Popular, Inc. Q4 FY2021 Earnings Call

Hello and welcome to the Popular, Inc. Q4 2021 Earnings Call. My name is Emily, and I will be coordinating the call today. I will now hand the call over to your host, Paul Cardillo, Investor Relations Officer at Popular Inc. Please go ahead.

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 Vázquez; 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 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. Before I begin, I would like to acknowledge our recently appointed Chief Operating Officer, Javier Ferrer. Javier joined Popular as Chief Legal Officer in 2014 and has made important contributions to our strategic initiatives these past years. As COO, he will continue to provide strategic and operational guidance to our senior management team. Javier passes the legal baton to José Coleman, who has assumed the position of Chief Legal Officer. José has been with Popular since 2017. We are confident that each of these appointments will strengthen our senior management team. Today's results reflect another solid quarter and an outstanding year in which we achieved record earnings. Our results reflect the continued recovery in economic activity, our diversified sources of revenue, and prudent risk management. I am very pleased to report that in January, we announced a series of planned capital actions that we intend to execute this year. These actions include an increase in the company's quarterly common stock dividend of 22% to $0.55 per share beginning in the second quarter and a common stock repurchase program of up to $500 million. Additionally, we completed our 2021 capital plan in November with the redemption of $187 million of our 6.7% trust preferred security. These actions evidenced the strength of our capital position, which allows us to return capital to our shareholders while we continue to invest in our franchise. Our annual net income of $935 million reflects an increase of $428 million above our 2020 annual net income of $507 million. The increase was largely driven by lower provision expense, higher fees, and higher net interest income, and was partially offset by higher expenses. 2021 results also benefited from strong deposit growth and a higher level of earning assets in both Puerto Rico and the U.S. Credit quality continued to improve throughout 2021. NPL decreased by $190 million or 26% and net charge-offs were 7 basis points in 2021, compared to 56 basis points in the prior year. We are pleased with how our portfolios have outperformed, particularly with net charge-offs below 10 basis points for the year. Our capital levels are strong, with a year-end common equity tier 1 ratio of 17.5%. Our tangible book value ended 2021 at $65.39, a 4% increase year-over-year. Our quarterly net income of $206 million was $42 million lower than the third quarter, and $30 million higher than the same quarter of 2020. The sequential variance was driven by a lower benefit in the provision for credit losses, higher expenses, and lower fee income, partially offset by higher net interest income. Loan growth was solid in the quarter, particularly in Popular Bank, where we saw commercial loans increase by 12%. Our margins continue to be impacted by the low-rate environment and our asset mix. However, we are encouraged by the margin expansion and the U.S. business. Credit quality trends continue to be favorable in the period with lower NPLs and net recoveries in charge-offs. Our customer base in Puerto Rico grew by 43,000 in 2021, of which 1,800 were in the fourth quarter to reach nearly 1.95 million unique customers. Adoption of digital channels among our retail customers continues to be strong. Active users on the Mi Banco platform exceed 1.1 million and have grown by 3% since December 2020 and by 20% since December 2019. We captured two-thirds of our deposits during the period through digital channels. This trend remains significantly higher than pre-pandemic levels. The dollar value of credit and debit card sales for our customers have continued to trend higher, increasing by 7% compared to the same quarter a year ago and by 25% in 2021 as compared to 2020. Auto loan and lease originations at BPPR have remained very strong. While it increased compared to the fourth quarter of 2020, they were 23% higher year-over-year in 2021. The housing market also continues to be robust. The dollar value of mortgage origination to BPPR decreased by 11% sequentially in the fourth quarter, but the full-year originations increased by 28% as compared to 2020. Please turn to Slide 6 for an update on the current macro environment in Puerto Rico. In the fourth quarter, the economy performed well as business trends and customer activity remain solid. New auto and used auto sales reflect strong consumer demand. For the year, 129,000 new units were sold compared to 95,000 units in 2020, and it is the highest annual level of reported sales since 2005. The Puerto Rico economic activity index, which includes total employment, cement sales, electricity generation, and gasoline sales has been improving, and as of November 2021, it has returned to pre-pandemic levels. Employment levels have also continued to improve. According to a recent study by a Federal Reserve Bank in New York, employment levels in Puerto Rico have recovered more quickly than in many other jurisdictions and have now surpassed pre-pandemic levels. Cement sales have remained strong. In 2021, sales were 13% higher compared to 2020. Airport traffic has also continued to improve. Passenger volumes doubled in 2021 compared to last year and increased by 3% compared to 2019, which itself was a strong year. Activity levels in the tourism and hospitality sector have also been a source of strength for the local economy in 2021. While the recent surge in COVID cases may impact the industry in the near term, Puerto Rico continues to be a popular destination for mainland revenue. The recent quarter approval of the plan of adjustment should be an important catalyst for Puerto Rico’s fiscal and economic recovery. The plan eliminates uncertainty and provides necessary clarity to confidently plan investments toward Puerto Rico’s sustainable growth. A significant amount of time and effort has been invested to get us to this point, and we look forward to refocusing these resources on the items related to long-term economic development. We are very pleased with our results for the fourth quarter. We couldn’t be more optimistic about the prospects for the future, yet we will remain attentive to how the evolving health situation may impact the economy. I'll now turn the call over to Carlos for more details on our financial results.

Thank you, Ignacio. Good morning. Before we turn to the fourth quarter results, let me expand on Popular’s 2021 full-year performance, which is included in the appendix to this presentation and today's press release. Our net interest income increased by 5% year-over-year to $1.96 billion, driven by the growth in earning assets. In 2021, we reported a provision benefit of $194 million compared to a provision expense of $293 million in 2020. The provision benefit was driven by the current recovery, the continued strength of economic projections, and low levels of charge-offs. Non-interest income increased by 25% year-over-year with more segments higher in 2021 versus 2020. Operating expenses increased 6% for the year to $1.55 billion, with higher personnel, technology, and regulatory costs being the primary drivers. Our capital position is robust. We ended the year with a tangible book value increasing by more than $2 per share to $65.39, notwithstanding the repurchase of $350 million of common stock. Please turn to Slide 7. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the third quarter. Net interest income for the fourth quarter was $501 million, an increase of $12 million from Q3. Non-interest income decreased by $5 million to $165 million in Q4. The impact of two items in Q3 contributed to these results, a $7 million gain associated with the sale of two corporate office buildings and income from investments held under the equity method that were $5.4 million lower in Q4. These negative variances were partially offset by $4 million higher seasonal contingent insurance commissions and $2 million higher credit card fees. Going forward, we expect that the average quarterly level of non-interest income will be around $155 million to $160 million. The provision for the fourth quarter was a benefit of $33 million. This was $28 million lower than the benefit recorded in the third quarter. Total operating expenses were $417 million in the quarter, an increase of $29 million from Q3. This increase was impacted by higher employee compensation costs of $3 million, mostly driven by salary increases, higher incentives, and commissions, equipment expense up by $3 million, and seasonal business promotional expenses up by $8 million, including $2 million higher credit card rewards expenses. Other operating expenses increased by $50 million, due to higher sundry losses by $10 million, which includes $4 million related to the termination of a white label credit card contract and higher permit losses on undeveloped properties of $5 million. Also, amortization of intangibles grew by $5 million, due to a write-down of a trademark. Excluding the $10 million of impairments and write-downs just mentioned, our expenses would have been within our prior guidance for Q4. For 2022, we expect average quarterly expenses to be around $415 million. The increase on 2021 is driven by higher expenses in the following categories: personnel, as we continue to invest in training and compensation with the related benefit cost also increasing. This is driven by a tight labor market in Puerto Rico and in the regions where we operate on the mainland. Technology, as we continue to modernize our digital capabilities, cure obsolescence, and address regulatory, cyber, and compliance needs. And finally, Business Promotion, especially in expenses related to reward programs for our clients. Some of these higher technology and reward expenses are related to our expectations of higher levels of client activity. Obviously, we will strive to come in below this effective level of expenses. Our effective tax rate for the quarter was 27% and for the full-year 2021 was 25%. In 2022, we expect the effective tax rate to be between 18% and 20%, with the higher tax rate in 2021 related to the tax effect of the provision releases throughout the year. Please turn to Slide 8. Net interest income on a taxable equivalent basis was $544 million, $8 million higher than in the third quarter. The increase in net interest income on a taxable equivalent basis was mainly related to the repayment of PCD loans and higher PPP fees, as well as the activity recognized in the quarter from our recently acquired lease refinancing business. Deposits grew by $1 billion in the quarter, with the growth being in BPPR with a $700 million increase in our retail and commercial deposits, adding a $300 million increase in public deposits. Net interest margin was essentially flat. The total loan yield increased by 11 basis points in Q4, mostly from PPP fees and repayment of PCD loans. PPP loans yielded 17.9% in this quarter, compared to 10.1% in Q3, due to higher accelerated recognition of fee income from our forgiveness. In 2021, we recognized $82 million in income from this program. The outstanding year-end balance of PPP loans is $353 million. The remaining unamortized portion of fees for this portfolio is approximately $18 million, which we expect to recognize during the first half of 2022. As of the end of the fourth quarter, Puerto Rico public deposits were roughly $21 billion. Given the approval of the final adjustment, we anticipate that approximately $7 billion to $10 billion of public deposits will reach the bank by the end of the first quarter or early in the second quarter. This will reduce low-yielding assets on our balance sheet. As of December 31, every $1 billion decrease in public deposits would have increased our net interest margin by 4 to 5 basis points. It's important to reiterate that this anticipated outflow of deposits will not be a liquidity event for the bank, as by law in Puerto Rico, business deposits must be collateralized. We continue to be asset sensitive due to our large cash position, driven by elevated public deposit balances. Even with the expected outflow of these deposits, we will continue being asset sensitive. As of December 2021, a 25 basis points change in Fed funds would correspond to a $6 million to $8 million change in net interest income per quarter. Our ending loan balances increased by $389 million in the quarter. This increase occurred by a $317 million decrease in PPP loans. Excluding the impact of PPP, loan balances grew by $706 million in Q4, reflecting higher commercial loan balances of Popular Bank and to a lesser extent, higher auto, personal, credit card, and commercial balances in Puerto Rico. The increase in the U.S. includes the acquisition of K2, which added $105 million in loans. These balance increases were offset partly by lower construction balances, both in the U.S. and Puerto Rico, as well as a continued trend like run-up in the mortgage portfolio in Puerto Rico of $112 million. We are encouraged by the demand for credit at BPPR and are already seeing growth in most segments. Despite these positive trends, we do not expect overall loan growth to materialize in Puerto Rico until the middle of this year when demand resulting from expected economic growth should outpace the forgiveness of PPP loans and the mortgage run-off. Please turn to Slide 9. Capital levels remain strong. Our common equity Tier 1 ratio in Q4 was 17.5%, flat with Q3. Tangible book value decreased in the quarter by approximately 1% to $65.39, primarily driven by the higher accumulated unrealized losses on investments. Our return on tangible equity was 19.4% in the fourth quarter. To review our 2021 capital actions, last year, we repurchased $350 million in common stock, increased our quarterly dividend by $0.05 per share to $0.45 per share, redeemed $187 million in high-cost trust, and finally acquired a national healthcare equipment leasing business for $157 million. As Ignacio mentioned at the start of today's call, our announced 2022 capital plan includes two actions. First, an increase in Popular’s quarterly common dividend by $0.10 to $0.55 per share starting in Q2. Secondly, we will be executing a common stock repurchase program of up to $500 million. While our recent buyback programs have been executed via ASR, the implementation plan for this buyback is still under consideration. We have returned to our normal capital planning schedule, which should result in the announcement of Popular’s 2023 capital actions no later than our January 2023 webcast. We will continue to explore opportunities to manage our capital structure during the remainder of 2022 and in future periods.

Thank you, Carlos, and good morning. Overall, Popular continued to exhibit strong credit quality trends and low credit costs with net recoveries and decreasing non-performing loans. We continue to closely monitor COVID-19 pandemic-related risks on borrower performance and changes in the pace of economic recovery as new variants continue to emerge. However, we're optimistic given recent credit performance, economic outlook, and improvement in the risk profile of the corporation's loan portfolios. Turning to Slide number 10. Non-performing assets decreased by $77 million to $633 million this quarter, mainly driven by a decrease in NPL of $85 million, offset in part by an audio increase of $8 million. The decrease in NPLs was mainly in Puerto Rico, driven by lower commercial NPLs of $63 million, primarily due to pay-off and pay-downs related to troubled loan resolutions. Also contributing to the increase were loans that returned to accrual status during the quarter, coupled with lower mortgage NPLs of $21 million and lower contractual NPLs of $14 million. In the U.S., NPLs increased by $10 million, mainly due to mortgage loans that did not resume payment at the end of the pandemic deferral period. Year-over-year, NPLs decreased by $119 million or 26%, mostly in Puerto Rico due to improvement in economic performance. Compared to the third quarter, NPL inflows excluding consumer loans increased by $3 million, driven by an increase of $10 million in the U.S., due to the higher mortgage inflows as discussed before, offset by lower commercial and mortgage NPL inflows in Puerto Rico. The order increase in the quarter was driven by the resumption of our closure activity in the Puerto Rico mortgage portfolio. At the end of the quarter, the ratio of NPLs to total loans in a healthy portfolio was 1.9%, compared to 2.2% in the previous quarter and 2.5% year-over-year. Turning to Slide number 11. Net charge-offs amounted to a net recovery of $8 million or an annualized negative 11 basis points of average loans held in the portfolio, compared to $9 million or 12 basis points in the previous quarter. The variance in net charge-offs was mainly driven by the resolution of the previously mentioned commercial non-performing loans. For the year, the net charge-off ratio improved by 59 basis points from 56 basis points in 2020 to 7 basis points this year, driven by improvements in both regions across all major loan categories. The allowance for credit losses decreased by $23 million to $695 million, driven mainly by improving credit quality, improvement in mortgage-related industries’ operating values coupled with releases from our qualitative reserves. The ratio of the allowance for credit losses to loans held in portfolio decreased slightly to 2.38% from 2.49% in the third quarter and is down from 2.89% as of CECL Day 1. The ratio of the allowance for credit losses to NPLs held in portfolio was 127%, compared to 114% in the prior quarter. The provision for credit losses was a benefit of $31 million, compared to a benefit of $59 million in the previous quarter. Please turn to Slide number 12. The variance in the allowance for credit losses was driven by changes to qualitative reserves, economic outlook, as well as portfolio credit quality and mix offset in part by changes in economic scenarios. During the quarter, we released $17 million from our qualitative reserve due to the economic environment and improvements in borrower performance. Portfolio changes driven mainly by credit quality and volume mix caused the ACL to decrease by $28 million. This quarter, in response to uncertainty caused by Omicron and the setback in President Biden’s Build Back Better Plan, we increased the pessimistic scenario weight, which contributed to an increase of $13 million from reserves. However, the macroeconomic scenarios for Puerto Rico and the U.S. continue to show a positive outlook for the economy. To summarize, our loan portfolio exhibited strong credit quality metrics with net recoveries in charge-offs and decreasing non-performing loans. We’re optimistic about recent credit performance, economic outlook, and improvements in the risk profile of the corporation's loan portfolio. 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. 2021 was an outstanding year for Popular, driven by record earnings, improved credit quality, record deposit levels, continued customer growth, and the successful execution of our capital actions. We are optimistic about the economic outlook. In addition to the unprecedented level of federal stimulus with COVID, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed, but have now begun to flow at a faster pace. 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. I’m very proud to report that both BPPR and Popular Bank each now offer Bank On certified deposit accounts. Bank On certified accounts were created by the cities for financial stability, a national non-profit organization, advocating for financial inclusion for underbanked and unbanked consumers through standard account features that ensure low cost while offering robust transaction capabilities. In Puerto Rico, we are the only bank that is currently offering a Bank On product. Additionally, the mission of financial inclusion and equal access to banking closely aligns with the core values of our organization. We are committed to improving access to financial services for members of our community that have, for number of reasons, remained outside the traditional banking system. We are also proud to be included in this year's Bloomberg Gender-Equality Index, as we continue to make strides in gender parity at Popular and across the financial industry. Our commitment to fostering a workplace that values inclusion, respect, and accountability doesn't just make us a better employer, it makes us a stronger organization. And last, but certainly not least, I'd like to thank our entire team for their patience and resilience in helping us achieve our record results. It goes without saying that our employees continue to be our greatest source of strength. We are now ready for your questions.

Thank you. Our first question today comes from Brett Rabatin from Hovde Group. Brett, your line is open.

Hey guys, good morning.

Good morning, Brett.

Good morning, Brett.

Wanted to first ask congrats on the loan growth in the U.S. Bank and that change the tenure on the path of the loan portfolio. Can you talk maybe a little bit about the continued momentum, if possible, on the U.S. side and K2 and if the trends we saw in the fourth quarter, if that might continue to translate during 2022 and if the Puerto Rico Bank starts to maybe have stronger trends as well that kind of contributes to maybe a better trend for positive net growth and maybe you were thinking a quarter or so ago?

I think the fourth quarter was actually a great quarter for the U.S. operations, but it did follow a slower third quarter. So, I wouldn't predict that the fourth quarter would be the normal rate of growth, but we are anticipating solid growth in the U.S. In Puerto Rico, I think we've been very consistent saying we're starting to see loan demand pick up and we continue to see that. And as Carlos mentioned in his remarks, we expect that by the second half of the year, loan growth in Puerto Rico will outpace our mortgage runoff and our PPP repayment. So, we continue to be optimistic, but I think I wouldn't project the fourth quarter U.S. as their run rate, but they have a strong book and I think we’re looking forward to that production.

Okay. And then with the deposit outflow if I understand right, if your deposits are down $7 billion that your margin will be up around 35 basis points, if I heard you correct, it was 4 basis points to 5 basis points per billion of deposits, was that the correct number?

That is correct.

Okay. And then on the expense guidance for 4.15 would there be a progression during the year of that or is that more of how you kind of view the quarters in general and either kind of flat throughout the year?

Yes. There usually is some volatility in our expense, total expenses on the fourth quarter basis. Rarely are flat through the year. They tend to go up during the year actually. So that is the reason we've described it as an average quarterly for the year. It may be that we have a couple of quarters that will be lower, and then we may end up with a couple of quarters that will be higher. But again, there has historically been some seasonality in our expense as you know, it probably would repeat itself next year, but we’re not sure. I mean this year, sorry.

Okay. And then last is kind of a housekeeping issue. I don't have, I've seen a couple of different numbers and so you mentioned the funds dispersed still to come for Puerto Rico and I've seen a few different numbers, and the number, I guess, I've seen a lot $40 billion, would you guys have a better number for the funds that are yet to be dispersed in Puerto Rico?

Yeah. Yes, I think it's hard to figure out, but if you take the FEMA COVID relief and then the infrastructure bill, we think there's probably $50 billion to $60 billion left to be dispersed.

Really. Okay. Great. Thanks for all the color. Congrats on the quarter.

Thank you.

Thank you.

Our next question comes from Brock Vandervliet from UBS. Brock, your line is open.

Great. Thanks Emily. Good morning guys.

Good morning.

Let's see. The capital return, talk about the ASR under consideration, is that just the timing issue where it's technically always under consideration at this point, or might you really do a different structure there. And secondly, can you talk about whether it's refinancing sub-debt or other items, kind of other organic uses of capital?

Right. On your first question, we have, as I have mentioned, ASR in the last few years, but we actually have no pre-decision made, every year we actually sit down, we look at the market and we look at what we think is going to happen and consider all the alternatives. So, the real answer to your question is that all alternative to execute the buyback are still open. And as soon as we make a decision, we will let the market know, but at this point in time, alternatives are open.

Okay. And separately on the non-interest revenue guide, the 155 to 160 if I cut that correctly, that looks just a bit below your current run rate and especially showing momentum on the fee side? Just wanted to dig in to that.

Yeah. The runway rate has been a bit higher, but if you break down the formation on all those lines of fees Brock for the last couple of quarters, there have been a number of things in those quarters that are unusual. So, my commentary was more directed to – so the run rate of the normal fees is supposed to try to incorporate new side items in it.

Okay.

But it has been a bit higher in the last quarter, you are correct.

Got it. And is any of that guidance due to elimination of MCF fees? That's a constant question I get.

Right. Well, we are in – as every other bank case is, I guess, we are in the process of concluding our analysis of all overdraft and overdraft-related fees. There's a lot of lines that are broadly described as overdraft fees that are not necessarily the same activities by the client. So, we're in the process of going through and analyzing what our present practices are and what could make sense. We have not concluded that in our response. What I can tell you is that, in our case, the summation of all those fees is about $20 million a year. And of course, not all of those lines of fees will be affected because there's some of those fees will continue moving forward, but we haven't concluded anything yet.

Okay. Thanks.

Thank you.

Our next question comes from an unidentified analyst from Wells Fargo. Your line is open.

Hi, good morning.

Good morning.

Hi. Maybe just circling back on expenses, maybe another way of asking that question, so you pointed it through personnel expense, technology, and business promotion activity in 2022 driving that average rate higher. I guess of the planned personnel technology and business promotion spend, how much already is accomplished and maybe give a timeline for some of the bigger projects that are slated to come online during 2022?

Yes, I mean, our expense lines tend to be rather volatile. So that's one of the reasons we have shied away from giving guidance on a per line basis. We would keep our guidance on the aggregate expense level. What I can tell you is that a significant part of the increase will be in the personal line. As we've seen real pressure on competitive pressure on the personal side. As we've made public, for example, at the beginning of this year, we increased our minimum wage in Puerto Rico from $11 to $13 an hour. So that will obviously affect the full year 2022. We also increased our minimum wage in the very Virgin Islands and in both of our U.S markets. So that is a big part of it. The technology one is broken up in our expense lines in a whole bunch of different lines. It's a little bit unusual for us. In our case, a lot of the technology expense in personnel is from our professional fees because of our relationship with Evertec on the equipment line, so they've broken up all the expense lines. And again, that's one of the reasons we try to stay away from line-by-line guidance, and we give you general guidance.

Okay. Thank you for that. And then maybe looking at the residential runoff of the Puerto Rico book there, it looks like the pace of runoff slowed in the fourth quarter a little bit. I guess what's your expectation with higher interest rates to the pace of refi activity, and could we actually get kind of normalization and stability in the residential books sooner than expected with the help of rates?

I mean, you're right. The runoff rate was slightly lower. I think it was around 1.30 or something like that in the third quarter as 1.12 this quarter. I would expect with rates going up, that the runoff rate may slow down somewhat, yes, but even in an environment where rates weren't changing as much, the runoff rate was still $25 million a month, sorry a quarter. So, yes, it could become lower than 1.12. I'm not sure if it is going to become immensely smaller than 1.12 but it should – with higher rates it should become smaller, yes.

Okay, thank you. And then just lastly to me, maybe a bigger picture question. Can you just provide us with an update on the Evertec situation and kind of what your ongoing plan is with that investment? Could we see something in the near term, or are you really reluctant to be much with, I think the service agreement runs until 2025, if I'm not mistaken? Are you likely to do something prior to that or do you want to go through that process first if we’re making any ongoing decisions?

Yes. We have 3.5 years to go on that. Obviously, we would try and reach an arrangement with Evertec before then for the benefit of both going forward, but still it's too early to really say much more than that.

Understood. Okay. Thank you.

Our next question comes from Alex Twerdahl from Piper Sandler. Alex, your line is open.

Hey, good morning.

Good morning.

First off, just wanted to clarify Carlos your comments on the rate sensitivity, the $6 million to $8 million per hike, per quarter, which is definitely above what you saw coming down. That just assumes the static balance sheet, correct?

Correct, yes.

Okay. So then just dig in a little bit more into that, you know, if we do get some loan growth later in this year, which we're all very much hoping for. Can you just remind us what kind of the new loan yields are that you'd be deploying cash at, if that growth comes in the various categories?

It will depend on the mix Alex. I think the best thing you could do is look at the yields with which we closed every one of the different business lines in the press release, and start thinking about that, and hopefully rates go up. Some of the businesses may do a little bit better, but it is hard because if we end up, for example, we're using a lot more higher FICO credit cards, high-yield loans then the yield may not go up, even as the market is going up simply because the risk profile is changing.

Okay. But in terms of the expected yields that you'd see on a commercial loan today, those are pretty close to that, sort of 5.5% range that we're seeing on the average balance sheet?

Yeah. Perhaps. If you actually look at the yields in our loan book, they don't move as much as market rates do. They’re made a lot lower. So, they're probably going to be around that ballpark. Again, the thing that could swing it is a big change. If we end up doing bigger loans in different sectors or something.

Okay, great. And then in the past, you’ve been hesitant to deploy liquidity to securities just given where the tenure was and we're up about 50 basis points since we last had this conversation. I know you did some purchases in the fourth quarter, could you give us some color on the timing and what you'd actually deployed in terms of liquidity in the fourth quarter? And then kind of how your outlook is from here in terms of security purchases early in 2022?

Yes. As you know, for the last, I think four quarters, we've been moving cash into the securities portfolio, every one of the last four quarters, the increase in the fourth quarter was $500 million, roughly, a bit more. So, it's something that we have been doing for the last few quarters, as we found rates are a little bit more interesting. This is literally a decision that we make in our weekly ALCO committee and we have a very capable treasurer whose job it is to do that. So, we'll keep looking at alternatives. To the extent that rates continue to go up and are more attractive, our probability that we will really employ cash will go up, but there is no specific plan I can describe to you right now.

Okay. Can you give us some color on the…?

Do remember that when we hold treasury securities in our portfolio in Puerto Rico, the income for those securities is taxable, so it is important not to forget that.

Yeah. That's an important point. But just in terms of what you did in the fourth quarter, was that done late in the quarter or early in the quarter, just so we can kind of get a sense for what's already impacted the NII line in the fourth quarter?

It was all late in the quarter.

Okay. And then just switching to loan growth, and you talk about some of the money coming in, and if you drill into some of those programs, there is a pretty large component and some associates some of this CDBG money that really requires bank funding. I was just wondering if you can give us an update on kind of what that pipeline could look like? I heard from another bank down there that a lot of those applications, if there's a huge number of applications for some of the programs that are kind of awaiting government approval at this point? And maybe you can just give us a little bit of color on sort of what that process is like and when you could actually see some disbursements for those types of loans and hopefully whether or not it's in 2022?

Yes. It's a kind of a complex answer because it's a complex situation. We have different sources of funds, right? So, you got the FEMA funds, you got the CDBG funds, you got COVID relief money, and now you have the infrastructure. I think the CDBG has gone through a process requesting proposals and they're pretty advanced. A lot of people have filed proposals and are in the process of analyzing them. So, I would expect that by the end of the year – it's a process of getting the plan, the permit, but the money is starting to flow in – not as the massive amounts we anticipated in, but money is starting to flow, especially the COVID relief funds that have very few restrictions. So that money you're seeing already in some projects, to a lesser extent. I think the CDBG will begin to flow this year, certain of their programs, and FEMA though that is a slower pace, but it's also moving in the right direction. They’ve awarded a number of projects now and are in the design phase. So, I think this year won't be the year where the pipeline will be wide open. You'll see – it’s hard to predict because we're not trying to be elusive; it is very hard for everyone to predict how fast these projects will get off the ground, but they're beginning to move. So, I would expect we'll see more disbursements this year. The infrastructure bill has also money for highways and roads and bridges. I think we'll begin to see this year especially in the second half, and next year picking up again, and the next year picking up again. I mean, some of the big, big money projects like the rebuild of the energy sector take longer because that's a very complex process and has to go through the review process, but I think some of the money for housing and for other projects for economic development of the CDBG will start to flow this year.

Right. And if you just kind of peel back the onion a little bit on the loan growth guide, you know PPP is obviously going away in the next couple of quarters. We know that residential runoff is going to be a persisting issue. If we just look at the commercial portfolio, just the commercial standalone portfolio in Puerto Rico, which I guess would include commercial real estate and construction, would you anticipate that portfolio to grow exclusive, of course, of PPP over the next couple of quarters? And maybe talk a little bit about what the pipeline could look like, utilization rates, and whether or not you have any construction loans that maybe have been approved, but haven't really seen disbursements yet?

I wouldn't get into single construction projects; our book is big enough, but I think as we said before, we do expect our portfolio to grow in the second half of the year. So – and that we do expect the commercial loan portfolio to grow. There have been lines granted for different construction projects. Those lines, their utilization probably isn’t as high as they’ve been in the past because for example, the ones that are used to build residential units are being sold much faster than in the past and people now are more prudent about how they build. They also build in stages where they don’t build the whole project at a time to do these projects. But, yeah, we expect – I think there'll be infrastructure projects, there’ll be commercial projects. So, we do expect loan growth in the commercial sector in the second half. We're seeing a lot of interest in different things. As you know, the King of Spain was here the other day, and they brought a commercial mission, a lot of interest from U.S. Ambassadors, but also we have a lot of Spanish investors very interested in different types of projects. So, again, we do think commercial in general is going to see growth in the second half. We don't see this particular pipeline because our focus is too big and I think too complex to get into that, but generally we are optimistic and positive with what we're seeing in terms of guidance coming in.

Actually, ex-PPP and commercial vertical growth thus far. So, we’re positive that construction will be a little bit more volatile depending on projects.

Understood. And then just one more question that I wanted to make sure you guys addressed on this call. When I look at the press release you guys put out a couple of weeks ago on the capital return, can't help but to notice that the language that you put in last year's press release about the – I think last year you said that that announcement of the buyback was it for the whole year, is that language missing from this year's press release? Am I reading too much into that? Or is the door just open for kind of everything at this point? We know that we're going to have a $500 million buyback and if growth really picks up, maybe that's all you get this year, but if the growth doesn't materialize and you don't see M&A as a potential, that maybe there could be some more buyback later in the year as other uses of capital is they do or don't materialize?

We stand by what we say Alex. We'll continue those discussions moving forward.

Okay. That’s it from me.

Our next question comes from Gerard Cassidy from RBC. Your line is open.

Good morning Ignacio. Good morning, Carlos.

Good morning, Gerard.

Good morning, Gerard.

I have to ask before I ask a real question with – being one degrees up here, I'm seeing sea smells off the ocean. How warm is it down there today?

It’s a beautiful day today. Warm, but not too warm.

There you go. There you go. I appreciate you today. Thank you for taking the questions and stuff. Carlos, you talked about the deposits with the government. I think you said they totaled $21 billion; you're expecting $7 billion to $10 billion to be dispersed to them over the first and second quarters. Will there be more disbursements later in the year or next year? What's the outlook for that, the remaining amount?

They haven’t concluded all of the transactions. There are still some restructuring and other companies that are pending. So, there could be some more outflow related to those. Those are smaller. I think when this amount of liquidity moves out, the government will finally get back into a normal course of business of running the government. So, I think the flow of funds will probably get money coming in and going out will increase as well. So, I think what was going to happen is that we'll end up normalizing to some level of balances that were very good in the year. As you know, it always goes up in the first quarter – the second quarter when tax savings come in, and then it goes down throughout the year. But as far as we know, it might be slightly smaller than the 11 or 10 or 12 that will be left after this, but it is hard for us to figure out exactly what the new number is going to be because as you know Gerard, a lot of these accounts were not with us before, so we don't have a long history with them. They used to be GDB before. So, yes, there could be some additional outflows. They should not be of this magnitude and we will end up with a more normalized level of probably deposits moving forward, again, probably less than the net amount of the outflow, but exactly where we’re not sure.

Okay. Thank you. And then in your slide deck, you guys showed the credit – unsecured credit ratings you have, and I notice the S&P one is on positive outlook. Now granted, there's a slightly below Moody's and Fitch, do you guys have any idea when they may come out with their determination whether they're going to reach that credit rating?

Not very clear. I am not sure if they will wait till they look at the government before they look at the rest of us. They don't tend to move very fast, Gerard. So, not very clear. We're very hopeful that these developments will – the catalyst for some changes in our ratings. So, we get our ratings get closer to what we think the company really is, but we don't have a clear view of the timetable here.

Okay. I think Ignacio, you talked about the commercial loan growth here in the United States, and in your slides, you show that your total deposit costs at Popular Bank are about 40 basis points, which I know that's an absolute level low relative to history, but relative to the current period we're in and to your peers, it seems to be on the high side, any thoughts on what's driving that number and what could happen to that number once the Fed starts raising interest rates as they've said just they are going to do in March?

Well, we haven’t had tremendous loan growth that we had to balance our desire to reduce our interest costs with the funding of our loans. We've been very successful this year. I think we have nine consecutive quarters where we lower funding costs. Obviously, if rates go up, we'll have to manage that, but remember that part of our strategy in New York, especially was to have our commercial-led strategy. So, we are volunteering our branches more for commercial business where you tend to get more stable deposits. So, that's a big part of our strategy, so far it's paying off. Rising rates will, obviously, we will have to watch the market. Part of our strategy, especially to the New York market to go after commercial growth was to rely more on commercial deposits and retail deposits which tend to be more volatile.

Very good. And I assume the K2 numbers are obviously in those quarterly commercial loan numbers, but are you thinking – I may have missed it, I apologize. In response to an earlier question about what drove the commercial loan growth in the U.S., was it middle-market commercial real estate? Is it C&I lending? What type of commercial lending drove the core growth in the quarter?

Yes. It is of the growth where I mentioned is, about $105 million was due to the company in the quarter. So, ex the leasing company was a number – high 600. What drove it was mostly our historic lines of business: healthcare, is paired with the associated banking and CRE, which is a typical kind of business we do. So, we’ve touched on all the lines of our growth across the board in our historical businesses that drove the growth.

Very good. And then just lastly, Ignacio, a lot of positive numbers coming out of Puerto Rico, which you highlighted on the auto sales, etcetera, can you, I don't know if there's any specific numbers you can cite, but can you share with us what's going on with the immigration patterns? Have they reversed yet? Are folks from Puerto Rico maybe coming back onto the Island or has that not happened yet?

You know, there's a lot of anecdotal evidence. I don't have the net inflows from the airport at hand, which we used to use. I can tell you that even the fiscal board is not the most optimistic bunch has that in the most recent fiscal plan, reduced the projected level of declining population. So, they had it declining in about one point something a year, now they have a 0.9%, and that matches what we're seeing anecdotally. We are seeing more people coming back to the Island. So, I think there's no doubt that the migration trends have improved. I think one area where we have to work as a society and as many other societies have to work is, I'm not so worried about migration anymore because the economics of the island are changing, and I don't believe that the push factors, you know – we talk about migration, you talk about the pull and the push. I think the pushback factors in Puerto Rico are much less now. We currently, you know—in fact, anybody who wants a job really should be able to get a job in Puerto Rico today. I worry more about the growth rate and how we can get the growth rate up, because at the end of the day to me that is more important than the migration actually. Migration will work itself out. Growth rates are very hard to change. So, but definitely, the demographic situation has improved; it's still challenging, but again, the only empirical numbers I've seen are the projection in future growth decline, which has now improved in the most recent fiscal platforms which are being submitted by the board.

Great. I appreciate the color. Thank you, gentlemen.

Thank you.

Lastly, we have a follow-up question from Brock Vandervliet from UBS. Brock, please go ahead.

Thanks. Just in terms of the credit quality, it seems like credit quality is continuing to improve really across the board. How should we think about the appropriate level of reserving? And related to that, do you think there's something special in capping the net charge-offs in the past year? Because it just doesn't look like the credit quality of the bank that we used to know. It looks like the credit quality of a traditional U.S. Bank, Mainland Bank, and that would point to or suggest a materially lower reserve over a period of time?

I think, as I think we stated before; I mean obviously the allowance was going to be driven by credit quality, economic outlook, and the charge-offs that we experienced. Over the last two years, as we mentioned, we have seen significant improvements over what was the traditional charge-off rate. We used to be in a corridor between 75 basis points and 225 basis points; in 2021 that was 7 basis points. In 2020, 66 basis points, as that continues to be key, we received continuous releases over the provision.

Well, close enough. So, the key is among other things, just the continued low net charge-offs.

Yes, obviously. And the forecast. Remember the forecast is a big part of the equation.

Yes. Okay. Alright. Thank you.

At this time, we have no further questions registered. So I now hand back to Ignacio Alvarez for any concluding remarks.

Thank you. Thank you everyone for joining the call for your questions. We look forward to updating you on our progress in April. Have a great day.

Thank you everyone for joining us today. This now concludes our call. Please disconnect your lines.