BPOP - NASDAQ

Hello, and welcome to the Popular, Inc. 2Q Earnings Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to Paul Cardillo, Investor Relations Officer at Popular. Please go ahead.

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our President and COO, Javier Ferrer; our CFO, Jorge Garcia; and our CRO, Lidio Soriano. They will review our results for the second quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that on today's call, we may make forward-looking statements regarding Popular such as projections of revenue, earnings, expenses, taxes and capital structure as well as statements regarding Popular's plans and objectives. These statements 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 release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Good morning, and thank you for joining the call. Before I discuss the highlights for the second quarter, I am pleased to report that today we announced a 13% increase in our quarterly common stock dividend from $0.62 to $0.70 per share, commencing with the dividend payable in the first quarter of 2025 and a $500 million common stock repurchase authorization. These actions evidence the strength of our capital position, which allows us to continue to invest in our franchise and serve the needs of our customers while also returning capital to our shareholders. Please turn to Slide 3. We are pleased to report a strong second quarter, achieving net income of $178 million. Excluding the impact of the FDIC special assessment and tax withholding matter on the results for the first quarter, net income increased by $43 million. The results in the second quarter were driven by higher net interest income and lower provision for credit losses. Our ending loan balances increased by $473 million during the quarter. BPPR achieved loan growth of $509 million, reflecting growth across almost all lending segments. Popular Bank saw a $36 million decrease in loan balances driven by $140 million commercial loan payoff that offset growth in construction loans. Deposit balances increased by approximately $1.7 billion driven by higher level of Puerto Rico government deposits. Our net interest margin increased by 6 basis points to 3.22% mainly driven by higher average loan balances and the repricing of loans and reinvestment of securities in a higher interest rate environment. This was partially offset by higher deposit costs. Noninterest income increased by $2 million to $166 million. Excluding the additional FDIC special assessment and the expenses associated with the prior period tax expense, operating expenses increased by $7 million driven by professional fees and transaction-related costs. Credit quality trends improved in the quarter with lower net charge-offs, NPLs and NPL inflows. The credit trends in the Puerto Rico unsecured consumer segments have stabilized. Tangible book value per share of $62.71 increased by $2.65 driven by our quarterly net income and lower unrealized losses in our investment portfolio. Please turn to Slide 4. Consumer spending remained healthy. Combined credit and debit card sales increased by 5% compared to the second quarter of 2023. Our auto loan and lease balances increased by $129 million compared to the first quarter as demand for new cars continue to be strong in Puerto Rico. Mortgage loan balances at BPPR increased by $107 million in the second quarter driven primarily by home purchase activity and our existing strategy to retain FHA loans in portfolio. Business activity in Puerto Rico remained solid as reflected in the positive trend in total employment, consumer spending and other economic data. The tourism and hospitality sector continues to be a source of strength for the local economy. Passenger traffic at the San Juan International Airport increased by 8% in the second quarter compared to the second quarter of 2023. Hotel occupancy was flat year-over-year in the first half of 2024. And the average daily rate in RevPAR were up slightly year-to-date compared to the same period a year ago. There is a significant amount of committed federal funds that have yet to be disbursed. The pace of disbursement of these funds has accelerated, and we anticipate that they will support economic activity for several years. We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years. In short, we are pleased with our financial performance for the quarter, particularly in Puerto Rico, where continued loan growth and improvement in credit metrics helped contribute to our increase in net interest income and support our optimistic outlook for the balance of the year. On that note, I now turn the call over to Jorge for more details on our financial results.

Thank you, Ignacio. Good morning, and thank you all for joining the call today. As Ignacio stated, we reported net income of $178 million in the second quarter, $43 million higher than the prior period's adjusted results. We are pleased with the core results, particularly the NII growth and the expansion of the NIM. Net interest income increased by $18 million. Our net interest margin increased by 6 basis points on a GAAP basis and 10 basis points on a tax-equivalent basis driven by the repricing of loans and securities and higher balances. Loan growth improved this quarter to 1.5% year-to-date driven by BPPR where we saw loan growth across nearly all categories led by commercial lending, auto and mortgage originations. The underlying economic activity in Puerto Rico remains strong. However, the demand for credit in our U.S. market continues to be less than we had anticipated at the beginning of the year. As a result, we now expect consolidated loan growth to be towards the low end of our original 3% to 6% guidance. Consolidated customer deposit balances, excluding Puerto Rico public deposits, were flat as increases in time deposits at Popular Bank were offset by outflows at BPPR. However, average customer balances during the quarter were higher, including noninterest-bearing demand deposits. At the end of the second quarter, Puerto Rico public deposits were $19.7 billion, up $1.7 billion compared to Q1 and above the upper end of our year-end guidance range. Q2 is typically the peak in public deposit balances and is mostly related to tax receipts. Normal annual seasonality should result in these balances trending lower for the rest of the year. By the end of 2024, we expect public deposits to be near the upper end of our $15 billion to $18 billion guidance. While higher balances of public deposits contribute to higher NII, approximately $800 million of low-cost government-related accounts managed by our fiduciary services group were repriced during the quarter to market-linked rates, offsetting in part the benefit of the higher balances. As a result of the shift of the deposit mix toward higher-cost deposits along with a slower loan growth in the U.S., we now expect our year-over-year growth in NII to be 8% to 10%. Noninterest income was $166 million, an increase of $2 million from Q1 driven primarily by higher credit card and debit card fees from customer transaction activity. We continue to expect noninterest income to be approximately $160 million to $165 million per quarter. During the second quarter, we were also very pleased to see the continued improvement in credit metrics. The provision for credit losses of $47 million was $26 million lower than the first quarter. Total operating expenses were $470 million or $7 million higher than last quarter's adjusted operating expense. The increase was driven by professional fees due to advisory related expenses and increased the reserves for operational losses and higher transactional expenses tied to client activity. These increases were offset in part by lower personnel expenses, which are traditionally higher during the first quarter of the year due to annual incentive awards and payroll taxes. We continue to expect total 2024 expenses in a range of $1.89 billion to $1.95 billion. Our effective tax rate for the quarter was 19% compared to a 25% adjusted tax rate in the prior quarter as we benefited from higher tax exempt income and certain tax credit during the quarter. We continue to expect the effective tax rate for the year to be in the range of 21% to 23%. Please turn to Slide 6. Net interest margin increased by 6 basis points. On a taxable equivalent basis, NIM was 3.48%, an increase of 10 basis points. The increase was driven by higher earning asset yields and balances. This benefit was partially offset by higher interest expense on deposits due to increased average balances of public deposits at BPPR and time deposits at Popular Bank. During the quarter, we continued to see the benefits in the contribution of the investment portfolio as low-yielding maturities are reinvested in short-term T-bills that are tax exempt in Puerto Rico. This improved the tax effective yield of the securities portfolio by 24 basis points to 3.47%. In BPPR, the cost of total deposits increased by 2 basis points to 1.83%. The total deposit costs at BPPR continued to be impacted by the proportion of public deposits to total deposits. At Popular Bank, deposit cost increased by 3 basis points during the quarter. This change reflected a significant stabilization when compared to an increase of 23 basis points in Q1. We expect to continue NIM expansion throughout the rest of 2024. Please turn to Slide 7. Regulatory capital levels remain strong. Our CET ratio of 16.5% increased by 12 basis points from Q1. Tangible book value per share at the end of the quarter was $62.71, an increase of $2.65 per share from Q1. Return on tangible common equity improved by nearly 500 basis points in the quarter to 11.8%. We continue to target a sustainable 14% return on tangible common equity by the end of 2025. As Ignacio mentioned, we announced an increase in our quarterly common dividend of $0.08 per share to $0.70. We expect our Board to approve and declare this dividend in Q4 for payment in the first quarter of 2025 and a $500 million common stock repurchase authorization. We expect to execute the stock repurchases in the open market. The timing and quantity of the repurchases will be subject to various factors, including market conditions, our capital position and financial performance. We will provide quarterly updates on our activity as part of our earnings webcast and SEC filings. With that, I turn over the call to Lidio.

Thank you, Jorge, and good morning. Credit quality metrics improved from the first quarter with the corporation's mortgage and commercial portfolios continue to reflect credit metrics significantly below pre-pandemic levels, while credit quality metrics continue to normalize for Puerto Rico's consumer portfolios. We continue to closely monitor changes in the macroeconomic environment and on borrow performance, given higher interest rates and inflationary pressures but remain encouraged by the performance of our loan book. Turning to Slide 8. Nonperforming assets and nonperforming loans decreased during the quarter driven by the BPPR segment. NPLs in BPPR decreased by $12 million, reflecting improvements across most loan categories. NPLs in the Popular Bank segment remained flat driven by the return to accrual of a $17 million mortgage loan, offset by a $17 million commercial NPL inflow. OREOs decreased in BPPR by $10 million driven by the sale of a commercial real estate property. Inflows of NPLs decreased by $2 million. In BPPR, total inflows increased by $8 million driven by higher mortgage inflows, while in Popular Bank, inflows decreased by $9 million as last quarter activity included a single $17 million mortgage loan that enter NPL, offset in part by higher commercial inflows by $7 million. The ratio of NPLs to total loans held in portfolio remained flat at 1%. Turning to Slide 9. Net charge-offs amounted to $54 million or annualized 61 basis points of average loans held in portfolio compared to $62 million or 71 basis points in the prior quarter. Net charge-offs in BPPR decreased by $7 million driven by lower consumer by $5 million and lower commercial by $2 million. The decrease in consumer net charge-offs were driven by lower auto by $4 million and lower personnel loans by $1 million. In Popular Bank, net charge-offs decreased by $1 million due to lower consumer net charge-offs. Given the credit performance in the first half of the year and our outlook for the second half, we now expect net charge-offs to be near the low end of our initial full year guidance of 65 to 85 basis points. Please turn to Slide 10. The allowance for loan losses decreased by $9 million to $730 million. In BPPR, the ACL remained flat as increases driven by higher commercial loan volumes, higher qualitative reserves and changes in credit quality were offset by changes in the macroeconomic scenarios and net charge-offs. In Popular Bank, the ACL decreased by $9 million mainly driven by lower reserves for the commercial portfolio due to risk rating improvements. The corporation ratio of ACL to loans held in portfolio decreased slightly from 2.11% to 2.05%, while the ratio of ACL to NPLs improved slightly from 209% in the previous quarter to 214% this quarter. The provision for loan losses was $44 million compared to $72 million in the prior quarter, reflecting lower losses, changes to credit quality and improvements in macroeconomic scenarios. In BPPR, the provision was $49 million compared to $61 million while in Popular Bank, the provision was a benefit of $4 billion compared to an expense of $11 million in the first quarter. To summarize, credit quality metrics improved during the second quarter. And we remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks.

Thank you, Lidio and Jorge, for your updates. Our results for the first half of 2024 were strong driven by higher net interest income and expanding net interest margin and improved credit quality. We are continuing to execute on our transformation to better serve our customers and drive returns over time. We are investing in talent and technology to deepen our relationships with clients and maximize the opportunities inherent in our unique franchise. I am optimistic about our prospects for the remainder of the year. Business trends in Puerto Rico continue to be positive, and we are well positioned to participate in the economic activity that is expected to be generated in the coming years. We are mindful of the responsibility we have to Puerto Rico as the leading banking institution and to all the communities that we proudly serve. In June, we released our annual corporate sustainability report. We continue to focus on providing opportunity for progress, protecting the environment and promoting trust. One of the highlights of the report included the financing of one of the largest transactions to date in the renewable energy sector in Puerto Rico: a solar farm that produces enough electricity to supply the needs of approximately 7,000 homes in Puerto Rico. Finally, providing opportunity in our community starts with ensuring Popular remains a great place to work. I want to thank all our colleagues for their continued dedication and commitment to serve our customers and contribute to our success. We are now ready to answer your questions.

[Operator Instructions] Our first question comes from Kelly Motta with KBW. Your line is open. Please go ahead.

Hi, good morning. Thanks for the question. I would like to start out with the capital plan. It certainly came at least a quarter sooner than I had expected. Just wondering, I know you guys were waiting for some clarity on the outlook before coming out with something. Has anything changed in terms of your comfort level with where you're viewing the capital position and the outlook ahead that allowed you to come out with this in July? And also wondering, any guideposts we should be thinking about in terms of what your constraining capital ratio is and how you're thinking about stepping in with the buyback, especially with the run we've had in the stock? Thanks.

Yes. Obviously, we hear our investors. And our Board and management is very conscious that people wanted a statement from us on where we were on capital return. We worked very hard with our group. We went through some analysis of our credit book and what we thought about the future. And we thought that the $500 million authorization was the appropriate amount, given the circumstances. We also thought given our view that the dividend increase was important. I think that's an important piece of the puzzle. So obviously, that shows our confidence in the future. In terms of where we're going, we're going to do open market purchases. We still think the stock is fairly valued. So we -- I won't keep more insight than that, but we still believe that the stock is fairly valued, especially relative to our peers and others in the industry.

Got it. Okay. That's really helpful. And then with the NII outlook being reduced, just a point of clarification, the 8% to 10% growth that you're currently projecting for this year, is that on a GAAP basis or an FTE because there are some moving parts with the FTE adjustment this year that does make it somewhat meaningful?

Yes. Thank you for the question, Kelly. Yes, all of our guidance is GAAP basis.

Got it. That's helpful. And with your outlook for government deposits to decline off of that $19.7 billion level we're at now, as we look ahead, should we be thinking about the balance sheet as being relatively flat from here, given the movement in government funds between now and year-end?

I mean certainly if -- I would expect the movement. If you see a decrease in deposits, we would not be leveraging off the balance sheet with alternative sources of liquidity. So I think that's a fair statement in terms of more or less around that level of decrease of public funds.

Got it. Thank you. I'll step back.

We now turn to Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

Hi. Good morning.

Good morning.

Wondering on the $800 million of low-cost government deposits managed by fiduciary services that were repriced this quarter, just wondering what drove that? When did that happen in the quarter? And how much of a headwind from an average standpoint will flow into 3Q from those actions?

Thank you, Timur. First, the repricing is baked into our guidelines. So our updated guidance takes into account this repricing. It happened towards the end of the quarter and I think at the beginning of June. So I don't know if there's any other part of the question there, Timur. I think...

That's helpful. And then just what drove that business?

As you know, I mean, these are client relationships. We have communications and coverage with our clients. And we react to market conditions and client expectations.

Okay. And then maybe just following up on Kelly's FTE question. Can you just give us an update on where you expect FTE for the year in context of the updated guide? How much of that revision was driven by the FTE?

Timur, we don't usually give guidance on FTE basis. So our guidance is all GAAP basis. The tax rate -- we do provide you the tax rate, so it allows you to at least get a sense of the flow to EPS.

Okay. But should we expect further reinvestment into tax-advantaged T-bills? Or has remixing largely played out?

As you probably remember, we have about $1 billion a quarter in maturities in our investment portfolio. We currently continue to invest in T-bills or fund loan growth. So ultimately, the -- we haven't exhausted our potential for taxes and securities. But again, I'll all this and then I guess it's left offline effective rate.

Okay. Got it. And then just last for me, just around the cadence for buybacks. Is the expectation that we go back to a January authorization as we've seen in the past? Or is this $500 million more or less for a year, and the next Board authorization or Board decision will take place a year from now in July?

No. This is an open-ended authorization. We don't have a time limit on it. And we will execute under this authorization. And if things change, we'll let you know. But this is an open-end authorization with no specific time limit.

We're not expecting to go back to the annual January cadence. We want to have the flexibility to react to market conditions.

Great. Thanks for that.

Our next question comes from Jared Shaw with Barclays. Your line is open. Please go ahead.

Hi. Good morning. Maybe first, just if we look at the fees and expenses to get into your guidance range, what's -- where should we, I guess, expect to see lower fees? And where should we expect to see a faster pace of expense growth?

Let's talk about the expenses first. Various seasonality in expenses, for example, merit increases, our personnel costs are a significant portion of our expenses. Our merit increase schedule is in the summer. So that is an expense that will be accretive or an incremental expense that we'll see in the second half of the year. We continue to have efforts around the transformation, professional fees, technology. These are not symmetric throughout the year. So in terms of fee income, there are a lot of components to that fee income. Some of it comes from our equity pickup investment in Banco BHD in the Dominican Republic, there's transactional activity from clients. I mean there are a lot of variances. And frankly, $2 million or $3 million in -- up or down any quarter, it's not an unusual variance.

Okay. All right. Thanks. And then when we look at credit, good trends in credit charge-offs, do you think that we've seen peak consumer charge-offs here? And where should we expect to see the ACL settle out? Is this a rate as a ratio of loans? Or is there still room for that to move lower?

A lot of that, what you asked, is going to be economic dependent. We feel and we are comfortable with the state of the economy and the economy -- or the outlook for the economy going forward. So a little of that. I mean the rate and net charge-off on the top of the ACL will depend on the economy.

Okay. But so right now, though, you still feel pretty confident on the general trajectory at this point, it sounds like?

We do. Yes.

Great. Thank you.

We now turn to Gerard Cassidy with RBC. Your line is open. Please go ahead.

Hi. Good morning. This is Thomas Leddy calling on behalf of Gerard. Loan growth has remained pretty solid now for several consecutive quarters, while some of your peers have seen negative growth in recent periods, acknowledging you guys have guided to the lower end of your overall loan growth range. As you look ahead, given the remaining sort of idiosyncratic tailwinds for the island specifically, could loan growth for BPPR actually accelerate from here as some of the construction projects you guys have referenced historically sort of come online?

This is Ignacio. I think we would reiterate the guidance we've given. I think we feel pretty good about the economic activity in Puerto Rico. We are seeing a lot of positive economic activity, investment from outside the island, entrepreneurs locally. So we feel pretty good. And as you saw the results, we are seeing loan growth on Puerto Rico. What's holding us back a little bit is that the U.S. -- like many of our peers in the U.S., especially that focus a lot on commercial real estate, that loan growth has been slower and slower than we expected. So again, in general, we reiterate the guidance. We feel good about Puerto Rico, but we feel that the U.S. has been a bit slower than we actually had expected.

Okay. That's helpful. And then I guess just more broadly, can you give us some color regarding your appetite for actually growing that mainland portfolio in the face of what's expected to remain a pretty uncertain credit environment in the back end of this year and then to early next year?

I would say, generally, I don't think I have anything there. We're comfortable with the portfolio that we have, but obviously, we've been -- as most banks, we have been prudently looking at the market. And we are being careful, especially in the commercial real estate sector, but we're very comfortable with the portfolio we had. So again, there is a lot of pressure in general from regulators and others to sort of make sure your growth in that area is cautious. So we'll be cautious like the rest of the market, commercial real estate. But we have other areas that we're hopeful. The condominium association, that I think is an area we're expecting to see some more growth from. But yes, we'll be cautious with the commercial real estate, just like everyone else.

Okay, that's helpful. Thank you for taking my questions.

[Operator Instructions] We now turn to [Samuel Varga] with UBS. Your line is open. Please go ahead.

Good morning. I just wanted to turn back to those lower cost of government deposits for a question. After the $800 million that's already been repriced, how much more do you have in lower-cost balances? And can you give any sense for the sort of difference between the reset yield and the original one?

Yes. We're not going to give specific information on the reset. I would tell you that you can see in the levels in yield, these deposits are categorized as time deposits. You can get a sense of the increase in the cost in that segment of our levels and yield schedule. In terms of other large low cost, I'm not aware of any significant amount that would reprice or are subject to repricing.

Yes, thank you very much.

We have a follow-up question from Kelly Motta with KBW. Your line is open. Please go ahead.

Hi, thank you so much for letting me back in. I have two questions, if I could sneak in. The first is on -- just a clarification on the tax rate. The tax-advantaged income brought down the tax rate considerably this quarter from last, and I think you also had some discrete items impacting last quarter. I know you guide on a full year basis, but would it be fair to say within that range, 2Q is a good starting point to -- for forecasting the back half of this year?

I think as you mentioned, the quarter did have some discrete events that may not recur. So that is something that would certainly not multiply times 3, I guess. So I mean, we've given the guidance. I think you can work on -- it's GAAP guidance, so you know what the first quarter was, second quarter, and I think you can get a sense of what the rent was to achieve it.

Fair enough. And then I was hoping if you could spend a minute talking about your insurance subsidiary. We've seen a couple of banks sell those at a considerable gain as well as your stake in the Dominican Bank. Just wondering how management is viewing these businesses and if there's any potential gains that could be harvested from that?

Yes. Let me start by saying we don't have any current plans to sell either of those investments. Obviously, like any business, we always -- we look at every opportunity, but it's not in our current plans. In terms of the BHD, that's been a very successful investment for us. It produces a steady amount of income every quarter. As mentioned, the equity pickup has been very good. They also produce a cash dividend, which brings money to the holding company. It's a well-run bank in a growing economy. So we'd have to have a much better use for our money. The tax implication of selling that would not be great, the Dominic Republic business -- so it wouldn't be -- right now, we looked at it. But really, I think we're going to hold that investment. And in insurance, it's very important for us. It's one of the things -- one of our thesis is how we can become more embedded in the lives of our clients. And I think insurance is an area in Puerto Rico where many of our citizens are underinsured, and we think we can add value to them by bringing a comprehensive suite of services. So that's not something that in my mind right now, we would sell. I think it's an important part of our fee business, and we like it.

Great. Thanks for taking the time.

This concludes our Q&A. I will now hand back to Ignacio Alvarez, CEO, for closing remarks.

Thank you very much for joining us today and for your questions. And we look forward to updating you and talking to you again on our third quarter results in October. Thank you very much.