Popular, Inc. Q1 FY2022 Earnings Call

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. 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 Vázquez; 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 webpage 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 a 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 three. 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 variances were 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 loan growth occurred during the period at both BPPR and PB, despite the continued run-off 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 remain favorable during the period with a low level of net charge-offs and decreasing non-performing loans. With increasing expectations to digitize and improve our customer experience, we are constantly assessing and investing in our capabilities. In February, we entered into 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 our $400 million accelerated share repurchase program. On April 1st, we paid a dividend of $0.55 per common share, an increase of $0.10 per share. Please turn to slide four. Our customer mix in Puerto Rico grew by more than 6,000 since March 2021 and by 19% since March 2020. We captured two-thirds of the par increase by $302 million or 4%. Auto loan and lease balances at BPPR increased by 1% this quarter, and consumer demand remains robust. The dollar value of credit and debit card sales for our customers continues to trend higher, increasing by 5% compared to the same quarter a year ago. The housing market remains strong; however, mortgage originations have been impacted by rising rates. The dollar value of mortgage originations at BPPR increased by 28% year-over-year in the first quarter, but it was more than 60% higher than the same period in 2019 and 2020. Please turn to slide five 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 five months. We are particularly encouraged by the positive employment trend. In March, total employment in 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 volumes 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 continues to be a source of strength for the local economy. Puerto Rico remains 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 of the quarter. We continue to be optimistic about the prospects for the future and 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 details on our financial results.

Thank you, Ignacio. Good morning. Please turn to slide six. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the fourth quarter. Net interest income for the fourth quarter was $494 million, a decrease of $7 million from Q4. The variance was driven by lower PPP-related income and lower income from the PCD loans repayment of BPPR, along with the impact of two 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. Non-interest 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 purchase activity in Q4, and $4 million contingent insurance commission that typically occurs 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 a 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 non-interest income will be around $155 million to $160 million. The provision for the first quarter was a benefit of $16 million. This was $80 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 decrease was driven by three factors. First, an $11 million decrease in business promotional 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 lower sundry losses by $5 million mainly related to the termination of a white label credit card contract and $5 million in permit losses on undeveloped property taken in Q4. Finally, a $5 million decrease in amortization of intangibles due to the write-down of 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 and 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 $415 million. We will, of course, try 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 seven. Net interest income on a taxable-equivalent basis was $548 million, $4 million higher than the fourth quarter. Net interest margin decreased by three basis points to 2.75% in Q1. On a taxable-equivalent basis, NIM was 3.05%, an increase of three basis points. The increase in FTE margin was driven primarily by higher yields on our investment portfolio by 17 basis points due to asset compensation and improved market rates. During the quarter, the average balance 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 billion, most of which we expect to recognize during the second quarter. Excluding public 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 Puerto Rico debt restructuring was approximately $10 billion. We also saw $5 billion in 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 estimate. The outflow of public deposits and the deployment of a portion of our cash position into loans and investments have reduced our asset sensitivity. However, we will continue to benefit from raising rates. As of March 2022, each 25 basis point change in fed funds would correspond 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. Excluded from the impact of PPP, loan balances grew by $524 million in Q1, reflecting higher commercial loan balances at BPPR and Popular Bank, as well as higher construction balances and, to a lesser extent, higher auto and personal loans. These balance increases were offset in part by continued runoff in 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 evolving economy and the opportunities to extend credit to improve the use and yield of our existing liquidity. Please turn to slide eight. 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, a 22% decrease driven by four 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, which 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 tangible book value, the decrease in the fair value of the investment portfolio should be temporary. Our investment portfolio is entirely comprised of treasury and agency mortgage-backed securities, which carry minimal credit risk. The bond portfolio has a duration of approximately four years. As the positions grow down the yield curve, their fair value will converge to par, and the mark will go down to zero. Despite the 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 would 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 recognize shareholders' equity of 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 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 for the remainder of 2022 and in future periods. With that, I'll turn the call over to Lidio.

Thank you, Carlos, and good morning. Overall, Popular continues to exhibit strong credit quality trends and low credit costs with low levels of net charge-offs and decreasing non-performing loans. We continue to closely monitor changes in our performance and the pace of economic recovery, even in the rising interest rate environment and geopolitical uncertainty. However, we remain optimistic given recent credit performance, the economic outlook, and improvements in the risk profile of the corporation's loan portfolio. Turning to slide number nine. Non-performing assets decreased by $22 million to $610 million this quarter, mainly driven by an NPL decrease of $28 million, offset in part by an audio increase of $5 million. The decreasing NPLs were mainly in Puerto Rico, primarily due to lower mortgage NPLs of $26 million, driven by 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 loans 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 impacts of loans that did not resume payment after the end of the COVID-related moratorium. The overall 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 NPL to total loans in the healthy portfolio was 1.8% compared to 1.9% in the previous quarter. Turning to slide number 10. Net charge-offs amounted to $4 million or an annualized 5 basis points of average loans in the healthy 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 non-performing loans in the prior quarter. The corporation's 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 of allowance for credit losses to loans in the healthy portfolio decreased slightly to 2.29% compared to 2.38% in the previous quarter. The ratio of allowance for credit losses to NPLs in the healthy portfolio was 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 number 11. The variance in the 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 reserves driven by improvements in employment levels in Puerto Rico. In accordance with its usual practice, the Bureau of Labor Statistics completed its annual benchmark revision to the establishment survey employment service, 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 the economic scenario driven by fiscal assumptions caused the allowance for credit losses to increase by $4 million. However, the macroeconomic scenarios 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 caused the allowance for credit losses to increase by $8 million. To summarize, our loan portfolio exhibited strong credit quality metrics with low net charge-offs and decreasing non-performing 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 update. 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 dispersed and which have now begun to flow at a faster pace. We expect a 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 to invest in our people, and in January, we 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.

Our first question comes from Brocker Vandervliet of UBS. Your line is open.

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 two and change from our prior reading.

Okay. Got it. And in terms of the government deposits, I guess, just two questions. One, you had framed out the impact of that runoff as, I believe, four to five 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 in balances within that range is normal operational activity of the government, which means that for the second quarter, 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, for the first time in five or six years, have a debt payment at the beginning of July. That is new as well. So our best guess right now is that it should be at the higher end of that range in the second quarter and then come down after that. The thing that affects that balance, which is very hard for us to predict, is the arrival of some federal funds. So sometimes, we get surprised on the upside when a particular program is triggered and a significant amount of federal funds arrive.

Our next question comes from Timur Braziler of Wells Fargo. Please go ahead, Timur.

Starting on the loan growth, two 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 two 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 two 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 in both the U.S. and Puerto Rico. It's hard to predict because those loans are lumpy. We definitely have not seen any deceleration of interest from our clients. There's a lot of activity going on. There are 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 in 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 four years. It's a pretty straight line. Should we assume about a quarter 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 were no substantive discussions of us moving the portfolio to held-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. When we add to the portfolio, 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 quarter of every year is not unreasonable, but it will be a bit lumpy.

Yes. This is Juan Pablo, the Treasurer. In terms of maturity structure, I'd say around 38% to 40% mature within the next three years and then another 30% kind of between years three and five. So again, as Carlos mentioned, the portfolio is laddered out all the way up to six or seven years. However, the bulk of the exposures are in the middle range.

Our next question comes from Brett Rabatin of Hovde Group. Please go ahead, Brett.

I wanted to ask about fee income and mortgages. It seems that the mark for the MSR didn’t reflect the significant changes in rates. Can you discuss the mortgage and the MSR? Also, if I understood correctly, you're guiding for quarterly fee income of $155 million to $160 million. It looks like there is some movement there, and regarding the equity fees, there could be some pressure towards the lower end of that range. I want to clarify how you are considering the guidance for fee income.

The guidance for fee income remains at $155 million to $160 million. There are many factors that contribute to this figure, and fluctuations can occur each quarter. We maintain guidance at an aggregate level because various changes tend to balance each other out over time, resulting in similar totals despite individual components being more volatile. We are confident that this range is appropriate given the current environment. Once the transaction with Evertec is finalized, we will adjust this range accordingly, but no changes have been made yet as that transaction has not been completed.

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

Yes. On mortgages, we are seeing trends that are not dissimilar to what 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 houses to buy. There's very little supply of units on the island, which makes the new market somewhat challenging. So we expect to have, as we did in the first quarter, lower volumes than last quarter. As a result, we will be securitizing fewer loans, and the fees from that will be lower. The MSR, my view on the MSR is that the MSR does what the MSR does. 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. 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 unravelling 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 is 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 express this sort of theory, but I think we're very optimistic about where the economy is. The Puerto Rico economy today is as good as it's been in a long time. And again, to me, one of the most important factors is employment. We have more people employed today with a lower population than we had a decade ago. 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 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 solidly than it has in a long time, and right now, the consumer remains healthy. Our customers have a lot of liquidity. The biggest problem we have is, like many others, is hiring. Across the board in 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 in a very strong position. Do keep in mind that Puerto Rico will benefit from an extended application of the federal child tax credit, which should add some additional liquidity to the market starting this month. So there are still positives that keep giving us tailwinds, and we remain positive on that.

Okay. Any—I think you mentioned that on health care. Any thoughts on the Supreme Court's decision to disallow 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 it. So it's not a benefit that we 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 two years that they have left or at least before the midterms, to get some of those benefits through legislation. But again, remember, that is not something we had and lost; it’s a benefit that the Congress has never given us. And of course, the lower courts ruled 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 Puerto Rico only participated in marginally. That has been a very large benefit to Puerto Rico. I think that has helped households in Puerto Rico deal with some of the inflationary pressures; it's a significant amount of money relative to the average annual salary in Puerto Rico. Again, there's a lot of money out there. I mean, stimulus is not our problem; our problem is where to get it out. Estimates of the hurricane recovery funds are more than $50 billion, yet to be spent. There are various COVID relief legislations that have about $10 billion left to be spent. We had the infrastructure bill that had about $2.7 billion in the next five 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. The Medicare issue is more a human rights issue than an economic impact issue.

Our next question comes from Gerard Cassidy of RBC Capital Markets. Please go ahead. Gerard, your line is open.

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. As part of that comment, if the Fed raises Fed funds rates 50 basis points, let's say, next month and possibly for 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 factors, 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 it 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 an 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?

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.

You guys talked about the growth in commercial lending in the quarter. 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 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 the hospitality sector and in the multifamily sector in the U.S. So really across the board, we had construction lending that was up also. It was really across the board in both geographies.

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 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.

Our next question comes from Alex Twerdahl of Piper Sandler. Alex, your line is open. Please go ahead.

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 the security portfolio over the last three or four 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 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. 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 will 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 talked about the hurricane money that still has kind of been slow to come to the aisle, you can 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. If you look at the numbers that are publicly available, you just 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 that 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 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. They just announced today the first recovery project for the Ecuador Consumer Authority, a $2 billion project. It was finally built. There are 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, we can’t hide the fact that 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 enters their halfway mark, I think there's going to be real pressure on the administration to get more money out because they were very critical of the way the Trump administration handled the funding for Puerto Rico. In really the first two years, it hasn't dramatically increased that much. 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 the 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 this specialized equipment I read somewhere could take two to three years for deliveries. So the logistical challenges are real. Yes, I mean, the money is starting to flow, not as fast as we want. But again, the economy is doing very well 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 to allow the equipment involved in some of the projects 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 eight to 10 months, and now lately, maybe two 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 two 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 on what you're talking about. Again, the equipment that will be, 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.

That's helpful. Just a couple of sort of follow-up questions. The 25 basis points equals $6 million to $8 million per quarter. What's the difference between that $6 million and $8 million? Is it really liquidity from the government that defines the two 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 are 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. 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 linear in the very short term. But as we get out of quarter two, that number will probably change.

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 does not include that yet because that transaction has not closed. Once the transaction closes, we will update our guidance to reflect any necessary changes.

And that takes the CPI escalator from 5% back onto 0% for this year, right? So that could lead to some decent savings in the back half of this year. Am I thinking about that correctly?

Assuming that everything closes as we are assuming right now, that would 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. When we see the leverage ratios or even the tangible common equity ratios 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 this will change the way we look at capital return.

We have a question from Kelly Motta of KBW. Please go ahead, Kelly.

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 one gains on the remaining sales of Evertec's shares. Is that incremental on top of the $100 million you already committed? Or 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 reserves. As we 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 it's a difficult question to answer. But I will say 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 in the short to medium term will be a little lower than that range. So that would give you 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 perform a bit better and that goes into that NII outlook for each 25 basis points?

Yes. Remember that we have two 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 looks much more like any other $10 billion bank on the eastern shore of the United States. It’s closer to changing market rates. In 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, especially is how clients will react to 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.

Operator: 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.