Popular - Q2 2023
July 26, 2023
Transcript
Operator (participant)
Good evening everyone, welcome to today's conference call, titled Popular, Inc. Q2 2023 Earnings Call. My name is Ellen, I'll be coordinating the call for today. During the presentation, if you would like to ask a question, please press star followed by one on your telephone keypad to join the question queue. I will now hand over to Paul Cardillo, Investor Relations Officer, to begin. Paul, please go ahead whenever you're ready.
Paul Cardillo (Investor Relations Officer)
Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez, our CFO, Carlos Vázquez, 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 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.
Ignacio Alvarez (CEO)
Good morning. Thank you for joining the call. The second quarter was another strong one in which we achieved net income of $151 million, $8 million lower than the first quarter results of $159 million. Net interest income and non-interest income remained strong. The decrease in net income was driven by higher operating expenses, offset in part by a lower provision for credit losses. We grew loan balances by $693 million during the quarter. Banco Popular generated loan growth across all segments, while Popular Bank achieved growth in commercial and construction loans, offset in part by runoff in the mortgage and consumer portfolios. Year to date, loan balances have grown by more than approximately $953 million.
Our net interest margin increased by 8 basis points to 3.14% in the quarter, primarily as a result of a 29 basis point increase in deposit costs. This was partially offset by higher loan balances and the repricing of adjustable rate loans in a higher interest rate environment, as well as higher balance of money market investments driven by our strong deposit growth. Non-interest income continued to improve, excluding the $7 million insurance claim reimbursement recorded in the first quarter, fee income was $5 million higher. Revenues related to customer transaction activity were particularly strong. We also began to see some early results from our various transformation initiatives. Operating expenses increased by $20 million as we continue to strategically invest in our people in areas such as regulatory compliance and technology and projects related to our transformation.
Credit quality trends remain positive. NPLs once again decreased in the period, and net charge-offs remain well below pre-pandemic levels. We maintain robust liquidity, anchored by our deposit franchise and our high levels of cash reserves and unpledged securities. Overall, deposits were up $3.1 billion in the quarter, and liquidity sources increased by $1.9 billion. We have a well-diversified deposit franchise in Puerto Rico, with an average balance of less than $10,000 per retail account. Our total consolidated borrowings remained flat during the quarter. Regulatory capital levels remain strong. Our Common Equity Tier 1 ratio in the second quarter was 16.9%. Additionally, tangible book value per share ended the quarter at $51.37, an increase of $1.22 per share.
Earlier this month, we announced that on August 14th, we will redeem at par all outstanding $300 million aggregate principal amount of our senior notes that mature in September of 2023. Please turn to slide four. Our customer base in Puerto Rico grew by approximately 9,500 during the quarter, reaching nearly 2 million unique customers. Adoption of digital channels among our retail customers remained strong. Active users on our Mi Banco 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, demonstrating our customers' adoption of this technology. In the second quarter, consumer spending remained healthy, with combined credit and debit card sales up 3% compared to the second quarter of 2022.
Our auto and lease originations increased by 29% compared to the first quarter, as demand for cars has continued to be strong in Puerto Rico. Mortgage production in Puerto Rico appears to have stabilized in the second quarter. The dollar value of mortgage originations at Banco Popular increased by 20% compared to the second quarter of last year, driven primarily by home purchase activity. The Puerto Rico economy performed well during the second quarter. Business activity is solid and remains in good shape, as reflected in the continued positive trends in total employment and other economic data. The tourism and hospitality sector continues to be a source of strength for the local economy. Year to date, San Juan's airport has seen record levels of passenger traffic. Hotel demand has also been very strong.
Year to date, occupancy, average daily rates, and RevPAR are all at the highest level seen in nearly a decade. There are still approximately $45 billion of hurricane disaster recovery funds yet to be disbursed. We expect that these funds will support economic activity in many sectors in the coming years. In fact, we are beginning to see these funds being dispersed into local construction projects. As this infrastructure investment in the economy expands, we are well-positioned to serve the needs of our customers and benefit from such activity. In short, we are pleased with our results for the quarter, particularly our strong loan growth in both Puerto Rico and in the U.S., as well as the continued strength of our deposit base, liquidity, and credit quality. We're encouraged by the resiliency of the U.S. economy and strong economic activity in Puerto Rico.
We remain optimistic about the future of Puerto Rico, our primary market, and our ability to manage and serve the needs of our growing customer base. I now turn the call over to Carlos for more details on our financial results.
Carlos Vázquez (CFO)
Thank you, Ignacio. Please turn to slide 5. We reported net income of $151 million, compared to $159 million in Q1. Net interest income was $532 million, in line with Q1. On a taxable equivalent basis, net interest income was $558 million, down $12 million from Q1, due to a higher disallowed interest expense in the calculation of taxes in Puerto Rico. Non-interest income was $160 million, a $2 million decrease from Q1, which included a $7 million insurance claim reimbursement. Excluding the Q1 reimbursement, during the quarter, non-interest income increased by $5 million, driven by customer activity. Service charges on deposit accounts increased by $3 million, mainly due to higher cash management fees on commercial customer accounts.
Additionally, other service fees increased by $4 million, primarily driven by higher credit and debit card fees due to higher volume of customer transactions. Going forward, we expect non-interest income to be approximately $155 million-$160 million per quarter. The increase from our prior $150 million quarterly guidance is partly due to two transformation-related initiatives that have yielded early results. First, we have enhanced the pricing segmentation in our commercial cash management business in Puerto Rico. Second, last year, we introduced a commercial credit card product for Puerto Rico SME businesses. Both initiatives have contributed additional fee income. The provision for credit losses was $37 million, compared to $48 million in the first quarter. Total operating expenses were $640 million in Q2, an increase of $20 million from the prior quarter.
This increase was primarily driven by higher professionals fees by $17 million, related to regulatory compliance and cybersecurity initiatives, as well as technology and software expenses that increased by $4 million. During Q2, we incurred $7 million in transformation-related expenses, compared to $6 million last quarter. We continue to anticipate transformation-related expenses of approximately $50 million in 2023, as these efforts are expected to accelerate in the second half of the year. Other large expense variances were higher business promotion expense by $6 million, mostly related to credit card customer loyalty programs, higher processing and transactional services expenses by $4 million due to retail credit and debit card replacement costs, and finally, lower personnel costs by $7 million, primarily related to lower equity-based compensation expenses.
Personnel costs historically exhibit a seasonal decrease in the second quarter, then typically increase for the remaining of the year, in part due to the impact of annual wage increases, which are effective on July first. 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. We will strive to come in below this expected level of expenses. Our effective tax rate for the quarter was 22%. For the full year 2023, we now expect an effective tax rate to be between 22% and 25%. This range is somewhat tighter than the 21%-26% range provided during our last webcast. Please turn to slide 6. Net interest income was $532 million.
On a taxable equivalent basis, it was $558 million, $12 million lower than in the first quarter. Net interest margin decreased by 8 basis points to 3.14% in Q2. On a taxable equivalent basis, NIM was 3.29%, a decrease of 17 basis points versus Q1. The decrease is driven by higher interest expense on deposits due to the increase in balance across the public sector's deposits, as well as growth in high-cost deposit accounts at Popular Bank. This was partially offset by higher loan yields and balances across all major lending categories. At the end of the second quarter, public sector deposits were roughly $18.5 billion, an increase of $3 billion compared to Q1.
The increase in Q2 was consistent with historical trends. As such, by the end of 2023, we still expect deposits, public deposits to be in the range of $14 billion-$16 billion. It is important to reiterate that by law in Puerto Rico, public deposits must be 100% collateralized. Changes in the level of these deposits may impact profitability, they do not have a significant impact on our liquidity. Excluding Puerto Rico public deposits, customer deposit balances were essentially unchanged in the quarter. We did, however, see some mixed shifts as non-interest-bearing deposits decreased by $624 million in the quarter. This was offset by increases in time and saving deposits at Popular Bank, gathered through its direct online channel.
In Q2, we continued to see commercial and high-net-worth clients pursuing better yields on excess liquidity by moving these funds outside the banking sector. We have been able to capture a good portion of these in our broker-dealer. We saw inflows from deposit customers of approximately $350 million in Q2. Our ending loan balances increased by $693 million compared to Q1, driven by growth in all loan segments at BPPR and by commercial and construction loans at PB. This growth is net of a transfer to held for sale of a $46 million private label credit card portfolio. That portfolio was sold at par value in early Q3. We are encouraged by the demand for credit at BPPR and PB.
We will continue to take advantage of prudent opportunities to extend credit and improve the use and yield of our existing liquidity. Our interest rate sensitivity continues to be relatively neutral. As this year progresses, we expect the margin to resume an upward trajectory. The timing will depend on our loan and deposit growth and mix, investment portfolio strategy, and the pace of repricing of public and incrementally retail and commercial deposits. Deposit betas in the current timing cycle are now above the prior cycle. We have seen a total cumulative deposit beta of 31% to date in this cycle. In BPPR, total deposit costs increased by 34 basis points compared to an increase of 35 basis points in Q1, led by public sector deposits. Excluding public sector balances, deposit costs in BPPR increased by 14 basis points.
In PB, deposit costs increased by 55 basis points versus 67 basis points in Q1, led by retail deposits gathered primarily through our online channel. In Puerto Rico, our combined retail and commercial deposit betas, cycle to date, continue to be less than 10%. Given the increase in short-term interest rates, we expect a continued increase in the cost of public sector deposits. The deposit pricing agreement with the Puerto Rico public sector is market-linked with a lag. This source of funding results in an attractive spread on their market rates. In the second quarter, the cost of public sector deposits increased by 39 basis points compared to our April estimate of 60 basis points. The different rests in balance fluctuations and the mechanics of the interest expense calculation. We expect the cost of public deposits to increase by approximately 50 basis points in Q3.
Please turn to slide eight. 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 2.3 years. As of the end of the second quarter, the balance of the unrealized loss in our HTM portfolio stood at $746 million, a reduction of $43 million from Q1. We expect this loss will be amortized back into capital throughout the remaining life of that portfolio, at a rate of approximately 5% per quarter through 2026. Please turn to slide nine. Our return on tangible equity was 10.6% in the quarter. Regulatory capital levels remain strong. Our Common Equity Tier 1 ratio in Q2 of 16.9% increased by 14 basis points from Q1.
Tangible book value per share at quarter end was $51.37, an increase of $1.22 per share. Given the continued uncertainty on the outlook for rates, the economy, and the potential regulatory response to events in the banking sector, we do not expect to engage in a share repurchase during the remainder of 2023. We do plan, however, to consider a dividend increase later this year. We'll review future capital actions as market conditions evolve. Our long-term outlook on capital return has not changed, anchored in our strong regulatory capital ratios. Over time, we expect our regulatory capital ratios to gravitate towards the level of our maintenance peers, plus a spread. I turn the call over to Lidio.
Lidio Soriano (Chief Risk Officer)
Thank you, Carlos. Good morning. Overall, Popular continued to exhibit strong credit quality trends with low levels of net charge-off and decreasing non-performing loans. We believe that the improvements over the last few years in the risk profile of the corporation's loans portfolio, positions Popular to operate successfully in the current environment. However, we continue to closely monitor changes in borrower performance and the macroeconomic environment, given inflationary pressures and geopolitical risk. Before discussing the credit metrics for the quarter, I would like to address the risk profile of three loan segments: Office CRE, credit cards, and auto and lease financing portfolio. We have also included additional information for these segments in the appendix to today's presentations. The office segment is receiving a lot of attention in the current environment due to the shift to remote work and higher interest rates.
Popular consolidated office CRE exposure is limited, representing only 1.8% or $600 million of our total loan portfolio. It is mainly comprised of low to mid-rise properties located in suburban areas, and is well diversified across tenant type, with an average loan size of $2 million. We have no exposure to large office tenant CRE in the mainland urban city centers. The portfolio has a favorable credit risk profile, with low levels of NPLs and classified loans. In terms of our credit card and auto, and lease portfolios, the credit risk profile of these portfolios is anchored on the strength of the job market and economic activity in Puerto Rico, coupled with the credit quality of our originations over the last few years.
In terms of credit cards, 30-plus delinquency is at 2.8%, compared to an average of 3.7% in the 2011 to 2019 pre-pandemic period. Year-to-date, net charge-offs are at 2.4%, compared to an average of 3.7% in the pre-pandemic period. In terms of auto loans, 30-plus delinquency is at 3.7%, compared to an average of 6.2% in the 2011 to 2019 period, and year-to-date net charge-offs are at 60 basis points, compared to an average of 1.9% in the pre-pandemic period.
For lease financing, 30-plus delinquency is at 1.3%, compared to an average of 2.1% in the 2011-2019 period. Year-to-date net charge-offs are at 20 basis points, compared to an average of 70 basis points in the pre-pandemic period. Turning to slide number 10. Non-performing assets decreased by $32 million to $472 million this quarter, driven by an NPL decrease in Puerto Rico of $27 million, due to lower mortgage NPLs by $30 million, offset in part by higher construction NPLs, due to a single $9 million relationship. Other balances also decreased by $6 million. NPL inflows decreased by $10 million quarter-over-quarter, driven by lower commercial NPLs in Puerto Rico by $13 million, and lower mortgage NPLs in Puerto Rico by $7 million, offset in part by the previously mentioned construction NPL relationship.
Inflows in the U.S. remained flat quarter-over-quarter. At the end of the quarter, the ratio of NPLs to total loans held in portfolio decreased to 1.2% from 1.3% in the previous quarter. Turning to slide number 11. Net charge-off amounted to $24 million, or annualized 29 basis points of average loans held in portfolio, compared to $33 million or 41 basis points in the prior quarter. The quarter-over-quarter improvement was driven by a $10.5 million line of credit charge-off in the prior quarter. Please turn to slide number 12. At June 30, 2023, the ACL increased by $11 million to $700 million, driven by portfolio changes due to higher specific reserves, higher volume, and change in the FICO mix of consumer portfolios.
Changes in the macroeconomic scenario caused the ACL to increase by $8 million, which were offset in part by a change in the mix in the probability weight of macroeconomic scenarios by $6 million. During the second quarter, we lowered the probability weights assigned to the pessimistic scenario, and increased the probability weight assigned to the baseline scenario. Changes to qualitative reserve re-reduced the ACL by $5 million. The provision for credit losses was $37 million, compared to $48 million in the prior quarter. In Puerto Rico, the provision was $28 million, compared to $45 million in the prior quarter, while the provision for the US was $7 million, compared to $2 million.
The cooperation ratio of ACLs to loans held in portfolio remained flat at 2.1%, while the ratio of ACL to NPL stood at 182%, compared to 167% in the previous quarter. To summarize, our loan portfolio continued to exhibit strong credit quality trends in the second quarter, with low net charge-off and decreasing non-performing loans. We remain attentive to the evolving environment, but remain encouraged by the post-pandemic performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.
Ignacio Alvarez (CEO)
Thank you, Lidio and Carlos, for your updates. Our results for the first half of 2023 were strong, driven by solid earnings, robust loan growth, positive credit quality, and continued customer growth. Our diversified business model, robust levels of capital, and most importantly, the talent and dedication of our people, position us well to support and meet the evolving needs of our growing customer base. We're optimistic about the opportunities that lie ahead. Economic trends in Puerto Rico continue to be positive, and a considerable amount of recovery funds yet to be dispersed are expected to support increased economic activity in the coming years. We made progress in our transformation initiatives during the quarter, which over time, will drive more customer connectivity, operational efficiencies, and greater potential for profitable growth and sustained return on capital. In June, we released our annual corporate sustainability report.
We continue to focus on providing opportunity for progress, protecting the environment, and promoting leadership. 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. We are now ready to answer your questions.
Operator (participant)
Thank you. As we head into the Q&A session, I would like to remind everyone that if you'd wish to register a question, please press Star, followed by one on your telephone keypad. When preparing to ask your question, please ensure that your device is unmuted locally. We'll take our first question from Timur Braziler from Wells Fargo. Timur, your line is now open. Please go ahead.
Timur Braziler (Director and Mid-Cap Bank Equity Research)
Hi, good morning. Maybe starting on the loan growth. Starting on the loan growth, that's remained quite strong now for many consecutive quarters. I'm just wondering, as you look ahead, is this kind of where we're at for the foreseeable future? Just given the remaining idiosyncratic tailwinds for the island, does loan growth actually accelerate as some of these construction projects you referenced come online?
Ignacio Alvarez (CEO)
Well, Timur, this is Ignacio. As in the past, it's always hard to project and forecast loan growth in Puerto Rico. It's coming and it's very lumpy, especially the larger loans that drive some of the growth. What I can say is that we continue to have good pipelines, good demand from our customers. We're not seeing that decrease. Again, I don't want to put a percentage level on it, but we have strong loan demand both in Puerto Rico and the U.S. I wouldn't put a number on it, but we certainly don't see it decelerating at this point.
Timur Braziler (Director and Mid-Cap Bank Equity Research)
Okay. Then as far as appetite for mainland credit, the growth in construction, I'm assuming that's contractual loans funding up, and then just maybe speak more broadly about appetite and growing the mainland portfolio in the face of what's expected to be an uncertain credit environment at the back end of the year.
Ignacio Alvarez (CEO)
Yeah, Lidio can add more to that, but I want to point out that we've always been a construction lender, especially in the New York metro area, but we are not very involved in the office sector, so most of our construction is around multifamily. You know, I think we're continuing to be prudent in lending to existing clients. You know, I don't see us pulling back from our traditional markets that we serve. Again, we're not in the office sector. I don't know, Lidio, if you want to add anything.
Lidio Soriano (Chief Risk Officer)
That's perfect.
Timur Braziler (Director and Mid-Cap Bank Equity Research)
Okay. Maybe switching to the funding of this loan growth. Just given the seasonal trends and public funds and those coming down in the back end of the year, coupled with the loan-to-deposit ratio that still has plenty of room to move higher, is there a willingness to fund upcoming loan growth through incremental deposits, or are you okay borrowing at this level in funding the new growth?
Carlos Vázquez (CFO)
Hi, Timur. Carlos. At this point in time, we do have a very strong liquidity position, everything else being equal, our first port of call would be our cash to fund loan growth. You know, we are very lucky that the yields on our loan book are quite attractive. They're even more attractive than the yields we can achieve in some of our investment portfolio. That would be first call. At this point in time, I don't envision us having significant borrowings to fund loan growth.
Timur Braziler (Director and Mid-Cap Bank Equity Research)
Okay, that's helpful. Last for me, just on the expenses, any color you can provide on the profit sharing component? Pretty big quarter relative to Street expectations, and I know Street is kind of the proxy that you have used in the past for determining whether or not we're going to have profit sharing contribution. Your comments on hoping to come in better than that $187, I'm just wondering what the outlook is for profit sharing in relation to that comment.
Carlos Vázquez (CFO)
At this point in time, there is no consideration of profit sharing in our numbers.
Timur Braziler (Director and Mid-Cap Bank Equity Research)
Okay, got it. Thank you. I'll step back.
Operator (participant)
Thank you. Our next question comes from Brody Preston, from UBS. Brody, your line is now open. Please proceed with your question.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone. I wanted just to ask, on the FTE adjustment, I guess I was a little bit perplexed this quarter. The FTE adjustment keeps moving a bit lower, but the tax rate, you know, was kind of flattish, and it looked like you kind of narrowed the guidance range a little bit. I guess, can you maybe explain, you know, again, the dynamics between what's happening with the FTE adjustment and the tax rate at this point?
Jorge Garcia (EVP and CFO)
Hi, this is Jorge Garcia. Good morning. It is a complicated question. I don't blame you. The first thing I will say is that the disallowance of our interest expense, which is really what drives that FTE adjustment, is increasing given that the cost of deposits are increasing. That's the first impact that you're seeing. Essentially, your tax-free income is becoming less. Your other question is, why isn't, why aren't we seeing a change necessarily in our effective tax rate? That has to do with GAAP accounting, where you try to anticipate changes in that effective tax rate throughout the year, and you make adjustments for that on a quarter-by-quarter basis. You normalize it.
Brody Preston (Equity Research Analyst)
Okay. Okay, maybe just shifting to deposit costs. You know, I think, you provided the betas, the cumulative betas for the interest-bearing portions, cycle to date, for the retail, commercial, and public, deposits. You know, I know the public is gonna be, you know, 100% with a lag, but just on the commercial and retail sides, just wanted to get your thoughts, if you have any, on where you thought the, those betas would end the year, you know, by the fourth quarter of this year?
Carlos Vázquez (CFO)
Yeah, well, it depends on, in part, on what the Fed does today and what the Fed does the rest of the year, frankly. I mean, you know, I think the trends are trends that can be expected to continue, meaning that our betas in Puerto Rico will continue to be lower in our retail and commercial businesses. Commercial, slightly higher; retail, a lot lower than the make market betas. We'll have a beta that's slightly higher, of course, closer to market averages in our bank in the US. I think those trends will probably continue.
Some, you know, to the extent that the Fed is done this afternoon, well, then, that will affect how it looks for the rest of the year.
Brody Preston (Equity Research Analyst)
Okay. Just last one for me for right now is just on the securities book. I'm sorry if you already touched on it, and I missed it. Just want to get your thoughts on, you know, how that's gonna ebb and flow and uses of securities cash flows at this point for the remainder of the year. You know, you had negative growth the first two quarters of this year. Just wondering if we're gonna continue to use that as a source of liquidity going forward.
Carlos Vázquez (CFO)
Yeah, I, you know, we've been cautious, with and actually have been building cash, because of the uncertainty in the last couple of quarters. Already I think, we'll feel a lot better than a lot of that is behind us now. What you should see during this quarter is that we'll start to redeploy some of the cash. We'll probably end up with lower cash balances, hopefully because we have a lot of loans first. Even without that, we'll start to redeploy some of that cash.
It, you know, it may not change the profile of the investment portfolio too much because some of that redeployment will probably be in T-bills, where the yield is gonna be similar and then the liquidity will be basically cash-like, but it will provide us a tax benefit.
Brody Preston (Equity Research Analyst)
Got it. Thank you for that.
Operator (participant)
Thank you. Our next question comes from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please proceed with your question.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Hey, good morning, all.
Carlos Vázquez (CFO)
Good morning.
Brody Preston (Equity Research Analyst)
Good morning.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Thanks. Just keeping on that last question on the tax rate on the T-bills. Does the tax rate range that you've provided, the 22%-25%, does that anticipate any additional investment into T-bills as the year progresses?
Carlos Vázquez (CFO)
Yeah, that range incorporates our best guess of what we're gonna do with the balance sheet the rest of the year. Yes.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Okay. I got to dig into just the comments on the buyback a little bit. You know, can you just sort of I know there's obviously a lot of uncertainty in the banking environment, but, you know, is it specifically uncertain around new capital rules for CCAR banks? Is it specifically around waiting to see how credit develops? You know, kind of what are the trigger points? Maybe just remind us, you know, how the process works. If you do, you know, go through and raise the dividend, is it a similar process to your normal capital plans, or is it different in any way from, you know, what you normally go through each year?
Carlos Vázquez (CFO)
Okay. Let me try to walk through sort of some thoughts on capital. I think it will try kind of address a lot of your questions, Alex. As we mentioned in the prepared remarks, we expect to consider a dividend increase in 2023, probably late in the third quarter of this year. At this time, no buyback is planned for the rest of this year. Obviously, the final decision on any dividend increase rests with our board of directors. They'll have the final call on that. We've described sort of our thinking process in the past that as we look at capital action. We're looking for three things to inform our actions.
Number one, clarity on the path of interest rates. Number two, clarity on the path for the economy. Lastly, clarity on the path for regulation. Those are sort of the inputs that help us make decisions. Now, it is still uncertain. I mean, we're getting some information from the Fed tomorrow on capital, which will be a nice first step to start adding some clarity to the process. By the way, we're getting information on capital, still not getting anything on what liquidity framework that may change, which is also pretty important as we think this through. We'll start getting some information from on that front, at least hopefully tomorrow, and that'll start informing some of the uncertainty here.
Now, it's unclear exactly when we get clarity in these matters, but those are the inputs that we're looking for. Additionally, while it's not a required regulatory ratio, TCE and therefore AOCI are considerations in our decision-making process. That is the consideration. What I can say today, as far as the process, which is the second part of your question, is that presently, we do not plan to return to our historical cadence of a yearly capital actions announcement in January. Instead, while still not decided, moving forward, we will probably shift to a capital management process that is closer to what most other banks do, where we will periodically announce stock repurchase authorization that may be executed from time to time.
What we can tell you so far, and you know, the process, we always advise the regulators in anything we're doing with regards to capital, it will be no different this time. You know, hopefully, get back to you late in the third quarter with a decision on the dividend.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Okay, that's good information. I mean, just in terms of that process, like, suppose we got some clarity on rates as early as today and some clarity on regulation, you know, tomorrow and, you know, economy, we're never gonna get clarity on. You know, how long would it take you to actually go through that, you know, like, the whole process with the Fed? You know, is that something that is a pretty, you know, pretty quick thing? I remember when you guys did the Evertec thing, it, this seems like the approval happened basically almost overnight. I'm just, I'm just curious if that's evolved and gotten any easier over the years.
Carlos Vázquez (CFO)
I mean, the Fed always has the option of deciding everything on their timetable. The fact is that we've been working very effectively with our regulators over the last few years. Frankly, you've seen it. What you mentioned on the approval on Evertec is a reflection of it, that we try to work closely with them. We try to never surprise them. They are always informed about what we're trying to do. If they have to be involved, they have been very responsive in working with us, if we have a timetable that we're trying to meet.
You know, our relationship is very good, and over the years, you know, they've gotten better at understanding what we're doing, and we've gotten better of asking the right questions.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Got it. You know, one final question for me. I wanted to just to sort of dig into a conversation we haven't talked about in probably a couple of conference calls, but M&A in the North American franchise. It just seems to me like we're hearing anecdotally and seeing more announcements of loan sales. You know, some of them related to specific asset classes that you may or may not want to be into, some of them related to rates. It seems like there's gonna be, you know, potentially a bunch of loan sales coming up, you know, even some from the FDIC that are gonna be potentially coming at pretty big discounts.
I'm curious, you know, you guys have tons of capital in North America, if you have appetite to do some loan purchases, and if so, what the criteria might be?
Ignacio Alvarez (CEO)
Yeah, this is Ignacio. I think we've said it before, you know, we view ourselves as opportunistic buyers of assets. If there's pools of assets that interest us, we will, we'll definitely go there. I think the assets that would interest us would be mostly those things that we feel we have a certain level of expertise in. You know, we have a certain level of expertise in CRE or healthcare financing, the condominium association financing. Those are things that would be of interest to us. We're not, we're not gonna buy office portfolios at a discount, that kind of thing. You know, even if it's a very attractive price, we're not gonna do something, because it's not something, you know, that we have a particular level of expertise.
I don't think we'd probably go after mortgage assets either, I think it'd be more in the commercial area. If there are attractive assets in those areas that we feel we know well, you know, we would be interested to look at them, sure.
Alex Twerdahl (Managing Director and Senior Equity Research Analyst)
Okay. Thanks for taking my questions.
Carlos Vázquez (CFO)
Thank you.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad to join the question queue. Our next question comes from Kelly Motta from KBW. Kelly, your line is now open. Please go ahead.
Kelly Motta (Managing Director of Equity Research)
Hi, thank you so much for the questions. Good morning. I thought I would just close the loop on the capital discussion. I appreciate the commentary that you're reviewing the dividend now. Can you remind us what you guys sort of target in terms of your dividend payout ratio, and how we should be thinking about that as we review the dividend here?
Carlos Vázquez (CFO)
Yeah, there is. We, you know, what we target is what we hear from regulators, which seems to be something bordering around 30% of income. That's what we're trying to target. A couple of recent announcements have taken banks slightly above that, so we're attentive to that. We also don't know what their forecasts are, so they may end up at 30%, depending on what they have, how they're looking at the year. You know, that's the broad guide, you know, what we understand to be the regulatory preference, that dividends be around that level.
Ignacio Alvarez (CEO)
This is Ignacio. We try to make the dividends, you know, do it a little bit every year so that we don't have a big ramp-up in one year. We try to do it incrementally, and I think we've been very successful in the past in doing that.
Kelly Motta (Managing Director of Equity Research)
Understood. Appreciate the color. I did want to flip to the deposit base, specifically the core deposit base, excluding the government deposits. It looked like there, most of the growth came from the U.S. Can you kind of walk us through your strategies there and any deposit campaigns you're running? As we look ahead with, you know, look, excess liquidity, Puerto Rico is still high, but and really money coming in. Obviously, where we are in the cycle, just kind of outlook for, how much, you know, higher liquidity balances or whatever you want to call it, is left. You know, what we should be thinking about, the deposit outlook, putting those dynamics together.
Carlos Vázquez (CFO)
As I mentioned in the earlier question, you know, I think it's fair to assume that our cash balances will be coming down in the rest of the year from where they are today. The biggest part of the deposit increase this quarter was still public sector deposits in Puerto Rico. There is a good chunk at Popular Bank. We continue to try to strengthen the deposit business of Popular Bank. That is a focus of the company. You know, the efforts actually, you know, the most obvious efforts are the increasing deposits through our online channel because that reacts quickly.
There's a bunch of other business efforts, intended to actually improve the deposit business of Popular Bank as well. You know, the problem with those is that they are less visible because they move slower. If that is not the only tool we have to improve deposit, the deposit business, which is our goal, we are moving different levers. You know, this lever happens to be the most obvious one, obviously, because it's the one that moves the quickest.
Kelly Motta (Managing Director of Equity Research)
Got it.
Ignacio Alvarez (CEO)
Yeah, I think in terms of Puerto Rico. Oh, sorry.
Kelly Motta (Managing Director of Equity Research)
Sorry, didn't mean to cut you off.
Ignacio Alvarez (CEO)
Yeah, in terms of Puerto Rico, while, you know, while deposits have gone down somewhat, average balances of our retail and small business clients especially, are still way above pre-pandemic levels. I don't think we view the necessity of starting, you know, aggressive marketing campaigns in Puerto Rico at this point, given our deposit levels.
Kelly Motta (Managing Director of Equity Research)
Appreciate, appreciate the color. That was my follow-up. I'll step back then. Thank you.
Carlos Vázquez (CFO)
Thank you.
Operator (participant)
Thank you. Our final question comes from Gerard Cassidy from RBC Capital. Gerard, your line is now open. Please go ahead.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Thank you. Good morning, Ignacio and Carlos.
Carlos Vázquez (CFO)
Morning, Gerard.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Ignacio, can you guys give us some color? Obviously, Puerto Rico over the years has had a healthy manufacturing component to your economy. I know in your prepared remarks that you talked about tourism and how well that's going. In, you know, in stateside, there's clear evidence of the onshoring of manufacturing coming back to Ohio or Indiana, et cetera. Are you guys seeing any evidence of the benefit of that possibly coming to Puerto Rico?
Ignacio Alvarez (CEO)
The manufacturing sector, based on the economic activity index, is relatively healthy in Puerto Rico. It's been growing. Sometimes it goes up for a few quarters, and then it goes down a bit. Frankly, it's been mostly in our traditional sectors. You know, the medical device sector, which has been very strong in Puerto Rico, also the aeronautic technology relating to airplanes and motors and that kind of thing is very popular in the West Coast. I haven't seen to date many brand new. At the beginning of last year, we saw a couple of foreign firms come in, an Indian company, I believe, a Mexican company.
We've seen some foreign people, foreign firms that don't have, perhaps any presence in the U.S., using Puerto Rico as their initial point, especially in the pharmaceutical, the generic pharmaceutical side. But to be honest, I haven't seen a big impact from the onshoring yet. We had a big promise for that, but it's been mostly the dynamism has been in our traditional sectors that have been growing.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Very good. As a follow-up, I believe the PREPA bankruptcy schedule was suspended in June. Do you guys have any updates on what's going on there with the, you know, the bankruptcy of PREPA and the resolution that is?
Ignacio Alvarez (CEO)
Not really. We don't know really more than we read in the press. I mean, we're optimistic that the most recent proposal will get approved. Obviously, it means they're cutting the debt down more and the rates will obviously have to go up less than on the prior plan. You know, we're optimistic that we can get this behind us, but really, we don't have a lot of inside baseball on what's going on there behind the scenes.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Got it, and I apologize if you addressed this. I came late onto the call, but did you guys, Carlos, give us the burn down rate for the next couple of years of the bond portfolio? What % of it will pay off, and by now and the end of 2024?
Carlos Vázquez (CFO)
Yeah, I mean, it's on page 8 of the deck, Gerard.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Yeah.
Carlos Vázquez (CFO)
That kind of gives you an idea. I mean, it's, you know, some pretty, you know, some pretty aggressive roll down in the treasury portfolio for the next two years.
MBSs, they'll be kind of present there. You know, they're paying very slowly. That's something that, as Carlos mentioned, if, you know, you have a rate reversal and prepayment speeds start to pick up again, you could see some acceleration there, but we're not necessarily forecasting that. You have, you know, about $8 billion or so that's in AFS and Treasuries that has an average life of around a year and a half. That'll kind of give you an idea of how that rolls in. As Carlos mentioned, just complementing that, you know, we'd probably be, at least for now, reinvesting some of those proceeds into T-bills. Treasury curves inverted, so actually picking up yield a bit, doing that and maintaining a relatively shorter portfolio as well.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Very good. Just lastly, the way the balance sheet is positioned today, if, you know, for when we're on this call a year from now, let's say, next July, what kind of interest rate environment would be ideal for Popular over the next 12 months, both long and short end of the curve?
Jorge Garcia (EVP and CFO)
I guess I could answer that. You basically, if you have, like, a reduction in short-term rates, that's going to reduce what we pay on the public sector deposits. As Carlos mentioned as well, it's a market linked with a lag. You'd see some pressure coming down from our cost deposits from that standpoint and a steepening. Any kind of, you know, intermediate level assets, kind of repricing at a higher spread to short-term rates is naturally what typically a bank likes. You know, our positioning is relatively neutral right now, so we're not really expecting, you know, major swings due to interest rates, at least in our current balance sheet positioning.
Paul Cardillo (Investor Relations Officer)
Like most-
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Great.
Paul Cardillo (Investor Relations Officer)
Like most banks, there are, you know, a normal yield curve at a lower short-term level tends to be good for the business.
Gerard Cassidy (Managing Director and Head of US Bank Equity Strategy and Large Cap Bank Analyst)
Very good. I appreciate the color. Thank you.
Operator (participant)
Thank you. There are no further questions on the line. At this time, I would like to hand back to Ignacio Alvarez for any closing comments.
Ignacio Alvarez (CEO)
Thank you everyone for joining us today and for your questions. We look forward to updating you on our progress in October. Have a great day.
Operator (participant)
This concludes today's conference call, everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.