Popular, Inc. Q2 FY2022 Earnings Call

Good morning. Thank you for attending today's Popular, Inc. Second Quarter Earnings Call. My name is Francis, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host, Paul Cardillo, Investor Relations Officer at Popular.

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vazquez; and our CRO Lidio Soriano. They will review our second quarter results 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. The second quarter was another strong one in which we achieved net income of $211 million. Our results reflect the strength of economic activity in our markets, our diversified sources of revenue, and prudent risk management. Reported net income was in line with the first quarter and $7 million lower than the same quarter of 2021. Compared to the first quarter, second quarter results were characterized by positive variances in net interest income and fee income, which were offset by higher provisions for credit losses, operating expenses, and tax rate. During the quarter, loan growth was solid and broad-based, both geographically and across most loan segments. Commercial loan growth was particularly healthy during the period at both Banco Popular and Popular Bank. Our margin in Puerto Rico improved in the second quarter, but continues to be impacted by our asset mix. We are positioned to benefit from higher market rates, although to a lesser extent due to lower asset sensitivity. Credit quality trends continue to be favorable during the period with a low level of net charge-offs and decreasing non-performing loans. On July 1st, we closed the previously announced agreement with Evertec to acquire key customer-facing channels and to extend important commercial agreements. This transaction will allow us to continue to accelerate our ongoing digital and business transformation as we continue improving our clients' experience. With the ability to manage our key customer channels and greater flexibility to choose our technology partners, we will be able to enhance the service and customer solutions that we offer with greater agility. We will continue to enhance our omnichannel experience to meet the changing needs and expectations of our clients. Finally, we continue to return capital to our shareholders. On July 12th, we completed the previously announced $400 million accelerated share repurchase program.

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 first quarter. Net interest income for the second quarter was $534 million, an increase of $40 million from Q1. The variance was driven by higher yield on investment securities, as well as higher income from loan growth at both banks. This was somewhat offset by lower PPP-related income and slightly higher interest expense on deposits. Non-interest income increased by $3 million to $157 million. Other service fees increased due to higher credit and debit interchange fees resulting from growth in purchasing activity during Q2. This was partially offset by lower income from investments held under the equity method by $3 million. We expect that the average level of quarterly non-interest income will remain at around $155 million to $160 million for the rest of 2022. The provision for credit losses for the second quarter was an expense of $5 million compared to a benefit of $16 million in the first quarter. Total operating expenses were $406 million in the quarter, an increase of $4 million from Q1. The increase was driven primarily by three factors: higher professional fees by $6 million due to higher processing and service charges; credit and debit card processing expenses were up by $4 million due to increased customer activity; and personnel costs were $2 million higher, driven mostly by profit-sharing plan accruals. These expense increases were partially offset by a $6 million decrease in other operating expenses, primarily due to lower legal reserves and lower OREO expenses by $5 million due to gains on the sale of OREO properties. For the remaining two quarters of this year, we now expect expenses to average $445 million per quarter. This brings the total average quarterly expenses for 2022 to $425 million, up from the previous guidance of $415 million.

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-off and decrease in non-performing loans. We continue to closely monitor changes in borrower performance under the macroeconomic environment, given potential economic headwinds, rising interest rates, and geopolitical uncertainty. However, we believe that the improvement over the last few years in the risk profile of the Corporation's loan portfolios positions Popular to operate successfully under more difficult economic conditions. Turning to slide number nine. Non-performing assets decreased by $40 million to $570 million this quarter, mainly driven by an NPL decrease of $42 million. The decreasing NPLs was mainly in Puerto Rico. This was driven by lower mortgage NPLs of $22 million, primarily due to the combined effects of collection efforts, increased foreclosure activity, and the ongoing low levels of early delinquency compared with pre-pandemic trends, coupled with lower commercial NPLs of $21 million, primarily due to the return to accrual status of $11 million commercial relationship. In the US, NPLs remain flat quarter-over-quarter. Compared to the first quarter, inflows to NPLs, excluding consumer loans decreased by $5 million. In Puerto Rico, total inflows decreased by $6 million, driven by lower commercial inflows of $4.5 million and lower mortgage inflows of $1.5 million. In the US, inflows remain flat quarter-over-quarter.

Thank you, Lidio and Carlos for your updates. Our results for the first half of 2022 were strong, driven by solid earnings, robust loan growth, improved credit quality, and continued customer growth. Our capital and liquidity position provides us the flexibility to invest for growth while continuing to return capital to our shareholders. Despite the possible negative impacts of inflation, higher interest rates, and the war in Ukraine, we are still seeing growth in the US and Puerto Rico with a historically strong employment market and healthy consumer deposit and spending levels. In the case of Puerto Rico, in addition to the unprecedented level of federal stimulus related to COVID, there is still a significant amount of hurricane recovery funds that are yet to be dispersed. We expect that a combined impact of these factors will generate considerable economic activity in many sectors for the coming years and we are well positioned to benefit from such activity. In June, we released our corporate sustainability report, which is available on our website. We have continued to further our ESG efforts with a focus on promoting sustainable finance, supporting our communities, and fostering a strong culture of diversity, equity, and inclusion. We are mindful of the responsibility we have to Puerto Rico as the leading banking institution and to all the communities that we serve. I am thankful to our entire team who have continued to perform at a high level and deliver results under adverse conditions. We recently completed a comprehensive market analysis that resulted in a significant investment in compensation. Our employees are Popular's greatest asset, and it is a priority for us to invest in their continued growth and success. We are confident in our ability to continue to deliver results for our shareholders, at the same time as we invest in our people, business, and communities. We are now ready to answer your questions.

Thank you. The first question comes from Brett Rabatin with Hovde Group. Please go ahead.

Hey, good morning everyone. Congratulations on double-digit loan growth. I didn't think I'd be saying that about the Puerto Rican environment, but obviously strong growth and the economy continues to move along. I wanted to make sure I understood what the outlook was in the back half of the year for loan growth. I know that year-over-year auto sales were down 9% in June, but they continue to be pretty robust and the commercial activity was notable this quarter. Maybe, Carlos, any thoughts on, or Ignacio, any thoughts on back half loan growth from here.

The commercial loan growth has been somewhat unpredictable, but we are consistently observing strong interest from our clients in the commercial sector for loans, and there has been no decline in demand. Consumer balances have also increased across those lines without any negative impact. Regarding autos, while sales are lower compared to last year, the local dealers association is still forecasting new auto sales of 111,000 vehicles for the year, which is quite substantial for Puerto Rico. Additionally, June marked our highest month ever for auto and lease financing originations, indicating robust demand for autos in Puerto Rico. The supply chain issues do pose challenges, similar to what is seen in many areas, but we still maintain a healthy outlook.

I appreciate the clarification. I want to ensure I understand the decline in the asset sensitivity of the balance sheet. It seems to me that the margin, despite the $2 million guidance for a 25 basis point change, would continue to increase. I'm not entirely clear on how the balance sheet is becoming neutral regarding interest rate sensitivity. Could you provide more insight on deposit betas moving forward and explain what is contributing to this neutral position of the balance sheet?

Several factors are influencing this situation. First, we are actively deploying our immediately repricing assets and extending some of our cash into the investment portfolio. More importantly, we are also channeling cash into the loan portfolio, which is our preferred approach. This strategy will naturally lower our asset sensitivity. Another contributing factor is that government deposits in Puerto Rico, which make up a significant portion of our deposit base, are market linked but not instantaneously; there is a lag. We have yet to see this market linkage reflected in our cost of deposits, but it should become noticeable over the next three to four months as we fully experience the lag in repricing. This will result in a substantial portion of our deposit book being repriced to align with market conditions. We will still maintain a healthy margin on these deposits, which will remain accretive, although this margin may not increase as much as it could for deposits not linked to the market. These are likely the two main factors at play.

Okay. That's helpful, Carlos. And then maybe just lastly if I heard it right, $444 million of expense quarterly guidance in the back half of the year. I was curious how much of that might be the stock-based incentive compensation versus other pieces?

Sure. Let me explain that. We had estimated average quarterly expenses to be $415 million. Our quarterly expenses are usually seasonal, meaning they tend to be lower in the first half of the year and higher in the second half. This quarter, we are running below that guidance of $415 million, which means that for the last two quarters of the year, our expenses will need to be higher to reach that $415 million target. The adjustment here is that we now believe, based on our year-to-date performance, that a profit-sharing payment will be triggered, and we have included that in our outlook. Typically, profit-sharing is not part of our outlook as it requires actual performance to occur, which will add approximately $30 million to our forecast. Additionally, as Ignacio mentioned, we conducted a thorough review of compensation at Popular, resulting in an increase in compensation expenses of around $7 million per quarter. This will take effect starting this quarter and continue into the third quarter of the year and beyond. Together, these factors account for the difference between the original $415 million and the updated average expenses of $425 million. Thus, the average quarterly expenses are increasing by $10 million, but nominal expenses in the last two quarters will be substantially higher, purely in mathematical terms. They would have increased regardless, even without the two events I just mentioned.

Okay, great. That's good color. Appreciate it.

Thank you, Brett. The next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Timur.

Maybe just following up on the expense line of questioning, does the back-end include the Evertec transaction? And I guess what does that in and of itself do to the expenses?

Yes, it does. I think, hold on for a second. I'm getting my numbers here. Yeah, it does include the Evertec transaction and the effect of that is net reduction of operational expenses already included in our outlook.

Net reduction of $10 million. Okay. And then you had made a comment that a component of the increased spend was to fund compliance, fraud, cyber security type initiatives, is there anything specific that kind of drove that narrative or is that just the cost of doing business and as economic activity continues to ramp higher you need to ramp those initiatives up to kind of keep pace?

Your explanations were as good as mine were going to be. Yes, it is because of doing business. I mean, the regulatory environment, as you know, is not getting any more complacent or any more flexible, number one. And number two, we simply have more clients doing more transactions with us, which means that there's going to be more events, there are going to be more alerts, there are going to be more fraud alerts that need to be investigated, there are going to be more chances of more clients that cyber criminals can try to use their credentials to get into our systems. So the growth of the business is the other part that’s driving it. So your explanation was on point.

Okay. And then just lastly on expenses, what does that assume as far as OREO outlook?

It assumes OREO at breakeven.

OREO is breakeven. Okay, great. And then just on the remaining Evertec transactions, the sell-down of 4.5%, that gain that's going to be returned to shareholders, is that a 2022 event? Does that happen in the fourth quarter or does that need to go through the same type of capital plan and that should be included kind of incrementally in the '23 plan?

It really depends on the market conditions. We will decide whether to proceed based on what occurs in the market. The first step is to sell the shares. Once the shares are sold, we will need regulatory approval to reinvest those gains through a buyback, and the approval process will take as long as it needs to. I’m not sure if all of this can happen in this quarter; it's probably not very likely. It seems more realistic to expect this to occur in the fourth quarter.

Okay. And then just lastly, just following up on the government deposit. The lag that you referenced, is that a lag on hikes or is that just a lag on timing when those hikes are passed along to the customer? And maybe if you could just talk through kind of how long that lag is and any kind of color you can provide on the beta that you're expecting there.

The way the formula works means that we reflect market rates in the rates applied to customers. Your comment is accurate. This effect occurs over time, with a lag that seems to be around three months. Essentially, we will see a gradual averaging over a period of about three months.

Okay. And do you have the exit deposit costs at end of June given that spot rate?

What deposit costs?

The cost of deposits at the end of June.

Total deposit costs for the quarter were 17 basis points. BPPR was 14 basis points, and Popular Bank was 42 basis points. Therefore, the total deposit cost for Popular, Inc. is 17 basis points.

Okay. Thank you.

Thank you for your questions. The next question comes from Gerard Cassidy with RBC. Please go ahead.

Hi, Ignacio. Hi, Carlos.

Hello, Gerard.

Hi, Gerard.

Can you guys share with us, there is, obviously, a number of cross currents going on in the economy today as we saw with the real GDP print this morning. And one of the concerns or one of the topics of conversation is end of cycle loan growth and the industry like you folks as well. So good loan growth this quarter. Can you somehow give us some color or reassurances that a year from now we're not going to be looking back and seeing maybe some regrets that the loan growth was too strong in the early part of '22 when the evidence again the cross currents in the economy is starting to show maybe a slowdown?

We feel very confident that we have maintained our credit standards without any relaxation. The growth we are experiencing comes from a prudent and disciplined approach. The economy in Puerto Rico is showing a strong shift, and we are starting to see economic activity that has been absent for a long time. There is significant pent-up demand, but we have consistently upheld our underwriting standards and have not attempted to create loan growth artificially. We believe we are well positioned. As Lidio has pointed out multiple times, the industries we operate in should withstand any potential slowdown in growth. Our consumer FICO scores remain strong. We are aware of potential challenges on the horizon, but I am not overly concerned. We have not made any changes that would suggest we need to tighten our approach, and the loan growth we’ve observed reflects the pent-up demand and economic growth in Puerto Rico.

The other thing to consider with your question, Gerard, is the concept of end of cycle. Several well-respected local economists in Puerto Rico believe that credit usage is positively impacting the Puerto Rico economy, which is a change compared to the last ten years. This time, the effects of federal fund expansion combined with hurricane assistance, which is not available elsewhere, may lead Puerto Rico to perform slightly better than the national average moving forward. Some local economists feel there is a reasonable chance that even if the US enters a recession, as long as it is short and shallow, Puerto Rico might avoid recession due to the beneficial effects of that investment. Of course, it depends on whether there is a recession in the US and its duration and depth, but there is a perception that we may perform slightly better on the island, which we haven't been able to claim for about 12 or 13 years now. So, we are hopeful that we might actually have the potential to perform better than the US economy for the first time.

Very good. And then as a follow-up to that, are you seeing any new entrants into the market for lending mainland banks that might be coming in that weren't there 12 months ago?

Not really, I think we have seen some of the bigger banks, the JP Morgan's of the world and the Goldman Sachs being interested in some of these big transactions that they are hopeful will happen or like perhaps the privatization of the ports, which is ongoing and things like that. I haven't seen any new activity of US players, some of the local players like Venesco got a lot of money from that statue that benefited minority institutions, which they be a little bit more aggressive in the small and medium size, but they're very small institution. But not really, I mean, they've always been here in certain deals, but nothing unusual, other than I do think that you're seeing more people who do project finance being interested in Puerto Rico.

For large commercial transactions, we have always faced competition from mainland banks, pension funds, and hedge funds to secure funding. This situation is consistent and not a departure from our usual operations. For any significant transaction, especially those involving US-based clients, we inevitably compete with US banks.

Okay, thank you. And then just finally, with the acquisition back a few years ago of the Wells Auto portfolio, you're obviously a bigger auto lender on the Island. Can you tell us what percentage of the auto loans are for used cars versus new cars if you break that out?

We can get that.

I would say there is about half and half new and used.

But it is an important market in Puerto Rico.

Yeah. We can get that, but we don't have it right now.

And are you in Puerto Rico seeing the used car price inflation similar to what we've seen in the states, which may if the new car market comes back in two years, used car prices could be lower two years from now than today. Are you guys seeing that elevation? Thank you.

Yes, used car prices have indeed increased in Puerto Rico. We are committed to maintaining our underwriting standards and are pleased with the originations we are achieving within those parameters, without the need to lower them. It's important to note that high taxes on new cars, particularly the excise tax, provide some support for the used car market. When purchasing a new car, buyers face substantial tax costs, which creates a bit of a cushion for used car prices in Puerto Rico. However, we are keeping a close eye on the situation.

Thank you for your question. The next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Hey, good morning guys.

Good morning, Alex.

Can you help us understand the fluctuations in government deposits now that we are out of bankruptcy, particularly regarding the expectations and seasonality that might lead us back to the 11% to 15% range by the end of the year?

I’ll let Carlos elaborate further, but when we issue estimates, they are typically based on discussions with the Treasury Department and their projections, which have varied significantly. On a positive note, the economy in Puerto Rico has improved, leading to higher-than-expected tax revenues. However, on the expense side, there are approximately $2 billion in COVID-related funds classified as public funds that have been slower to disburse than anticipated. The fluctuations are more pronounced in this unique environment shaped by the pandemic. Taxes are collected in April, and bond payments occur on July 1, marking significant points of cash flow. The pandemic has introduced significant inflows for COVID relief, making it difficult for the government to forecast accurately. We depend on them for these predictions, but it’s essential that these COVID funds are utilized, or we risk losing them. The government will gain a clearer understanding as time progresses.

No. We have been very consistent on our forecast of growing deposits by being wrong every quarter over nine quarters. So again, it’s not a lack of trying. It is, as Ignacio said, everything we communicate is our best guess given all the information we have from our clients. Remember, the balance is not a single client too, there are hundreds of clients in there as well. So it's our best guess given the information, but sometimes the clients themselves don't have that information as they think. The tax revenues being much higher this year is a good example of that. So, our best guess given all that we know today is that, again, we'll be back to the range that we expected by year-end. I have no idea whether the agreement that was announced today for some climate legislation will have money attached to it and whether some of that money will come to us and will change the forecast. So there's all kinds of things like that that affected. So, it's our best informed estimate given everything we know as of today, but, again, we've missed it a few times.

Got it. And then, I mean I guess sort of a corollary or a follow-on question to that is, how do you think about your normalized level of liquidity? Obviously, you got this chunk of deposits that could be anything in a given quarter, but how much of that can actually be invested in a way that either into loan growth or into longer duration securities that you feel comfortable?

It is easier to focus on government deposits since they make up the largest portion of our deposit portfolio. However, the answer to your question requires a broader perspective on future deposit flows. We anticipate that commercial deposits will continue to face challenges, as many banks in the mainland have already experienced declines. While we have seen a decrease in our deposits this quarter, we might be somewhat unique in that regard. Moving forward, we may observe significant pressure on commercial deposits, as clients engaged in treasury activities seek better yields for their liquidity. Although we haven't yet experienced these outflows, they could be on the horizon. On the retail side, changes are likely to happen at a slower pace, with high net worth clients potentially shifting some deposits to higher-yielding options, but the majority of retail clients will be more deliberate in their decisions. Therefore, the key factors to watch are commercial deposits, which are already declining in many mainland banks, and government deposits, which we predict might decrease by $2 billion to $5 billion by year-end if our estimates hold true.

Okay. Are you able to break out the portion of your deposits that you consider to be not super-sensitive to rates, either the retailer or the stuff that's not going to have that deck of treasury management?

Well, the most of the raise is the government deposits, and again, with a lag, but that's going to move in tandem to market. So again, keep in mind as I mentioned earlier, we do earn a margin on that, the difference of three months for now is that margin will not continue to increase, it will stay. It has increased for the last couple of months, but it will not continue to increase once we reach that point where the deposits are pegged to market changes in the market. So, again, that are still be accretive. We have a margin on them, but the margin will get cut when the linkages are fully in place.

Got it. I mean, when I think about the rate sensitivity and sort of the change in the guide this quarter. I mean there is another way to think about it just relative to last quarter that you've just pulled forward. I'm calculating around five rate hikes by deploying $1.5 billion into held-to maturity securities.

We've been addressing the increasing rates by trying to incorporate those higher rates into our balance sheet. We've made considerable progress by extending our bond portfolio and, importantly, also expanding our loan portfolio. We've taken actions that we believe are appropriate to capture that increased margin going forward, but it's a one-time effort. Once we've made those adjustments, we can't do it again, which limits our options in the future. So, your assessment is correct, Alex; that reflects what has already occurred.

Okay, great. And then, if I remember correctly part of the Evertec transaction was actually to recognize some revenue shares as well. And I couldn't remember if that was something that was going to impact this year or if that is a '23 event? Maybe you can just remind us kind of on the fee side how Evertec is going to impact the complexion of the fee income in your guide for the next two quarters, as well as how that's going to change next year with that revenue share component?

It affects the results right away, but the downside is that by reducing our equity stake, we also give up some equity income that contributes to that line. So, you won't notice a change in the line, Alex. There are positives and negatives, but they are roughly equal this year. The rationale behind the transaction is that we believe these factors won't remain equal and that the revenue or fees connected to the merchant business will actually grow at a faster rate than the other side of the equation.

Okay, great. And then just one final question for me, regarding the margin. The new loan yields you're experiencing today in Puerto Rico appear to be at a decent margin above U.S. yields, or at least they were when interest rates were at zero. Are you observing any loan betas, and how are higher rates actually affecting new origination yields on commercial products?

We see overall loan yields go up by 8 basis points in the quarter. So we are trying to reflect the change in rate into our origination. The loan yields, it also depends on mix and number of other things, obviously, but we are trying to reflect the new market conditions in our loan yield, the new origination will change the loan yield slowly though, because, again, we have a big base portfolio, so the new origination changes the overall yield only on our margin.

But, Alex, if your question was more about the decreased demand for commercial loans, we haven't seen that yet.

Okay. If a commercial loan had a five handle a year and a half ago, is it still coming on with a five handle today, or is it coming on with a seven handle?

It's definitely a higher handle, but I'm not sure if the beta is 100% or not. The clients are sensitive to this as well. So instead of five or seven-year handles, they may choose to make the loan a bit shorter, so the handles become six.

Okay. Thanks for taking my questions.

Thank you.

Thank you, Alex. The next question is from Kelly Motta with KBW. Please go ahead.

Hi, thank you for the questions, and good morning. While it seems these have been addressed, I would like to ask about your technology investments now that the Evertec deal is closed. One of the strategic reasons for this deal was the flexibility it offers. Can you discuss what initiatives you plan to pursue now that the deal is finalized? Additionally, I understand that increased tax spending is one area where expenses will rise. Was this part of your original plan, or are there new projects that weren't included in your previous guidance?

I'm not sure in terms of which projects were in the guidance or not, definitely by taking these client-facing platforms, take them over and bring them back in, we now see we have greater ability to work on things that we had before. In general, what we're looking to do is improve the origination process, the digital origination processes, both on the consumer and on the commercial front, that’s something we are working on. We're also willing to be spending some money on our cash management systems, which we think we need to upgrade, this remain competitive. So some of the big projects working on there. So, I don't think that the Evertec transaction as such has increased our spending. What it has, it has allowed us to have greater flexibility to look at things that we wanted to do anyway and do them. So I don't know, Carlos you want to add any color to that?

Yeah. I mean we may have moved some stuff around and having closed transactions gives us the possibility of maybe choosing to do some of the things we hadn't planned a bit quicker, but again we've only closed the transaction for a month now. So we have to give them a bit more time to put more numbers around that. But it is a possibility that things that we thought might – we may start it in the year and a half or two, we may now have the possibility or the option to start a bit faster or we may change around things when we want to do things. So, we may move a project that had a spend of X and do it later and then move forward a product that had spent of half times or two times. But that is still early days in the process.

Got it. Thanks so much. And then I do appreciate all the color on the puts and takes of expenses in the second half of the year and kind of the noise around higher profit sharing, as you get out from that how should we be thinking about what a normalized run rate looks like now that you took a step up on employee expenses and everything like that as we move past the second half of the year?

That's an excellent question and we don't have the answer to that question yet. So we gave you what we can, I think, get our arms around. With sound degree of confidence, which is the next two quarters, we will provide you and the market with new average quarterly expense guidance for 2023 in our webcast in January of next year. We're not trying to be evasive or acute about this. What ends up driving our expense guidance is all the projects and efforts that we decided to embark on next year. That is a result of our budgeting and planning process and that process really doesn't end until sometime in late November. So we will actually not know the number until we decide which products we're going to do or pursue and which products we're not and things of those sort that we will decide it later this year. So, I don't have the number yet. We will give you guidance in January for full 2023.

Understood. Thank you so much for the color.

Thank you.

Thank you, Kelly. We now have a follow-up question from Timur with Wells Fargo. Please go ahead.

Hi, thanks for the follow-up. Maybe just adding on to Kelly's question and asking it a little different. Are you expecting kind of this $245 million range for both third quarter and fourth quarter or is it kind of ramping up towards the fourth quarter and how are you thinking about kind of the fourth quarter exit rate?

Yeah. I mean it could move around a little bit between the two quarters. Our best guess is that, those quarters will look very similar at $445 million, Timur. But it could be that it's $440 million or $450 million or $450 million and $440 million or something like that, it depends on when some things get going and get paid and that sort of stuff. So, we have a visible degree of confidence on the average for both quarters. If you actually wanted to the pin it down to one quarter or the other, I have a lesser degree of confidence on that.

Okay. And is there an expectation that earnings credit rate is a component of the higher expense base and then maybe if you can just provide any color on what component of the public funds will see higher rates through an ECR versus just higher deposit costs.

That's a valid question. Not all of the costs appear under interest expense; some are included in the fee section. We haven't separated them this way before. It also depends on how many services they utilize from us. If they are contracting services, the balance between what appears in interest expense and what is classified as fees changes, but I don't have that specific number. We'll see if we can determine something reasonable regarding that, but I don't have a figure readily available.

Okay. Thanks again for the follow-up.

Thank you.

Thank you for your questions. I would now like to pass the conference back over to Ignacio Alvarez for any further remarks.

Thanks again for joining us and for your questions. We look forward to updating you on our progress in October. Have a great day.

That concludes the Popular, Inc. Second Quarter Earnings call. Thank you for your participation. You may now disconnect your line.