Popular Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 12 speakers on the call.

Operator

Morning, ladies and gentlemen. Thank you for attending today's Popular Inc. Q1 2023 Earnings Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Operator

I would now like to pass the conference over to your host, Paul Cordelia with Popular Inc. Please proceed.

Speaker 1

Good morning, and thank you for joining us. With us on the call today is our COO, Javier Ferrer our CFO, Carlos Vasquez and our CRO, Lidio Soriano. They will review our results for the Q1 and then answer your questions. Other members of our management team will also be available during the Q and A session. Our CEO, Ignacio Alvarez, is unavailable today due to a medical matter.

Speaker 1

We expect him back at the office early next week. Before we begin, I would like to remind you that on today's call, we may make forward looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our COO, Javier Ferrer.

Speaker 2

Thank you, Paul. Good morning and thank you for joining the call. We began the year with a strong quarter, Achieving net income of $159,000,000 our quarterly net income was $30,000,000 lower than the adjusted 4th quarter net income of $189,000,000 First quarter results were impacted by lower net interest income, Offsetting part by lower expenses, higher non interest income and a slightly lower provision for credit losses. Loans increased during the quarter by $261,000,000 Banco Popular generated loan growth across all segments, While Popular Bank saw commercial loan growth offset by runoff in the construction and consumer portfolios, Our net interest margin decreased by 6 basis points to 3.23% in the quarter. Higher deposit costs, Particularly in our Puerto Rico public deposit portfolio and a Popular Bank impacted our margin.

Speaker 2

This was partially offset by an improvement in asset mix due to loan growth and a reduction of the investment portfolio. Credit quality trends remained favorable during the period. NPLs decreased and net charge offs remained well below pre pandemic levels. During the quarter, Popular issued $400,000,000 in 5 year senior notes With a 7.25 percent coupon, we intend to use a portion of the net proceeds of the offering to redeem or repay The $300,000,000 principal amount of our senior notes that mature in September. Please turn to Slide 4.

Speaker 2

We maintain robust liquidity anchored by our diversified deposit franchise And our high levels of cash reserves and unplanned securities. Our deposit franchise is made up of approximately 42% in retail deposits with an average balance of less than $10,000 per account, 25% of the balances are in public sector deposits, which are secured by collateral. 28% are in commercial deposits and the remaining 5% are wholesale deposits. Overall, the profits were down by $273,000,000 in the quarter, but liquidity sources We're up by $1,300,000,000 Our total consolidated borrowings, including our newly issued senior notes, We remain flat during the quarter. Our customer base in Puerto Rico grew by approximately 12,000 During the quarter, reaching nearly 2,000,000 unique customers.

Speaker 2

Adoption of digital channels among our retail customers remains strong. Active users on our Nibanco platform exceeded 1,100,000 For 56% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channels. This trend remains significantly higher than pre pandemic levels and well above our island peers. In the Q1, consumer spending remained healthy and with combined credit and debit card sales up 9% compared to the Q1 of 2022.

Speaker 2

As on the mainland, mortgage originations in Puerto Rico have been impacted By rising rates and also by limited inventory of available properties, the dollar value of mortgage originations At Banco Popular decreased by 29% compared to the Q1 of last year, driven by lower refinance activity due to the interest rate environment. The local economy performed well during the Q1. Business activity is solid And remains in good shape, as reflected in the continued positive trends in total employment and other published economic data. While new auto sales have slowed compared to the quarterly pace of the past couple of years, they remain above pre pandemic levels, Evidencing continued robust demand for cars in Puerto Rico. The tourism and hospitality sector Continues to be a source of strength for the local economy.

Speaker 2

Year to date, San Juan's airport has seen record levels of passenger traffic. Hotel demand also has been strong as can be seen in record high average daily rates And revenues per available room. There are still approximately $50,000,000,000 of hurricane recovery funds that have yet to be disbursed. We expect that these funds will support economic activity in many sectors in the coming years. We are uniquely positioned to serve the needs of our customers and to benefit from such activity.

Speaker 2

In short, we are pleased with our results for the quarter, particularly our solid loan growth in Puerto Rico And the continued strength of our deposit base, liquidity and credit quality. We are mindful of And have been monitoring the economic and market environment as well as the recent developments in the U. S. Banking sector. We will continue to manage our banks to maintain significant available liquidity as we grow responsibly.

Speaker 2

Despite these headwinds, we remain optimistic about the future of Puerto Rico, our primary market, and our ability to manage And serve the needs of our customers through any potential challenges that may lie ahead. I now turn the call over to Carlos for more details on our financial results.

Speaker 3

Thank you, Javier. Good morning. Sorry, apologies. Please turn to Slide 5. Net income was $159,000,000 compared to $257,000,000 in Q4.

Speaker 3

Excluding the impact of the $68,000,000 DTA allowance reversal in Q4, net income decreased by $30,000,000 in Q1. Net interest income was $532,000,000 a decrease of $28,000,000 from Q4. $9,000,000 of this variance was related to the lower date count during the quarter. On a taxable equivalent basis, Net interest income was $570,000,000 compared to $622,000,000 in Q4. The variance was primarily a result of higher interest expense on deposits of $54,000,000 resulting from increased deposit rates, Mainly from Puerto Rico Public Deposits and to a lesser extent, Popular Bank.

Speaker 3

Non interest income was 162,000,000 An increase of $3,000,000 from Q4. Included in this result was a $7,000,000 litigation related insurance claim reimbursement. The provision for credit losses was $47,000,000 compared to $48,000,000 in the 4th quarter. Total operating expenses were $441,000,000 a decrease of $21,000,000 from the prior quarter. This reduction was primarily driven by lower professional fees by $16,000,000 as well as lower technology and software expenses by 10,000,000 Historically, these costs tend to be lower during the Q1 of every year.

Speaker 3

This is more accentuated in the Q1 of this year due to our multi year transformation initiatives. During Q1, we had $6,000,000 transformation related expenses Compared to $10,000,000 last quarter. As the transformation progresses, expenses will shift from advisory and conceptual plans Through development and execution of implementation plans. As a result, we expect a slower pace of expenditure initially as in Q1 And an acceleration as the year progresses. We continue to anticipate transformation related expenses of $50,000,000 in 2023.

Speaker 3

Other large expense variances were lower seasonal business promotion expenses by 9,000,000 Which was somewhat offset by higher personnel costs by $9,000,000 primarily related to the previously disclosed increase in hourly minimum wage at BBPR That took effect in January. And lower order benefit of $7,000,000 mostly due to lower gain on sale of properties. Our quarterly expense trajectory has historically ramped up as the year progresses. We anticipate that 2023 will be consistent with that experience And continue to expect expenses for the year of approximately 1,870,000,000 Our effective tax rate for the quarter was 23%. For the full year 2023, We expect the effective tax rate to be within a range of 21% to 26%, higher than the range provided during our last webcast.

Speaker 3

In the near term, we expect to run our banks with a higher level of reserves at the Fed, which leads to less Tax exempt income and therefore a higher tax rate than we have previously anticipated. Please turn to Slide 6. Net interest income was $532,000,000 On a taxable equivalent basis, it was $621,000,000 lower than in the 4th quarter. Net interest margin decreased by 6 basis points to 3.22 percent in Q1. On a taxable equivalent basis, NIM was 3.46%, a decrease of 18 basis points.

Speaker 3

The decrease is driven by higher interest expense on deposits due to a significant, though anticipated, 103 basis point increase in the cost of public deposits. This was partially offset by higher loan balances and yields, Close an improved mix of earning assets. At the end of the Q1, public deposits were roughly 15,500,000,000 For $15,800,000,000 excluding $700,000,000 in deposits held and managed by our trust division. This compares to $15,800,000,000 $15,200,000,000 respectively at year end. In the past, we had excluded the balances in trust From our discussion about Puerto Rico public deposits, given that these are managed by our fiduciary services division, where we act as custodian or escalated.

Speaker 3

However, we have decided to aggregate these amounts to reflect the overall relationship with government entities and provide more visibility To collateralize deposits, these trust deposits have always been reported in our total deposit balance. During 2023, now inclusive of trust deposits, we expect public deposits To be in a range of $14,000,000,000 to $16,000,000,000 essentially unchanged from our previous expectation of $13,000,000,000 to $15,000,000,000 That excluded trust deposits. It's important to reiterate that by law in Puerto Rico, foreign deposits must be 100% collateralized. Any decrease in the level of these deposits will have no significant impact on our liquidity. Excluding Puerto Rico public deposits, Consolidated deposit balances increased by $180,000,000 in the quarter, primarily time and saving deposits at Popular Bank Got it through a direct channel.

Speaker 3

This compares to a decrease of $1,400,000,000 in non public deposits during the Q4. In Q1, we continued to see some commercial and high net worth clients pursuing better yields on excess liquidity, Moving these funds outside the banking sector. However, we have been able to capture a good portion of this movement In our broker dealer, which saw an increase in assets under management of approximately $450,000,000 Since the end of Q1, Overall deposits have increased by approximately $700,000,000 Our interest rate sensitivity As the year progresses, we expect the margin to resume an upward trajectory. The timing will depend on the interaction of our loan growth and mix, deposit balances and the pace of repricing of public And incrementally non public deposits. Our rising loan balances increased by $161,000,000 compared to Q4, Driven by growth on all loan segments at BBPR and commercial loans at PB.

Speaker 3

We are encouraged by the demand for credit at BBPR and PB. We will continue to take advantage of opportunities to extend credit, Thereby improving the use and yield of our existing liquidity. Please turn to Slide 7. Deposit betas of the current tightening cycle are now at or above the prior cycle. We have seen a total cumulative deposit beta of 24% to date.

Speaker 3

However, In Q1, we saw an acceleration of deposit pricing. In BBPR, total deposit costs increased by 35 basis points, Led by public sector deposits. In PV, total deposit costs increased by 67 points, led by retail deposits as we increase the use of our online deposit channel. In Puerto Rico, our combined retail and commercial deposit betas Cycle to date have been less than 10%. As we've discussed over the past couple of quarters, Given the rapid shift to higher short term interest rate, we expected a significant increase in the cost of public deposits.

Speaker 3

In the Q1, the cost increased by 103 basis points versus our January estimate of roughly 120 basis points. The difference rests in lower average balances and the mechanics of the interest expense calculation. We expect the cost of public deposits to increase by approximately 60 basis points in Q2. The deposit pricing agreement with the Puerto Rico Public Sector is market linked with a lag. This source of funding resulted in an attractive spread under market rates.

Speaker 3

Please turn to Slide 8. We have added the following two slides in our deck because of the increased focus on liquidity, Borrowings and deposit composition. Liquidity sources for the corporation increased by $1,300,000,000 in Q1. 77% of this liquidity resides in excess funds at the Fed and on pledged securities. Borrowings for the quarter were flat at $1,400,000,000 We reduced our Feral Home Loan Bank borrowings by $366,000,000 in However, the issuance of our senior notes due in 2028 roughly compensated for that reduction.

Speaker 3

There were no incremental borrowings during the quarter from the Federal Home Loan Bank, the Fed discount window for the bank term funding program. On March 13, 2023, Popular issued $400,000,000 of 7.25 percent senior notes During 2028, we intend to use a portion of the net proceeds of the offering to redeem or repay 300,000,000 Principal amount of our outstanding senior notes that mature in September 2023. Please turn to Slide 9. The summation of transactional accounts and time deposits with balances over $250,000 Ended Q1 at $13,800,000,000 or 23% of total deposit balances. The liquidity sources described in Slide 8, the prior slide, totaled 18,300,000,000 Covering 135 percent of deposits or $250,000 The balances of our non interest bearing deposits have been Most of our recent balance changes have been in interest bearing accounts.

Speaker 3

Please turn to Slide 10. Our investment portfolio is almost entirely comprised of treasury and agency mortgage backed securities, which carry minimal credit risk. Including our cash position, this portfolio has an average duration of approximately 2.6 years. As discussed previously, During the rapid increase in rates in 2022, as well as the uncertain outlook for interest rates, in October of last year, We transferred to health to maturity $6,500,000,000 of U. S.

Speaker 3

Treasuries, thereby reducing the future impact of rates on tangible book value. At the time, this action reduced AOCI exposure to interest rates by about a third. When transferred to HPM, These positions had a pre tax unrealized loss of $873,000,000 which will be amortized back into capital throughout the remaining life of the transferred positions. As of the end of the Q1, the balance of this unrealized loss Stood at $789,000,000 a reduction of $43,000,000 from Q4 $84,000,000 from the transfer date. We expect this loss to be amortized back into capital through the remaining life of the portfolio At a rate of approximately 5% per quarter through 2026.

Speaker 3

As a result of the timing of this transfer And given the level of rates at quarter end, all of the unrealized losses related to the HDA portfolio are already reflected in our tangible capital. Therefore, at the end of the quarter, there are no significant or recognized marks related to our HDM book. Please turn to Slide 11. Our return on tangible equity was 11.5 Regulatory capital levels remain strong. Our common equity Tier 1 ratio in Q1 of 16.7% Increased by 34 basis points from Q4.

Speaker 3

Annual book value per share at quarter end was $50.15 An increase of $5.18 per share or almost 12% from Q4. This improvement is driven mostly By a favorable variance of $192,000,000 in the net unrealized losses on securities oil for sale And quarterly net income of $159,000,000 partially offset by dividends declared in the quarter. Finally, touching on capital, we will revisit future capital actions in the second half of twenty twenty three. Our long term outlook on capital return has not changed, anchored in our strong regulatory capital ratios. However, in the near term, We need to get more certainty on the outlook for rates and the economy and also more clarity on the potential regulatory response to recent events in the banking sector.

Speaker 3

Over time, we expect our regulatory capital ratios to gravitate towards the levels of our main line peers plus the buffer. With that, I turn the call over to Olivier.

Speaker 4

Thank you, Carlos, and good morning. Overall, Coplera continues to reflect Stable credit quality trends with low levels of net charge off and decreasing NPLs. We remain encouraged by the performance of our loan Book post pandemic. Specifically, early delinquency, net charge offs and nonperforming loan inflows continue to trend significantly below Turning to Slide number 12. Nonperforming assets decreased by 24,000,000 To $504,000,000 this quarter, driven by an NPL decrease of $27,000,000 due to lower mortgage And consumer NPLs in Puerto Rico, offset in part by an audio increase of $3,000,000 NPL inflows increased slightly quarter over quarter.

Speaker 4

At the end of the quarter, the ratio of NPL to total loans held in portfolio decreased to 1.3% from 1.4% in the previous quarter. Turning to Slide number 13. Net charge off amounted to $33,000,000 for our annualized 41 basis points of average loans held in Compared to $31,000,000 or 39 basis points in the prior quarter. The results for the quarter We're impacted by a $10,500,000 charge off on a previously reserved loan. Excluding this, The net charge off ratio would have been 28 basis points.

Speaker 4

Please turn to Slide 14. At the end of the Q1, the ACL decreased by $31,000,000 to $689,000,000 During the quarter, we implemented a new accounting guidance, which eliminated the accounting for TBRs and the requirements to measure The effect of the concession from a loan modification. This impact resulted in a release in the ACL of approximately $46,000,000 driven by our mortgage CDR portfolio, which is presented as an adjustment to the beginning balance of retained earnings net of Excluding this impact, the ACL increased by $14,000,000 driven by changes in the HPI forecast, Higher loan volume, portfolio mix and the migration of consumer credit scores. The provision for credit losses was $47,000,000 Compared to $48,000,000 in the prior quarter. To summarize, our loan portfolio continues to exhibit strong credit quality trends In the Q1, we loan net charge off and decreasing nonperforming loans.

Speaker 4

We remain attentive to the evolving environment, but remain encouraged By the post pandemic performance of our loan book, we believe that improvement made over time in the risk profile of the corporation's loan portfolio Before I turn the call over to Javier, let me comment on Popular SRE's office segment exposure. The office segment is receiving a lot of attention in the current environment due to the shift to remote work and hiring to shrink. In the case of Popular, our office exposure is limited, representing only 1.9% $605,000,000 of our total loan portfolio. The exposure is mainly comprised of low to mid rise property With average loan size of $2,000,000 and

Speaker 3

is well

Speaker 4

diversified across Pennant type. With that, I would like to turn the call over to Javier

Speaker 2

Thank you, Lidio and Carlos for your updates. Popular started off 2023 with a strong Q1, building on the positive momentum generated in 2022. Our diversified business model and strong deposit base, robust regulatory capital and liquidity position are a source of strength, which allow us to continue to meet our clients' needs as reflected by the growth in our customer base and loan portfolio during the quarter. We are optimistic about the opportunities that lie ahead, and we remain vigilant around potential risks Stemming from continued inflation and economic and market uncertainty. Economic trends in Puerto Rico continue to be positive And a considerable amount of recovery funds yet to be disbursed are expected to support increased economic activity in future years.

Speaker 2

We made progress on our transformation initiatives during the quarter, which over time will drive more customer connectivity, Operational efficiencies and greater potential for profitable growth and sustainable return on capital. I want to recognize and express our gratitude to our colleagues. It is their daily effort and commitment The lead to our customers' continued trust in Popular and our strong results. We are now ready to answer your questions.

Operator

We will now begin the Q We will pause here briefly to allow questions. The first question comes from the line of Brody Preston with UBS. Please proceed.

Speaker 5

Hey, good morning everyone. Thanks for taking my questions.

Speaker 3

Good morning, Tia.

Speaker 5

I was hoping maybe Carlos, could we dive Back into the net interest income, the FTE situation. So you I guess, I'm trying to understand, so you're going to hold more cash at the Fed with both the Puerto Rican sub and the U. S. Sub and so that's resulting in Lower levels of tax exempt interest income, but is there I guess is there some GAAP NII impact There as well, I'm just getting a few questions about it. It just came across a little confusing.

Speaker 3

No, I think your description is correct, Brody. The cash we keep at the Fed earns taxable it didn't for the bank in Puerto Rico by the way mostly, it does not apply to the bank in the States. It earns taxable income as opposed to when we hold treasury securities our extent to a large extent bank In Puerto Rico, so our mix of taxable and non taxable income shifts towards taxable, so that results

Speaker 5

And will that get I guess, will that strategy of holding Higher levels of cash at the Puerto Rican sub, will that get reversed once we get clarity on liquidity and the economy? Or is that Kind of like holding higher levels of cash through 2024, the expectations?

Speaker 3

Well, at least for the moment, it's our Choice and we revisit that choice every week in our ALCO committee. We'll see whether it continues to be our choice once the regulators express themselves.

Speaker 5

Got it. Okay. So it seems like it's more conservatism at this point.

Speaker 3

Yes, go ahead, Warren.

Speaker 6

Yes, you asked a question about impacting GAAP NII. Given the Yield on cash overnight of the Fed versus short term rates is not very different. We wouldn't expect a significant different in GAAP NII from that shift. Certainly, our FTE NII will be affected because of that strategy.

Speaker 5

Okay. And I guess what is I guess from this strategy, how much on a quarterly basis is the FTE impacted?

Speaker 6

That won't be driven by everything else on our the deposit costs that are disallowed, etcetera.

Speaker 3

It's a little more complicated That one, of course, also depends on NOFT-ten and the strategy at the present level and that again is prevalued constantly. Okay.

Speaker 5

But it is fair to say that like as deposit costs move higher, if you kept the same level of cash at the Fed, That there would be an incremental drag on the FTE NII?

Speaker 3

That would be fair, yes. Okay. And on the fee income, okay. On the fee income,

Speaker 5

I just wanted to get a So where you thought that would shake out going forward? And I'll stop there and I'll hop back in the queue for my other questions.

Speaker 3

No, our fee income is reasonably steady over a year You divide by 4, but it's not necessarily steady on a quarter by quarter basis. So they tend to fluctuate a little bit up and down. We're happy to have started slightly ahead of our guidance, $150 per quarter. But for the moment, we still think that guidance applicable, and we'll revise it again depending on the results of the Q2 to see if it is worth the change. So for the moment, we'll keep The guidance, we're very pleased that we're trying to hit again, that number moves in both directions that require

Speaker 5

Okay. And could you just remind me Carlos, it looks like other And the other service fees, there's 3rd quarter upward seasonality that will come through, that's still the expectation, right?

Speaker 3

That's the insurance side. Yes, I mean, there is we get contingent insurance commissions Hey, once or twice a year, it depends on the insurance company that we have we're dealing with. It tends to be in the second I don't remember exactly the Q3, Brody, but it tends to be in the second half of the year. Of course, the other thing that has to happen is that The insurance market has to be ignited for them to pay us the contingent fees, but that will be exactly half of the year.

Speaker 5

Got it. Okay. Thank you very much. I'll hop back in the queue.

Operator

Thank you. The next question comes from the line of Tamir Braziler with Wells Fargo. Please proceed.

Speaker 7

Hi, good morning.

Speaker 3

Good morning. How are you? Good.

Operator

I appreciate

Speaker 7

the comments on the The range of public funds kind of $14,000,000,000 to $16,000,000,000 exiting the year. Maybe talking to second quarter specifically, can you just Give an update on the magnitude of seasonal inflows you're expecting in the quarter, kind of timing of those and then ultimately Where we could expect GAAP NIM and NII to kind of bottom out before starting the ramp higher in the back end of the year to your comments?

Speaker 3

Yes. Well, in the Q2, we have tax revenues. So as I think we mentioned before, we expect government buses to go up this quarter And we've seen some of that. We already mentioned that deposits are up $700,000,000 so far this quarter. So Well, it's harder for me to tell you is exactly if they're going to end higher than because that depends on what the government chooses to do with their money, which is not our decision.

Speaker 3

Historically, they have tended to be higher in the second quarter and then gravitate down in the second half of the year. What was your question on NIM again, Kumar?

Speaker 7

Just if you can provide any kind of magnitude on where NIM or NII could bottom in 2Q prior to resuming the ramp higher in the back end of the year?

Speaker 3

No, we usually don't Good guidance on that type of detail. We as I mentioned in my prepared remarks, we still expect Name to take an upward trend again this year, the difficult part of that is that it depends on how The things I mentioned, Interact, that will give us the final timing on when it's going to shift. So it's going to be a pace of increasing rates, loan growth and loan mix and also deposit balances and mix and how those three things interact is what results in The ultimate NIM. So we still think it's going to revert to an expansion mode this year, But for the timing, we have not spoken of the timing.

Speaker 7

Okay. And then maybe one for Lidio. Excluding the impact of 2022-two, allowance levels continue to Bill, despite the broader trends on the island improving, can you maybe talk about some of the levers that were pulled Within the portfolio changes that called for incremental allowance and what do you need to see Prior to releasing some of the incremental allowance and getting closer to a level, maybe not where mainland peers are, but at least starting

Speaker 4

What I think is a lot of different levels that were at play during this quarter. As we mentioned, we have been doing good in terms of volume. So the volume increase Yes, role, small role in terms of increasing allowance. The economic scenario also plays small role in terms of the Increasing allowance, then you also had volume mix. We changed we gravitated to some of our higher Allowance portfolio that also had a gradual impact in allowance We've also seen some gravitation in some consumer score that also had a small impact in the allowance.

Speaker 4

So it's a combination of a lot of small things. So It's the interplay of all of that and the continued low performance of net charge offs that will dictate allowance going forward.

Speaker 3

Okay, thanks.

Speaker 7

And just last for me, maybe back to Carlos. Can you provide an update on merchant acquiring and the revenue share component, how that's trending and maybe an outlook for both 2023 and 2024 there?

Speaker 3

Well, we don't break out that number, Timur, but we did talk about the volume of credit and debit cards Going up 9% versus the same quarter last year. It will go down versus the last quarter because it's seasonal, as you know. So the business keeps growing. We're getting a share of that. So I presume the number is going up, but we don't have and I don't think we disclosed in detail that number.

Speaker 1

Thank

Operator

you. I'll step back. Thank you. The next question comes from the line of Alex Twerdahl with Piper Sandler. Please proceed.

Speaker 5

Hey, good morning.

Speaker 3

Good morning.

Speaker 6

First off,

Speaker 2

I was wondering if you can give us an Update

Speaker 8

on expectations for loan balance outlook over the next couple of quarters?

Speaker 3

Now, as you know, we don't give specific loan balance guidance. We did say that we expect loan growth this year and we are seeing that, But we also expect it to be at a lower pace than we saw last year and we're seeing that as well. So the Q1 was A good quarter. It was a bit quieter than the Q1 of last year, obviously. Hopefully, As the economy locally, Puerto Rico particularly continues to grow and more projects come online, We'll have more opportunities to close calls with the client.

Speaker 3

So I'm hopeful it I do not think even when it gets better that it will come to match last year's growth.

Speaker 8

Okay. And do you think growth comes from basically all categories as you saw in the Q1 or

Speaker 3

So far that's what we've seen in Puerto Rico and that's actually been true since the middle of last year, Alex, so it probably will continue to be in most categories, but dollar terms obviously the category that carries a day is commercial. So in dollars, it's going to be mostly commercial, but we probably will see most categories continue to Auto is growing a bit less, a bit slower than it did last year and we'll see how the year evolves. So there is the effect of higher rates and how that affects the appetite of people for loans, we'll have to see how That plays out during the year as well.

Speaker 8

Okay. And to that last point on rates And appetite, can you give us a sense for where new loan yields are relative to the existing portfolio For consumer, I mean for commercial primarily?

Speaker 3

Yes. I mean the best you can do we can do on that Alex is And our levels and yields in the press release, you have loan yields by category and you can see the variation from last quarter to this quarter. We don't provide any more detail on deals than that.

Speaker 8

Okay. Can you in the slide deck on the deposit slide, can you just Help us understand exactly what's happening in the commercial deposits as well as the government deposits towards the end of the quarter? It looks like those rates Ticked down a little bit?

Speaker 3

Yes. I'll explain commercial, and one of my colleagues here will explain you public sector. In the commercial, it's actually quite simple. We had a large relationship with a deposit aggregator that exited We exited in early February and that was a very high cost. So the cost actually did that contributed to the cost actually coming down In February March, so that was an actual transaction decision that we did That affected that one.

Speaker 3

On the public deposits?

Speaker 1

Hey, Alex, it's Paul. So on the public deposits for all the charts, We actually provide the data points as part of the analysis on a monthly basis. And so given A variety of inputs, including day count and average balances and whatnot, the calculation does move around a little bit Along with the lagged effect of the repricing. So if you look back prior in that chart, what you can see is it does jump around a little bit During certain time periods, even when the at least the comparative chart of the Fed funds is moving directionally, So that's all that this is. We do expect that those that, that repricing has not yet been completed, and we talked about Sort of another 60 basis points roughly in the second quarter.

Speaker 8

Okay, that's helpful. And then with respect to the NIM commentary about resuming an upward trajectory, is that is there a scenario where that could happen in the second quarter?

Speaker 3

Yes. If you move around in your model, the three things I mentioned, Base of interest rate increases, loan growth and mix and deposit balances and mix, I'm sure there's a number of possible combinations that will give you I hired him in the Q2, but it depends on how those three things move.

Speaker 8

Okay. Thanks for taking my questions.

Speaker 3

Thank

Operator

you. Thank you. The next question comes from the line of Kelly Motta with KBW. Please proceed.

Speaker 9

Hi. Thanks for the question. I think I'll carry on with that, at least a portion of that NIM question. Carlos, one of the things that you had mentioned was you're carrying higher balances at the Fed just out of conservatism. Do you mind sharing what you guys view as an appropriate level of cash to have on hand right now?

Speaker 9

And what are the things we should be looking for To toggle that either up or down, do you need clarity from the regulators in order to take that down? Just interested in what we should be looking for as we think about the liquidity number ahead.

Speaker 3

Yes. I mean to a large extent, What you see in our Fed account right in our cash position right now is a lot of the maturities that's in our investment portfolio in the Q1 minus the loan growth that we had for the quarter. So the outcome Of those two things is the number in there. Now we'll keep watching this closely and And evaluating the environment on an ongoing basis, Kelly. So I mean, We don't we're not running it on the basis of a target amount of cash necessarily.

Speaker 3

We are running the business and the business results in an amount of cash. What we did decide in the Q1 was to allow the portfolio to mature without reinvesting For extending it again. Again, that is a discussion that we have in our weekly ALCO meetings and we evaluate all the parts And come to conclusions on a dynamic basis. So there isn't a target. The level where we are At this sort of seems to make sense to us.

Speaker 3

It's not a tough decision because at this point in time The yield in cash is not bad. So it's not a horrible decision to have cash at the Fed. So we'll keep looking at it. Can that position double? Unlikely.

Speaker 3

Will that position be half of what it is? Unlikely, but it will probably gravitate around where it is. And if we make A decision to reinvest or move some of the cash to the investment portfolio, It will not change our characteristics of our cash position because some of that will be T Bills, but it will change the nature of our tax position.

Speaker 9

Understood. I appreciate the color. Thinking about the buyback, In order to get more comfort with the buyback, do you think the Board needs The regulators to come out with additional guidelines on that front in With what's gone on in March, just any sort of color as to what could get you guys more Interested in buyback stock here?

Speaker 3

Yes. I mean, what we So what we described in October is that we wanted more clarity on race and the economy, So that we could be more informed in making any decision on capital return and that we thought that clarity may be available by the summer. Frankly, I'm not sure we have significantly more clarity now than we had then. Hopefully, we'll get clarity by the summer, but I'm not sure we're there yet. I think the more important thing is what you mentioned, which we have Added to those two considerations, the consideration of regulatory changes, if anybody guess Exactly what the regulators will come up with, we do not know, but we will be attentive To how they are moving, we definitely don't want to be in a position where we Do something and there's a very good announcement a month later and it makes our life much more difficult because we did something that moved us in the wrong direction.

Speaker 3

So we'll be looking at all these things. It's hard to gauge right now whether it is will come out, Kelly, so we're paying attention and listening. So it's 3 things now that we're waiting to get some clarity on that too. So we'll just see how those evolve.

Speaker 9

Got it. And just to seek Last one in on the capital front is the dividend. We had discussions about the buyback. You usually have a dividend raised in 2Q. I think that's part of your capital hold capital discussion, but wondering if There's any updated, even if a buyback isn't, in the cards necessarily, are you still thinking about the dividend the same way in any target For a payout ratio on that.

Speaker 3

We tend to work the 2 things together, But you're right in pointing out they don't have to be together. So it's something that we will continue to consider. Again, I think probably step back for a minute, the more important point to make is our long term view on capital hasn't changed. No, we still expect over time that our capital ratios will go in the direction of our mainland peers Plus a spread, but that is over time. That doesn't mean every quarter in a perfect sequence, Number 1.

Speaker 3

And number 2, now we have the other uncertainty that we have no idea where our peers will be required to be If the rules change, so we'll have to keep those things in mind.

Speaker 9

Great. I'll step back. Thank you so much for the questions.

Operator

Thank you. The next question comes from the line of Brett Robatin with Hope Group. Please proceed.

Speaker 10

Hey, guys. Good morning. This is Brian calling in for Brett.

Speaker 6

Hi, Brian. Just wanted

Speaker 10

to go quickly back good, thanks. I just wanted to go quickly back to deposits. I appreciate the detail on liquidity deposits slides you added. It looks like demand deposits Decreased similarly to what we saw last quarter. Do you guys expect a steady mix shift Over into interest bearing accounts from DDA and then on the deposit beta as well, you mentioned that most of the segments are at or above Their prior cycle deposit beta, and you guys on the island maintain an advantage Mainland, but just wanted to know if you expect those betas to increase notably above the prior cycle?

Speaker 10

Thanks.

Speaker 3

Yes. On demand deposits, I think that the message in demand deposits, Brian, is that they've been Very steady actually. And we have seen, as I mentioned, some commercial clients and some high net worth Clients seek higher yields. We have also been successful when the clients are in that position To help them achieve that without leaving the relationship or shrinking the relationship with us, We had increasing assets under management of public securities of over $450,000,000 in the Q1, Which is exactly that. But the fact that that happened and you see that demand deposits from the 4th to 1st quarter were flat Means that somebody else brought in $450,000,000 So demand deposits have been quite Steady, actually, most of the volatility we've seen in volume or levels have been in our interest bearing accounts.

Speaker 3

And as you know, some of the big chunks or big movements happening in our public sector accounts that are large depositors, right? And I'm sorry, but I missed the second part of your question, Brian.

Speaker 10

Just on the deposit betas compared to the prior cycle.

Speaker 3

Well, we've seen deposit betas accelerate as probably every bank in the country has, The rates have gone up so fast and so high. So we are above the last cycle. So I don't think we have to the chances are that the betas for all banks will probably end up higher than last cycle in this cycle just because of the speed and magnitude of how the Fed raise rates. So that's probably what's going to end up happening. Specifically in our case, it's hard to tell.

Speaker 3

When you look at, for example, a big chunk of our deposit business, which is retail and commercial In Puerto Rico continues to have a sub-ten percent beta. So overall, betas will accelerate, I think it's our view. They are already above the last cycle. There's a reasonable chance that terminal beta will be higher than the last But there is pieces of our business that continue to show a lot of strength, Particularly the non public pricing in Puerto Rico.

Speaker 10

All right, great. Thanks for all the color. That's it for me. Thanks.

Operator

Thank you. The next question comes from the line of Gerard Cassidy with RBC. Please

Speaker 11

proceed. Hi, good morning, everyone. This is Thomas Leddy calling on behalf of Gerard. A couple of quarters ago, you guys mentioned that You had not seen any new entrants into the market for lending and PR, such as from Mainland Banks that haven't historically been as active there, You thought you might see some increased competition for some of the big pending infrastructure projects there. Has that dynamic changed at all in light of recent events and any additional color you can provide there?

Speaker 3

I don't think it changed very much. It really is the size of the investment is important, obviously, because not every bank can make every size loan. But when you have foreign operators that come into Puerto Rico to run a public private partnership, for example, They have worldwide banking relationships and those relationships arrive to Puerto Rico with them. In almost every instance, They want a local bank with our experience and capabilities to help them. So we end up either leading or being an important part of And the effort to finance those kind of projects.

Speaker 3

So I don't think that it's a change from what we've experienced in the past. And hopefully some of these projects will get going pretty soon. There's a number of the public private partnerships that are supposed to be Closer to realization now than they were months ago. And if those happen, that would be a welcome event.

Speaker 2

I just want to add to Carlos' comments that in fact, we are, I can say engaged in those PPP projects. So we expect to Have those come to fruition if the government moves quickly this year. So we'll play an important part in those financings as we

Speaker 11

Okay, great. Thank you. And then, just a quick follow-up. High level, obviously, credit quality remains pretty Strong, what trends in credit are you guys watching most closely today? I mean, how have those changed over the past couple of quarters?

Speaker 4

I will say the performance and the shift in the FICO mix of our books And the performance of the small and medium enterprises in our commercial books, those will be the 2 Particular elements that we're watching closely.

Speaker 2

Okay. Thank you.

Operator

Thank you. We have a follow-up question from the line of Brody Preston with UBS. Please proceed.

Speaker 5

Hey, guys. Just had a couple of quick follow ups. I did want to touch on the consumer line of credit charge offs that you called out. Just I wanted to clarify, it was called a line of credit. I just wanted to ask if that was one line of credit or if that was multiple lines of credit?

Speaker 4

It is it was one line of credit. It is a legacy one off type of relationship That shouldn't recover in the future.

Speaker 5

Got it. Okay. And then I just want to ask one on the deposit mix. You guys outperformed the industry by a wide margin on noninterest bearing. So just wanted to get a sense for what your conversations look like with customers around rates, particularly as it relates So like any level of excess funds that might be in DDAs or do you feel like the non interest bearing mix can be relatively steady from here?

Speaker 3

Yes. We had the discussions every day. The best way I can answer that question, Brody, is that we've been having those discussions for the last two quarters And the results are the results. So despite the fact that we're having those discussions that we have Moving cash seeking higher yields, we still were able to successfully maintain Stable demand deposit balances. That does not mean that some money did not move.

Speaker 3

As I said, we can Track specifically $450,000,000 of those monies have moved to our broker dealer, but We successfully found another $450,000,000 of demand deposits that showed up and enjoyed the bank. So far we've been able to manage those interest of higher yields from our clients successfully. We're keeping the relationship. We're serving the client. By the way, we've been here before and those flows go back the other way when rates come down.

Speaker 3

So the important thing here is to keep the relationship so that when rates come down, the money does flow back into the bank. So I mean, that's the best my best guess. Javier, do you want to

Speaker 2

I just want to add that we saw a very strong New deposit account opening numbers for the Q1 in Puerto Rico, including non interest bearing accounts. So I just wanted to clarify that very high compared to prior quarters.

Speaker 3

Our net new account opening in the Q1 was higher than it's been for a couple of years. Yes,

Speaker 2

Since 2021, since the Q1 of 2021.

Speaker 5

Got it. All right. Thank you very much for the color, everyone. I appreciate it.

Operator

Thank you. We have a follow-up question from the line of Tameh Brazila with Wells Fargo. Please proceed.

Speaker 6

Hello? Tim, are you there?

Speaker 3

Tim, are you there?

Speaker 7

Yes. Sorry about that. I had you on mute. Thanks for the follow-up. One last one for me on the expense base.

Speaker 7

Appreciate the color on the reduction in the Q1 and the Expectation for it to ramp higher as the year goes. Any additional commentary on the cadence of that increase to get to that unchanged Guidance level. And then secondarily, if you can provide any kind of color as to what type of internal budget you're using for this year's profit Sharing initiative.

Speaker 3

Okay. On the second question, there is presently No incorporation of any profit sharing in our numbers or are forward looking. So nothing on that is in our numbers or our forward looking outlook at this point in time. On your first question, it's tough to tell because it depends When the projects get going and when the people that are helping us in this project actually bill us. So I would assume that it will be straight line up.

Speaker 3

It's always my best assumption right now for in the next three quarters to reach Reached the goal, but it's the best I can do that. I have a colleague here telling me what Do it straight line in your model. It's probably not going to be far for the truth.

Speaker 6

I'll just clarify. We don't we do accrue on services provided and we don't wait for these bills.

Speaker 2

Okay. But of course And

Speaker 7

then I guess once those projects

Speaker 3

I'm sorry?

Speaker 7

I guess once those projects start to ramp up, is the expectation going forward that those expenses remain on or is it going to be as lumpy as we've seen in the Q1?

Speaker 3

Well, It will depend on the project, Brody. Sorry, Timur. If it's It will depend on the project. I don't think there's a global answer to your question.

Speaker 6

The project and the number of projects that are ongoing at the same time. We're just moving from the theory and the planning to execution. That's just how quickly we can get all those plans going.

Speaker 2

Okay. Thank you.

Operator

Thank

Speaker 10

you.

Operator

There are no additional questions at this time. I will now hand the call back over to Javier Ferrer for closing remarks.

Speaker 2

Thanks again for joining us and for your questions today. We look forward to updating you on our progress in July.

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