Popular Inc (BPOP) 2024 Q4 法說會逐字稿

Hello, and welcome to the Popular Incorporated fourth quarter earnings call. My name is Elliot, and I will be your coordinator today. (Operator Instructions) I'd now like to hand over to Paul Cardillo, Investor Relations Officer. Please go ahead.

Good morning and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our President and COO, Javier Ferrer; our CFO, Jorge García; and our CRO, Lidio Soriano. They will review our results for the full year and fourth quarter and then answer your questions. Other members of our management team will also be available during the Q&A session.

Before we begin, I would like to remind you that on today's call, we may make forward-looking statements regarding Popular's such as projections of revenue, earnings, expenses, taxes and capital structure as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Good morning, and thank you for joining the call. In 2024, we delivered results that reflect the strength of our franchise and the continued stability of the Puerto Rico economy. Our annual net income of $614 million compared to $541 million in 2023. On an adjusted basis, we achieved net income of $646 million, 10% higher than in 2023. The adjusted variance was mainly driven by higher net interest income offset in part by a higher provision for credit losses and higher operating expenses.

Our strong fourth quarter loan growth helped bring our total loan growth for the year to $2 billion, an increase of 5.8%. BPPR generated loan growth across most business segments, led by commercial loans, reflecting the continued strength of the local economy and our diversified product offerings. Popular Bank achieved growth in commercial and construction loans. Credit quality remained stable throughout 2024. Nonperforming loans decreased slightly while net charge-offs remains below our historic normalized levels.

Our capital levels are strong, ending the year with common equity Tier 1 ratio of 16%. Our tangent book value per share of $68.16 increased by 14% year-over-year primarily driven by lower unrealized losses on investment securities and net income for the year, offset in part by dividends and our share repurchase activity. Our robust capital and liquidity position allowed us to continue returning capital to our shareholders.

During the quarter, we announced the resumption of buybacks with a $500 million stock repurchase authorization. In total, during 2024, we repurchased 2.3 million of our shares for approximately $220 million. We continue to believe that our shares are attractive at current prices. Additionally, in the fourth quarter, we increased our quarterly common dividend by $0.08 to $0.70 per share.

Please turn to slide 4. We closed the last quarter of 2024 on a strong note, achieving net income of $178 million, an increase of $23 million from the third quarter. These results were primarily driven by higher net interest income and a lower provision for credit losses. Credit quality trends remained stable in the period. Our net interest income increased by $18 million in the quarter, and net interest margin expanded by 11 basis points to 3.35% mainly driven by lower deposit costs.

As I mentioned before, loan growth was very strong in the quarter, with balances increasing by $913 million or 2.5%. We were happy to see that both banks contribute equally to this growth. During the quarter, we purchased approximately 160 million shares at an average price of roughly $96. Tangible value per share decreased by $0.88 to $68.16 driven by higher unrealized losses in our investment portfolio and share repurchase activity in the period, offset by our quarterly net income.

Please turn to slide 5. Business activity in Puerto Rico remained solid as reflected in the favorable trends in total employment, consumer spending and other economic data. The current unemployment rate of 5.4% is not something that I would have expected to see in my lifetime. Consumer spending remained healthy. Combined credit and debit card sales for BPPR customers increased by approximately 5% compared to the fourth quarter of 2023.

Mortgage loan balances at BPPR increased by $114 million in the fourth quarter driven primarily by home purchase activity and our current strategy of retaining FHA loans in portfolio. Our auto loan and lease balances increased by $43 million compared to the third quarter as demand for new cars continue to be strong in Puerto Rico. The tourism and hospitality sector continues to be a source of strength for the local economy.

Recently, several prominent luxury hotel brands have announced development plans for Puerto Rico. Passenger traffic at the San Juan International Airport increased by 10% in the fourth quarter compared to the fourth quarter of 2023 and hotel occupancy continues to be healthy. For the year, a record 13.2 million travelers visited Puerto Rico.

We expect the ongoing disbursement of federal funds will continue to support [account] activity for several years. We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years. On that note, I now turn the call over to Jorge for more details on our financial results.

Thank you, Ignacio. Good morning and thank you all for joining the call today. Please turn to slide 6. We're pleased with the quarter's results, particularly with the NII growth and the expansion of the NIM. As Ignacio stated, in the fourth quarter, we reported net income of $178 million, $23 million higher than the prior period. Net interest income increased by $18 million, driven primarily by lower deposit costs in both of our banks. We finished the year with a 7% year-over-year increase in NII.

Loan growth was strong, increasing by $913 million in the quarter, with each of our banks contributing similar amounts towards that growth. At BPPR, consistent with the activity throughout the year, we continue to see increases across nearly all categories, led by commercial lending, auto and mortgage originations. And at PV, we saw increases in commercial and construction lending.

Ending customer deposit balances at BPPR, excluding Puerto Rico public deposits increased by approximately $600 million, while average balances decreased by approximately $100 million. At PV, ending balances decreased by approximately $190 million and average balances decreased by approximately $30 million.

At the end of the fourth quarter, Puerto Rico public deposits were $19.5 billion, an increase of approximately $750 million when compared to Q3. Average balances for public deposits were lower by $125 million. Going forward, we expect public deposits to continue to be in the range of $18 billion to $20 billion. Our net interest margin expanded by 11 basis points on a GAAP basis and 15 basis points on a tax equivalent basis, driven by lower deposit costs and higher loan balances.

Noninterest income was $165 million, flat versus Q3. In December, we completed the sale of the daily car rental business from our popular auto subsidiary. This business was not a material contributor to net income as the fee income generated was mostly offset by depreciation expenses.

This sale was completed at roughly book value, and going forward, there is little to no impact to the bottom line. This transaction helps to further simplify our business and will increase borrowing capacity at the Fed discount window.

In 2024, this rental business contributed approximately $30 million to noninterest income. Therefore, in 2025, we expect quarterly noninterest income to be in a range of $155 million to $160 million including the impact of the sale, offset in part by initiatives geared towards increasing fee income. Credit metrics remained stable during the fourth quarter. The provision for credit losses decreased by $5 million to $66 million. Total operating expenses were $468 million, flat with last quarter.

The largest expense bearings in the quarter were related to higher professional fees, seasonal promotional expenses and personnel costs driven by incentives. These increases were offset by lower technology costs related to our transformation efforts as some of our IT projects have reached development stage and the costs are now being capitalized and lower equipment expense, mainly due to a decrease in the vehicle fleet depreciation as a result of the sale of the daily rental business.

In 2025, we expect total full year expenses to increase by approximately 4% compared to 2024. Our effective tax rate in the fourth quarter was 20%, driven by higher tax-exempt income. For the full year, the effective tax rate was 23%. In 2025, we expect the effective tax rate for the year to be in the range of 19% to 21%.

Please turn to slide 7. During the quarter, we continued to reinvest bond maturities into two-to-three-year US treasury notes, buying approximately $600 million at an average yield of around 4%. We expect to continue this strategy as a way to lessen our sensitivity to lower rates. In BPPR, deposit cost decreased by 22 basis points to 1.67%, mostly due to a 56-basis point reduction in the cost of market-linked public (technical difficulty) deposits.

At Popular Bank, deposit cost decreased by 15 basis points during the quarter. This change reflected recent market repricing and lower volumes in high-cost deposits. Economic activity and demand for credit in Puerto Rico remains strong. In our US. market, demand for credit improved during the fourth quarter, and we benefited from continued draws in construction lines and our condo association lending business in Florida.

In 2025, we expect consolidated loan growth of 3% to 5% with the rate of growth improving as the year progresses. We anticipate 2025 NII will increase by 7% to 9% driven by continued reinvestment of lower-yielding securities and loan originations in the current rate environment as well as lower cost of Puerto Rico public deposits and online deposits at Popular Bank.

We expect NIM expansion to continue in 2025. Our ability to continue to reduce the cost of the deposits in the US and the deposit mix in Puerto Rico will continue to present the biggest risk to achieving the expected level of expansion in NIM.

Please turn to slide 8. Regulatory capital levels remain strong. Our CET1 ratio of 16% decreased by 39 basis points from Q3, mainly due to an increase in risk-weighted assets from loan growth and the effects of capital actions during the quarter.

Tangible book value per share at the end of the quarter was $68.16, a decrease of $0.88 per share from Q3, mostly resulting from increase in the realized losses in our MBS portfolio, our stock repurchase activity and dividends in the quarter. During the fourth quarter, we repurchased approximately $160 million in shares at an average price of roughly $96.

At the end of December, we repurchased approximately $220 million of our existing $500 million authorization. Return on tangible equity for the quarter was 11.2%, an increase from 10% last quarter driven by higher NII, lower provision expense and our buyback activity. We continue to anticipate we will achieve at least 12% ROCI in the fourth quarter of 2025 and longer term, we as a management team continue to be focused on achieving a sustainable 14% return on tangible common equity.

With that, I turn the call over to Lidio.

Thank you, Jorge, and good morning. Credit quality metrics remained stable during the fourth quarter with the mortgage and commercial portfolios continue to reflect credit metric significantly below pre-pandemic levels. Consumer portfolios reflected increased delinquencies and net charge-offs driven by auto, personal loans, and credit card portfolios.

However, we are encouraged about the outlook given the performance of the most recent bids. We believe that the improvements over recent years in risk management practices and the risk profile of our loan portfolio positions Popular to continue to operate successfully under the current macroeconomic environment.

Turning to slide number 9. Nonperforming assets and nonperforming loans decreased during the quarter, driven by Popular banks. NPLs in the US decreased by $40 million, driven by the sale of book value of a $17 million commercial NPL loans. NPLs in BPPR increased by $3 million driven by a $6 million increase in auto loans and leases.

[ORE] decreased by $6 million, driven by sales of residential real estate properties in Puerto Rico. Inflows of NPL increased slightly by $2 million. BPPR, total inflows increased by $11 million, driven by the mortgage portfolio. In Popular Bank, inflows decreased by $9 million as the prior quarter included an impact of a single $17 million mortgage loan. The ratio of NPLs to total loans held in portfolio decreased 5 basis points to 0.95%.

Turning to slide number 10. Net charge-offs amounted to $77 million or annualized 74 basis points compared to $59 million or 65 basis points in the prior quarter. Net charge-offs in BPPR increased by $8 million, driven by higher consumer losses by $6 million. In Popular Bank, net charge-off remained flat quarter-over-quarter. For the full year, net charge-offs were 68 basis points at the low end of our 65 to 85 basis points guidance for the year.

As we have discussed in the past, prior to the COVID pandemic, Popular's net charge-offs were generally between 75 to 125 basis points. For 2025, we expect net charge-offs for the full year to be between 70 to 90 basis points, given current trends, and the macroeconomic environment.

Please turn to slide number 11. The allowance for credit losses increased by $2 million to $746 million. In the P.R, the ACL increased by $4 million, driven by a reserve increase of $11 million in consumer loans in part offset by a $6 million decrease in reserves for commercial loans. In Popular Bank, ACL decreased by $2 million driven by improvements in risk ratings of US commercial loans, offset in part by portfolio growth.

The corporation ratio of ACL to loans held in portfolio was 2.01% compared to 2.06% in the prior quarter. While the ratio of the ACL to NPLs was 213% compared to 206% in the previous quarter. The provision for credit losses was $69 million compared to $72 million in the prior quarter.

In BPPR, the provision decreased by $10 million, while in Popular Bank, the provision was $2 million compared to a benefit of $4 million in the prior quarter. To summarize, credit quality metrics remained stable during the fourth quarter. We are attempted to evolve the environment. We remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks, gracias.

Thank you, Lidio, and Jorge for your updates. 2024 was a good year for Popular, continuing our positive earnings trajectory with a 10% increase in adjusted net income and improved operating leverage. Our results were driven by higher revenues solid loan growth across each of our regions, stable credit quality and continued customer growth.

In addition, we are pleased to resume our share repurchase activity and increase our quarterly dividend. We made great progress in our transformation efforts and some of the initiatives are already producing encouraging results. We will continue to transform our organization to ensure success for many years to come. This entails meeting the rapidly changing needs of our customers, providing our colleagues with a workplace where they can thrive, promoting progress in the communities we serve and generating sustainable value for our shareholders.

I am thankful for the hard work and dedication of our employees throughout the year. We entered 2025 on a strong footing and optimistic about our prospects for the year as leverage the continued stability in Puerto Rico economy and the strength of our franchise. We are now ready to answer your questions.

(Operator Instructions) Brett Rabatin, Hovde Group.

Wanted to start with the funding costs. And last quarter, you had the phenomenon of some high net worth and retail deposits, leaving the bank and seeking some higher yields. It seems like that abated significantly this quarter. Can you talk maybe about what you saw in trends with the core bank, high net worth and retail related to changes in the funding costs and balances.

Sure, Brett. It's Jorge. First, we were very happy with the increase in deposits in the fourth quarter and general activity. If we look at Puerto Rico and a stand-alone the nonpublic deposits were higher by about $600 million in the quarter and about -- on an average basis, $100 million down. You asked about the high net worth and commercial clients.

That activity has continued. We've set a pace of about $100 million a month going into our subsidiary popular securities for asset management, [see so] in our deck. The assets under management increased about over 30% during this year. A lot of that is supported by that growth from those clients. The increase in the fourth quarter did benefit from some seasonal activity for commercial clients. We also saw a lot of good traction in efforts from our branches in retaining clients and growing deposits particularly around rate exceptions.

During the fourth quarter, we also launched a new product targeted at our mass affluent clients. This resulted in a shift in what used to be zero cost demand deposits into a low-cost transactional account. This affected about $660 million in balances during the month of December.

I think you can see that in some of our detailed reports in our press release. But overall, we continue to work towards finding that kind of baseline of our deposits, that $600 million to $800 million level that we talked about in Q3, I think that's still kind of the estimate of potential at risk.

However, given the results and the efforts of our teams, we're very happy with how the activity in the fourth quarter.

Okay. That's helpful. And then just -- yes. If you gave it, I didn't hear it, but margin expectations are higher for the year, but you didn't really quantify that. If I back into it with the NII guide, it's about 10 basis points during the year.

And when I look at slide 22 and the maturities of the treasury notes, it would seem like that could be stronger. Are you guys assuming that the deposit betas pick up? Or any thoughts on the margin from here and why it wouldn't be a little better than 5 or 10 basis points increase throughout the year.

Yes. We don't provide any NIM guidance, Brett. We do believe it's going to continue to expand in 2025, driven in part by lower deposit costs. As you know, the Puerto Rico public deposits are market linked, short-term rates had come down around 100 basis points in the fourth quarter, and we haven't seen that full benefit in the 56 basis points that the process came down.

And certainly, as we continue to reinvest maturities of the investment portfolio that's still running about $1 billion a month at higher rates than what they're coming off our books, that should help with the expansion of the NIM and contribute to NII growth.

Okay. It just seems like that NII guide could be double digit. And if I could sneak in one last one around the credit card portfolio on slide 28, it looks like it continues to increase in terms of charge-offs. Any color that you're seeing with retail in Puerto Rico or consumers in terms of any weakening relative to what you're noticing with -- or what's trending with the core portfolio over the past few quarters in particular.

Generally, I would say that we were a little bit late in terms of -- when you compare Puerto Rico to the US in terms of come into the cycle in terms of delinquencies and chaff, I think we are -- my view is that we are at the late stage of that process here in Puerto Rico. We are very encouraged by the performance, as I mentioned in the prepared remarks, (technical difficulty), and we think the outlook for consumers as a whole is favorable given the macroeconomic environment and recent trends.

Okay. Fair enough. Congrats on a strong finish to '24.

Kelly Motta, KBW.

Maybe circling back to the margin. I appreciate the commentary that the biggest risk to achieving that is the -- still the potential deposit pressures, the $600 million to $800 million level that you identified. Wondering underlying that guidance, are you able to provide how much you're still expecting of that $600 million to $800 million to roll off. I'm just wondering how much of that risk is already kind of baked into the outlook that you provided here.

Yes. I mean certainly, the outlook considers our best estimates of when and how that corresponds. But I can tell you that we're working very hard, so that doesn't happen. So, we hope to under-promise on (technical difficulty) deliver on retention of those.

Okay. So, if I'm hearing you correctly, and please correct me if I'm wrong, the guidance includes some outflow of this $600 million to $800 million, but not potentially all of it because of the efforts that you're doing?

Correct, Kelly. I mean it does include our best estimate of that guidance. Remember that we do expect to see some seasonality. First quarter deposits tend to benefit from the beginning of tax returns in mid late March. And last year, we saw that continuing to the second quarter.

So what we're looking to see is where does that baseline -- where does it settle? And when does that happen? Our retail customers still our expense were 30% higher balances at pre-pandemic levels. So, we're continuing to work with our teams and try to get some more visibility on that. But certainly, our expectations and the risk with those outflows are part of our guidance.

Got it. Thank you for the clarifications helpful. And then with your fee guidance, I appreciate there's about $5 million a quarter. I think you said the $30 million impact to your outlook for fees potentially related to that business you sold. That implies some growth in some of the core businesses, I believe.

Can you just take a minute to explain where you're seeing good traction? I know you've, through your efficiency efforts been working towards some of these initiatives here.

On the fee income, we've had some success with what we call price for value with some of our commercial clients, we're still rolling out some of those efforts also a big contributor to our fee income as credit card activity, both from retail and commercial clients, and we see continued demand purchasing activity from our clients that benefit our noninterest income.

Got it. Last question for me and then I'll step back. The net charge-off guidance to 90 basis points implies an uptick from this last year, and you've spoken of the consumer normalization. Just wondering if there's any cadence you're thinking of as you said you were a little bit late to tightening standards on the consumer book if the charge-offs would be more towards the first part of the year?

Or just kind of wondering if we could walk through some of the moving pieces of that and the cadence of -- if there is some on how to expect that to flow through?

I mean (technical difficulty) I will say, Kelly, that everything being equal, I would expect to see improvements over time. And as I mentioned in the prepared remarks, we have seen improved performance of our recent vintages as those vintages become more prevalent in our overall balances that is going to lead to improved performance. Having said that, I mean, we are -- this was (technical difficulty) 74 basis points.

So we are within the range that we stated for the full year. So in terms of cadence, I would say, maybe slightly higher in the first half to lower during the second half, given everything that you said.

(Operator Instructions) Frank Schiraldi, Piper Sandler.

Just one more on deposits on the core head, the $600 million to $800 million. Just thinking through it, I mean the work you've done there, I assume that reflects sort of specific deposits in specific places. And just curious if that's the wrong way to think about it? And did you see any of that maybe already flow out in 4Q and maybe replaced by other deposits.

I mean I think in terms of -- we're seeing -- we look at it more on the average balances, I think that would be more of our focus and those were down about $100 million in the quarter in Puerto Rico nonpublic. In terms of sources, we know some of the client activity moving to asset management for higher yield, particularly when it comes from commercial clients, we have a lot of access to the CFO [pressures] of our large clients, so we have a good perspective.

We don't see necessarily that being a significant source of outflows going forward. It's really general use of small business, retail clients that are benefiting from higher balances and they're just spending more and maybe making different decisions on working capital, lending powering activity, things like that. But I've been exaggerating that I can tell you individual behaviors that we can tie to how that corresponds to the increase in balances that we saw in the fourth quarter -- at the end of the fourth quarter.

Okay. So, I guess that you're saying the $600 million to $800 million is then still potentially on the comp. I think that's what you said. Are you still -- that's still the number at risk as of the end of the quarter.

Maybe the high bound is lower by the 100 already went out, right? I mean I think the important message here we are actively making efforts that we believe will help us in retention and deposit growth. I think when you look at the focus of the teams and the efforts, incentives that are being evaluated to make sure that we are encouraging the proper activities by our teams. I think all those things make -- give us some comfort that we're on the right track.

Okay. And then just on buybacks, just trying to think through cadence going forward. I think, 1.7 million shares this quarter. Last quarter, it was about $600,000, although I think that was only two months' worth. So, I guess, would you say you're a little more optimistic here with the stock price down.

Should we expect to see more of that sort of a little bit of volatility given where the stock price is as opposed to just assuming the same cadence every quarter here going forward? Is that a more reasonable kind of expectation?

I think that's a fair expectation. I mean we -- I think over time, you'll get a sense of kind of a normalized level of buyback. But our goal with what we're doing is to have the little flexibility that all of our peers have and certainly we saw some softening on the stock price after our third quarter results, and we were opportunistic in buying into the lower price.

But we do like the price where it's at, and it's still attractive. We'll continue our efforts. And I think over time, you'll get a better sense of our repurchase activity.

Okay. And then just lastly, just tied to that, when we think about normalized capital levels. Obviously, as a systemically important bank in Puerto Rico, it's -- I would assume some excess capital is required there over peers, but I don't think it's whatever, 400, 500 basis points. So just curious, any color you can provide on your thoughts on a more normalized CET1 ratio or maybe just how that trends over time?

Yes. The unwinding it to be lower and that we would not do a step function, right? We would favor a more gradual reduction in that, but we agree with you that -- while we do believe we need to operate with a higher margin, given our concentration in Puerto Rico, it does not require 400 or 500 basis points.

Joe Cassidy, RBC Capital Markets.

Ignacio, I was caught by your comment about the unemployment rate being so low and you really didn't think it could be reaching your lifetime, if I heard you correctly. And my question is this, I recall about 10 years ago, when Puerto Rico was really in a tough spot the out migration from the island to the Mainland was very steady. And people weren't leaving the island because they didn't like it. It's because the economic environment was pretty weak. Now it's very strong.

Are you seeing any evidence of people coming back to Puerto Rico from the mainland or the amount of people leaving has really diminished, any color there?

Well, we report, Gerard, that the Census Bureau has said that for the first time in many years, we had positive net in migration, very small, 15,000, but it was positive. So yes, the trend has reversed, and albeit it's small, it is positive. So that has changed. So, you anticipated the trends.

Yes. That's really good to hear. Congratulations. The second bigger picture question, because of the unfortunate natural disasters the island has experienced over the years and then, of course, COVID that we all experienced. There was an enormous amount of federal monies that came into Puerto Rico as well as the insurance money, which I assume have all have been dispersed from the natural disasters.

Can you share with us do you have anything here what's left in terms of the dollar amount of the aid that Puerto Rico expects to receive from the federal government?

Yes. I think the -- if you look at the majority, we're talking about the recovery funds basically related to Maria, it's about -- you could -- there's about between $45 billion and $47 billion, and that's between FEMA and HUD, which are the most -- of that, about $44.8 billion is obligated by the Congress. So, there's a lot of money there, and those are the two principal programs that we have.

Got it. And what are some of -- if you could give us some insights, what are some of the major projects that are remaining with some -- where that money might go to in terms of rebuilding the electrical grid or other types of major municipal type projects?

There really are two categories. One FEMA and FEMA would be mostly centered around the electric grid as well as water. So, there's a number of water projects for wastewater, water filter plants, flood control is another one. There's a lot. And there's some per highway. So mostly, I'd say, between its infrastructure.

So it's mostly the electric grid. There's a lot on the water, a lot of flood control. For example, dams are being -- the dams are being revitalized, they're trudging the dams, making it stronger. So, there is mostly a basic infrastructure. And there's another big slug of funds, which has to do with HUD, and that's mostly related to housing. And so, there's a number of programs to build housing for the persons who were impacted by Hurricane Maria. So those are the big -- the big areas.

And is it safe to assume that it's a three-to-five-year type period that this all would be rebuilt? Or will it take longer?

I think it will take longer. Different things will take on, I think some of the -- some of the basic building of bridges and roads will be sooner, but the electric grid is an 8- to 10-year project, and say, 7- to 10-year project. Of course, it will not be done at once. But I think you'll see the money for the grid go out over a longer period of time. It's a more complex operation.

[Jared Shaw], Barclays.

This is (technical difficulty) on for Jared. I guess maybe just sticking on this this area of investments in infrastructure. There was that the outage on New Year's that left a lot of islands without power. I guess, were you able to see any change in, I guess, due to the investments in the speed of getting back up to power or just the overall response to an outage like that relative to in the past?

Yes. I mean, there's a long way to go still on the electrical grid. So, I don't know the response time. Luma would say we probably fight faster than in the past. And perhaps they did, we went to major back out. It came back a little bit sooner. But I think what people understand is that a lot of the work that has been done is simply the basis of putting the system back up. (technical difficulty)

The thing of improving the system, a lot of that is in the works now. So, you haven't -- you can't expect radically different results yet because (technical difficulty) a lot of investment for the distribution system and for new generation is in the works. So again, that's why I say it's a 7- to 10-year period.

I mean they have done some adjustments. I think they're doing very basic stuff like putting the trees because (technical difficulty). Believe it or not, they claimed that 40% of blackouts are caused by trees hitting the lines. So, they have a major investment in that. But basically, I think we're still in the early stages of the actual improvement of the system.

The system is back up and they put it back up, and we expect blackouts to be less over time. And the real improvement of ability is going to require these investments in the distribution system and in new generation.

Okay. Great. That's good color. And then I guess just on the loan growth trajectory kind of ramping into the -- it seems like the upper end of that 3% to 5% range by the end of the year. Is that like 5% plus annualized growth rate in the -- I guess, the second half of the year and maybe into 2026, a good jumping off point or kind of a steady run rate for you guys?

The 3% to 5% is the year-over-year growth. It would be measuring -- we stand at the end of December of 2025 and compare back to 2024.

Okay. Was there any pull forward from -- into the fourth quarter in terms of loan growth just with the higher levels.

Yes, this is Ignacio. So, we had a very strong fourth quarter and from both banks and a lot of big loans came in. So obviously, that will probably impact the beginning of the first quarter a little bit because a lot of those going close at the end of the fourth quarter. We're happy to start with those balances on our books they want. So, it's going to be very positive for us.

Yes. Okay. Sounds good color. And then just last -- last one for me. It sounds like you're adding securities to the book at around 4% yield. What are they rolling off at over the next 6, 12 months?

Yes, under 2%, like 1.5%. -- as our lower data (technical difficulty) bonds, right? Not (technical difficulty).

Kelly Motta, KBW.

Thank you for letting me jump back on. I just had some housekeeping items and then one bigger picture question I was hoping to get help on. One, I mean, the deposit flows were at quarter. And I think you mentioned part of it could be seasonality in those trends. Is there a way to quantify how much of those in closed to be seasonal?

And can you remind us about the cadence of seasonality now that we're -- it's been a couple kind of odd years with the excess liquidity in the system. Just if we could get a reflector on kind of how that cadence goes through the year, that would be helpful from a modeling perspective.

Yes. I mean in the first quarter; we see some of the tax refunds to our retail clients. I think that was an increase that we saw last year that went into the second quarter as people benefited not only from their normal tax return, but also a onetime rebate that the government of Puerto Rico did in 2024. And obviously, we -- and if you remember, even in the -- we benefit on higher average trial lenses from all that activity early on in the second quarter. But I think by the end of the second quarter, we had seen some stabilization of point-to-point.

Third quarter, there's really nothing that we've identified as a driver that would help -- that would be an inflow. And in the fourth quarter, the activity that we saw today -- or this quarter, I'm sorry, if there's some historical evidence to show it, but we've also seen headquarters where we saw outbound amounts because of all that COVID money.

So I mean, we really are trying to get our arms around kind of that baseline, Kelly. It's part of why we're giving such a broader range of what we believe it's at risk. But again, I think the important message that we want to provide is that we are -- we have active efforts to try to mitigate that activity.

Okay. That's helpful. And then a housekeeping question regarding your expense guidance, the 4% increase for the year. I just wanted to clarify if that's relative to GAAP reported expenses for the year or you had an FDIC special assessment, I believe another kind of $6 million adjustment in 1Q that was higher. I was hoping you could just clarify the correct starting base on which.

We give the guidance on a GAAP basis for all the guide, the metrics.

Got it. Last question for me. I know it's early, and it's kind of hard to know how these things play out, but I saw last night, Trump had an executive order on the flow of federal funds. I'm not sure if it impacts Puerto Rico or if anyone knows, but I was wondering if you could just give an update on how you're thinking of it and the potential risk or noise that could come from his ability to gum up the works here?

Yes. Well, like you said, it's very early, and the language in some of the executive orders are very broad. But I personally don't believe that they are directed at the recovery funds by their own statement of the administration, they've stated that their target is more the green energy initiative, the DEI initiatives, initiatives related to electric vehicles, promoting electric vehicles.

So we'll see the last (technical difficulty) order say they have to clarify it in two weeks. I don't believe it was directed to get the recovery funds, but we'll see its broad language, but I'm very confident that most of the funds coming to Puerto Rico in terms of infrastructure recovery should not be impacted by their words.

So we're not being singled out. Puerto Rico being treated like any other state or territory. So obviously, we'll be watching carefully. But again, at least I'm relatively optimistic that we are not the target of many of these initiatives.

(Operator Instructions) Gerard Cassidy, RBC Capital Markets.

As a follow-up question, and I apologize if you guys addressed this in the prepared remarks. You mentioned about changing, I think, the underwriting standards for the credit cards a little later than maybe some of the mainline banks. Can you share with us what type of underwriting changes you made for the new originations for credit cards versus what it was like 12 or 24 months ago?

Thank you, Gerard. This is Lidio. Let me clarify that I mentioned was when you look at the performance of our credit card book or consumer book compared to the US, we enter delinquency levels and net charge-offs or you saw the (technical difficulty) increase in delinquency and net charge-offs later that occurred in the mainland. So that's the difference.

But in terms of changes that we have made under the criteria, I mean, we have -- we tightened our underwriting criteria. We -- the FICOs that we lend to are much higher than they were when we make the changes.

This concludes our Q&A. I'll now hand back to Ignacio Alvarez, CEO, for any final remarks.

Thanks again for joining us today and for your questions. We look forward to updating you on our first quarter results in April. And so, everyone, have a great day. Thank you very much.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.