have very low betas on the way down. And then you have the US deposits. They're both the direct online channel, as well as the branch network. We have had high betas in both of those channels. We would expect, and we have already begun to see reductions in both of those deposit sources.
Frank Schiraldi: The second group is the retail and commercial network in Puerto Rico as you know we've had.
Frank Schiraldi: Very low betas on the way up in Puerto Rico, We don't expect to see a lot of opportunities to move down, particularly in the early stages of movements. So that we don't we would expect that to have very low betas on the way down and then you have the U S deposits.
Frank Schiraldi: Both the direct online channel as well as the branch network.
Frank Schiraldi: We have had high beta and those both of those channels.
Frank Schiraldi: We would expect and we have already begun to see reductions in both of those.
Frank Schiraldi: Deposit sources.
Ignacio Alvarez: But, you know, those are a little more subject to market competitive dynamics. You know, for example, I think in the online channel, we were able to bring down, you know, our savings accounts, I think 30 basis points versus the Fed's move 50 basis points. We have seen competitors in the space actually increase rates in the last couple of weeks. So right now, we're pricing to maintain the deposits. We're not pricing to grow. There is opportunity there, and we'll be very focused. That's an area of opportunity for us, but given the competitive stand-up, the US franchise, you know, they change it in liquidity in the marketplace or pricing by bigger banks or competitors could have an impact.
Frank Schiraldi: But those are a little bit more subject to market.
Frank Schiraldi: <unk> dynamics.
Frank Schiraldi: For example, I think in the online channel.
Frank Schiraldi: We're able to bring down our savings accounts I think 30 basis points versus defense moved 50 basis points, we have seen competitors in this space actually increase the rates in the last couple of weeks. So right now we're pricing to maintain the positive we're not pricing to grow there is opportunity there and we will be very focused and that's an area of opportunity for us.
Frank Schiraldi: Given the competitive stand of the U S franchise.
Frank Schiraldi: Any changes in liquidity in the marketplace or pricing by by bigger banks or competitors could have an impact but over time, there is an opportunity there.
Ignacio Alvarez: But over time, there is an opportunity there.
Ignacio Alvarez: Okay, and then just in terms of the updated, the 12% Watson, I think you mentioned you're targeting now by the fourth quarter or in the fourth quarter, 2025, does that continue to, you know, not benefit from any AOCI loss? That continue to exclude AOCI that Watson target. That is correct. That is the same calculation. Okay.
Frank Schiraldi: Okay.
Speaker Change: And then just in terms of the updated.
Speaker Change: The 12% ROTC.
Speaker Change: You mentioned, you're targeting now by the fourth quarter or in the fourth quarter 2025.
Speaker Change: Does that continue.
Speaker Change: Two.
Speaker Change: Benefit from any LCI losses that continue to exclude LCI that ROTC target.
Speaker Change: That is correct.
Speaker Change: <unk> calculation.
Speaker Change: Okay.
Speaker Change: And any thoughts on in terms of as you obviously the NII.
Ignacio Alvarez: And any thoughts on, you know, in terms of as you, obviously the NII, reduction in the AOCI expectations, such you back a little bit in terms of getting to higher return on tangible common equity, but any sort of updated thought on that 14% bogie in terms of timing or to our lives. It's certainly to say, I mean, I would say that number one, as a management team, we're still focused on that 14%. You know, the dynamics of popular haven't changed in just one quarter. We still believe that the transformation efforts and management focus towards a determined target, you know, albeit, you know, aspirational.
Speaker Change: Reduction of our expectations set you back a little bit in terms of getting to.
Speaker Change: Higher return on tangible common equity, but any sort of updated thought on that on that 14% bogey in terms of timing or too early to say.
Speaker Change: It's early to say I mean, I would say that number one as a management team. We're still focused on that 14%. The dynamics haven't changed in just one quarter, we still believe that the transformation efforts and management's focused stores.
Speaker Change: Determined target.
Speaker Change: Good.
Speaker Change: Aspirational.
Ignacio Alvarez: It's still there and important for us. I think it will take us longer. We're going to work a lot harder to get there, but we are focused on that. In terms of the 12% Rodsey, you know, I think the simplest way I can describe it: I look at the second quarter results and the third quarter results; we took a step back. In those Rodseys, you know, we're coming from a lower base. We want to get back to, you know, that growth and that level that we had anticipated before and work hard towards achieving that.
It's still there and important for us.
Speaker Change: It will take us longer we're going to work a lot harder to get there, but we are focused on that in terms of the 12% ROTC.
Speaker Change: I think the simplest way I can describe it I look at the second quarter resulted in the third quarter results, we took a step back.
Speaker Change: And those rod fees, we're coming from a lower base, we want to get back to that growth in that level that we had anticipated before and work hard towards achieving that.
Brett Rabatin: And if I could just sneak in one last one, just on. In the past, I think you guys done sort of the accelerated buyback route.
Speaker Change: And then if I could just sneak in one last one just on in the past. Thank you guys have done sort of the accelerated buyback route and so kind of harder to get a sense, but.
Ignacio Alvarez: And so kind of harder to get a sense, but, you know, could you, is there any, would you say there's any seasonality to buy back activity here, just trying to get a sense of what the quarterly run rate could look like going forward. So one thing I'll, you know, make sure Mr. So we started the third quarter's buyback in August. We're really wearing the market for two months out of the quarter. You know, we hope that over time you'll get to see a cadence of our activity. You know, we obviously haven't given a time frame on the authorization, but we intend to use it.
Could you is there any what did you say there is any seasonality too.
<unk> two buyback activity here, just trying to get a sense of what the quarterly run rate could look like going forward.
Speaker Change: So one thing.
Speaker Change: Sure.
Speaker Change: Listeners know we started the third quarter's buyback in August so really we're in the market for two months out of the quarter.
Speaker Change: We hope that over time, you'll get to see a cadence of our activity.
Speaker Change: <unk>.
We obviously haven't given a timeframe on that authorization, but we intend to to use it.
Ignacio Alvarez: You know, but maintain the flexibility, you know, like our peers, you know. We see peers change in terms of when they're in and out of the market. We just want to retain that flexibility. But at the end, we didn't put on authorization, just as a benchmark for you, but for us to execute upon that. And I wrote, we'll still continue to be the driver to improve Roxy, but that's, you know, obviously now that we have an authorization, we, you know, it should contribute to improving that return from what we're at today.
Speaker Change: But maintained the flexibility like our peers.
Speaker Change: We see peers change in terms of when they are in and out of the market and we just want to retain that flexibility, but again, we didn't put out an authorization just as.
Speaker Change: As a benchmark for you, but for us to execute upon that.
Speaker Change: NII growth will still continue to be the driver to improve ROTC.
Speaker Change: But as you know.
Speaker Change: Obviously now that we have an authorization.
Speaker Change: It should contribute to improving that that return from where we're at today.
Unknown Executive: Okay.
Speaker Change: Okay, Alright, great. Thank you.
Unknown Executive: All right. Great.
Kelly Motta: Thank you. Next question comes from Kelly Mota with KBW. Your line is open. Please go ahead.
Speaker Change: Our next question comes from Kelly Motta with <unk>. Your line is open. Please go ahead.
Kelly Motta: Hey, Kelly. Hey, good morning. Thanks. Thanks for the question.
Speaker Change: Hey, Kelly Hey, good morning.
Speaker Change: Thanks, Thanks for the question.
Kelly Motta: And maybe just a housekeeping item on expenses. I appreciate that you're guiding on a gap basis. Just want to clarify: does that include any Oreo gains and losses in there? Sure, yeah, that's part of our expense base. Got it.
Yes.
Maybe just.
Speaker Change: Housekeeping item on expenses I appreciate that you're guiding on a GAAP basis.
Speaker Change: I wanted to clarify does that include any oreo gains and losses in there.
Speaker Change: Sure, Yes, that's part of our expense base.
Speaker Change: Got it.
Ignacio Alvarez: And, you know, long growth was really, really strong this quarter. Kind of as you look ahead, I'm interested in, I appreciate, you know, 4% for the year. As you look ahead, wondering, you know, where you're seeing good opportunities, how you're seeing demand on the island for loans. And if you expect an acceleration in that with, you know, the rates coming down.
Speaker Change: And.
Loan growth was really.
Speaker Change: Really strong this quarter.
Speaker Change: You will go ahead.
Speaker Change: Interested in.
Speaker Change: I appreciate you know 4% for the year.
Speaker Change: Go ahead wondering where you're seeing good opportunities.
Speaker Change: How you're.
Demand.
Speaker Change: On the island for loans, and if you expect an acceleration in that with them.
Speaker Change: The rates coming down.
Okay.
Ignacio Alvarez: This is Ignacio. I mean, really, the man in Puerto Rico, as he says, has been very strong, and we've been able to close a number of loans. I don't, I don't know if I would use the word accelerate, but I think it's going to continue to be strong. The pipeline looks good. You know, some of the loans are bulky, so it depends when we close them and what payouts we have. But we're seeing good, you know, we're seeing good demand across the board, especially in commercial. We've seen a lot of interest in investment in Puerto Rico; assets continue to trade.
Ignacio Alvarez: So this is ignacio I mean really weak demand in Puerto Rico. As you said, it's been very strong and we have been able to close a number of loans.
Speaker Change: I don't I don't know if I would use the word accelerate.
Speaker Change: It's going to continue to be strong the pipeline looks good.
Some of the loans are bulky so it depends when when we close them and what payoffs we have but we're seeing good.
We're seeing good demand across the board, especially in commercial we've seen a lot of interest and investment in Puerto Rico assets continue to trade, we're seeing people coming to the island.
Ignacio Alvarez: We've seen, you know, people coming to the island. So, you know, we're very confident in almost across all sectors. Are we seeing strong will growth, especially in the commercial area?
Speaker Change: So.
Speaker Change: We're very confident I mean almost across all sectors.
Speaker Change: Are we seeing strong loan growth, especially in the commercial area and one thing I would add Kelly is I mean, thats, Puerto Rico and the U S. This year, we had no.
Ignacio Alvarez: And one thing I would add, Kelly, is, I mean, that's Puerto Rico in the US this year. We've had no, you know, we went backwards, right? In the first two quarters, we went down; this quarter, we grew about 20 million. We are seeing a pickup in demand, credit demand in the US, in particular, in construction and in community association lending in Florida in particular. I think that's an area where we might be able to seek, you know, more solutions, certainly from the level this year.
Speaker Change: Went backwards in the first two quarters, we went down this quarter, we grew about $20 million we are seeing.
Speaker Change: A pickup in demand in credit demand in the U S.
Speaker Change: And particularly in construction and in community Association lending.
Speaker Change: In Florida in particular.
Speaker Change: I think thats, an area, where we might be able to see more installation certainly from from the level. This year part of that slow loan growth what's affected our our projections for next year and the change in their ROTC guidance.
Ignacio Alvarez: Part of that slow loan growth, it's what's affected our projections for next year and the change in the ROTC guidance. I mean, the things in Puerto Rico continue to really steady, steady growth. I mean, the numbers just came out for unemployment in September, and the unemployment rate went down again from 5.7 to 5.5%. And we added private sector jobs of 16,000 in the month. So that gives you a sort of a benchmark of economic activity on the island. Got it. That's helpful.
I mean, the things in Puerto Rico continue to really steady steady growth I mean, the numbers just came out for unemployment in September.
Speaker Change: The unemployment rate went down again from five 7% to five 5% and we added private sector jobs of 16000 in the months.
Speaker Change: As you sort of benchmark of economic activity on the island.
Speaker Change: Got it that's helpful. Maybe maybe last one for me.
Ignacio Alvarez: Maybe, maybe last one for me. I think in your prepared remarks, you know, ex liquidity on the island remains high. You did have now two quarters of an IBs outflows, wondering, is there is there any way that you're approaching the deposit base in terms of an IBs that could continue to be at risk. And how does that factor into your revised kind of NII profitability outlook from here? Yeah, so what I mentioned before is that, you know, looking at the average balances, you know, being around 30% higher than people in the make. and seeing the behavior that we saw in this last quarter, in particular, with our retail plans.
Speaker Change: I think in your prepared remarks.
Speaker Change: Liquidity.
Speaker Change: On the island remains high you did have now two quarters of.
Speaker Change: At Ibs outflows I'm wondering.
Speaker Change: Is there a is there any way that you're approaching the deposit base in terms of.
Speaker Change:
Speaker Change: At Ids that could continue to be at risk and how does that factor into your revised kind of NII profitability outlook from here.
Speaker Change: Yes.
Speaker Change: No.
Speaker Change: What I mentioned before is that looking at the average balances being around 30% higher than people endemic.
Speaker Change: And seen the behavior that we saw in this in this last quarter in particular with our retail clients, it's hard to predict.
Ignacio Alvarez: It's hard to predict. We think that our best guess right now is that you still have $600,000,000,000 possibly at risk from that base. In terms of timeline, we certainly would expect that in the second quarter next year, we'll see the same cyclicality of tax refunds coming in at the same level. There's no reason to expect that they would be significantly different or lower. It's just whether the client behavior changes. We're not seeing people; certainly, the affluent and corporate clients, commercial clients, have been consistent over the last seven or eight quarters in improving and enhancing their excess liquidity, using it for working capital or simply going for higher yield.
Speaker Change: We think that.
Speaker Change: Our best guess right now you still have $6 million to $800 million.
Speaker Change: Possibly at risk from them from that base.
Speaker Change: And in.
Speaker Change: In terms of timeline or anything.
Speaker Change: We don't have that and we certainly would expect that in the second quarter next year, we will see that same cyclicality of tax refunds coming in at the same level. There is no reason to expect that they would be significantly different or lower is just whether the client behavior changes, we're not seeing people.
Speaker Change: Certainly the affluent and corporate clients commercial clients have been consistent over the last.
Speaker Change: Seven or eight quarters.
Speaker Change: Improving and enhancing their excess liquidity using it for working capital or simply going for higher yield we're not seen it as early a lot of clients in the <unk>.
Ignacio Alvarez: We're not seeing it as early; a lot of clients in the math affluent group moving to other banks or be competitive in terms of yield and cost. So it's really a matter of balancing client behavior with our offerings of deposits, service, and being strategic with our larger relationships to make sure that we retain those deposits. But it's helpful to back.
Speaker Change: Mass mass affluent group moving to other banks or be competitive in terms of yield and cost. So it's really a matter of balancing.
Speaker Change: Same behavior with our.
Speaker Change: Offerings of of deposit service and being strategic with our larger relationships to make sure that we retain those deposits.
Speaker Change: Got it that's helpful I'll step back thank you.
Unknown Executive: Thank you.
Jared Shaw: We now turn to Jared Shaw; your line is open. Please go ahead.
Speaker Change: We now turn to chart Shaw with Barclays. Your line is open. Please go ahead.
Jared Shaw: Hi, thanks.
Speaker Change: Hi, Thanks, good morning.
Jared Shaw: Good morning. I guess maybe just first on the new ROTCE target. What capital level are you assuming to support that, or should are you expecting? Are you expecting to see capital B significantly lower or potentially lower, or is it still still grinding higher with that base? Jared, I think the NII continues to be the driver of increased profitability. That doesn't change with the change in the target. Again, we have the authorization is out. We're executing upon that. We know that that's a lever, certainly, but we want to make sure that what we're doing is sustainable and NII will continue to be the big driver.
Speaker Change: Good morning, I guess, maybe just first on the new <unk> target.
Speaker Change: No.
Speaker Change: What what.
Speaker Change: Capital level are you assuming.
Speaker Change: To support that or.
Speaker Change: Are you expecting.
Speaker Change: Are you expecting a capital b significantly lower or potentially lower or is it still so grinding higher with that base.
Speaker Change: Yes, Jerry I mean, I think the NII continues to be the driver of increased profitability and that doesn't change with the change in.
Speaker Change: The targets.
Speaker Change: I would.
Speaker Change: Again, we have a.
Speaker Change: The authorization is out we're executing upon that.
Speaker Change: We know that Thats, a lever certainly, but we want to make sure that what we're doing is sustainable and.
Speaker Change: NII will continue to be the big driver, we haven't given that target number will have to think about it and see if it helps in the future but.
Ignacio Alvarez: We haven't given that target number. We'll have to think about it and see if it helps in the future, but NII continues to be the driver.
Speaker Change: NII continues to be the driver.
Speaker Change: Okay.
Jared Shaw: Okay.
Speaker Change: Okay. Okay.
Jared Shaw: And then just shifting to credit. You look at charge up levels. They've been better than that longer term normalized range quality, you know, 75 to 125 basis points.
Speaker Change: And then just shifting to credit.
Speaker Change: You look at if you look at charge off levels, they've been better than that longer term normalized range call. It 75 to 125 basis points is this is this a new.
Lidio Soriano: Is this a new good long-term level, or is there a reason to think we should expect to see credit costs and charge-offs migrate back up higher? I will say certainly that, in the short term, that would not be the case. We still see strong performance by our commercial mortgage portfolios, with actually in the mortgage portfolio version. I've seen negative charges of benefits.
Speaker Change: Good long term level or is there a reason to think we should be we should expect to see.
Speaker Change: Credit cost and charge offs.
Speaker Change: Great back up higher.
Speaker Change: I will say certainly that in the short term I will not be the case I mean, we still see strong performance by our.
Speaker Change: Commercial and mortgage portfolios.
Speaker Change: With.
Speaker Change: Actually in the mortgage portfolio were seen.
Speaker Change: I think I've been charge offs.
Speaker Change: <unk>.
Lidio Soriano: So, I mean, I think in the short to million term, probably not; in the long term, long term we'll see.
Speaker Change: So I mean, I think in the short to medium term probably not in the long term.
Speaker Change: <unk>.
Unknown Executive: Okay, thanks.
Speaker Change: Okay. Thanks.
Speaker Change: Okay.
Timur Braziler: We now turn to Timur Braziler with Wells Fargo. Your line is open.
Speaker Change: Wait authentic team Priscilla with Wells Fargo. Your line is open. Please go ahead.
Timur Braziler: Please go ahead.
Timur Braziler: Hi, good morning. Just going back to the NII guidance, you know, tax equivalent NII declined in 3Q. The guide for fourth quarter, is that on a tax equivalent basis, or is there going to be continued movement between the adjustment in tax equivalent and the tax rate there that might change the tax equivalent expectation versus.
Priscilla: Hi, good morning.
Speaker Change: Going back to the NII guidance.
Speaker Change: Tax equivalent NII declined in three Q. The guide for fourth quarter is that on a tax equivalent basis or is there going to be continued movement between the adjustment and tactical of Atlanta, and the tax rate there that might change.
Speaker Change: The tax equivalent expectation versus the GAAP NII expectations.
Speaker Change: No.
Paul Cardillo: The guidance is gap is based on gap. What, you know, one of the drivers obviously we had lower tax exempting because of the lower earning assets, Timur. But with the increase in the deposit cost in Puerto Rico, that just essentially makes your tax-exempt portfolio less efficient. That's why you had kind of this weird relationship between an expansion in the gap in the name gap versus the tax effective gap. Okay, I mean, could we extrapolate that same level of increase in the tax equivalent NII for next quarter or not? Yes, I don't think of it that way.
Speaker Change: Guidance is GAAP is based on GAAP.
Speaker Change: But what are the other drivers obviously, we had lower tax expense.
Speaker Change: Because of the lower earning assets tumor but.
Speaker Change: With the increase in the deposit costs in Puerto Rico that essentially makes your tax exempt portfolio less efficient. That's why you had kind of this weird relationship between an expansion in the in the gap and the NIM gap versus the tax effect effective GAAP.
Speaker Change: Okay, I mean could we extrapolate that same level of increase in the tax equivalent NII for next quarter or we're not.
Speaker Change: Oh, yes, I don't think of it that way so it will be giving you an answer without really having looked at it.
Paul Cardillo: So I'll be giving an answer without really having looked at it. What I would say is that, you know, we are anticipating the name to expand. I would expect that both the gap name and the tax effective tax affected name to expand as well. Okay, thanks for that.
Speaker Change: What I would say that we are anticipating the NIM to expand I would expect that both the GAAP NIM and the tax effective tax effected NIM to expand as well.
Speaker Change: Okay. Thanks for that and then just again on the deposit.
Paul Cardillo: And then just again on the deposits, any line of sight for public fund outflows in 4Q? I guess the decline that happened in 3Q, was there anything that maybe got pulled forward and I guess to what extent do you need a stable deposit base in the fourth quarter in order to achieve that fourth quarter and I got.
Any line of sight for public fund outflows.
Speaker Change: In <unk>.
Speaker Change: The decline that happened in <unk> was there anything that may be got pulled forward and I guess to what extent do you need a stable deposit base and in the fourth quarter in order to achieve that fourth quarter NII Guide.
Paul Cardillo: Well, let me first say we don't have a large winner guidance right now for the end of the year. We gave 17 to 19, sorry, 17 to 19. We were not anticipating anything large in the fourth quarter. After we had anticipated the Q3 payoff, that was part of our, you know, we had visibility in that and why we had not increased the range in the, you know, when we announced in the second quarter.
Speaker Change: Yeah.
Speaker Change: Let me first say, we don't have a largely in our guidance right now for the end of the year we gave.
Speaker Change: <unk> two <unk>.
Speaker Change: 19, sorry.
Speaker Change: 17 to 19, we're not anticipating anything large in the fourth quarter, we had anticipated the Q3 payoffs.
Speaker Change: Part of our.
Speaker Change: Visibility on that and why we had not increased.
Speaker Change: The range in the when we announced in the second quarter.
Paul Cardillo: In the first quarter, the government does have some geo payments and other, other, you know, the first ones that might impact the first quarter, but right now we're not expecting anything large.
Speaker Change: In the first quarter the government does have some geo payments and other other.
Speaker Change: The disbursements that that might impact the first quarter, but.
Speaker Change: Right now, we're not expecting anything large.
Lidio Soriano: Okay, and then just last for me, trying to extrapolate consumer credit trends with the fact that consumers are starting to utilize more of their liquidity. How closely correlated are those two? We've seen kind of consumer trough earlier in the year and now starting to take a little higher in those delinquencies as some of the liquidity is being rolled off.
Speaker Change: Okay, and then just last for me.
Speaker Change: Turning to extrapolate consumer credit trends was the fact that consumers are starting to utilize more of their liquidity.
Speaker Change: Closely correlated or those two weeks.
Speaker Change: We've seen kind of consumer trough earlier in the year now starting to tick a little higher in those delinquencies add some of that liquidity is being rolled off can you maybe provide us an update on where you see consumer credit peeking out here.
Lidio Soriano: Can you maybe provide us an update on where you see consumer credit peaking out here. Well, I mean, the way we look at the consumer, I look for it. I mean, we have a very strong market, a very strong unemployment market with, as Ignacio mentioned, unemployment at record low 5.5%. We also have a consumer that still has a lot of liquidity, 30% above the liquidity that they had prior to the pandemic. So we are generally positive about the outlook for the consumer on a going forward basis. I'm also with rates coming down. I think that is also going to also be helpful for some of the outstanding debt that they may have, particularly in credit cards.
Speaker Change: Well I mean.
Speaker Change: The way, we look at the consumer outlook for it.
We have a.
Speaker Change: A very strong market.
Speaker Change: Very strong unemployment market we've mentioned.
Speaker Change: I mentioned unemployment a record low of five 5%.
Speaker Change: We also have a consumer.
Speaker Change: Consumers are still.
I don't know really quickly 30% above then agree that they have.
Speaker Change: Mimic so we are generally positive about the outlook for the consumer on a going forward basis I'm also with rates coming down I think that is also going towards it'll be helpful for some of the funding.
Speaker Change: They may have particularly in credit cards.
Speaker Change: Great.
Speaker Change: Yes.
Benjamin Gerlinger: Next question comes from Ben Gerlinger with City. Your line is open. Please go ahead.
Speaker Change: Our next question comes from Bank Garlinger with Citi. Your line is open. Please go ahead.
Benjamin Gerlinger: Good morning. I just wanted to clarify: in the prepared remarks, you said, if I taught it correctly, of at least 12%, or should we kind of hear market 412. I know a bit of a modeling and back into it.
Speaker Change: Hey, good morning.
Speaker Change: Hi, Good morning, just wanted to.
Speaker Change: Clarify.
Speaker Change:
Speaker Change: In the prepared remarks, you said.
Speaker Change: If I if I caught it correctly of at least 12% or should we kind of hear market for 12, I know, it's a bit of a modelling and backing into it I'm just trying to make sure of that.
Benjamin Gerlinger: I'm just trying to make sure that we're not, we're not, we're not. We're just trying to do low expectations here. I did, I did say at least 12%. That's the target. Yes, okay.
Speaker Change: We're not expand to lower expectations here.
Speaker Change: I did say at least 12%.
That's the target.
Speaker Change: Got it okay cushion the blow a little bit here, but.
Benjamin Gerlinger: The cushions blow a little bit here, but when you think about credit, I know we just touched on it here with the last question. But I know in 2Q you made an issue to kind of calling people within the consumer book a little bit faster, doing things behind the scenes. That's clearly showed improvement on 2Q.
Speaker Change: When you think about credit.
Speaker Change: Just touched on it here with the last question, but.
Speaker Change: And <unk> you made it initiatives kind of calling people within the consumer book, a little bit faster doing things behind the scenes that clearly showed an improvement on the <unk> <unk>.
Benjamin Gerlinger: 3Q seemed to show a little slippage, and it's not like you guys are the only one in the other banks for a reason to have similar component, but we could go forward here.
Speaker Change: <unk> is a little slippage in it sounds like you guys are the only one out of Puerto Rico.
Speaker Change: More component, but when we go forward here.
Benjamin Gerlinger: Is it in color? You can provide them kind of marrying the two of like you just said, unemployment as well, or wages are up. I was still seeing a little bit of slippage.
Speaker Change: Is there any color you can provide on.
Speaker Change: Kind of marrying the two like you just said, but unemployment is low wages are up or so seems a little bit of slippage.
Benjamin Gerlinger: Is it legacy FICO kind of working this way through the Python here, or just a little thought on credit. I mean, I think you did touch upon some of the things. You know, we did see that the duration of the second half of last year, we reacted by changing underwriting, collection efforts, etc. Some of that, you know, as you said, is to pick through the Python. It will take some time to get through and clear up.
Speaker Change: The legacy FICO kind of working its way through the Python here or just any thoughts on credit.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: You did touch upon some other things we did see that deterioration in the second half of last year, and we reacted by changing underwriting collection efforts et cetera. Some of that as you said as the pig through the Python. It will take some time to get through and clear up.
Lidio Soriano: You know, it's important that the U.S. is also seeing strong unemployment numbers, strong consumer, and they are seeing consumer losses as well, so it's not unique to us. We're still well below pre-pandemic levels, and some of our portfolios, particularly around the linkancies. I think where we see some of the noise in Puerto Rico, we do have some purchased portfolios that we bought from Vintex in 22, 21, and 22. Those have higher losses than the Puerto Rico numbers. That skews the number a little bit. If you want to get a sense, you can look at the losses in the consumer loan portfolio in PV.
Speaker Change: It's important.
Speaker Change: The U S has also seen strong unemployment numbers strong consumer and they are seeing consumer losses as well. So it's not unique to us we're still well below.
Speaker Change: Pre pandemic levels in some of our.
Speaker Change: Portfolios, particularly around delinquencies I think where.
Speaker Change: You see some of the noise in Puerto Rico, we do have some.
Speaker Change: Purchased.
Speaker Change: <unk>.
Portfolios that we bought from <unk>.
Speaker Change: Fintech in 'twenty to 'twenty, one 'twenty two those have higher losses in the Puerto Rico numbers.
Speaker Change: That skews the number a little bit if you wanted to get a sense you can look at the losses in the consumer loan portfolio PV and those losses are very similar.
Lidio Soriano: And those losses are very similar, and you can kind of get a sense. I think there's about 100 million in that portfolio. So that impacts us number. And then the other is the auto loans; they do tend to be a little bit more lumpy because you do have to do the recovery of those delinquent autos and repossess them. And that can be lumpy in the numbers for charges.
Speaker Change: You can kind of get a get a sense I think there's about $100 million in that portfolio. So that impacts those number and then the other is the auto loans they do tend to be.
Speaker Change: Little bit more lumpy because.
You do have to do their recovery of those.
Speaker Change: Delinquent.
Speaker Change: Autos and repossess them and that can be lumpy in the numbers for charge offs I don't know ill leave you two things maybe to add to I would say.
Lidio Soriano: I don't know, leave you. Now, two things maybe to add to that. I would say, first, when we're looking at things on a vintage basis, we see very strong performance by the recent vintage. So that is very encouraging from a going from our basis. We also see the trenching. Early, the link was also very positive. So now with standing the current performance, we think as we look into a future, things are heading the right direction. Gotcha.
Speaker Change: <unk> when we're looking at things on a vintage basis, we see very strong performance by the recent vintages. So that is very encouraging from a going forward basis. We also see the trends in early delinquency also very positive so.
Speaker Change: Sunbeam decline performance, we think as we look into the future.
Speaker Change: Things are heading in the right direction.
Speaker Change: Gotcha.
Lidio Soriano: I know you're not going to give guidance on 25 expenses yet, but I also do know that you're also doing behind-the-scenes initiative. Is there any of that rolling off in 25? Now, I mean, I think the transformation effort will be ongoing, as we said. You know, we look at early on a slowdown in expense increases, not necessarily a recovery or reduction of expenses, but we see it's a lot of shifts, right? So maybe today we're spending money and consultant and doing work while we're capitalizing software development. Next year, you might see reductions and consultants, and then you pick up on depreciation, our organization of software, capitalized software.
Speaker Change: To give guidance on 'twenty five expenses, yet but.
Speaker Change: Also do know that you're also doing behind the scene initiatives. There is any of that rolling off in 'twenty five.
Speaker Change: No I mean, I think the transformation effort it will be ongoing as we've said we look at early on a slowdown in expense increases not not a necessarily.
Speaker Change: A recovery of a reduction of expenses, but we see it as a lot of shifts right. So maybe today, we're spending money in consultant and doing work, while we're capitalizing software development next year, you might see reductions in <unk>.
Speaker Change: And consultants and then you pick up on depreciation or amortization of software capitalized software. So it's a it's a.
Lidio Soriano: So it's a trend that kind of bounces out, but this transformation effort is going to take some time. It doesn't end in 25. Yeah, okay. So not something down, but the pace of increase probably as well. Okay, helpful.
Speaker Change: A trend that kind of bounces out, but this transformation effort is going to take some time and it doesn't end in 'twenty five.
Speaker Change: Yes, Okay I got you.
Speaker Change: Coming down, but the pace of inquiries promos flows okay.
Unknown Executive: I appreciate it. Thank you.
Speaker Change: I appreciate it thank you.
Jared Cassidy: We now turn to Jared Cassidy with RBC. Your line is open.
Speaker Change: You May now turn to Jared Cassidy with RBC. Your line is open. Please go ahead.
Jared Cassidy: Please go ahead.
Jared Cassidy: Good morning, gentlemen. Can you share with us? I think when I looked at your 2Q, 10Q, you guys in your acid sensitivity table indicated that you were acid sensitive that a, you know, rise and rates would positively affect that interesting. And I noticed this quarter, the investment portfolio duration extended a little bit from the second quarter. Are you currently acid sensitive still today?
Speaker Change: Good morning, gentlemen.
Speaker Change: Can you hi, good morning, Gerrard Jorge share with us.
Speaker Change: Can you share with us I think.
Jared Cassidy: When I looked at your two Q10-Q, you guys and your asset sensitivity table indicated that you were asset sensitive.
Jared Cassidy: Rising rates would positively affect net interest income.
I noticed this quarter the investment portfolio duration extended a little but from the second quarter are you currently asset sensitive still today and then the second part of the question is I'm not asking for 25 guidance, but if the forward interest rate curve is correct and we.
Paul Cardillo: And then, as the second part of the question is, I'm not asking for 25 guidance, but if the forward industry curve is correct and we see the short end of the curve coming down, you know, possibly to 3.5% by the end of next year, would that be an added headwind for net interest income growth for you guys? So first, I want to say we are fairly neutral in our interest rate position, right? We measure that on a 12-month period. Sorry, I want to make sure that we highlight that. In terms of the quarter, we did start during this quarter. We bought about 1.1 billion in 2 to 3 year Treasury notes, both in Puerto Rico and in the US bank, to try to mitigate any, you know, or hedge against rates coming down.
Jared Cassidy: See the short end of the curve coming down, possibly the three 5% by the end of next year would that be an added headwind for net interest income growth for you guys.
Jared Cassidy: Yeah.
Speaker Change: So first Jerry I won't say we are.
Speaker Change: Fairly neutral in our interest rate position right, we measure that on a 12 month period.
Speaker Change: So I want to.
Speaker Change: Make sure that we.
Speaker Change: We highlight that.
Speaker Change: In terms of the quarter, we did start during this quarter, we bought about $1 1 billion in two to three year Treasury notes, both in Puerto Rico and in the U S Bank.
Speaker Change: To mitigate any hedge against rates coming down so we're trying to become a little bit more liability sensitive we expect to continue that.
Paul Cardillo: We're trying to become a little bit more liability sensitive. We expect to continue that, not necessarily adding more to it, but as new notes mature, reinvesting them in that 2 to 3 year period, trying to maintain a similar level of duration for the entire portfolio. And over time, that will help mitigate. Certainly, you know, we all would like to see a normal sloping curve that would be very helpful to us. And a higher for longer environment, you know, with the long road that we're seeing in Puerto Rico, and certainly helps to be eventually, you know, get to reduce your funding costs.
Speaker Change: Not necessarily adding more to it but as new notes mature reinvesting them in that two to three year period of trying to maintain a similar level of duration for the entire portfolio.
Speaker Change: And over time that that will help me.
Speaker Change: Mitigate certainly we all would like to see a normal sloping curve that would be very helpful to us and a higher for longer environment with the loan growth that we're seeing in Puerto Rico, certainly helps if you eventually get to reduce your funding costs.
Paul Cardillo: But given our position and the repricing of those, that investment portfolio that today is, you know, underwater against the cost of public funds, we see that we still have a lot of tailwind positive tailwinds through the next few quarters. I think through 2026 for repricing and getting a lift from where we're at today to where those should reap. Right. Very good.
Speaker Change: But given our position.
Speaker Change: And the repricing of that investment portfolio that today is under water again.
Speaker Change: The cost of public funds, we see that we still are.
Speaker Change: A lot of tailwind positive tailwind through the next few quarters I think through 2026.
Speaker Change: For repricing and getting a lift from.
Speaker Change: From where we're at today to where those should reprice.
Speaker Change: Very good. Thank you and then just a follow up on the credit conversation.
Paul Cardillo: Thank you.
Jared Cassidy: And then just to follow up on the credit conversation we've been having on this call, the credit card portfolio, Slide 24. You give us very good detail on what's going on with the link with these and charge off. I'm curious. It seems odd that when I look at your phyco mix of originations, they steadily have increased from the pre-COVID period. It's clear to where we are today, but you point out in this line that your delinquency levels, as well as your charge-offs, as the percentage of the portfolio, have risen above pre-COVID levels. What's counting for the disconnect of a high olfaco score, but now you're seeing higher charge-off and delinquency levels.
Speaker Change: Having on this call.
Speaker Change: Credit card portfolio Slide 24, you gave us very good detail on whats going on with delinquencies and charge offs.
Speaker Change: I'm curious it seems odd that when I look at your FICO mix of originations. They steadily increased from the pre COVID-19 period to where we are today, but.
Speaker Change: Hinted out in this slide that your delinquency levels as well as charge offs as a percentage of the portfolio have risen above pre COVID-19 levels.
Speaker Change: Accounting for the disconnect of Ohio, FICO score, but now you're seeing higher charge off and delinquency levels.
Jared Cassidy: In the course of credit cards, our reinations don't necessarily equate with outstanding balances. So because it takes time, it takes a little bit of time for it to build up. So the renegies that you're seeing, the slide in my contact with a very small percentage of a total balance. So that explains why now it's standing the fact that you're seeing improvements in phyco. You're not seeing the same level of improvements in delinquency and charge-offs. Do you have a sense of the outstanding, not the originations, but where the phyco scores sit for the outstanding as of the third quarter?
Speaker Change: And because of credit cards.
Speaker Change: Originations doesn't necessarily equate with.
Speaker Change: On the bonds.
Speaker Change: So because it takes time so things on it.
Speaker Change: A bit of time for it to build up so.
Speaker Change: We measure how youre seeing the slide my coincide with a very small percentage of our total balance. So that explains why notwithstanding the fact that you are seeing significant improvement.
In FIFO.
Speaker Change: You are not seeing the same level.
Speaker Change: In delinquency.
Speaker Change: And in terms of.
Speaker Change: I see.
Speaker Change: And would that.
Do you have a sense of the outstandings not be originations, but where the FICO scores.
Speaker Change: For the Outstandings as of the third quarter.
Jared Cassidy: Sure. We have that information that is not something that we have publicly made available.
Speaker Change: We have that information that is not something that we have publicly made available I think.
Lidio Soriano: We'll think about it and maybe provide that in the future. Okay. Thank you. I would also add, I mean, certainly when we look at pre-pandemic, I mean, the current rate environment is fairly high, right? So I think that those have some impact to, and hopefully this is one portfolio that, as rates start coming down, the borrowers should see some very quick relief in terms of the level of payments, etc. Correct.
Speaker Change: Maybe provide that in the future.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Speaker Change: I would also add I mean, certainly when we look at pre pandemic.
Speaker Change: The current rate environment is fairly high right. So I think that does have.
Speaker Change: Some impact too and hopefully this is one portfolio that as rates start coming down.
Speaker Change: The borrowers should see some very quick relief in terms of the level of payments et cetera.
Correct, Okay. Thank you.
Lidio Soriano: Okay.
Unknown Executive: Thank you.
Speaker Change: Yeah.
Unknown Executive: As a reminder, if you'd like to ask a question, please press star one on your telephone keypad now.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now.
Samuel Varga: I mean, I'll turn to Samuel Varga with UPS. Your line is open. Please go ahead.
Speaker Change: Thank you Samuel Barker with UBS. Your line is open. Please go ahead.
Samuel Varga: Good morning. I just wanted to go back to the public deposits for a minute. Given some of the, you know, short-term rate moves, for example, like the one year treasury, or the last few weeks, is there an argument to be made that there's going to be some headwind to repricing them down and for you? There's always, you know, basis risks in turn. When we talk about being neutral, we talk about being neutral over a 12-month period. But, you know, bottom line, that means that our assets, and we have still a number of out-of-assets and liabilities that reprise, right?
Samuel Barker: Good morning, I, just wanted to go back to the public deposits.
Samuel Barker: Given some of the short term rate moves for example, like the one year Treasury.
Samuel Barker: Over the last few weeks because there is there an argument to be made that there is going to be some headwinds to your repricing them down and <unk>.
Samuel Barker: Okay.
Samuel Barker: I mean.
Samuel Barker: There's always basis risk and turned on and when we talked about being neutral we talked about being neutral over a 12 month period, but.
Samuel Barker: Bottom line that means that our assets and we have similar number out of assets and liabilities that we price right.
Samuel Barker: The there is a difference in basis.
Paul Cardillo: There is a difference in basis. So there's always that risk. That risk is not always negative, right? The rates can get ahead of Fed movements and benefit. And, you know, we have assets that may be repricing based on Prime versus liabilities, pricing based on different indexes. So that could create some noise. So I'm always hesitant to say that it's a headwind. There's a timing difference. I mean, these are our prices on a lag. So that you always have to risk that the full effect will take longer. But we've also tried to stagger some of our T-bills to account for some of these things.
Samuel Barker: So theres always that risk that risk is not always negative right.
Samuel Barker: The rates can get ahead of.
Samuel Barker: Fed movements.
Samuel Barker: And benefit than we have.
Samuel Barker: Assets that may be repricing based on prime versus I believe.
Samuel Barker: Reising based on different indexes, so that could create some noise.
So I'm always hesitant to say that it is a headwind there is a timing difference.
Samuel Barker: These are priced on a lag so that you always have de risked that that the full effect will take longer.
Samuel Barker: <unk> also try to stagger some of our T bills to account for some of these things and when we try to manage to that.
Paul Cardillo: And we try to manage to that. And I think the issue and the hesitation is that it is $18 billion, $19 billion portfolio. So, you know, 5-10 basis points; that does make a difference there.
Samuel Barker:
Samuel Barker: I think the issue in the hesitation is that it is $18 billion $19 billion portfolio, So 510 basis points and it does make a difference there.
Ignacio Alvarez: Yes, thank you for that. And then just wanted to go back to you talked through the different deposit channels and sort of the repressing opportunities. It sounds like you're happy to pay the rate to keep the deposit sort of the non-public deposits at least flat. Is that the right way to read it, or could we see you get sort of aggressive enough to drive some deposit growth in the non-public part of the base? I think, you know, we'd only get aggressive if we thought we were losing deposits to price competition. And I don't think that's the case.
Speaker Change: Yes. Thank you for that and then just wanted to go back to talk through the different deposit channels and sort of the repricing opportunities.
Speaker Change: It sounds like you are happy to pay the rates to keep the deposits sort of the nonpublic deposits at least flat is that the right way to read it or could we see you get.
Speaker Change: Sort of progressed.
Speaker Change: Progressive enough to drive some some deposit growth in the nonpublic cart.
Speaker Change: Base.
I think we would only be aggressive if we thought we were losing deposits.
Speaker Change: To price competition, and I don't think Thats the case.
Ignacio Alvarez: You know, I mean, there is some price competition from US Treasuries, but, you know, we can't raise deposit rates enough to compete with that. And in terms of, you know, regular deposits from our commercial competitors, we're not seeing that. So, we're just seeing, you know, people either moving money to these other alternative investments or spending the money. So, we don't think at this point it would be productive to raise rates. Now, we will be like what I mentioned earlier in the call. We don't think we're going to be able to lower rates much either because they're starting from a low point.
Speaker Change: There is some price competition from U S treasuries, but we can't raise deposit rates enough to.
Speaker Change: With that in terms of regular deposits from our commercial.
Competitors, we're not seeing that so we're just seeing people either moving money to the alternative investments or spending the money. So we don't think at this point it would be productive to to raise rates.
Speaker Change: Like I had mentioned earlier in the cloud, we don't think we're going to be able to lower rates much either because they're starting from a low point.
Unknown Executive: I just did basically to hear my question.
Understood. Thanks for taking my question.
Speaker Change: Yeah.
Unknown Executive: This concludes our Q&A.
Speaker Change: This concludes our Q&A I'll now hand back to Ignacio Alvarez CEO for any final remarks.
Ignacio Alvarez: I'll now hand back to Ignacio Alvaro's CEO. Any final remarks? Thanks again for joining us today and for your questions. We look forward to updating you on our port car results in January.
Ignacio Alvarez: Thanks, again for joining us today and for your questions. We look forward to updating you on our fourth quarter results in January.
Speaker Change: Sure.
Unknown Executive: Ladies and gentlemen, the state call has now concluded. We'd like to thank you for your participation. You may now just connect your lines. Thank you very much.
Speaker Change: Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Thank you.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].