(BPOP) 2022 Q1 法說會逐字稿

Hello, everyone, and a warm welcome to the Popular, Inc. Q1 2022 Earnings Call. My name is Simona, and I'll be coordinating your call today. (Operator Instructions)

With that, I have the pleasure of handing over to Paul Cardillo, Investor Relations Officer at Popular, Inc. Please go ahead, Paul.

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

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. 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. We began the year with a very strong quarter, achieving net income of $212 million. Our results reflect the continued recovery in economic activity, our diversified sources of revenue and prudent risk management.

Please turn to Slide 3. Our quarterly net income of $212 million was $6 million higher than the fourth quarter and $51 million lower than the same quarter of 2021, which included significant reserve releases. The sequential variance is driven by lower expenses and a lower tax rate, partially offset by a lower benefit in the provision for credit losses, lower net interest income and lower fee income. During the quarter, loan growth was solid and broad-based, both geographically and across all loan segments. Commercial loans grew during the period in both BPPR and PB, despite the continued runoff of PPP loans. Our margins in Puerto Rico continue to be impacted by our asset mix. However, we are well positioned to benefit from higher market rates.

Credit quality trends continue to be favorable during the period with a low level of net charge-offs and decreasing nonperforming loans. With increasing expectations to digitize and improve our customer experience, we are constantly assessing and investing in our capabilities. In February, we entered in an agreement with Evertec to acquire key customer-facing channels and to extend important commercial agreements. We expect this transaction will allow us to enhance our client experience and provide us with greater flexibility to meet our customers' needs.

During the quarter, we continued to return capital to our shareholders. In March, we entered into a $400 million accelerated share repurchase program. On April 1, we paid a dividend of $0.55 per common share, an increase of $0.10 per share.

Please turn to Slide 4. Our customer base in Puerto Rico grew by more than 6,000 in the first quarter to reach 1.96 million in customers. Adoption of digital channels among our retail customers continues to be strong. Active users of our Mi Banco platform exceeded 1.1 million and have grown by 1.5% since March 2021, and by 19% since March 2020. We captured 2/3 of deposits during the quarter through digital channels.

This trend remains significantly higher than during pre-pandemic levels. Commercial loan growth was solid during the first quarter. Excluding PPP loans, commercial loan balances at BPPR increased by $302 million, or 4%. All of loan and lease balances at BPPR increased by 1% versus the fourth quarter and consumer demand remains robust. The dollar value of credit and debit card sales for our customers has continued to trend higher, increasing by 5% compared to the same quarter a year ago. The housing market continues to be strong. However, mortgage originations have been impacted by rising rates. The dollar value of mortgage originations at BPPR decreased by 28% year-over-year in the first quarter, but was more than 60% higher than the same period in 2019 and 2020.

Please turn to Slide 5 for an update on the current macroeconomic environment in Puerto Rico. The Puerto Rico economy performed well during the first quarter with business trends and customer activity remaining solid. Auto sales increased by 1% in the first quarter compared to the same period in 2021. This was the highest level of new auto sales seen during the first quarter in more than a decade. The Puerto Rico Economic Activity Index, which includes total employment, cement sales, electricity generation and gasoline sales has been steadily improving and has exceeded pre-pandemic levels for more than the past 5 months.

We are particularly encouraged by the positive employment trends. In March, total employment of Puerto Rico reached its highest level in recent history. Additionally, the March 2022 unemployment rate of 6.5% is the lowest since records began nearly 60 years ago. It is especially encouraging that the decrease in unemployment levels was accompanied by an increase in the participation rate. Airport traffic also continued to improve. Passenger volume during the first quarter increased 35% compared to the same period a year ago and also exceeded the very strong traffic seen in the first quarter of 2019.

The tourism and hospitality sector continue to be a source of strength to the local economy. Puerto Rico is a popular destination for mainland residents and the recent increase in COVID cases does not appear to be having the same impact on consumer demand for travel as prior surges have had. We believe that the recently completed debt restructuring should be an important catalyst for Puerto Rico's fiscal and economic recovery. In short, we are very pleased with the results for the quarter. We continue to be optimistic about the prospects for the future, yet remain attentive to how the evolving geopolitical, inflation and health situations may impact the economy and our clients.

I'll now turn the call over to Carlos for more detail on our financial results.

Thank you, Ignacio. Good morning. Please turn to Slide 6. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release detailed variances from the fourth quarter. Net interest income for the first quarter was $494 million, a decrease of $7 million from Q4. The variance was driven by lower PPP-related income and lower income from PCD loan repayments at BPPR along with the impact of 2 fewer days in the quarter.

This was somewhat offset by higher income from loan growth at BPPR and PB as well as a higher balance of investment securities. Noninterest income decreased by $10 million to $155 million. The decrease in other service fees was mainly related to seasonality in credit and debit card fees, which were lower by $3 million due to higher purchasing activity in Q4 and 4 million contingent insurance commissions that typically happen in the last quarter of the year.

Income from mortgage banking activities was $4 million lower, mainly driven by lower gain on securitization activities resulting from lower volume of transactions and unrealized premiums. These negative variances were partially offset by $3 million in higher income from investments held under the equity method. We continue to expect that the average quarterly level of noninterest income will be around $155 million to $160 million. The provision for the first quarter was a benefit of $16 million, this was $18 million lower than the benefit recorded in the fourth quarter. Total operating expenses were $402 million in the quarter, a decrease of $15 million from Q4.

This was driven by 3 factors: First, an $11 million decrease in business promotion expenses, primarily impacted by lower expenses associated with seasonal advertising, charitable donations and credit card rewards; second, an $11 million decrease in other operating expenses, driven by sundry losses -- lower sundry losses by $5 million, mainly related to the termination of a white label credit card contract and the $5 million impairment losses on undeveloped properties taken in Q4; finally, a $5 million decrease in amortization of intangibles due to the write-down of a trademark in Q4.

These decreases were partially offset by a $7 million increase in employment compensation costs, mostly driven by higher incentives and commissions as well as seasonality in payroll taxes that increased by $4 million, a $4 million increase in credit and debit card processing expenses due in part to lower volume incentives and a $3 million increase in professional fees. For 2022, we continue to expect our average quarterly expenses to be around [$450 million]. We will, of course, strive to come in below this expected level of expenses. Our effective tax rate for the quarter was 19%. In 2022, we expect the effective tax rate to be between 18% and 20%.

Please turn to Slide 7. Net interest income on a taxable equivalent basis was $548 million, $4 million higher than in the fourth quarter. Net interest margin decreased by 3 basis points to 2.75% in Q1. On a taxable equivalent basis, NIM was 3.05%, an increase of 3 basis points. The increase in FTE margin was driven primarily by higher yields on our investment portfolio by 17 basis points due to asset composition and improved market rates. During the quarter, average bonds of U.S. treasury securities increased by $4.2 billion while the average balance of money market investments decreased by $3.1 billion.

The FTE loan yield decreased by 20 basis points in Q1 to 6.06%, driven by lower PPP amortization. PPP income in Q1 was $11 million, down from $23 million in the prior quarter due to lower recognition of fees upon forgiveness and lower balances. The yield of the portfolio was 17% compared to 17.9% in Q4. The outstanding quarter balance of PPP loans was $173 million. The remaining unamortized portion of fees for this portfolio is $8 million, most of which we expect to recognize during the second quarter.

Excluding falling deposits, deposit balances grew by $4.1 billion in the quarter. As of the end of the first quarter, public deposits were roughly $15 billion, a decrease of $5 billion from Q4. While the aggregate deposit outflow associated with the completion of the third debt restructuring was approximately $10 billion. We saw $5 billion additional public deposit inflows during the first quarter. We now expect public deposit balances to fluctuate between $11 billion and $15 billion, slightly higher than our prior estimates. The outflow of public deposits and the deployment of a portion of our cash position into loans and investments have reduced our asset sensitivity, but we will continue to benefit from rising rates. As of March 2022, each 25 basis point change in Fed funds, which corresponds to $6 million to $8 million in NII per quarter.

Our ending loan balances increased by $344 million. This increase occurred despite a decrease of $180 million in PPP loans. Excluding the impact of PPP, loan balances grew by $524 million in Q1, reflecting higher commercial loan balances at BPPR and Popular Bank, higher construction balances and to a lesser extent, higher auto and personal loans. These balance increases were offset in part by continued runoff of the mortgage loan portfolio in Puerto Rico. We are encouraged by the demand for credit at BPPR and PB as net growth has occurred earlier than expected. We will continue to take advantage of the evolution of the economy and the opportunities to extend credit so we can continue to improve the use and yield of our existing liquidity.

Please turn to Slide 8. Capital levels remain strong. Our common equity Tier 1 ratio in Q1 was 16.3% compared to 17.5% in Q4. Tangible book value per share in the quarter was $51.16 or a 22% decrease, driven by 4 factors: $1.1 billion higher accumulated unrealized losses on debt securities available for sale as a result of rising interest rates, the impact of the $400 million accelerated share repurchase program the corporation entered into in February and declared quarterly common stock dividends. This was partially offset by the quarterly net income of $212 million. The lower mark-to-market valuation of our investment portfolio will not have an impact on our regulatory capital ratios.

While this is a large variance in annual book value, the decrease in fair value of the investment portfolio should be temporary. Our investment portfolio is nearly entirely comprised of treasury and agency mortgage-backed securities, which carry minimal credit risk. The bond portfolio has a duration of approximately 4 years, and as the positions roll down the yield curve, their fair value will converge to par and the mark down to 0. Despite extension of some cash into the investment portfolio over the last few quarters, we continue to have large cash balances. Continued extension of available liquidity into the investment portfolio will lead to higher earnings and improved tax effective markets in this interest rate environment. Our return on tangible equity was 16.4% in the quarter.

As a result of the ASR, we recognized in shareholders' equity approximately $320 million in treasury stock and $80 million as a reduction in capital surplus. The final accounting treatment of the program will depend on the average price of the shares during the term of the ASR, scheduled to close in Q3. Our EPS in Q1 increased by $0.03 as a result of this transaction. Our capital planning schedule should result in an announcement of Popular's 2023 capital actions no later than our January 2023 webcast. The announced intention to redeploy the net gains expected from the sale of our Evertec stake is subject to the closing of the transaction and regulatory approvals. As of now, the closing is still expected for midyear. We will continue to explore opportunities to manage our capital structure through the remainder of 2022 and in future periods.

With that, I turn the call over to Lidio.

Thank you, Carlos, and good morning. Overall, Popular continued to exhibit strong credit quality trends and low credit costs with low levels of net charge-offs and decreasing NPLs. We continue to closely monitor changes in our performance and the pace of economic recovery, given the rising interest rate environment and geopolitical uncertainty. However, we remain optimistic given recent credit performance, economic outlook and improvements in the risk profile of the corporation's loan portfolio.

Turning to Slide #9. Nonperforming assets decreased by $22 million to $610 million this quarter, mainly driven by an NPL decrease of $28 million, offset in part by an OREO increase of $5 million. The decrease in NPLs was mainly in Puerto Rico. This was driven by lower mortgage NPLs of $26 million, primarily due to the combined effects of collection efforts, increased foreclosure activity and the ongoing low levels of early delinquency compared with pre-pandemic trends. In the U.S., NPLs remained flat quarter-over-quarter.

Compared to the fourth quarter of last year, NPL inflows excluding consumer loans remained flat. In Puerto Rico, total inflows increased by $5 million driven by higher commercial by $4 million and higher mortgage by $2 million. In the U.S., inflows decreased by $5 million, driven by a $7 million reduction in the mortgage portfolio as the prior quarter included the impact of loans that did not resume payment after the end of the COVID-related moratorium.

The OREO increase in the quarter was driven by the resumption of foreclosure activity in the Puerto Rico mortgage portfolio. At the end of the quarter, the ratio of NPLs to total loans held in portfolio was 1.8% compared to 1.9% in the previous quarter.

Turning to Slide #10. Net charge-offs amounted to $4 million or an annualized 5 basis points of average loans held in portfolio compared to a net recovery of $8 million in the previous quarter. The variance in net charge-off was mainly driven by the resolution in Puerto Rico of certain commercial nonperforming loans in the prior quarter. The corporation allowance for credit losses decreased by $18 million or 2.5% to $678 million, driven mainly by reductions in qualitative reserves due to substantial improvements in employment levels in Puerto Rico.

The ratio allowance for credit losses to launch health and portfolio decreased slightly to 2.29% compared to 2.38% in the previous quarter. The ratio of allowance for credit losses to NPLs held in portfolio was around 130% compared to 127% in the prior quarter. The provision for credit losses was a benefit of $14 million compared to a benefit of $31 million in the previous quarter. In Puerto Rico, the provision for credit losses was a benefit of $12.7 million. While in the U.S., the provision was a benefit of $1.7 million.

Please turn to Slide #11. The varying allowance for credit losses was driven by changes to qualitative reserves and economic outlook as well as portfolio credit quality and mix. During the quarter, we released $26 million from our qualitative reserve driven by improvements in employment levels in Puerto Rico. In accordance with its usual practice, the view of Labor Statistics completed its annual benchmark revision to the Establishment Survey Employment Series, which yielded significant improvements in payroll employment.

As a result, we released qualitative reserves associated with uncertainties due to the employment situation in Puerto Rico after COVID. Changes in economic scenario driven by fiscal assumptions caused the ACL to increase by $4 million. However, the macroeconomic scenario for Puerto Rico and the U.S. continue to show a positive outlook for the economy. Portfolio changes driven mainly by credit quality, portfolio growth and volume mix cost ACL to increase by $8 million.

To summarize, our loan portfolio exhibited strong credit quality metrics with low net charge-offs and decreasing nonperforming loans. We are optimistic given recent credit performance, economic outlook and improvements in the risk profile of the corporation's loan portfolios. 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 updates. Popular started off 2022 with a strong quarter, building on the positive momentum seen in 2021. Our results were driven by strong earnings, improved credit quality and continued customer growth. Our planned capital actions reflect this strength. In addition to the unprecedented level of federal stimulus related to COVID, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be disbursed and which now have begun to flow at a faster pace.

We expect that the combined impact of these factors along with the continued progress on the resolution of Puerto Rico's fiscal issues should generate considerable economic activity in many sectors for the coming years, and we are well positioned to benefit from such activity. We are optimistic about the economic outlook, yet cognizant of the possible challenges to the environment resulting from the war in Ukraine, inflation and the ongoing health situation.

I am thankful to our entire team who have continued to perform at a high level and deliver results under a myriad of changing conditions. We continue investing in our people and in January, increased the minimum wage paid to our employees across all our geographies. Our employees are Popular's greatest source of strength. We are ready now to answer your questions.

(Operator Instructions)

Our first question comes from Brocker Vandervliet of UBS.

I may have just missed that, but constantly hunting for economic and employment data in particular about the island. Could you review the actual number that you're citing in terms of the employment improvement?

Yes. The unemployment rate was 6.5%, and the participation rate, I didn't say it specifically, but it's 44 and change and increase about 2 and change from our prior reading.

Okay. Got it. And in terms of the government deposits, I guess, just 2 questions. One, you had framed out the impact of that runoff as, I believe, 4 to 5 basis points of NIM benefit for every $1 billion. Is that still reasonable? And should we see that in Q2? And I guess, secondly, what would drive that range in terms of $11 billion to $15 billion down to the low or sticking at $15 billion?

Yes. The range still applies, Brock, that we mentioned earlier. What's going to drive the change -- the balances within that range is normal operational activity of the government, which means that for the second quarter is, for example, they get all the tax receipts in the second quarter. We'll still end up in the higher end of that range. Normally, during the rest of the year, the government spends money, and they have less inflows. So, the balance should come down during the rest of the year.

They will have now for the first time in 5 years, 6 years, a debt payment at the beginning of July. That is new as well. So our best guess right now is that it should go -- should be at the higher end of that range in the second quarter and then come down after that. The thing that may -- that affects that balance that is very hard for us to predict is the arrival of some federal funds. So sometimes, we get surprised in the upside when a particular program is triggered and a big slug of federal funds arrive. But normal flow of business should be -- which would be around the highest at this point in the year and should gravitate down from here.

Our next question comes from Timur Braziler of Wells Fargo.

Starting on the loan growth, 2 quarters in a row of positive net growth, I heard your comment that this is coming sooner than what you had been expecting, which was kind of net growth in the back end of the year. I'm guessing, how does the loan growth outlook change, if at all, given the last 2 quarters? Should we expect accelerating growth as some of the stimulus money begins to find its way into the economy as some of this existing growth in the fourth and the first quarter here kind of preemptive in anticipation for increased economic activity and rolls off? I guess, how do you think about loan growth going from here with these 2 good quarters in your pocket now?

Yes. I think that the loan growth has a lot to do with confidence in the economy, and I think there's a lot of confidence in the economy right now, especially in the larger players. So a lot of the loan growth we saw in the larger commercial loans, both in the U.S. and in Puerto Rico. So it's hard to predict because those loans are lumpy. We definitely have not seen any deceleration of the interest from our clients. There's a lot of activity going on. There's a lot of people looking at different possibilities, acquisitions, investments. So it's a bit lumpy because these loans are large, but we certainly don't see any deceleration on the loan demand at this point.

Okay. And then just looking at the swing in AOCI, could you just maybe talk through some of the internal discussions about potentially having moved some of the portfolio into held-to-maturity status during the quarter? And then the duration, you said it's 4 years. It's a pretty straight line. Should we assume about a 1/4 of the portfolio runs off annually and kind of extrapolate that on a quarterly basis? Or is there some difference in the pace of cash flow on that book?

There was no substantive discussions of us moving the portfolio to help to maturity during the quarter. We have historically held the portfolio available for sale, so no significant expected change there. The portfolio maturities are pretty well balanced as we move forward. So -- and when we add to the portfolio as well, Timur, we tend to layer in all our future maturities a little bit as opposed to a big chunk in any given maturity. So we have a quite balanced portfolio. Your guess of a 1/4 of every year, lumpy, will comment on lumpy.

Yes. This is Juan Pablo, the treasurer. In terms of maturity structure, I'd say, around 38% to 40% mature within the next 3 years and then another 30% kind of between years 3 and 5. So again, as Carlos mentioned, the portfolio is laddered out, all the way up to 6 or 7 years. But again, the bulk of the exposures are kind of like in the belly of the curve.

Our next question comes from Brett Rabatin of Hovde Group.

Wanted to ask about fee income and mortgage. And specifically, it seemed like the MSR mark didn't -- that rates given where rates have moved would have been more significant. Can you maybe talk about mortgage, the MSR? And I think if I heard you correctly, $155 million to $160 million kind of guidance for quarterly fee income. It seems like you've got some movement there and other with the equity fees. So it would seem like there could be some pressure to the lower end of that, but I want to make sure I understood. How you're thinking about the guidance for fee income as well?

Yes. I mean the guidance for fee income is unchanged. As you know, there's a lot of moving parts that add up to that number of $155 million to $160 million. In any given quarter, things will come up and down. One of the reasons we keep the guidance at the aggregate level is that a lot of the things that happen tend to cancel out from quarter-to-quarter. So you end up at similar levels, even those specific lines may be a lot more volatile. We still feel comfortable that this is the correct range moving forward in this environment. Now the -- when the transaction with Evertec closes, we will make some adjustments to that range, yes. But we -- that hasn't happened yet. So we haven't made any adjustment yet. There will be some adjustments to the rate moving forward.

Okay. That's helpful. Any thoughts on the MSR and mortgage overall?

Yes. On mortgage, I mean we are seeing trends that are not dissimilar for everybody else is seeing in the country when rates go up, the refi rate goes down. So we still have a very healthy housing market in Puerto Rico, but one of the challenges is finding house to buy. There's very little offer of units in the island and that makes the new market somewhat challenging. So lower -- there will be -- we expect to have as we did in the first quarter, lower volumes than last quarter. As a result, will be securitizing less loans and the fees from that will be lower. The MSR, you know my view on the MSR, the MSR does what the MSR does. And there's -- the effect of rates, there's also the effect of extension on it. So different things will affect it at any point in time. So I take that more as a fact than something that we try to forecast or hedge.

Okay. Fair enough. And then the other thing really wanted to talk about was, I've been looking at all the data economically and it's been very strong and you pointed out some of the numbers on the call so far this quarter, so far this year. And I mean it looks really to me like this is going to be the first year where Puerto Rico in many, many years is going to have low single-digit positive GNP growth, and there doesn't seem to be anything unrailing that, even despite higher energy prices potentially impacting retail spending, et cetera, employment continues to be stronger. Yet it doesn't sound like you guys are taking a very bullish view on the economy. More of a wait and see or conscious approach. Can you give me any color around that and how you're viewing the year? And if it's just that everybody sort of nervous about the yield curve implications, et cetera, global stuff? Or maybe you can provide a little color on that.

Maybe we didn't expect this sort of theory, but I think we're very optimistic about where the economy is. I mean the Puerto Rico economy today is as good as any (inaudible) senior for a long time. And again, to me, the most important -- one of the most important is employment really is, we have more people employed today with a lower population than we had a decade ago. So I think the biggest headwind in the economy that we're concerned about is external to Puerto Rico, it's not internal. It's what happens in the Ukraine and what that does to inflation and the supply chain.

But really, I think the Puerto Rico economy as you said is positioned to grow more solid than it has in a long time, and right now, the consumer remains healthy. Our customers have a lot of liquidity. Really, the biggest problem we have is, like many people, is hiring. And across the board and Puerto Rico, it's staffing people for the growth. But yes, I think we're very optimistic about the Puerto Rico economy. I think there are some legitimate concerns about external factors, Ukraine, inflation, logistics, all that kind of stuff. But in terms of Puerto Rico, we're very optimistic.

Brett, our average retail client balance is up 50% from where it was pre-pandemic. So the consumer seems to be still a very strong position. Do keep in mind that Puerto Rico will benefit from an extended application of the federal child tax credit and that should add some additional liquidity to the market starting this month. So there's still positives that keep giving us tailwinds and we are positive on that.

Okay. Any -- I think you mentioned that on health care. Any thoughts on Supreme Court decision to disallow the several hundred thousand people off the medicare benefits this year?

Well, it's very disappointing. Keep in mind though that we didn't have that benefit until very recently when the appellate court -- in fact, I don't know, they never implemented. So it's not a benefit that we lost, it's -- that we had and lost, it's a benefit that obviously would have been very important. So it's disappointing. We're hopeful that the administration will be able in the next 2 years that they have left or at least before the midterm before the Congress changes, get some of those benefits through legislation.

But again, remember, that is not something we had and lost, that is something that the courts -- the Congress have never given us. And of courts, the lower courts rule that it was unconstitutional to discriminate against Puerto Rico and the Supreme Court reversed that. We have had a lot of additional benefits, though. The child tax credit, which is something in Puerto Rico only participating marginally. That has been a very large benefit to Puerto Rico. So I think that's very important, and I think that has helped households in Puerto Rico deal a little bit with the inflationary pressures.

It's a lot of money vis-a-vis the average annual salary in Puerto Rico (inaudible). Again, there's a lot of money out there. I mean stimulus is not our problem, our problem was where to get it out. Estimates of the hurricane recovery funds is more than $50 billion, yet to be spent. There's the different legislation for COVID relief. Some estimates have about $10 billion left to be spent. We had the infrastructure bill that had about $2.7 billion in the next 5 years and another $1.2 billion after that. So there's a lot of money out there yet to be spent. How much will be spent, I don't know. This is more the supplemental Medicare is more a human, human rights issue than, I think, an economic impact issue.

Our next question comes from Gerard Cassidy of RBC Capital Markets.

you mentioned in your prepared remarks that at the end of March, you indicated that a 25 basis point increase in Fed fund rates would lead to about a $6 million to $8 million increase in net interest income. And as part of that comment, if the Fed raises Fed funds rates 50 basis points, let's say, next month and possibly, a second time. Can you share with us what that would do? Is it an automatic double to that number? Or is it not that linear? And then second, as you look out through the remainder of the year and if the forward curve is accurate, I assume the $6 million to $8 million for every 25 basis points is not linear and because of deposit betas and other things, that benefit might diminish a bit?

Yes. I think it's -- in the short term, you can assume that it's reasonably linear. It will not necessarily be as you move later in the year in part because there may be other changes in the balance sheet as well that may adjust it. But in the short term, if next month is 15 instead of 25, it should be something in the ballpark of twice the range we gave, yes. But if you're trying to think about how that may affect the rate change in September or October, that number may be somewhat different. We'll update this commentary in every webcast that you'll get in updated version.

Very good. And then you were talking earlier about the investment securities portfolio and the duration. I know in the average balance sheet, you give the yield for both the money markets trading and investment securities together. I think it was 135 basis points. What is the yield in the investment securities portfolio today? And what are you now seeing as you invest money into that portfolio? What's the new rate that you're receiving?

I'll have Juan Pablo answer that one.

Yes. Right now, the portfolio -- the bond portfolio, including the cash is around 135 basis points. At the margin, you got to take that right now, depending on where you're purchasing stuff, anywhere above between 250 and 275 is where marginal funds are being deployed at this point in time.

Very good. And then finally...

Just to reiterate, the other thing that is a tax exempt for us. So the actual after-tax yield is quite higher than that.

Got it. You guys talked about the growth in commercial lending in the quarter, and can you give us a little further color? Is it C&I lending, commercial and industrial lending, is it commercial real estate mortgages that you're seeing the growth in? And is it primarily in -- on the island? Or is it here in the mainland?

I think we saw it in both markets. I don't know maybe you want to put some more color on it, but we saw strong lending in hospitality sector in the multifamily sector in the U.S. So really across the board, we had construction lending was up also. So it was really across the board in both geographies. I don't know Lidio...

It's pretty balanced too, Gerard. Commercial growth in Puerto Rico was about 161 and in the states like 135. So it's actually pretty balanced. Last quarter, it was much more heavily weighted to the Popular Bank and Puerto Rico, this quarter was a lot more balanced.

Very good. And then just finally on the commercial mortgage portion, with the 10-year backing up the way it did in the month of March, was there any change in what your guys on the front line are seeing? Meaning commercial real estate mortgage folks are not looking to do as much activity right now? Or is that no, it hasn't really affected them?

We haven't seen any significant change so far. No, Gerard.

(Operator Instructions)

Our next question comes from Alex Twerdahl of Piper Sandler.

A couple of questions here. So with the new range on the government deposits, the $11 billion to $15 billion, does that change -- and with obviously, this bankruptcy kind of now in the rearview mirror, does that change your willingness to actually activate some of those deposits? I know that you're kind of sitting on a big chunk of them for a long time, kind of unsure what was going to flow out. But now that we have a little bit more clarity, could you take some of that $10.5 billion of cash on the balance sheet and maybe at least invest a little bit more in the securities portfolio?

Well, we have been adding to security portfolio of everyone in the last 3 or 4 quarters, I think, Alex. So we've been doing some of that. You are correct that some of the uncertainty about forward-looking balances is now -- has now gone away. So we'll continue to look at our cash position and investment opportunities. The investment opportunities are obviously a lot more attractive now than they were a few quarters ago. So our willingness to extend is probably getting better because we find them more attractive now. So this is a -- this is what our ALCO committee does on a weekly basis. So we will definitely continue to extend and with less uncertainty on our balances and better investment opportunities, we'll consider extending more than we have in the last few quarters on average.

Have you done any so far during the second quarter that you can share with us?

I don't recall on the second quarter, Alex, but you should assume that we will do some in the second quarter as well.

Okay. And then when we talk about loan growth and we talked about the hurricane money that still has kind of been slow to come to the aisle, you can kind of really parse out from some of the programs. Big chunks of money that have been allocated to things like affordable housing and just some of the R3 program and the investment portfolio for growth. And if you look at the numbers that are publicly available, you just -- you see the projections have been pretty strong going forward, but a lot of that money is really yet to be spent. In the past, you talked about kind of planning and permitting. It was maybe last year and now this year, you're starting to see a little bit of commercial growth. Are you seeing any of that related to some of these HUD programs? And if not, do you think that there's -- do you have a line of sight on to sort of when some of those programs might come online?

It's hard to get a line of sight because of all internal negotiations and processing going on between HUD or [core 3] in the federal government. We are starting to see it -- you're right. This did come out slower than we hoped. I mean they just announced today the first recovery project for the Ecuador Consumer Authority, a $2 billion project. It was finally built. There is a lot of proposals. I think somebody read Luma and the Power Authority have 16 projects in front of FEMA to be approved. So it's going through the project. I think the housing with the CDBG funds is moving a little bit faster. They have dispersed the money. But again, it's -- we can't hide the fact, it's just slower than we would have hoped.

The one thing that I do think the political realities are that as the Biden administration enter their halfway mark, I think there's going to be real pressure on the administration to get more money out because obviously, they were very critical of the way the Trump administration handled the funding for Puerto Rico. And really, the first 2 years, it really hasn't dramatically increased that much. So I think just the timing in the process as you get further along, a lot of work has been done. I think there'll be political pressure on the federal government to show some results, especially they were highly critical of Trump administration. They should make some progress.

Now that's the positive side. A little bit on the negative side is all these logistical challenges and inflationary challenges complicate the process of buying the stuff for projects. Some of these specialized equipment I read somewhere could take 2 to 3 years for deliveries. So the logistical challenges are real. Yes, I mean, the money started to flow not as fast as we want. But again, the economy is doing very well, sort of without that big inflow. So keeping a little bit of that reserve is not necessarily a bad thing.

As an example, the government announced today that they are trying to negotiate with federal authorities for them to allow the equipment that is involved in some of the projects that will be built for it to rebuild the electrical sector to be purchased ahead of the final granting of the contracts because the way it is now, you actually have to wait for the contract to be granted to order the equipment. As Ignacio said, that equipment may have a lead time normally of 8 to 10 months maybe, and now lately, maybe 2 years. So trying to get ahead of some of that. So that's the kind of logistical discussions that are going on. Hopefully, they will be resolved positively so we can get more of those projects going quicker.

And theoretically, if someone wanted to purchase a big piece of equipment with the 2 years ahead of when the contract might be executed, is that something that they need a bank loan to help facilitate that purchase?

Well, it depends what you're talking about. Again, the equipment that will be the, let's say, the power stations, that's going to be bought by Luma or the power authority with federal funds. However, a lot of the work will be done by private contractors and those private contracts will have to buy trucks and equipment they use to install the stuff. Now the infrastructure itself is going to be funded by federal funds. But again, much of the work will be done by private contractors, who will have to buy equipment and that kind of thing.

That's helpful. Just a couple of sort of follow-up questions. The 25 basis points equals $6 million to $8 million per quarter. Kind of what's the difference between that $6 million and $8 million? Is it really liquidity from the government that defines the two kind of ends?

Yes. Largely, the difference in the two ends was $20 billion in balances versus what we thought was $10 billion, which it now looks like more like $11 billion to $15 billion, as we mentioned. So that is the biggest delta. There's other things that will swing in, but that is the biggest delta yet.

Okay. So if it's $15 million, then you're probably looking at around $7 million per rate per quarter. And that -- just correct me if I'm wrong, that's just the short end, right? That makes no assumptions on the long end of the curve.

That is correct. And as I mentioned earlier, it is fairly lineal in the very short term. But as we get out of quarter 2, that number will probably change, okay?

Okay. And then on the expense guide, which is unchanged from last quarter, is that reflective of the renegotiation of the Evertec contract?

No, the expense guide, it does not include that yet because that transaction has not closed. Once the transaction closes, we will update our guidance to reflect any changes are necessary.

And that takes the CPI escalator from 5% back on to 0% for this year, right? So that could have some decent savings in the back half of this year. Is that -- am I thinking about that correctly?

Assuming that everything close as we are assuming right now, that will provide some savings in the back end of the year, yes.

Okay. And then how should we think about the $100 million of buyback authorization that you left out of the ASR. Can you give us some thoughts on how we should be thinking about how that will be utilized over the remainder of the year?

We are still going through that analysis and making decisions on it. We are sort of considering this together with our express intent to redeploy some of the gains from Evertec. So the size and timing will depend on a number of things. So we're still working through that. We haven't made any decisions.

Okay. And then just to clarify, the capital ratio that really matters for you guys in your mind is the common equity Tier 1. And when we see the leverage ratio or even the tangible common equity ratio kind of decline as a result of the size of the balance sheet or things like the AOCI hit, does that have any -- is that something you guys pay attention to at all when you're thinking about capital actions?

Remember, the AOCI has no effect on our regulatory ratios. So that didn't change the regulatory ratios. We continue to have very healthy regulatory ratios, and at this point in time, we have no reason to think that, that will change the way we look at capital return.

We have a question from Kelly Motta of KBW.

Just carrying on, on the topic of the buyback remaining. When you announced Evertec, you said you would be repurchasing kind of the post day 1 gains on the remaining sales of Evertec's shares. Is that incremental on top of the $100 million you already committed? Or is that -- are they kind of one and the same?

No, that would be incremental, yes.

Okay. And then, I guess, with credit, I mean things have -- you had another negative provision. Things have continued to strengthen and get better and you could release other qualitative reserve. As we kind of look out -- net charge-offs have been really almost negligible, have you guys considered at all what a normalized charge-off ratio looks like now on a go-forward basis, given all the relief money that is yet to be disbursed and kind of thoughts around that?

Kelly, I would say, a difficult question to answer. But I will say that prior to the pandemic and all the money that is coming into Puerto Rico, the normal range of charge-offs for the corporation was between 75 basis points to 125 basis points. it seems like the new normal or in the short to medium term will be -- was a little bit lower than that range. So that's will give you as a part of a new normal.

Okay. That's helpful. And then maybe just the last one for me. I really appreciate all the color around asset sensitivity. Just wondering on kind of what you're baking in for your expectations for deposit betas? Do you expect it to follow a similar cadence as the last time around or given the fact that you guys all have so much liquidity? Do you think it will be a -- perform a bit better and that goes into that NII outlook for each 25 basis points?

Yes. Remember that we have 2 pieces to our deposit beta, the deposit beta in the U.S. bank and the deposit beta in the Puerto Rico bank. The deposit beta in the U.S. bank is much -- looks a lot more like any other $10 billion bank in the eastern shore of the United States. So it's closer to changing market rates. In the case of Puerto Rico, historically, deposit betas have been lower in both directions than they have been in the Mainland. You're correct that there's a lot of liquidity.

So just thinking that they will look like last time is not unrealistic. Now what we do not know, Kelly, is especially how clients are going to react to a very fast increasing rates, especially commercial clients that are the most sensitive and the most attentive to that. So if commercial clients start looking at opportunities to reinvest the cash in a different way then that could affect the betas negatively. But as a starting point, it's not unreasonable to think that they will look like last time.

That's really helpful. And just a small follow-up for me. Do you have a sense of or just like an approximate breakout of your deposit base of retail versus commercial?

Yes. Give me a second, and we'll give you that question. Hold on. Okay. In the bank in Puerto Rico, retail is $23 million, about 60% of the $39.6 million, almost $40 million that we have, excluding falling deposits, okay? So that...

Got it.

And sorry, the U.S., we have the U.S. too. The U.S. -- no, no, sorry, I don't have the U.S. in my head right ahead. We can check up in the U.S. and get back to you on that.

We have a follow-up question from Brock Vandervliet of UBS.

Just a follow-up to that credit string of questions. Is there any -- just trying to dimension where the reserve could go. Is there any reason to expect given this tailwind that it's not returning to 1.75% to 2% as a percentage of loans over time?

I'm not sure what you mean return to 1.75% to 2%. Again, it's also a difficult question to answer. As you know, under CECL, another important factor is the economic forecast. So when you look at the trend, it seems that the -- everything else being equal, that we're seeing lower releases of research on a month-to-month basis. So we are sort of like getting close to a plateau, but then you have the factor related to the economic forecast. If that changes, then there could be a significant impact to the reserves.

Okay. Nothing new there. On nonaccruals, a lot of that, 75% is resi mortgage. Is there some guidance where we should expect just an ever present large component of resi mortgage just because of the way the market is on the island. I'm just trying to dimension the potential increases ahead in nonperformers.

I mean that has always been the case of our business in Puerto Rico. NPLs are mostly or largely being residential mortgage loans, and that is in part due to the fact that the foreclosure process in Puerto Rico takes very, very long. So I would expect going forward that, that will continue to be the case.

We currently have no further questions. So I will hand back to Popular's CEO, Ignacio, for any closing remarks.

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

This concludes the Popular, Inc. Q1 2022 Earnings Call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.