Popular, Inc. (BPOP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for attending today's Popular Inc. Q1 2023 Earnings Call. My name is Tia, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Paul Cardillo with Popular Inc. proceed.

Good morning, and thank you for joining us. With us on the call today is our COO, Javier Ferrer, our CFO, Carlos Vazquez; and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Our CEO, Ignacio Alvarez, is unavailable today due to a medical matter. We expect him back at the office early next week. Before we begin, 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 COO, Javier Ferrer.

Thank you, Paul. Good morning, and thank you for joining the call. We began the year with a strong quarter, achieving net income of $159 million. Our quarterly net income was $30 million lower than the adjusted fourth quarter net income of $189 million. First quarter results were impacted by lower net interest income, offset in part by lower expenses, higher noninterest income and a slightly lower provision for credit losses. Loans increased during the quarter by $261 million. Banco Popular generated loan growth across all segments while Popular Bank saw commercial loan growth offset by runoff in the construction and consumer portfolios. Our net interest margin decreased by 6 basis points to 3.23% in the quarter. higher deposit costs, particularly in our Puerto Rico public deposit portfolio and a popular bank impacted our margin. This was partially offset by an improvement in asset mix due to loan growth and a reduction of the investment portfolio. Credit quality trends remained favorable during the period. NPLs decreased and net charge-offs remain well below pre-pandemic levels. During the quarter, Popular issued $400 million in 5-year senior notes with a 7.25% coupon. We intend to use a portion of the net proceeds of the offering to redeem or repay the $300 million principal amount of our senior notes that matured in September. Please turn to Slide 4. We maintained robust liquidity anchored by our diversified deposit franchise and our high levels of cash reserves and unpledged securities. Our deposit franchise is made up of approximately 42% in retail deposits with an average balance of less than $10,000 per account. 25% of the balances are in public sector deposits, which are secured by collateral. 28% are in commercial deposits and the remaining 5% in our wholesale deposits. Overall, deposits were down by $273 million in the quarter, but liquidity sources were up by $1.3 billion. Our total consolidated borrowings, including our newly issued senior notes remained flat during the quarter. Our customer base in Puerto Rico grew by approximately 12,000 during the quarter, reaching nearly 2 million unique customers. Adoption of digital channels among our retail customers remain strong. Active users on our Mibanco platform exceeded $1.1 million or 56% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channels. This trend remains significantly higher than pre-pandemic levels and well above our Island peers. In the first quarter, consumer spending remained healthy and with combined credit and debit card sales up 9% compared to the first quarter of 2022. As on the mainland, Mortgage originations in Puerto Rico have been impacted by rising rates and also by limited inventory of available properties. The dollar value of mortgage originations at Banco Popular decreased by 29% compared to the first quarter of last year, driven by lower refinance activity due to the interest rate environment. The local economy performed well during the first quarter. Business activity is solid and remains in good shape as reflected in the continued positive trends in total employment and other published economic data. While new auto sales have slowed compared to the quarterly pace of the past couple of years, they remain above pre-pandemic levels, evidencing continued robust demand for cars in Puerto Rico. The tourism and hospitality sector continues to be a source of strength for the local economy. Year-to-date, San Juan Airport has seen record levels of passenger traffic. Hotel demand also has been strong as can be seen in record high average daily rates and revenue per available room. There are still approximately $50 billion of hurricane recovery funds that have yet to be disbursed. We expect that these funds will support economic activity in many sectors in the coming years. We are uniquely positioned to serve the needs of our customers and to benefit from such activity. In short, we are pleased with our results for the quarter, particularly our solid loan growth in Puerto Rico and the continued strength of our deposit base, liquidity and credit quality. We are mindful of and have been monitoring the economic and market environment as well as the recent developments in the U.S. banking sector. We will continue to manage our banks to maintain significant available liquidity as we grow responsibly. Despite these headwinds, we remain optimistic about the future of Puerto Rico, our primary market, and our ability to manage and serve the needs of our customers through any potential challenges that may lie ahead. I now turn the call over to Carlos for more details on our financial results.

Thank you, Javier. Good morning. Apologies. Please turn to Slide 5. Net income was $159 million compared to $257 million in Q4. Excluding the impact of the $68 million DTA allowance reversal in Q4 Net income decreased by $30 million in Q1. Net interest income was $532 million, a decrease of $28 million on Q4 $9 million of this variance was related to the lower day count during the quarter. On a taxable equivalent basis, net interest income was $570 million compared to $622 million in Q4. The variance was primarily a result of higher interest expense on deposits of $54 million, resulting from increased deposit rates mainly from Puerto Rico public deposits and to a lesser extent of their banking. Noninterest income was $162 million, an increase of $3 million from Q4. This included in this result was a $7 million litigation-related insurance claim reimbursement. The provision for credit losses was $47 million compared to $48 million in the fourth quarter. Total operating expenses were $441 million, a decrease of $21 million from the prior quarter. This reduction was primarily driven by lower professional fees by $16 million as well as lower technology and software expenses by $10 million. Historically, these costs tend to be lower during the first quarter of every year. This is more accentuated in the first quarter of this year due to our multiyear transformation initiatives. During Q1, we had $6 million in transformation-related expenses compared to $10 million last quarter. As the transformation progresses, expenses will shift from advisory and conceptual plans to development and execution of implementation plans. As a result, we expect a slower pace of expenditure initially as in Q1 and an acceleration as the year progresses. We continue to anticipate transformation-related expenses of $50 million in 2023. Other large expense variances were lower seasonal business promotion expenses by $9 million which was somewhat offset by higher personnel costs by $9 million, primarily related to the previously disclosed increase in hourly minimum wage at BPPR that took effect in January. And lower order benefit of $7 million, mostly due to lower gain on sale of properties. Our quarterly expense trajectory has historically ramped up as the year progresses. We anticipate that 2023 will be consistent with that experience and continue to expect expenses for the year of approximately $1.87 billion. Our effective tax rate for the quarter was 23%. For the full year 2023, we expect the effective tax rate to be within a range of 21% to 26% higher than the range provided during our last webcast. In the near term, we expect to run our banks with a higher level of reserves at the Fed, which leads to less tax expense income and therefore, a higher tax rate than we had previously anticipated. Please turn to Slide 6. Net interest income was $532 million. On a taxable equivalent basis, it was $570 million, $51 million lower than in the fourth quarter. Net interest margin decreased by 6 basis points to 3.22% in Q1. On a taxable equivalent basis, NIM was 3.46%, a decrease of 18 basis points. The decrease is driven by higher interest expense on deposits due to a significant though anticipated 103 basis point increase in the cost of public deposits. This was partially offset by higher loan balances and yields, plus an improved mix of earning assets. As we ended the first quarter, public deposits were roughly $15.5 billion or $15.8 billion excluding $700 million in deposits held and managed by our trust division. This compares to $15.8 billion and $15.2 billion, respectively, at year-end. In the past, we had excluded the balances in trust from our discussion about Puerto Rico public deposits given that these are managed by our fiduciary services division, where we act as custodian or [indiscernible] However, we have decided to aggregate these amounts to reflect the overall relationship with government entities and provide more visibility to collateralize deposits. These branch deposits have always been reported in our total deposit balance. During 2023, now inclusive of trust deposits, we expect public deposits to be in a range of $14 billion to $16 billion, essentially unchanged from our previous expectation of $13 billion to $15 billion that excluded trust deposits. It's important to reiterate that by law in Puerto Rico, public deposits must be 100% collateralized. Any decrease in the level of these deposits will have no significant impact on our liquidity. Excluding Puerto Rico public deposits, consolidated deposit balances increased by $180 million in the quarter, primarily time and saving deposits at popular bank gathered through a direct channel. This compares to a decrease of $1.4 billion in nonpublic deposits during the fourth quarter. In Q1, we continue to see some commercial and high net worth clients pursuing better yields on excess liquidity, moving this bond outside the banking sector. However, we have been able to capture a good portion of this movement in our broker-dealer, which saw an increase in assets under management of approximately $450 million. Since the end of Q1, overall deposit have increased by approximately $700 million. Our interest rate sensitivity continues to be relatively neutral. As the year progresses, we expect the margin to resume an upward trajectory. The timing will depend on the interaction of our loan growth and mix, deposit balances and the pace of repricing of public and incrementally nonpublic deposits. Our ending loan balances increased by $161 million compared to Q4, driven by growth on all loan segments and commercial loans at PV. We are encouraged by the demand for credit at BPPR and PV. We will continue to take advantage of opportunities to extend credit, thereby improving the use and yield of our existing liquidity. Please turn to Slide 7. Deposit betas the current tightening cycle are now at or above the prior cycle. We have seen a total cumulative deposit beta of 24% to date. However, in Q1, we saw an acceleration of deposit pricing. In BBPR, total deposit costs increased by 35 basis points, led by public sector deposits. In PV, total deposit costs increased by 67 points led by retail deposits as we increase the use of our online deposit channel. In Puerto Rico, our combined retail and commercial deposit beta cycle to date have been less than 10%. As we've discussed over the past couple of quarters, given the rapid shift to higher short-term interest rates, we expected a significant increase in the cost of public deposits. In the first quarter, the cost increased by 103 basis points versus our January estimate of roughly 120 basis points. The difference rest in lower average balances and the mechanics of the interest expense calculation. We expect the cost of poly deposits to increase by approximately 60 basis points in Q2. The deposit pricing agreement with the Puerto Rico public sector is market linked with a lag. This source of funding resulted in an attractive spread on our market rates. Please turn to Slide 8. We have added the following 2 slides in our deck because of the increased focus on liquidity, borrowings and deposit composition. Liquidity sources for the corporation increased by $1.3 billion in Q1. 77% of this liquidity resides in excess funds at the Fed and unpledged securities. Borrowings for the quarter were flat at $1.4 billion. We reduced our Feral Home Loan Bank borrowings by $366 million in Q1. However, the issuance of our senior notes due in 2028, roughly compensated for that reduction. There were no incremental borrowings during the quarter from the Federal Home Loan Bank, the Fed discount window or the bank term funding program. On March 13, 2023, Popular issued $400 million of 7.25% senior notes during 2028. We intend to use a portion of the net proceeds of the offering to redeem or repay $300 million principal amount of our outstanding senior notes that mature in September 2023. Please turn to Slide 9. The summation of transactional accounts and time deposits with balances over $250,000 ended Q1 at $13.8 billion or 23% of total deposit balances. The liquidity sources described in Slide 8, the prior slide, totaled $18.3 billion, covering 135% of deposits over $250,000. The balances of our noninterest-bearing deposits have been steady. Most of our recent balance changes have been in interest-bearing accounts. Please turn to Slide 10. Our investment portfolio is almost entirely comprised of treasury and agency mortgage-backed securities, which carry minimal credit risk, including our cash position, this portfolio has an average duration of approximately 2.6 years. As discussed previously, given the rapid increase in rates in 2022 as well as the uncertain outlook for interest rates, in October of last year, we transferred to held to maturity $6.5 billion of U.S. treasuries, thereby reducing the future impact of rates on tangible book value. At the time, this action reduced AOCI exposure to interest rates by about 1/3. When transferred to HCM, these positions had a pretax unrealized loss of $873 million which will be amortized back into capital throughout the remaining life of the transfer positions. As of the end of the first quarter, the balance of this unrealized loss stood at $789 million. A reduction of $43 million from Q4 and $84 million from the transfer date. We expect this loss to be amortized back into capital through the remaining life of the portfolio at a rate of approximately 5% per quarter through 2026. As a result of the timing of this transfer and given the level of rates at quarter end, all of the unrealized losses related to the gin portfolio are already reflected in our tangible capital. Therefore, at the end of the quarter, there are no significant recognized marks related to our HTM book. Please turn to Slide 11. Our return on tangible equity was 11.5% in the quarter. Regulatory capital levels remain strong. Our common equity Tier 1 ratio in Q1 of 16.7% increased by 34 basis points from Q4. Tangible book value per share at quarter end was $50.15, an increase of $5.18 per share or almost 12% from Q4. This improvement is driven mostly by a favorable variance of $192 million in the net unrealized losses on securities [indiscernible] for sale and quarterly net income of $159 million partially offset by dividends declared in the quarter. Finally, touching on capital, we will revisit future capital actions in the second half of 2023. Our long-term outlook on capital return has not changed anchored in our strong regulatory capital ratios. However, in the near term, we need to get more certainty on the outlook for rates and the economy and also more clarity on the potential regulatory response to recent events in the banking sector. Over time, we expect our regulatory capital ratios to gravitate stores the levels of our mainland peers plus the buffer. With that, I turn the call over to Lidio.

Thank you, Carlos. And good morning. Overall, Popular continues to reflect stable credit quality trends with low levels of net charge-offs and decreasing NPLs. We remain encouraged by the performance of our loan book of pandemic. Specifically, early delinquency Net charge-offs and nonperforming loan inflows come to trend significantly below pre-pandemic levels. Turning to Slide #12. Nonperforming assets decreased by $24 million to $504 million this quarter, driven by an NPL decrease of $27 million due to lower mortgage and consumer NPLs in Puerto Rico offset in part by [auto]increase of $3 million. NPL inflows increased slightly quarter-over-quarter. At the end of the quarter, the ratio of NPLs to total loans held in portfolio decreased to 1.3% from 1.4% in the previous quarter. Turning to Slide #13. Net charge-offs amounted to $33 million were annualized 41 basis points of average loans held in portfolio compared to $31 million or 39 basis points in the prior quarter. The results for the quarter were impacted by a $10.5 million charge-off on a previously reserved loan. Excluding this, the net charge-off ratio would have been 28 basis points. Please turn to Slide #14. At the end of the first quarter, the ACL decreased by $31 million to $689 million. During the quarter, we implemented a new accounting guidance, which eliminated the accounting for TDRs and the requirements to measure the effect of the concession from a loan modification. This impact resulted in a release in the ACL of approximately $46 million, driven by our mortgage [indiscernible] portfolio, which is presented as an adjustment to the beginning balance of retained earnings net of tax effect. Excluding this impact, the ACL increased by $14 million, driven by changes in the HPI forecast higher loan volume, portfolio mix and the migration of consumer credit scores. The provision for credit losses $47 million compared to $48 million in the prior quarter. To summarize, our loan portfolio continues to exhibit strong credit quality trends in the first quarter with low net charge-offs and decreasing nonperforming loans. We remain attempted to evolving environment we remain encouraged by the post pandemic performance of our loan book. We believe that improvement rates over time in the risk profile of the corporation's loan portfolio positions Popular to operate successfully on the more difficult economic conditions. Before I turn the call over to Javier, let me comment on Popular's CRE's office are exposure. The office segment is receiving a lot of attention in the current environment due to the achieve level work and higher interest rates. In the case of Popular, our office exposure is limited representing only 1.9% or [$6.9 million] of our total loan portfolio. The exposure is mainly comprised of low to price property with average loan size of $2 million and is well diversified across [indiscernible] With that, I would like to turn the call over to Javier for his concluding remarks. Thank you.

Thank you, Lidio and Carlos, for your updates. Popular started off 2023 with a strong first quarter, building on the positive momentum generated in 2022. Our diversified business model and strong deposit base, robust regulatory capital and liquidity position are a source of strength, which allow us to continue to meet our clients' needs as reflected by the growth in our customer base and loan portfolio during the quarter. We are optimistic about the opportunities that lie ahead, and we remain vigilant around potential risks stemming from continued inflation and economic and market uncertainty. Economic trends in Puerto Rico continue to be positive and a considerable amount of recovery funds yet to be disbursed are expected to support increased economic activity in future years. We made progress on our transformation initiatives during the quarter, which, over time, will drive more customer connectivity and operational efficiencies and greater potential for profitable growth and sustainable return on capital. I want to recognize and express our gratitude to our colleagues. It is their daily effort and commitment that lead to our customers continue to using popular and our strong results. We are now ready to answer your questions.

[Operator Instructions] The first question comes from the line of Brody Preston with UBS.

I was hoping maybe, Carlos, could we dive back into the to the net interest income, the FTE situation. So you -- I guess I'm trying to understand, so you're going to hold more cash at the Fed with both the Puerto Rican sub and the U.S. And so that's resulting in lower levels of tax-exempt interest income. But is there -- I guess, is there some GAAP NII impact there as well? I'm just getting a few questions about it. It came across a little confusing.

No. I think your discretion is correct, Brody. The cash we keep at the Fed earns taxable, it didn't put back in Puerto Rico, by the way, mostly it does not apply to the fact in the space. It earns taxable income as opposed to when we hold treasury securities that are expense to a large extent, the bank in Puerto Rico. So our mix of taxable and nontaxable income shift or is taxable. So that results in a higher tax rate.

And will that get -- I guess, will that strategy of holding higher levels of cash on the Puerto Rican sub, will that get reversed once we get clarity on liquidity in the economy? Or is that like kind of like holding higher levels of cash through 2024, the expectations?

Well, at least for the moment, it's our choice, and we revisit that choice every week in our ALCO committee we'll see whether it continues to be our choice once the regulators express themselves.

Got it. Okay. So it seems like it's more conservatism at this point?

You asked a question about impacting GAAP NII. Given that the yield on cash overnight of the Fed versus short-term rates is not very different, we wouldn't expect a significant difference in GAAP NII from that shift. Certainly, our FTE NII will be affected because of that strategy.

Okay. And I guess, what is -- I guess, from this strategy, how much on a quarterly basis is the FTE impacted?

That will be driven by everything else on our -- the positive costs that are disallowed, et cetera, that's

It's a bit more complicated calculation on that one. Of course, it also depends on [indiscernible] this rate at present level, and that, again, is pretty value constantly.

Okay. But it's fair to say that like as deposit costs move higher, if you kept the same level of cash at the Fed that there would be an incremental drag on the FTE NII

That will be fair, yes.

And on the fee income? Okay. Okay. On the fee income, I just wanted to get a sense for where you thought that would shake out going forward. And I'll stop there, and I'll hop back in the queue for my other questions.

No, the income -- our fee income it's resoundly steady over a year, [indiscernible] by 4, but I don't it's hardly study on a quarter-by-quarter basis. So it tends to fluctuate a little bit up and down. We're happy to have started slightly ahead of our guidance $150 million per quarter. But for the moment, we still think that guidance is applicable, and we'll revise it again depending on the results of the second quarter to see if it is worth to change. So for the moment, we'll keep the guidance. We're very pleased that we again, that number moves in both directions every quarter for many different reasons because of the many lines that are in there.

Okay. And could you just remind me, Carlos, it looks like other in the other service fees, there's third quarter upward seasonality that will come through. That's still the expectation, right?

That's sure. Yes. I mean there's -- we get contingent insurance commissions paid once or twice a year. It depends on the insurance company that we have -- we're dealing with. It tends to be in the second half of the year. I don't remember it's exactly a third quarter, Brody. But effectively in the second half of the year, of course, the other thing that has to happen is that the insurance market has to be nicely for them to pay as a continued contingent fees. That will be the second half of the year.

Thank you. The next question comes from the line of Timur Braziler with Wells Fargo.

I appreciate the comments on the expected range of public funds kind of $14 billion to $16 billion exiting the year. Maybe talking to second quarter specifically, can you just give an update on the magnitude of seasonal inflows you're expecting in the quarter kind of timing of those? And then ultimately, where we could expect GAAP NIM and NII to kind of bottom out before starting the ramp higher in the back end of the year to your comments?

Well, the -- in the second quarter, we have tax revenues. So as the we mentioned before, we expect government process to go up this quarter. And we've seen some of that. We already mentioned that deposits are up $700 million so far this quarter. So what it's harder for me to tell you is exactly if they're going to end higher than because that depends on what the government chooses to do with their money, which is not our decision. Historically, they have tended to be higher in the second quarter and then gravitate down in the second half of the year. What was the question on NIM again?

Just if you can provide any kind of magnitude on where NIM or NII could bottom in 2Q prior to resuming the ramp higher in the back end of the year?

No. We usually don't guidance on that type of detail. As I mentioned in my prepared remarks, we still expect NIM to take an upward trend again this year. The difficult part of that is that it depends on how the things I mentioned interact that will be able to find the timing on when it is going to shift. So it's going to be a pace of increase in rates, loan growth and loan mix and also deposit balance some mix and how those 3 things interact is what results in the ultimate NIM. So we still think it's going to revert to an expansion mode this year. But for the timing, we have not spoken to the timing.

Okay. And then maybe one for Lidio. Excluding the impact of 2022-02 allowance levels continue to build despite the broader trends on the island improving. Can you maybe talk about some of the levers that were pulled within the portfolio changes that called for incremental allowance and what do you need to see prior to releasing some of the incremental allowance and getting closer to a level, maybe not where mainland peers are, but at least starting to trend in that direction?

What I think is a lot of different levers that we are playing during this quarter. As we mentioned, we have been doing good in terms of volume. So the volume increase. Role, a small role in terms of increasing allowance. The economic scenario also play a small role in terms of the increasing allowance, then you also have volume mix we changed -- we gravitated to some of a higher allowance portfolio that also have a gradual impact in allowance. We've also seen some gravitation with some consumer score that also had a small impact in allowance rate it's a combination of a lot of small things. So it's the interplay of all of that and the continued low performance net charge-off that will dictate allowance going forward.

And just -- Great. And just last for me, maybe back to Carlos. Can you provide an update on merchant acquiring and the revenue share component, how that's trending and maybe an outlook for both '23 and '24 there?

Well, we don't break out that number, Timur, but we did talk about the volume of credit and debit cards going up 9% versus same quarter last year. It will go down versus the last quarter because it's as you know. So the business keeps growing. We're getting a share of that. So if we assume the number is going up, but we don't have -- and I don't think we'll disclose the detail of that number.

I'll step back.

The next question comes from the line of Alex Twerdahl with Piper Sandler.

First off, I was wondering if you can give us an update on expectations for loan balance outlook over the next couple of quarters.

No. I mean -- I'm sorry. Now as you know, we don't give a specific combine guidance. We did say that we expect loan growth this year, and we are seeing that, but we also expect it to be at a lower pace than we saw last year, and we're seeing that as well. So the first quarter was a good quarter. It was a bit quieter than the first quarter of last year, obviously. Hopefully, as economy locally in Puerto Rico, particularly continues to grow and more projects come online, we'll have more opportunities to grow well. So I'm hopeful it makes us better as the year goes along. I do not think even when it gets better, that it will come to match last year's growth.

Okay. And do you think growth comes from basically all categories as you saw in the first quarter?

So far, that's what we've seen in Puerto Rico, and that's actually been true since the middle of last year, Alex. So it probably will continue to be in most categories. But dollar terms, obviously, the category that carries the day is commercial. So in dollars, it's going to be mostly commercial, but we probably will see most categories continue to grow. Autos is growing a bit less -- a bit lower than last year, and we'll see how the year evolves. So there is the effect of higher rates than how that affects the appetite of people for loans, we'll have to see how that plays out during the year as well.

Okay. And to the last point on rates and appetite, can you give us a sense for where new loan yields are relative to the existing portfolio? For consumer -- I mean for commercial primarily?

I mean the best you can do -- we can do on that, Alex, is on our levels on yields in the press release, you have loan yields by category. And you can see the variation from last quarter to this quarter, we don't provide sort of any more detail on deals in that.

Okay. Can you -- in the slide deck on the deposit slide, can you just help us understand exactly what's happening in the commercial deposits as well as the government deposits towards the end of the quarter, it looks like those rates ticked down a little bit.

Yes. I'll explain commercial and one of my colleagues here will be any public sector. In the commercial, it's actually quite simple. We had a large relationship with a deposit aggregator that exited. We exited in early February, and that was a very high cost. So the cost actually did that contribute to the [indiscernible] down in February and March. So that was an actual sort of transaction decision that we did that affected that one on the public deposits.

Alex, it's Paul. So on the public deposits for all the charts, we actually provide the data points as part of the analysis on a monthly basis. And so given a variety of inputs, including day count and average balances and whatnot, the calculation does move around a little bit along with the lagged effect of the repricing. So if you look back prior in that chart, what you can see is it does jump around a little bit during certain time periods, even when the -- at least the comparative chart of the Fed funds is moving directionally. So that's all that this is. We do expect that those -- that repricing has not yet been completed, and we talked about sort of another 60 basis points roughly in the second quarter.

Okay. That's helpful. And then with respect to the NIM commentary about resuming an upward trajectory, is that -- is there a scenario where that could happen in the second quarter?

Yes. If you move around in your model, the 3 things I mentioned pace of interest rate increases, loan growth and mix and deposit balances and mix. I'm sure there's a number of possible combinations that will give you a higher NIM in the second quarter. but it depends on how those 3 things move.

Thank you. The next question comes from the line of Kelly Motta with KBW.

I think I'll carry on with that at least a portion of that NIM question. Carlos, one of the things that you had mentioned was your carrying higher balances at the Fed just out of conservatism, do you mind sharing what you guys view as an appropriate level of cash you have on hand right now? And what are the things we should be looking for to toggle that either up or down? Do you need clarity from the regulators in order to take that down just interested on what we should be looking for as we think about the liquidity number ahead?

Yes. I mean, to a large extent, what you see in our Fed account in our cash position right now is a lot of the maturities that happened in our investment portfolio in the first quarter minus the loan growth that we had for the quarter. That's the outcome of those 2 things is the number in there. Now we'll keep watching this closely and evaluating the environment an ongoing basis, Kerry. So I mean -- we don't -- we're not running it on the basis of a target amount of cash necessarily. We are running the business and the business results in an amount of cash. What we did decide in the first quarter was to allow the portfolio to mature without reinvesting or extending it again. Again, that is a discussion that we have in our weekly outcome meetings, and we evaluate all the parts and come to conclusions on a dynamic basis. So there isn't a target, the level where we are at this so seems to make sense to us. It's not a tough decision because at this point in time, the yield and cash is not bad. So it's not a horrible decision to have cash at the Fed. So we'll keep looking at it that position double unlikely. Will that position on behalf of what is unlikely, but it will probably gravitate around where it is. And if we make a decision to reinvest or move some of the cash to the investment portfolio. It will not change our characteristics of our cash position because some of that will pre-bills, but it will change the nature of our tax position.

Understood. I appreciate the color. Thinking about the buyback, in order to get more comfort with the buyback, do you think the board needs the regulators to come out with additional guidelines on that front in -- with what's going on in March. Just any sort of color as to what could get you guys more interested in buying back stock here?

Yes. I mean what we described in October is that we wanted more clarity on rates and the economy so that we could be more informed in making any decision capital return. And that we thought that currently may be available by the summer. Frankly, I'm not sure we have significantly more clarity now than we had been. So hopefully, we get clarity by the summer, but I'm not sure we're there yet. I think the more important thing is what you mentioned, which we have added to those 2 considerations to consideration of regulatory changes. If anybody's guess exactly what the regulators will come up with, we do not know but we will be attentive to how they are moving. We definitely don't want to be in a position where we do something, and there's a word announcement a month later, and it makes our life much more difficult because we did something that moved us in the wrong direction. So we'll be looking at all those things. It's hard to gauge right now whether others will come out, Kelly. So we're paying attention and listening so it's 3 things now that we're waiting to get some clarity on that, too. So we'll just see how those evolve.

Got it. And just to speak last one in on the capital front. Is the dividend we had discussions about the buyback. I usually have a dividend raise in 2Q. I think that's part of your capital -- full capital discussion, but wondering if there's any updated even if a buyback isn't in the cards necessarily. Are you still thinking about the dividend the same way in any target for a payout ratio on that?

Yes. We tend to work the 2 things together. But as you are right in pointing out, they don't have to be together. So it's something that we will continue to consider. Again, I think probably step back for a minute, the more important point to make is that our long-term view on capital hasn't changed. We still expect over time that our capital ratios will go in the direction of our mainland peers plus a spread. But that is over time. That doesn't mean every quarter in a perfect sequence, number one. And number two, now we have the other uncertainty that we have no idea where peers will be required to be if the rules change. So we'll have to keep those state right.

Okay. I'll tip back.

The next question comes from the line of Brett Rabatin with Health Group.

This is Brian calling for Brett. Just want to go quickly back. - just wanted to go quickly back to deposits. I appreciate the detail on the liquidity deposits slides you added it looks like demand deposits decreased similarly to what we saw last quarter. Do you guys expect a study mix shift over into interest-bearing accounts from DDA. And then on the deposit beta as well, you mentioned that most of the segments are at or above their prior cycle deposit beta and you guys on the island maintain an advantage to the Mainland, but just wanted to know if you expect those betas to increase notably above the prior cycle?

Yes. On demand deposits, I think the message in an deposits, Brian, is that they've been very steady, actually. And we have seen, as I mentioned, some commercial clients and some high-net-worth clients seek higher yields. We have also been successful when the clients are in that position to help them achieve that without leaving the relationship or shrinking the relationship with us. We had increasing assets under management and public securities of our $450 million in the first quarter, which is exactly that. But the fact that, that happened, and you see that demand deposits from the fourth to first quarter were flat, means that somebody else burning $450 million. So demand deposits have been quite steady, actually. Most of the volatility we've seen in volume or levels have been in our interest-bearing accounts. And as you know, some of the big chunks or big movements happening in our public sector accounts or larger posters, right? And I'm sorry, but I missed the second part of your question, Brian.

Just on the deposit betas compared to the prior cycle.

Well, we've seen deposit betas accelerate as probably every bank in the country has the rates have gone up so fast and so high. So we are above the last cycle. So I don't think we have to -- the chances are that betas for all banks will probably end up higher than the last cycle in this cycle just because of the speed and magnitude of how the Fed raised rates. So that's probably what's going to end up happening. Specifically in our case, it's hard to tell. When you look at, for example, a big chunk of our deposit business, which is retail and commercial in Puerto Rico continues to have a sub-10% beta. So overall, betas will accelerate. I think it's our view. They are already above the last cycle. There's a reasonable chance, the terminal beta will be higher than the last cycle. But there is pieces of our business that continue to show a lot of strength. Particularly the nonpublic pricing in Puerto Rico.

All right. Great. That's it for me.

The next question comes from the line of Gerard Cassidy with RBC.

This is Thomas Leddy calling on behalf of Gerard. A couple of quarters ago, you guys mentioned that you had not seen any new entrants into the market for lending in PR, so just from mainland banks that haven't historically been as active there, but you thought you might see some increased competition for some of the big pending infrastructure projects there. Has that dynamic changed at all in light of recent events? And any additional color you can provide there?

I don't think it changed very much. It really is the size of the investment is important, obviously, because not every bank can make every size loan. But when you have foreign operators that come in to Puerto Rico to run a public private partnership, for example, they have worldwide banking relationships, and those ratios arrive to Puerto Rico with them. In almost every instance, they want a local bank with our experience and capabilities to help them. So we end up either leading or being an important part of any effort to finance those kind of projects. So I don't think it's a change from what we've experienced in the past. And hopefully, some of these projects will get going pretty soon. There is a number of the public private partnerships that are supposed to be closer to realization now than they were months ago. And it does happen, that would be [indiscernible]

I just want to add to I just want to add to also then in fact, we are I can say, engaged in those PPP projects. So we expect to have those come to fruition if the government moves quickly this year. So we'll play an important part in those financings as we expected prior.

Okay. Great. And then just a quick follow-up. High level. Obviously, credit quality remains pretty strong. What trends in credit are you guys watching most closely today? And how have those changed over the past couple of quarters.

I will say the performance and the shift in the FICO mix of our book and the performance of the small and medium enterprises in our commercial book. Those will be the 2 particular elements that we're watching closely.

We have a follow-up question from the line of Brody Preston with UBS.

Just had a couple of quick follow-ups. I did want to touch on the consumer line of credit charge-off that you called out. Just I wanted to clarify, it was called the line of credit. I just wanted to ask if that was one line of credit or if that was multiple lines of credit?

It was 1 line of credit. It is a legacy one-off type of relationship that shouldn't recur in the future.

Got it. Okay. And then I just want to ask one on the deposit mix. You guys outperformed the industry by a wide margin on noninterest bearing. So just wanted to get a sense for what your conversations look like with customers around rates, particularly as it relates to like any level of excess funds that might be in DDAs? Or do you feel like the noninterest-bearing mix can be relatively steady from here?

Yes. I mean we had the discussions every day. I mean the best way I can answer that question, Brody, is that we've been hiring those discussions for the last 2 quarters and the results are the results. So we -- despite the fact that we're having those discussions that we have clients moving cash seeking higher yields. We still were able to successfully maintain stable demand deposit balances. That does not mean that some money did not move. As I said, we can track specifically $450 million of those monies that moved to our broker dealer. But clearly, we successfully found another $450 million of demand deposits that showed up enjoyed the bank. So, so far, we've been able to manage those interest of higher yields from our clients successfully. We're keeping the relationship. We're serving the client. By the way, we've been here before, and those flows go back the other way when rates come down. So the important thing here is to keep the relationship so that when rates come down, the money does flow back into the bank. So I mean, that's the best guess. Javier, do you want to?

I just want to add that we saw very strong new deposit account opening numbers for the first quarter in Puerto Rico, including non interest-bearing accounts. So I just wanted to clarify that very high compared to prior quarters.

Our net new account in the first quarter was higher than it's been for a couple of years.

2021. Since the first quarter of 2021.

Got it. All right. I appreciate the color.

We have a follow up from Timur Braziler with Wells Fargo.

Yes. Sorry about that -- one last one for me on the expense base. I appreciate the color on the reduction in the first quarter and the expectation for it to ramp higher as the year goes. Any additional commentary on the cadence of that increase to get to that unchanged guidance level? And then secondarily, if you can provide any kind of color as to what type of internal budget, you're using for this year's profit-sharing initiative.

Okay. On the second question, there is presently no incorporation of any profit sharing in our numbers or are forward-looking. So nothing on that is in our numbers or our forward-looking outlook at this point in time. On your first question, it's tough to tell because it depends on when the projects get going and when the people are helping us in this project actually bill us. So I would assume that it will be straight line up. It's always my best assumption right now for -- in the next 3 quarters to reach the goal. But [indiscernible] a colleague here telling me what -- so that is my do it straight line in your model is it's probably not going to be far from the truth.

I'll just clarify, we do accrue services provided, we don't wait for being

I guess once those projects start to ramp up, is the expectation going forward that those expenses remain on? Or is it going to be as lumpy as we've seen in the first quarter?

It will depend on the project. I don't think there's a global answer to your question.

The project and the number of projects that are ongoing at the same time. We're just moving from the theory and the planning to execution. That's just how quickly we can get all those plans going.

[Operator Instructions]There are no additional questions at this time. I will now hand the call back over to Javier Ferrer for closing remarks.

Thanks again for joining us and for your questions today. We look forward to updating you on our progress in July. Thank you.

That concludes today's conference call. Thank you. You may now disconnect your lines.