Popular Inc (BPOP) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Popular, Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Investor Relations Officer, Brett Scheiner. Please go ahead, sir.

Good morning, and thank you for joining us on today's call.

Today, I'm joined by our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our first quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, 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, our financial quarterly release and supplement.

You may find today's press release and our SEC filings on our web page at popular.com.

I'll now turn the call over to Mr. Ignacio Alvarez.

Good morning, and thank you for joining the call.

The impact of the hurricanes continue to affect Puerto Rico, though the recovery efforts have yielded meaningful progress and our operations have returned to normal. While the electrical system remains fragile, power generation is currently at approximately 95% of normal production, up from 30% at the end of October.

Debit and credit card activity after the storm was severely impacted by the power and telecom service interruption. However, for the first quarter, the dollar value of our client's transactions exceeded the first quarter of 2017, reflected in higher fee income this quarter compared to the same quarter last year.

First quarter consumer loan origination was approximately 96% of first quarter 2017 pre-hurricane levels. The trends are encouraging with credit demand in some sectors like auto and personal loans continuing to show faster recovery compared to others such as mortgage. New car sales for the first quarter of the year are up 12% from the first quarter of last year. Our auto loan production is up 30% compared to the first quarter of last year.

On the commercial side, we expect additional lending opportunities to come in sectors such as construction. Already, for the first time in roughly a decade, cement sales are up year-over-year to the highest level in the last 10-year period.

The pace of economic recovery will be heavily dependent on the magnitude and timing of federal recovery and private insurance funds flowing into Puerto Rico. These funds, which are estimated to exceed $60 billion over the next 6 years, are likely to have a stimulant effect on the economy.

Insurance companies continue to make advances to our clients. And the pace, while slower than many would like, has yielded over $2 billion so far out of an amount estimated by the Puerto Rico Oversight Board to exceed $8 billion.

Regarding federal funds, more than $2.6 billion in FEMA emergency funds have been awarded in emergency relief assistance to individuals, public corporations and municipalities. The Puerto Rico fiscal plan anticipates over $50 billion of federal recovery funds over the next 6 years. The effect of these funds will be tempered somewhat by the austerity contained within the recently approved fiscal plan.

The new plan released last week contains a number of fiscal and structural reforms designed to improve fiscal stability on the island. The successful execution of this plan will require a disciplined and increased cooperation between the Oversight Board and the local government.

Recently received passenger data from the San Juan Airport reflects that the net number of people who left the islands since September is at approximately 224,000. However, despite the increased pace of outmigration and the interruption to the operation in many businesses, employment was down only 3% or 25,000 jobs in March compared to August, the month immediately preceding the hurricane. Much of the decline remains in the hospitality sector, jobs we expect to return once the larger tourist hotels reopen.

Notwithstanding the impact of the hurricane and the declining population, Popular's deposits and number of customers were up for the first quarter and since the date of the hurricane.

Looking beyond the immediate impact and the recovery process, the island's longer-term economic prospects will depend on the decisions regarding Puerto Rico's rebuilding. The island, facing long-standing structural problems, now has a unique opportunity to tackle them. The goal is not to get back to where we were, but to make important fundamental changes in areas such as energy, housing, health and education.

Now, let me address the highlights of the first quarter. Please turn to Slide 3 to touch upon the first quarter highlights. In the first quarter, Popular reported net income of $91 million compared to last quarter's adjusted net income of $66 million.

While much of the discussion of -- in the last few quarters centers on the hurricanes and their impact, we continue to execute on our growth strategy. We grew commercial loans in our U.S. business by 3%, increased our total deposit base by nearly $2 billion and announced an agreement to purchase $1.8 billion of auto loans in Puerto Rico.

Our capital levels remain strong with Tier 1 capital and Tier 1 coverage ratios at 16.8% at quarter-end. Total nonperforming assets, including covered loans of $739 million, were up from $743 million last quarter. Non-covered nonperforming loans increased to $607 million from $551 million. Nonperforming loans were 2.5% of non-covered loans compared to 2.3% last quarter. Lidio will explain these results later in the call.

The key takeaways from this quarter's results were a normalization of our operation with credit demand, client activity and fee income generally returning to pre-hurricane levels.

Please turn to Slide 4 as Carlos discusses our financial results in further detail.

Thank you, Ignacio. Good morning.

Slide 4 presents our financial results for the first quarter. Additional information is provided in the appendix. Today's earnings press release details variances for the fourth quarter driven by higher net interest income and higher fee income.

Net interest income for the first quarter was $393 million, up $6 million from the fourth quarter on higher loan volume as well as higher volumes and rate on investments. Our net interest margin was 3.89%, down 1- basis point from last quarter. The reduction is mostly due to asset mix as balances increased in our lower-yielding investment portfolio. Our overall asset yields were steady.

The average yield of our $1.7 billion Westernbank loan portfolio increased to 8.74% from 8.59% last quarter. Over time, we expect this yield to decline as a result of repayment and resolutions. The runoff in this portfolio has slowed considerably in recent quarters.

The cost of our interest-bearing deposits was up 3- basis points to 57- basis points, mostly due to a higher cost of Puerto Rico government deposits. This is 1- basis point higher than the first quarter of 2017 and flat with the first quarter of 2016. For 2018, we anticipate slight growth in overall loan balances with U.S. growth more than compensating for Westernbank runoff.

In our U.S. operations, commercial portfolio grew 3% in the first quarter and we continue to see a strong pipeline. Loan balances in Puerto Rico are expected to remain relatively flat, but we are encouraged by recent rebound in credit demand.

On February 14, we announced the agreement to purchase $1.8 billion of consumer auto and auto-related commercial loans in Puerto Rico from Wells Fargo. We continue to expect approximately $34 million of net income from this purchase in the first 12 months after closing. We remain hopeful the transaction will close during the second quarter. Additional information is available in the 8-K we filed alongside the announcement of this transaction in February.

For the first quarter, net interest income, excluding FDIC loss-share activity, increased by $38 million as our operations continue to normalize. The increase is mostly due to the negative fee income effects of the hurricane and the write-down of our MSR in the prior quarter.

Fee income for the period was higher than the first quarter of 2017. FDIC loss-share expense increased by $8 million -- I'm sorry, $11 million as a result of quarterly evaluation of the FDIC true-up liability.

Our Puerto Rico mortgage business originated $145 million of loans in the first quarter. Also, the hurricane affected $98 million in the fourth quarter. Despite this improvement, we have seen originations level off at a pace below pre-storm volumes.

Total operating expenses for the quarter were $322 million, flat to last quarter, with lower business promotion expense offset by seasonally higher personnel costs. For the full year 2018, we continue to expect operating expenses to average $328 million per quarter.

In 2018, we expect our tax rate to be approximately 22%, incorporating the effect of U.S. tax reform. Please remember that the U.S. tax reform only affects Popular's U.S.-based income.

Please turn to Slide 5. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers as well as with respect to well-capitalized regulatory requirements. Tangible book value in the quarter was $42.61, down from $43.02 last quarter, as the increase in our operating earnings was offset by the payment of our quarterly income in stock dividend and the realized losses in our securities portfolio caused by changes in interest rates. Our Common Equity Tier 1 ratio was 16.8%, up 50- basis points, as the realized losses in securities portfolio do not affect regulatory capital.

Regarding additional capital actions, we continue our discussions with regulators and are still hopeful for an update around the middle of the year. We will continue to pursue our target of a double-digit return on tangible equity while keeping capital levels that are appropriate for Popular's risk profile.

With that, I turn the call over to Lidio.

Thank you, Carlos, and good morning.

In Puerto Rico, credit quality metrics continue to reflect the aftermath of Hurricane Maria. Notwithstanding that, we feel encouraged by trends in our portfolio.

In consumer lending, delinquencies are near pre-hurricane levels except for the credit card portfolios, which have experienced an increase in delinquencies related to certain customers exceeding their approved credit limit due to interest payments accumulated during the moratorium period. This has caused the new payment to increase significantly as we require payments to bring the balance back to the approved limit. Alternative payment strategies are being implemented to assist these customers.

Consumer charge-offs have been higher post-hurricane, impacted by the payment moratorium and the temporary fall of collection activities. Since charge-offs for the consumer portfolios are directly related to delinquency levels, it is expected that charge-offs will stabilize as delinquency do.

In the mortgage portfolio, NPLs increased post-payment moratorium by $51 million mainly due to customers still being evaluated for repayment options related to deferred payments during the moratorium, either a short-term payment plan, a piggyback loan or a loan restructuring. Early delinquencies are slightly above pre-hurricane levels.

Mortgage charge-offs were relatively high during the moratorium when, with the interruption of collection activity, the number of loans subject to credit loss increased. However, during the first quarter of 2018, mortgage net charge-offs were below pre-hurricane levels.

In commercial lending, overall credit metrics during the quarter remained stable and near pre-hurricane levels despite higher quarter-over-quarter early delinquency. The increase in early delinquencies largely reflects the end of the moratorium period, recidivism of a large borrower and certain delinquencies related to loans in the renewal process.

Even though we have noticed some credit quality deterioration in certain small and medium enterprise portfolio segments, we continue to feel encouraged by overall trends. Commercial NPLs and net charge-offs decreased slightly during the first quarter compared to the prior quarter. In the U.S., excluding the taxi medallion portfolio, asset quality remains strong.

Please turn to Slide #6 to begin the discussion. Our current outstanding direct exposure to the debt of Puerto Rico government, municipalities and other instrumentalities is $481 million, decreasing by $2 million from the prior quarter. At the end of the quarter, we had no direct exposure to the debt of Puerto Rico central government or its public corporations. Our municipality exposure consists mainly of senior priority loans to a select group of municipalities whose revenues are largely independent of the central government. In most cases, the good faith credit and a limited taxing power of each municipality is pledged to repayment of the loans.

Our top exposures are to 4 large municipalities in the San Juan metro area: Carolina, where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico; Maunabo, the municipality with the highest per capita income; and Bayamón, the second-most populous municipality. These municipalities comprise 74% of our total exposure.

We also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee, similar to [efficient] programs in the U.S.

Turning to Slide #7 to discuss credit metrics for the quarter. As discussed in the introduction, nearly every credit quality metric for Puerto Rico has been affected by the moratorium of Hurricane Maria.

Nonperforming assets, including covered loans, increased by $36 million to $779 million this quarter driven by an NPL increase of $56 million offset in part by a decrease in OREO of $20 million. The increase in NPLs was driven by higher Puerto Rico mortgage NPLs of $51 million mainly due to customers still being evaluated for post-moratorium options. In the U.S., NPLs decreased by $6 million driven by decreases of $3 million on both the mortgage and commercial portfolios.

At the end of the first quarter, the ratio of NPLs to total loans held in portfolio increased to 2.5% from 2.3% in the prior quarter, returning to pre-hurricane levels. The decreasing OREOs was mainly Puerto Rico driven by the combined effect of the resumption of sales effort and lower inflows due to the suspension of foreclosure activity as a result of Hurricane Maria.

Please turn to Slide #8 to discuss NPL inflows. The fourth quarter of 2017 had only $2 million of inflows to NPL due to the payment moratorium. This quarter, inflows of NPLs held in portfolio increased by $98 million mainly driven by higher inflows in the Puerto Rico mortgage portfolio of $107 million prompted by the end of the payment moratorium and customers being evaluated for repayment plan options. Puerto Rico NPL inflows in the first quarter were up $23 million from the third quarter of last year. NPL inflows in the U.S. were down $5 million to $4 million for the quarter.

Turning to Slide #9. Net charge-offs amounted to $53 million or an annualized 90- basis points of [original] loans held in portfolio compared to $94 million or 1.6% in the fourth quarter of last year. The decrease of $41 million for the fourth quarter of 2017 was mainly driven by a decrease of $24 million related to the U.S. taxi medallion portfolio coupled with a decrease of $18 million in Puerto Rico. Puerto Rico's fourth quarter charge-off activity was impacted by the temporary pause in collection efforts after the hurricanes.

The corporation's allowance for loan losses increased by $17 million from the prior quarter to $607 million. This was mainly driven by an increase of $15 million in Puerto Rico due to the effect of a single commercial borrower, in part offset by a downward adjustment to estimated losses associated with Hurricane Maria of $8 million.

The provision for loan losses remains relatively flat at $69 million quarter-over-quarter with a provision in Puerto Rico increasing by $4 million with the opposite impact in the U.S. The provision for the U.S. included $12 million related to the taxi portfolio.

At the end of the first quarter of the year, our taxi medallion portfolio had an unpaid principal balance of $230 million. Net of reserves, the current value of this portfolio is $71 million or approximately 31% of its unpaid principal balance, representing less than 1% of our total loan portfolio. 95% of the taxi portfolio is in New York City with an average current loan value of $199,000 per New York medallion.

To summarize, credit quality metrics in Puerto Rico continue to be impacted by the aftermath of Hurricane Maria. The first quarter metrics reflect higher inflows and nonperforming loans, largely attributed to the end of the payment moratorium. We continue to monitor credit quality trends given the uncertainties that remain. Regarding the full effect of the hurricanes on the loan portfolio, we are encouraged by post-hurricane credit results. In the U.S., we continue to reflect strong growth and favorable credit quality metrics.

With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Thank you, Lidio and Carlos, for your update.

To summarize, our first quarter results reflect strong margins, higher net interest income, fee income above pre-hurricane levels and relatively stable credit metrics. As you can see on Slide 10, there are many factors that are driving value for our shareholders: Strong earnings, robust capital and other sources of value. While we are still working diligently to address the remaining hurricane-related issues, we are focused on the future, ready to take advantage of the opportunities that lie ahead.

Our franchise in Puerto Rico continues to demonstrate its strength. It has proven its worth in a wide variety of scenarios, many of them extremely difficult. Looking ahead, there are many challenges, but we have no doubt that Popular, as it has done in the past, will manage these challenges and seize opportunities to continue to deliver solid results.

We are also encouraged by the growth in our U.S. business. The recent rebranding from Popular Community Bank to Popular reflects the evolution of our operations in the U.S., our focus in that market and now under a single brand that one cooperation between our operations in Puerto Rico, the U.S. and the Virgin Islands.

This year, in October, we will celebrate our 125th anniversary. We are proud of our history and even more excited about our future. We look forward to updating you on our progress in July.

Thank you for your time and we are now ready to answer your questions.

(Operator Instructions) The first question today will come from Alex Twerdahl with Sandler O'Neill.

First off, I just wanted to drill down on these deposit flows that you saw in the first quarter, $1.7 billion. Obviously, pretty big numbers, especially coming on the heels of the $1.2 billion of deposit inflows in the fourth quarter. I think, last quarter, you kind of attributed some of the inflows to people not having to make payments on lending products, on their cable bills and electricity, et cetera, and just being a little bit more flushed with cash. Is that kind of what's driving the first quarter, too? Or is it more insurance money coming in? Or maybe just comment a little bit on sort of the dynamics that you're seeing just within the deposit balances?

Well, I think there's a little bit of everything, Alex. This is Ignacio. We've seen the economy in Puerto Rico obviously picked up a bit after the hurricanes. A lot of our clients are -- have a lot more cash than they had before either because they got collections from the insurance or because their businesses are up. And frankly, we have increased the number of our retail clients and commercial clients. So that is also affecting the deposit flows and the other government deposits all continue to be high. So really, we've seen an increase across the board. I don't think there's one particular reason we could point to.

Okay. And then, just as that kind of sits on the balance sheet today, if you look at the average balance sheet, it seems like securities, including cash, it's 41% of total assets, which is roughly double from where it was a couple of years ago. I mean, do you think that at some point in the next couple of quarters, there's -- and I know that you did the -- the Wells Fargo auto portfolio helped that number a little bit. But is there more investing that can be done of cash balances to help drive a little bit more NII? Or is there still some of that behavioralization that we're waiting to sort of see how it plays out?

Yes. I mean, the -- Alex, this is Carlos. The Westernbank will be -- sorry, the Reliant transaction, hopefully when we close that, will hold more than a little bit actually because it's almost $2 billion worth of cash will be redeployed into higher-yielding assets. We are -- after that, we will continue to monitor the flow of deposits and redeploy them as we think it makes sense. Again, the more time that passes, we learn a little bit more, but the deposits do keep going up. So in general, we -- it is not our plan to have 40% of our assets in investments. We prefer to have loans and we're working hard to try to achieve that.

Okay. And then, I just had a question for Lidio on the language in the release, the $7.5 million of downward adjustment related to the Hurricane Maria estimated losses. Can you just tell us exactly what that is? Is that taking the loss range that you published a couple of quarters ago and adjusting that loss range down? Or is it taking the environmental-related reserve, which I think was around $120 million, and bringing that down by $7.5 million? Or just kind of exactly how we can interpret that data point?

Our thing is our estimate of the losses associated with -- after the hurricanes associated with what we expected to happen, we decreased that estimate by $8 million or $7.5 million to be more exact.

And do you have handy what that total loss estimate was or is currently?

We have not provided that information. I mean, I think we said that the increasing allowance was $122 million and so that's information that is publicly available.

The next question will be from Brett Rabatin with Piper Jaffray.

Wanted to ask, so just thinking about the commentary, I realize there was some noise around the medallion portfolio this quarter, but just wanted to, I guess, think about the provisioning this quarter, the delinquency trends that you had sort of post the payment moratorium. If we're thinking about 2Q or maybe the rest of the year, would it not seem rational, assuming that those delinquency trends don't worsen at the provisioning levels, would decline from here? And then, just thinking about kind of the delinquency trends in 1Q, would those seem to probably flatten out as you work through all of the adjustments to the existing mortgages and consumer?

I think -- this is Lidio. I think in the last webcast, we provided a little bit of detail in terms of when we think things will normalize. We thought that, for the most part, the consumer loan -- the consumer portfolio will be normalized by this quarter. I think it will continue to be the case except for the credit card portfolio, which will take -- will go into the second quarter. We see the mortgage portfolio as well as the commercial portfolio stabilizing more towards the second quarter, second half of this year and we believe those are the best information that we can provide you as of today.

Okay. And then, as far as the credit card delinquencies, what actions are you taking with those borrowers? And then, how do we think about the impact of that in the next few quarters?

We are reaching out to our clients, making payment plans, if the case might be, increasing limits. So it is your typical working out of a relationship with your clients on a day-to-day basis.

Okay. And then, from a -- just a fee income perspective, I realize there is some volatility in some of the numbers, but we're "back to normal". This first quarter run rate, particularly for mortgage banking, does that seem like a fair go-forward rate?

Mortgage banking tends to be pretty volatile, Brett, particularly because of the evaluation of the MSR. So I would hesitate to speak forward -- any comments -- forward-looking comments on mortgage because, as you know, the MSR does fluctuate quite a bit.

If you look at the other components of our mortgage income, part of it is volume-related. And so as the volume stays flattish, then those (inaudible) should stay flattish as well and servicing income is probably leveling up. So I think what will drive the volatility there is going to be volumes and the MSR.

Okay. And then, just one last clarification. The loan growth guidance, I assume that does exclude the Reliant purchase in 2Q?

Yes.

Yes, of course. Absolutely.

The next question will be from Ken Zerbe with Morgan Stanley.

I guess, you guys mentioned, I think, Lidio, perhaps mentioned that customers are currently being evaluated for payment plan options. That came up a couple of times. Can you just remind us, if you do find a customer with problems or there needs to be some sort of other payment plan, have you already recognized the loss or the potential loss of the higher reserve due to that customer already? Or could we see some credit volatility as you work out -- work with these customers over time?

I think as we work with our clients under the premises that the client's having difficulty, the most likely outcome initially is a -- some type of loan modification or restructuring of the relationship. That would entail certain increases in allowance associated with doing a DVR. This is something that is ongoing and occurs every quarter. And as I said in the previous questions, I think -- I see the normalization of the mortgage portfolio carrying more towards the second half of the year. So we'll still have some work to go through in terms of the mortgage portfolio.

Got it. Understood. Okay. No, that helps. And then, I guess, just back on the deposit question. I think if I heard it right, I think it was $2.6 billion of FEMA funds have come into the island. Are you able to identify how much of those FEMA funds actually are now deposited within the bank versus just normal increase in customer activity on the deposit side?

I don't think we have that number specifically for the -- I mean, for the FEMA funds. But again, as I said, we do track the different categories and we've had increases in deposits across all lines, which will be retail, commercial. Most of the FEMA funds will be coming into municipalities or some public organization, not to private clients.

Remember also, Ken, a lot of this is actually flow, not stock. I mean, the money comes then it gets spent. So while a reasonable amount of that money will flow to the bank, it doesn't mean it sits at the bank.

Correct.

Got it. Understood. So, I guess, we assume the next, whatever, $10 billion, $20 billion of FEMA funds coming in over time -- is it right to assume then that we're not really going to see an increase in deposit balances at Popular. It's just because, as you say, it's not stock, it's a flow, so that money can come and go and it won't really affect you guys at all. Is that the right way of thinking about it?

I think the way to think of it is it won't affect us directly. I wouldn't focus on the FEMA funds itself. Now, the FEMA funds come into the economy and they reimburse people for losses. They reimburse the municipality for work they've done in the recovery. They help pay for their reconstruction event. And that money, not all of it obviously, but a lot of that money stays in the economy. So it won't be that we'll see the deposit flows necessarily from FEMA. We'll see it from our clients, the commercial clients and the individuals who receive the funds and also from the municipalities that receive the funds. That's the way I look at it.

The next question will be from Gerard Cassidy with RBC.

A question. Did I understand your answer to the question about the Wells portfolio, Carlos, that you're essentially going to replace the cash that's on your balance -- some of the cash on the balance sheet with these auto portfolio loan? Is that correct?

Yes.

What kind of yield pickup do you guys see by doing that, the average yield in that portfolio versus what you're getting in your cash portfolio?

Yes. It was in the deck. The yield of the portfolio we are purchasing was in the deck we published in February. It's slightly over 7%, I believe. And cash yields -- what are fed funds now, Lidio?

1.75.

1.75. So subtract those 2 and you'll be at the right ballpark.

Okay. Great. Super. The other question was the true-up that you guys did with the FDIC. Is there any of that left to do? Or is that kind of the last time that we'll see that kind of item on the income statement?

That revaluation happens every quarter until the LSA is over. And that has how many years left?

A little bit over 2 years.

A year or 2 years left. So that will -- until [the other things go].

Okay. Got you. And then, you also had -- you commented, Lidio did, about the large commercial credit that you had issues with this quarter. Can you just share with us, was it a commercial real estate loan? Or was it a construction loan, C&I loan?

It was a commercial real estate loan.

So it was a performing mortgage then, I assume?

It was performing and we made a determination this quarter to make a -- based on certain behavior, to call it a mega special provision related to it.

I see. And then, finally, I think you guys mentioned that the cement production for the island is the highest it's been in about 10 years. Are there any other economic metrics you can share with us, showing how the growth is starting to pick up for the economy?

Well, we mentioned auto sales also, which is important because auto, for most consumers at least, after you purchase your home, your car is your next biggest consumer spending item. And that is way up so we're encouraged by that. Debit and credit transactions are above the same level they were last year. So the consumer is spending. So we've seen debit and credit, auto, cement, those are the type of things that we're looking at.

The next question comes from Arren Cyganovich with Citi.

With the auto transaction, I think you mentioned in the press release that this now does have to go through an additional regulatory approval process. What's your -- I guess, what's the reason that, that language changed? And is there any risk you would have to divest any of those assets?

As a second point, no. We're still planning to close on $1.8 billion, which was not the whole of Reliable's portfolio in Puerto Rico, but that number has not changed. Basically, what happened is after discussing certain aspects of the transaction with our lawyers and certain conversations with the regulators, it was determined that the regulatory approval was required. We are still confident or at least optimistic that we are still going to meet our deadline in the second quarter. And again, the economics of the transaction have not changed, either amount or price.

Okay. Great. And then, just lastly, the -- is there any timing impact from the net charge-offs? It seems relatively low this quarter as you come out of the moratorium and you need the delinquency formation to come on the consumer side. Should we expect that those just naturally would start to see an increase in charge-offs as these delinquencies roll through?

Could you repeat that one more time? I'm sorry.

I'm just thinking about in terms of the consumer assets and as you've kind of come off of the moratorium, it takes a while for the delinquencies to roll through to 180 days. So would the second quarter just naturally have a higher level of timing related to the charge-offs on those portfolios?

I think as I said during the introduction of the prepared remarks, I mean, we believe what we have experienced in terms of consumer portfolio, I mean, delinquency levels are back to pre-hurricane levels. So we feel comfortable with where we are except for the credit card portfolio where we have seen an increase in delinquency driven by customers that were close to their preapproved levels. In the mortgage portfolios, as we also said, we have seen an increase in NPLs driven by still evaluating certain customers for their post-moratorium payment options. And the commercial portfolio, we have experienced a slight increase in early delinquency, but nothing significant so far. So we still, I mean, as I said, I think normalization will occur more towards the second half of the year, but we feel encouraged by the trends that we have seen so far.

The volatility in our target number tends to be some bulky commercial clients that hit now and then as opposed to the consumer. It tends to move in a trend. So (inaudible) normally is not consumer. It's just commercial, the one-off commercial client that it hit. Yes.

Okay. And then, I guess, following up on that. I think Lidio said in his prepared remarks that uncertainties remain. Which uncertainties are you referring to with respect to that? Is it across the entire book? Commercial? Obviously, you've talked about mortgage being second half, so that sounds like that's some uncertainty. Where do you have the, I guess, least amount of conviction relative to those expected losses?

I think in general terms, it's just uncertainty surrounding the macro in Puerto Rico, the flow of funds, the timing of the flow of funds into the Puerto Rico economy. I think those are, for me, the biggest uncertainties.

The next question will be from Jordan Hymowitz with Philadelphia Financial.

This is actually [Dan] (inaudible) for Jordan. The first is in regards to Slide 14. I'm just trying to get some color around the movements of the mortgage balances quarter-over-quarter in both the U.S. and Puerto Rico. And then, I had a follow-up question after that.

14. Give us one second. That's the slide highlight -- titled the Risk Loan Portfolio?

Yes, that's it. That's it.

Okay. So, I mean, this is a look at a very long-term trend in terms of, I mean, there's a difference of 10 years between one and the other. So what we're trying to...

You could stop there. I apologize. I thought it was 4Q '17. I didn't appreciate it was in the deck.

Let me move to my second question. The second is there was a recently failed IPO of a Caribbean-based bank and we're just curious if you had -- if those assets or anything that could be potentially appealing to you, assuming that the seller would be willing to sell portions of those assets?

I think we've said in the past that our main focus for now is going to be in the markets that we are in. So if -- we're in the New York, New Jersey and the South Florida region and I think that that's going to be our main focus. We -- obviously, when someone presents us an opportunity, we look at them, but I think our focus is to grow in the markets that we are in right now.

The next question will be from Glen Manna of KBW.

I just wanted to ask you -- it said in the press release that with regard to the Reliable transaction that you had to secure regulatory approval whereas previously you thought you didn't need to. Kind of what changed in your thinking and if you could let us know where you stand in the process of securing that approval?

Well, I don't want to get too much in the details and the weeds, but basically, just when we discuss it with our attorneys and certain aspects of the transaction and with our regulators, the consensus was that we did need regulatory approval. At this point, we're still optimistic that, that won't affect the timetable, that we'll still close by the end of the second quarter. And again, that it won't -- as I said previously, it will not affect the amount of assets that we're purchasing or the, otherwise, the economic trends of the transaction. Basically, I'll leave it at that.

And I remember when the deck came out, I think you had estimated that CET1 would be reduced by about 130- basis points versus pro forma 4Q '17. Is that still a good number to use, that 130- basis points? And with the 30- basis point build in CET 1, could we now use pro forma 15.3 for CET 1 after the transaction closes?

Yes, Glen. I think the delta is probably still about right, but you are subtracting from [a higher number].

Okay. And lastly, I think in BPPR as of 4Q '17, government -- state and local government deposits were about $6.3 billion. Do you have that number as of the end of the first quarter?

It's around $7 billion, more or less. It's going to be included in the quarter's detail.

The next question comes from Joe Gladue with Merion Capital Group.

Just had a couple of questions, I guess, margin-related. First off, maybe getting down to the weeds, but the -- it looked like there was a 80-some basis point reduction in the average yields on the consumer portfolio. Is that more related to NPL inflows? Or was there something else affecting -- dragging that -- those yields down?

That was -- the bulk of that is the credit card issue that Lidio discussed and the delinquency going up in credit cards, but most of it is in credit cards.

Okay. And then, just more broadly, just wondering if you could comment, I guess, more on the deposit side, but maybe on the loan side as well. Because as the inflow of funds on the island from FEMA and insurance, is that having an impact on sort of the competitive environment and pricing on deposits that's -- just wondering if you could talk about that dynamic?

Well, I think I can talk -- this is Ignacio. I can talk about it from our perspective. Our deposit costs have been remarkably stable for the last 2 years and we have not seen any material change in that so far. So we -- obviously, we look at the market. We try to price it based on market conditions. But last 2 years, our deposit costs have been remarkably stable and we're not seeing any major change in that right now.

And I think if you look at it, the -- I think the banking assets have been pretty flat in Puerto Rico in general. Obviously, there is not any economic logic that drives deposit prices up because banks are fairly well-funded with stable banking asset levels and stable deposit levels. It's probably actually going up in some cases. So there isn't a big driver causing deposit prices to go up because we had to fund a much bigger book.

And on the loan side, we continue to compete with our competitors. There -- we are seeing increased demand in certain sectors because of the hurricane. And, obviously, we compete for every loan we put on the books. So it's still -- on that side, we're out there every day chasing the loans.

(Operator Instructions) The next question will be from Matthew Keating with Barclays.

I had a clarifying question on the airline passenger data that you brought up. What month was that from? So I think you mentioned that since September, approximately 224,000 net passengers have left by air. Was that -- is that through March? Or what was the latest data? I think the latest data that we've seen was through January. So just curious about when that data point comes from.

I believe that was through February. We'll have to confirm that, but I believe it was through February.

Okay. Then, what do you think in your view is driving the wide discrepancy between the number of jobs lost versus the outflows here? Is it your expectation that it's just a lot of elderly and young people that have left the island? How do you just interpret that data? It's a bit hard to square with...

It's very hard to square. We discuss it a lot. But if you dig into -- you raised a good point about the elderly and perhaps the young. If you dig into the Puerto Rico participation rate, which is very low compared to the U.S., the real anomalies occur on the outer bounds of the age groups. So 55 and above and less than 25, the participation rate in Puerto Rico is dramatically lower in the States. In the middle age groups, it's not that much lower than the lowest U.S. jurisdiction, so that may explain part of it. Maybe some of these people were self-employed in the informal economy. But yes, it's something we look at. But obviously, so far, you've seen in the employment data, but not only in the employment data, but you've seen in deposit, you've seen it in bank customer clients that have not had a dramatic reduction. Certainly, not in our institution, but what we hear from other institutions is the same thing. So the employment data is one, but there are other -- again, you see it in the spending. The credit and debit card spending is higher than -- in the first quarter than it was in the first quarter last year. So it's an anomaly. It may be explained by that. I would be -- I wouldn't be sincere if I tell you we know all the reasons. We scratch our heads and look at this data all the time.

Let me correct something I said. The airport, the figure is from January.

From January. Okay. Great. That's helpful. And then, I guess, in general, in past natural disasters, the typical trend is usually these deposits start to come in and there's a 2-quarter lag, 2 to 3 quarters lag before you see more material credit demand. So I understand your guys have flattish loan growth in Puerto Rico, but given the kind of the cement sales that you're seeing at a decade high, is there -- as you look out to next year, do you think there's a potential, right, that you see some actual growth in Puerto Rico that's non-acquired portfolios?

I don't know. I don't want to make a judgment call on that, but I can say, anecdotally, especially in the higher markets like our corporate market, we are starting to see a healthier pipeline. And, like you say, it's taken a while for some of these deals to materialize, but we are starting to see the pipeline build up, especially in the corporate sector.

The next question is a follow-up from Jordan Hymowitz with Philadelphia Financial.

Sorry. Can you hear me?

Now we can.

When you look at the latest government projection for the $6.7 billion surplus, which still includes $1.3 million in legal expenses and doesn't include $5 million in Medicaid aids, so really the numbers could be $13 billion or $14 billion. Have you talked -- in that projection, it has Puerto Rico growing at a GDP of 7%-plus this year. I mean, that's China levels. I mean, is that really a possibility that Puerto Rico's GDP could grow 7%? And if it does grow at that level this year, what could that mean with the bank with a 50% market share? Like, what type of growth or deposit...

But it's not this year. Remember, that it's off a dip of -- it wasn't 1.13%. I don't remember. I think they adjusted it. It's not 13%. It's a little bit less. But if you add the 2 numbers together, those 2 years together, you still have a negative number. So I personally believe that probably the dip will be less than they anticipate and the growth will be also a little bit less than they anticipate. But keep in mind, yes, it looks great that year, but if you take the year before, it doesn't look that great.

I'm just saying there could be a massive inflow of aid this year and the recovery could be much sharper and quicker than a lot of people think, which could result in more economic development.

Well, yes, it could. Again, I think in our prepared remarks we said the recovery will depend on the amount, but almost as much as the amount of the timing of the flow. The sooner the dollars get here, the better. So the key to economic growth is investment and those monies are crucial for investment in infrastructure and other things.

And when you say your sales tax receipts are up year-over-year, when we try and parse out data, it seems like 5% or 6%...

I have to stop you there. I don't believe I ever said sales tax. Debit and credit card sales are up.

Okay. And do you have a sense of how much they're up?

We have -- I don't -- it's up -- I don't think I have the number. I mean, it's -- we'll try to get that for you. It's a relatively small number. If we can get it before the end of the call, we'll get it, but if we can't...

(inaudible) in our press release, you have the year-over-year fee income and the -- you get a sense of...

Yes.

Relative to the volumes (inaudible).

It's not a huge number, but to us, the most important thing is given the impact of the hurricanes and given the outmigration, actual -- the aggregate amount of sales are actually up. So that's what's most impressed us.

Ladies and gentlemen, this concludes today's question-and-answer session and, thus, concludes today's call. We thank you very much for joining Popular's First Quarter 2018 Earnings Call. You may now disconnect your lines. Take care.