Popular Inc

NASDAQ:BPOP

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to the Popular, Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Paul Cardillo, Investor Relations Officer. Please go ahead.

[Paul Cardillo, IR 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 start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com.

I will now turn the call over to our CEO, Ignacio Alvarez.

[Ignacio Alvarez, President, CEO & Director]

Good morning, and thank you for joining the call. The second quarter was another strong quarter in which we achieved net income of $218 million. Our results reflect the continued rebound in economic activity and the unprecedented level of federal stimulus. They also reflect our diversified sources of revenue and prudent risk management.

Please turn to Slide 3. Our quarterly net income of $218 million was $45 million lower than the first quarter and $90 million higher than the same quarter of 2020. The quarter-over-quarter variance was driven by a lower benefit in the provision for credit losses compared to last quarter, higher revenues and lower expenses. The increase in net interest income was driven by higher income from our investment portfolio and lower deposit costs.

Our noninterest income increased due to higher volume of credit and debit card transactions. Credit quality trends were positive in the quarter with lower NPLs and net recoveries. During the quarter, we continued to return capital to our shareholders. In late April, we entered into a $350 million accelerated share repurchase program. And on July 1, we paid a dividend of $0.45 per common share, an increase of $0.05.

Please turn to Slide 4 for an update on various business metrics. Our customer base in Puerto Rico continues to grow, increasing by 17,000 in the second quarter and by nearly 30,000 year-to-date to reach more than 1.9 million unique customers. Adoption of digital channels among our retail customers continues to be strong. Active users on our Mi Banco platform exceeds 1.1 million and have grown by 18% since March 2020. We captured 66% of our deposits in the second quarter through digital channels.

As expected, these trends have adjusted slightly lower compared to the levels seen over the past year, but remains significantly higher than pre-pandemic levels. With respect to the PPP program, we funded nearly 50,000 loans totaling $2.1 billion across both rounds. We originated more than 29,000 loans or $1.4 billion in round one and nearly 21,000 loans or $678 million in round 2. In Puerto Rico, we funded 62% of all PPP loans that were originated on the island. Of the loans originated in round 1, close to $965 million or 68% have been forgiven as of the end of June.

Within Popular's clientele, the dollar volume of credit and debit card sales have continued to trend higher, increasing by 17% compared to last quarter and by 45% compared to the second quarter of 2019. Auto loan and lease originations at BPPR increased by 8% in the second quarter compared to the first quarter and by 32% compared to the second quarter of 2019. Similarly, we have continued to see strength in the housing market. The dollar volume of mortgage originations at Banco Popular increased by 6% compared to last quarter and by 63% compared to the second quarter of 2019.

Please turn to Slide 5 for an update on the current macro environment in Puerto Rico. In the second quarter, business trends and customer activity continue to improve, building upon the momentum seen in recent quarters as most of the COVID-related restrictions that were in place have been either relaxed or eliminated. Puerto Rico has continued to make solid progress on the vaccination front. According to the CDC website, 1.9 million or 66% of the population over 12 years old have been vaccinated and 2.2 million or 76% of the population over 12 years old have received at least 1 dose.

New auto sales continue to reflect strong consumer demand with sales of more than 35 units in the second quarter. Year-to-date, auto sales have more than doubled compared to the first 6 months of 2020 and are up 31% from the same period in 2019. Cement sales have remained strong. Year-to-date sales through May were higher than the level of sales that we're seeing during the same time period in 2018 and 2019 when the island was rebuilding following the 2017 hurricanes. The improvement in the tourism hospitality sector has been extraordinary. With much of the world travel still somewhat limited, Puerto Rico continues to be a popular destination for mainland residents that have become more comfortable with traveling.

Additionally, earlier this month, the CDC improved its assessment of the risk of contracting COVID in Puerto Rico to Level 2 or moderate. This action should help further stimulate travel to the island. Wholesale demand has picked up dramatically. In June, occupancy rates in Puerto Rico were nearly 79%. Additionally, the revenue per available room reached $216, the highest level on record and compares to $129 in June of 2019. Airport traffic has continued to improve at a rapid pace. Year-to-date, passenger traffic is 75% higher than last year and is down only 6% compared to 2019.

In the month of June, traffic was up 372% compared to the same month a year ago and was 14% higher than in June 2019. In fact, June was the highest level of passenger traffic seen at the airport since it was privatized in 2013. Cruise ships are now scheduled to recommence arrivals during the first week of August. Employment levels have improved, but are still below pre-pandemic levels. Total nonfarm employment has increased by 2% since December 2020 and by 7% since June 2020. We are extremely pleased with the results for the second quarter. We continue to be very optimistic about the economic recovery, but we remain attentive to how the evolving health situation may impact the economic outlook.

I'll now turn the call over to Carlos for more details on our financial results.

[Carlos Vázquez, EVP & CFO]

Thank you, Ignacio. Good morning. Please turn to Slide 6. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the first quarter. Net interest income for the second quarter was $488 million, an increase of $9 million from Q1, driven by increased balances in the investment portfolio and lower deposit costs. Noninterest income increased by $1 million to $155 million in Q2.

Contributing to these results were higher credit card interchange fees of $4 million plus $2.4 million higher net earnings from investments held under the equity method, along with various other smaller positive variances. This was almost entirely offset by a $9.9 million lower mortgage banking income, primarily due to a negative quarter-over-quarter variance in MSR valuation of $6.8 million versus a positive variance of $9.2 million in Q1. The provision for the second quarter was a benefit of $17 million. This was $65 million lower than the $82 million benefit recorded in the first quarter. Lidio will expand on credit-related matters.

Total operating expenses were $368 million in the quarter, down $7 million from Q1. The decrease was primarily due to lower employee compensation cost by $5 million, mostly driven by seasonality of compensation plans and lower other operating expenses by $4 million, primarily due to a reserve release on our mortgage servicing business. These were partially offset by higher customer reward program expense of $3 million resulting from increased credit card transactions as well as slightly higher advertising costs. For the full year 2021, we now expect our average quarterly expenses to be $380 million to $385 million, $5 million per quarter higher than our prior estimate.

A number of factors contributed to this increase. We expect compensation expense to be higher due to continued business outperformance as well as increased competition for talent. Some projects and activities that were delayed in the first half of the year should materialize in the second half. And finally, we also expect higher processing and technology costs. Our effective tax rate for the quarter was 25% compared to 23% in the first quarter. This increase was primarily due to a higher proportion of taxable income in Puerto Rico. For 2021, we now expect our effective tax rate to be between 22% and 25%, which is an increase from our prior range of 20% to 24%.

Please turn to Slide 7. NII on a taxable equivalent basis was $541 million, $11 million higher than in the first quarter. The primary drivers of the increase were higher interest income from the investment portfolio by $13 million due to a $4.4 billion increase in average balances, lower deposit costs by $2 million and an additional $4 million of income due to 1 more day in the quarter. Deposits grew by $5.9 billion in the quarter. This increase was spread across all business lines. The majority of the growth was in Puerto Rico government deposits. But similar to Q1, our retail and commercial deposits increased by $1.9 billion.

NIM decreased by 16 basis points to 2.91% in Q2. On a taxable equivalent basis, NIM was 3.22%, a decrease of 17 basis points. The lower margin is due to asset mix, meaning higher balances of low-yielding money market and investment securities. The total loan yield decreased by 2 basis points in Q2 as a result of lower PPP-related income of $13.9 million compared to $23.1 million in the first quarter. PPP loans yielded approximately 4.45% this quarter compared to 7.21% last quarter. The reduction in yield was due to slower accelerated recognition of fee income upon forgiveness. The remaining unamortized portion of fees for the PPP portfolio is approximately $60 million.

We believe most of the remaining $354 million first round PPP loans will be forgiven during the third and fourth quarters of this year and a majority of the $670 million second round PPP loans by the middle of next year. We expect margin will continue to drop in Q3 due to continued high levels of deposits, but should recover towards year-end. The ultimate result will depend on our asset mix and the rate of forgiveness of PPP loans. As of the end of the second quarter, Puerto Rico public deposits were roughly $19 billion, an increase of just over $4 billion from last quarter. These balances reflect the most recent CARES Act federal stimulus, including assistance to state and local governments.

We continue to expect public deposit balances to come down over time, driven by outlays of funds advanced from the CARES and Jobs Act, the restructuring of public sector debt and the return to current debt service. Our ending loan balances decreased by $69 million in the quarter. This decline was due to a $224 million decline in PPP loans, partially offset by an increase of $139 million in the auto and lease portfolio. First round PPP loans dropped by $418 million, while second round disbursements were approximately $192 million.

Excluding the impact of PPP, loan balances grew by $170 million. We continue to see strong demand and net portfolio growth in auto loans and leases, while our other loan portfolios are either flat or have decreased since the first quarter. We expect loan balances will continue to be impacted by PPP forgiveness as well as limited demand resulting from unprecedented levels of client liquidity. As such, we do not expect overall loan growth to materialize until next year when the demand resulting from expected economic growth should outpace forgiveness of PPP loans.

Please turn to Slide 8. Our capital levels remains strong relative to mainland peers and well-capitalized regulatory requirements. Our common equity Tier 1 ratio in Q2 was 16.6%, down 60 basis points from Q1, primarily due to capital actions. In April, the corporation entered into a $350 million accelerated share repurchase transaction. As a result, we recognized in shareholders' equity approximately $280 million in treasury stock and $70 million as a reduction of capital surplus. The final accounting treatment for the program will depend on the average price of the stock during the term of the ASR, scheduled to close in Q3. Our EPS in Q2 increased by $0.08 because of this transaction.

We will continue to explore opportunities to manage our capital during the remainder of 2021 and in future periods. However, we do not expect further dividend increases or common stock repurchases this year. We have returned to our normal capital planning schedule this year, hopefully resulting in an announcement of Popular's 2022 capital actions no later than our January 2022 webcast. Our stockholders' equity decreased in the quarter, primarily due to the impact of the $350 million ASR. However, our tangible book value per share increased by $1.82 to $63.24. This increase was driven by our quarterly net income, higher cumulative unrealized gains on investments and the lower share count. Our return on tangible equity was 17.6% in the second quarter.

With that, I turn the call over to Lidio.

[Lidio Soriano]

Thank you, Carlos, and good morning. During the second quarter, the corporation continued to exhibit strong credit quality metrics and low credit costs, driven by the improving economic environment. Please turn to Slide 9 to discuss credit metrics. Nonperforming assets decreased by $7 million to $777 million this quarter, mainly driven by an NPL decrease of $13 million, offset in part by an increase of $5 million in NPLs held for sale.

In Puerto Rico, NPLs decreased by $9 million, mainly due to lower mortgage NPLs of $20 million, resulting from lower inflows and continued improvement in early delinquency trends, coupled with lower consumer NPLs, mainly in the overall portfolio. These decreases were offset in part by higher commercial NPLs of $17 million, mainly due to the inflow from a single $32 million non-COVID-related client. This increase was offset in part by the resolution of a $9 million NPL relationship that resulted in a significant recovery. In the U.S., NPLs decreased by $4 million mostly related to a construction loan transferred to held for sale. The ratio of NPLs to total loans held in portfolio was 2.4%, flat versus the prior quarter.

Please turn to Slide 10 to discuss NPL inflows. Compared to the first quarter, NPL inflows, excluding consumer loan, increased by $11 million, driven by an increase of $17 million in Puerto Rico, mainly due to the previously mentioned commercial relationship. This increase was offset in part by lower mortgage NPL inflows of $15 million. In the U.S., NPL inflows decreased by $6 million as the prior quarter included a $12 million construction loan that reached 90 days during its renewal process was current at the end of the quarter.

Turning to Slide 11. Net charge-offs amounted to a net recovery of $1.3 million or an annualized negative 2 basis point of average loans held in portfolio compared to net charge-offs of $21 million or 29 basis point in the previous quarter. The results for the quarter were aided by the recovery of $7.9 million related to the resolution of the above-mentioned nonperforming relationship. Excluding this, the net charge-off ratio would have been 9 basis point, which is lower than trend and pre-pandemic levels. In Puerto Rico, net charge-off decreased by $21 million, primarily driven by $8.4 million of lower commercial net charge-offs due to the resolution of the NPL relationship, lower mortgage net charge-off by $7.4 million and lower construction net charge-off by $6.4 million as the prior quarter included a $7 million charge-off related to a previously reserved loan.

In the U.S., net charge-off decreased by $1.3 million quarter-over-quarter. Our allowance for credit losses decreased by $15 million to $786 million, driven mainly by improving credit quality and releases from our hospitality portfolio's qualitative reserve, as discussed in the following slide. The ratio of allowance for credit losses to loans held in portfolio decreased to 2.7% from 2.75% in the prior quarter. Excluding Payment Protection Program loans and guaranteed mortgage loans, this ratio is 3.02%. The ratio of allowance for credit losses to NPLs held in portfolio was 115%, flat to the prior quarter.

Please turn to Slide 12 to discuss details on the drivers of the variance in our allowance for credit losses. The allowance for credit losses decreased by $15 million when compared to the previous quarter. Variances were driven by changes to qualitative reserves and economic outlook as well as portfolio credit quality and mix. While a strong recovery is evident, we also consider more adverse outcomes given uncertainties around the impact of the new virus strains and the Puerto Rico government's ability to utilize available federal assistance.

As a result, we continue to assign the highest probability to the baseline scenario followed by a more pessimistic test-free scenario. Our macroeconomic forecast uses a number of economic variables with the unemployment rate and GDP being the largest drivers. The current baseline scenarios shows a slight improvement in both 2021 GDP growth and unemployment rates when compared to the previous estimates. However, revisions to historical macroeconomic indicators conducted by the Puerto Rico Planning Board contributed to increases in the allowance for credit losses in Puerto Rico. These revisions caused ACL to increase by $21 million.

During the quarter, we released $10 million from our qualitative reserve prompted by the economic environment and improvements in our performance. Total portfolio changes caused the ACL to decrease by $27 million. Portfolio changes include fluctuations in credit quality, volume and mix. To summarize, our loan portfolio exhibited improved credit quality metrics during the second quarter, aided by the government stimulus and an improving economic environment. We will continue to monitor the exposure of the portfolios to pandemic-related risk and changes in the economic outlook.

With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

[Ignacio Alvarez, President, CEO & Director]

Thank you, Lidio and Carlos, for your updates. Our results for the first half of 2021 were strong, driven by solid earnings, improved credit quality, record deposit levels continued consumer growth and our capital actions. We are optimistic about the economic outlook. In addition to the unprecedented level of federal stimulus related to COVID, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed, which we expect will now start flowing at a faster pace. The combined impact of these factors and improved consumer confidence should generate considerable economic activity in many sectors for the coming years, and we are well positioned to benefit from such activity.

We are looking forward to having the entire team together in our office again. Given progress in the vaccination process, a general improvement in health conditions and sound and safety protocols in our facilities, we will begin to bring back to the office our colleagues that are still working remotely. Managers and supervisors will be returning in mid-August and the remainder of our workforce will return after Labor Day. We will, however, be offering eligible employees a hybrid work arrangement.

In June, we released our second annual Corporate Sustainability Report. It highlights our commitment, progress and achievements in our initiatives to operate as a responsible, ethical and sustainable company. We are mindful of the responsibility we have as Puerto Rico's leading banking institution and, in fact, to all the communities we serve. We have a firm commitment to continue expand our levels of transparency around our ESG practices, and we will continue working to ensure we have a positive impact on all our stakeholders. You can find our report on our website.

We are now ready to answer your questions.

[Operator]

[Operator Instructions]. Our first question comes from Brock Vandervliet of UBS.

[Brock Vandervliet, UBS]

If you could talk more about loan growth and what you see. I think, Carlos, you're very clear you're not expecting growth until next year. I guess I'm trying to put together what appears to be multiple economic data points pointing toward a resurgence of economic growth and the lack of it in the loan book. Maybe if you could talk about utilization or origination pipelines. Anything that could kind of help us triangulate.

[Carlos Vázquez, EVP & CFO]

Sure. Well, the first comment on loan growth is that I think our bankers are doing a pretty good job on originated loans. If you take out the effect of PPP in this quarter, we actually grew loans by $170 million. So that's a nice start. The reason we keep pointing to net loan growth in '22 is that even though our bankers are doing a pretty good job, we still have, number one, clients with very high levels of liquidity. The average commercial and retail client of Popular -- their average balance has grown by more than 40% since February of last year. So our average client has a significant amount of liquidity on their accounts.

And the other is just a normal flow of our business. If you think -- assume for a moment, Brock, that the PPP 1, whatever is left of it, which is around $350 million, goes away by year-end. That's probably in the right ballpark. We have our old Westernbank portfolio that amortizes about $25 million a quarter, so it's somewhere like $50 million. And the normal amortization schedule of our mortgage book is so large despite the fact that our organization is doing very well, it's still a negative number. It's probably in excess of $800 million a quarter.

So when you take those 3 pieces along -- there's a lot of other moving pieces, obviously. You have a portfolio that on the natural flow alone will come back -- come down about $500 million. So if our bank is doing a bang-up job, they make that up. But the net growth, they have to make that up and then do some more. So the reason we're still thinking about '22 is a combination of our clients with a significant amount of liquidity and the fact that we still have to overcome the natural runoff of our book. Now this is one in which we hope we're wrong. I hope the growth shows up earlier than that. But I think that our best guess right now is that when these balances start going the other way will probably be early '22.

[Brock Vandervliet, UBS]

Okay. I appreciate that color. And anything under the hood in terms of loan efforts to open new lines of credit on the C&I side that haven't been drawn yet as a result of some of the economic pickup we're seeing?

[Ignacio Alvarez, President, CEO & Director]

I think the activity -- this is Ignacio, sorry. The activity we're seeing is pretty normal. I think many of our clients, as Carlos says, have -- many of our existing clients have existing lines. The 1 area I'd say you'd probably see more activity is you're seeing more, I think, investor interest in Puerto Rico again. So I think we're seeing more new activity like acquisition loans for buying business or buying properties, more than lines of credit because most of our commercial clients, like I said, have plenty of liquidity, and they have available lines. So they don't really need new lines. But we are seeing more activity on the acquisition front.

[Operator]

The next question is from Gerard Cassidy of RBC.

[Gerard Cassidy, RBC]

Carlos, coming back to the liquidity comment you were making about your customers. Can we tie that to the deposit growth as well, ex the government deposit growth? What do you think is driving that liquidity? Is it primarily the stimulus programs, meaning PPP? And then on the consumer side, the stimulus checks? Or is there something else going on in addition to that, that is driving that liquidity, and therefore, you're still seeing these nice deposit levels or higher deposit levels?

[Ignacio Alvarez, President, CEO & Director]

This is Ignacio. I think there's no doubt that the stimulus payment had a big effect. I mean a lot of money came directly into people's accounts and they didn't spend it all. I also think that for a while, people didn't have the ability to really spend their money. They couldn't travel. They couldn't do other things. They weren't commuting, so they saved on gas. So there was a number of things that people, I think, were building up liquidity. So I would expect that going forward, that liquidity buildup is not going to continue because this was a special period. But there's still a lot of money in the bank to actually to my surprise. You hear a lot of stories about people buying cars and refrigerators and, by the way, we know they're doing that, but they still have money in the banks.

[Carlos Vázquez, EVP & CFO]

Yes.

[Gerard Cassidy, RBC]

Do you -- go ahead, Carlos. Sorry.

[Carlos Vázquez, EVP & CFO]

Gerard, you can actually see that the client activity continues to go up when you look at our -- the usage of our debit and credit cards. So they are continuing to spend that money, but it will probably take them a few months before. The other interesting thing to think about is, remember that when a client spends money -- when a retail client spends the money they have in their account with us, there's a better-than-not chance that, that becomes a deposit in the commercial account of a client of us. So there is a secular effect that some -- while the money is moving, you may not see a net reduction in our deposit balances simply because it's moving back and forth. Now the flip side of that is also true. If the client spends the money in Walmart, it goes to the states, right? So it's a combination of things. But there is a little bit of flow here that goes from 1 type of account to another too.

[Gerard Cassidy, RBC]

Very good. And when your line officers or when you guys go out and talk to your clients, is there any determination yet that because of what we've come through and now they have these higher levels of liquidity, could this be permanent? Where, let's say, like your auto dealers, you're obviously very big in the auto business. Are they going to just run with lower inventory levels permanently and just use higher margins? Any sense on that yet that this could be a permanent shift and not something temporary?

[Ignacio Alvarez, President, CEO & Director]

Now I -- well, I can tell you. I have been getting out more to see clients. I haven't heard that. I mean I think inventory levels are relatively low in large part because they can't get more inventory. But I don't think that's going to happen. I think once the market levels off again, there are going to be very competitive pressure for people to reduce their margins. And so I don't -- I think it will level set.

I also expect -- I mean, many of our clients went through a difficult period where liquidity was king, right, when you're in a tough situation. So I think they will always hold more liquidity probably if you think about the experience in real. But also, I think they're waiting to see this recovery to take hold. And then many of them will decide whether they need to invest and expand. And that's why I think Carlos is saying, we expect to see more loan growth later on because people are not going to want to miss business. So right now, they're stretching their capacity to generate the demand that's there. At some point, they're going to have to increase their capacity, not just stretch it. So that's what we're waiting for.

[Gerard Cassidy, RBC]

Very good. And then as a follow-up question, maybe this is for Lidio. The large credit that went on nonaccrual this quarter, if you could maybe give us some color what caused it to go on and what type of credit it is? And then second, I think you also mentioned that a large construction loan that was 90 days past due in the first quarter went back to performing status. Maybe some color on how you did that. And then the third part of the question, in your outlook for the allowance, I noticed that in the first quarter baseline, the unemployment rate assumption in Puerto Rico for '21 was 8%. And now in the second quarter, the baseline unemployment rate is 8.4%, which I found on considering all the positive economic trends we're hearing about in Puerto Rico. So if you don't mind, if you could address those questions.

[Lidio Soriano]

Let me see if I can remember all three or beginning with the first...

[Gerard Cassidy, RBC]

I'll help you.

[Lidio Soriano]

Okay. Thank you so much, Gerard. As I mentioned in the prepared remarks, the nonperforming relationship was non-COVID related. It is a pharmaceutical company who's -- while its main product went off patent, and they have also issues related to trying to get new products get FDA approved. So that's really the issue behind that 1 company. The second question was related to...

[Ignacio Alvarez, President, CEO & Director]

The construction loan.

[Gerard Cassidy, RBC]

The construction loan.

[Lidio Soriano]

As we mentioned in the last webcast, this was a relationship that while in the renewal process went past the 90 days maturity. And therefore, given our policy, we entered into nonaccrual, but it was refinanced within -- or restructured within at the end of the quarter. So that's why it went back to being current. So it was, to a certain extent, let's call it administrative or technical delinquency. And then as it relates to the unemployment rate, as you know, as you're aware, we use Moody's services to estimate unemployment. I think when you look at the baseline, even though it's true that it went up in 2021, it actually went down in 2022. So overall -- when you look overall unemployment rate for Puerto Rico for the whole -- the recent one supportable period, it actually went down. That's why we mentioned that looking at economic forecast from quarter-to-quarter was a slight improvement from 1 to the other.

[Operator]

[Operator Instructions]. The next question is from Alex Twerdahl with Piper Sandler.

[Alex Twerdahl, Piper Sandler]

Just wanted to go back to some of the different components of loan growth expectations. Is my understanding that there's some rather large construction projects potentially being sponsored somewhat by the CDBG money that potentially could come online in the next couple of quarters and you see disbursements that could, I don't know, potentially meaningfully impact construction loan balances across the banks? And obviously, you would expect you guys to get more than your fair share of that. Can you talk about some of those projects and the expectations for the timings for some of those disbursements and whether that's something that we can expect this year?

[Ignacio Alvarez, President, CEO & Director]

Yes. This is Ignacio. Yes. The FEMA process is quite complicated. So there's a large number of public projects that are going to be done. And they run across a gambit of some that will be done by the state such as road, the highway authority, some that will be through PREPA, which is now LUMA will handle the funds. Some will be Aqueduct and Sewer Authority and some will be the municipalities. I always tell people that 2021 is the year where you're not going to see a lot of disbursements because although FEMA has finally approved and signed off on the budgets for many of these projects and have signed them now, they still have to go through the design process. They have to go through a permitting process. And that -- and they have to sign a construction contract. All that requires bidding through FEMA.

So in terms of the federal fund, I think 2021 is more a preparatory sort of stage. And I don't think we'll see big dollars. There'll be dollars going out because, obviously, there'll be dollars going out to architects and people that are working on that. And some of the smaller-scale municipal projects, you'll see outlay. But I think the big projects, you're not going to see big outlays until 2022, just because that's the way the process works. It's a lengthy process. It requires bidding in every stage. You have to bid for the architectural work. You have to bid for the construction work. You have to permit. Unfortunately, in Puerto Rico, we probably do not set the gold standard for the permitting process. So that complicates everything.

So I don't think -- in private sector, you will see more home, I think, residential construction. The residential construction market is very hot. That takes time. Again, you got to find the land. You got to get the permits. But I think you definitely will seen not only in the public side, but I think you're going to see in the private side in the residential construction, it's very -- the market is very, very, very tight right now. There's very little housing supply available. So you'll see developers. That takes time. Again, partly being an island, there's not a lot of zoneable land available. So it takes time to get the land together, get the permits. But don't think only about the FEMA. Yes. That's going to be huge, but there'll also be private construction, I think, coming along. But I don't see much of that happening until 2022 in terms of the big disbursements.

[Alex Twerdahl, Piper Sandler]

When you talk about the big disbursements, can you give us some sort of sense for what sort of the magnitude of some of those projects might be? And like how big a component BPOP would be willing to finance?

[Ignacio Alvarez, President, CEO & Director]

I don't have it on a project by project basis, but $10 billion has been assigned to the power authority for improvements in the power, right? $3 billion has been assigned to the Aqueduct and Sewer Authority for improving that. So those are big projects. Highway, I don't have the number on highway, but highway had another couple of hundred millions in dollars. So most of what we have been doing is a lot of that is being financed by federal funds. Our biggest participation to date has not been like project financing but has been financing the contractors who do the work.

So in many of these projects, they have to put out the work and advance funds before they get reimbursed. So much of what we anticipate will happen is that our construction clients will have to increase their lines and draw more down to these projects. Obviously, on the private side, it's a little bit different. We will finance the construction there. But on the public side, I don't think that really is the case. I think we'll be financing more the people involved, the contractors, the architects, the suppliers of materials, that type of thing. I think that's where it's going to be our sweet spot instead of traditional project financing.

[Alex Twerdahl, Piper Sandler]

Okay. Understood. And then what about -- we've heard a lot about the residential market being pretty hot right now. A lot of the mortgage loans that you guys are doing or conforming and you're selling them. But is the jumbo market coming back in a more meaningful way? And is that something that could help to offset more of that residential runoff as we look out to the next couple of years?

[Ignacio Alvarez, President, CEO & Director]

Yes. I mean there's -- I think there's a couple of things there. I mean, I think Carlos and Lidio can add to this, but I think there's a limit on how much we want to do nonconforming. I don't think we have a problem right now filling up our appetite for nonconforming. And one of the things we are managing is because of this incredible demand we're seeing in Puerto Rico, we're seeing a big jumbo market developed where it really wasn't there before. We're playing very heavily in it. As you probably heard, Dorado, Mayagüez [ph], these are housing -- we're making mortgages $3 million, $4 million, $5 million that we never did in our history.

So our biggest issue there is not so much getting that, is adjusting our risk tolerance for how much that we could have. It's definitely helping. But we -- in this kind of low rate interest environment, we want to make too big a bet on holding mortgages in our balance sheet, apart from the risk of the residential market really being hot now. I mean we've seen things we've never seen in our lifetime here in Puerto Rico. Houses selling for $30 million, $20 million, we never saw that in our lifetime.

[Alex Twerdahl, Piper Sandler]

Wow. A couple of other questions for me. Just when I look at the deposit flows, $19 billion of public deposits. I know you guys expect that to eventually come down over time. Do you have any better sense for -- I mean, I know we have about a $7 billion slug that once the GOs reach resolution could flow out. But other chunks in terms of the timing of those deposits, is there any way we can kind of pin different chunks here or there as something that could flow out later this year?

[Ignacio Alvarez, President, CEO & Director]

Well, I think the biggest chunks -- the COVID money comes in and goes out pretty fast. So I don't have -- I don't -- so I think the biggest needle mover is going to be the plan of adjustment. The plan of adjustment not only has money to pay the GOs, they said about $7 billion, but there's other disbursements. And I think they're talking about this project up to $10 billion as part of that plan of adjustment. So that's going to be the biggest mover and it's going to probably change the perspective in a couple of ways.

One, a big chunk of money will go out. Progress has been made on that front. It's taken forever, but it's probably one of the most complex bankruptcy proceedings in the history of United States. And it's finally -- there's finally making progress. Recently, an agreement was reached with the Unsecured Creditors Committee, which is a big deal because they were very active and very aggressive. They seem to have almost have not already reached a deal with most of the nmonoline insurance, which also was a big issue.

So as they move forward, really the 1 big issue left is how you handle the pensions. And as you know, there is a provision in there. The pensions -- the amount of any pension that's above $1,500 a month, 8% of it will be reduced. That has been very controversial with the government. They claim so -- they claimed they were not going to accept that. So that's really the last big piece of the pulse that is left. So most people are expecting that we should have a resolution of that by the end of the year or early next year because the judge is moving the calendar.

So either -- so I think we're finally looking at a very possible solution, at least involving the central government debt. I'm not sure PREPA will get done. So we're pretty optimistic about that. And so that's going to be a big outflow of funds. And then secondly, I think once the government of Puerto Rico knows what it can count on, then you can expect that it will start maybe using its funds or investing its funds a little bit differently. So we'll have to see when that happens. But literally, right now, they don't know what they can count on, so they're just parking the money with us. But as they enter a more normal environment where they know where they can count on, I think you can expect for them to perhaps change how they handle their money somewhat.

[Alex Twerdahl, Piper Sandler]

Got it. And then sticking on the topic of deposits in terms of the rates that you guys are paying, I imagine there's not a whole lot of room to reduce the rates, but maybe there is some opportunity to increase fees related to deposits. I mean can you talk about whether or not that is the case and sort of how you're thinking about that?

[Ignacio Alvarez, President, CEO & Director]

Yes. I don't -- you got to be careful there because deposit tranches is a long-term asset. And you don't want to get a reputation as a nickel and dime in your deposit clients just because low deposit market. They're already getting hurt with the low interest we're paying. So I think -- I don't think the -- in terms of deposit fees, no. But obviously, as the economy picks up and you saw this quarter, we do expect our other sources of fee income to improve. We saw a nice rise in fees related to debit and credit cards. I think insurance over time will continue to go up as people recognize the value and the need of insurance, and we continue to build out our business there. So we are definitely looking for fees. But it's not -- we cannot put in risk the value of our deposit franchise. So we -- especially with the fintechs, everybody else competing. So I don't think it will be come from deposit fees. It will be more from other services where we can get a fee by providing value to our clients. That's really what we strive for.

[Carlos Vázquez, EVP & CFO]

Yes. On the cost of deposit, Alex, the -- you're correct. It's hard -- Puerto Rico is hard to continue to bring it down. Our total cost of deposit now is 14 basis points, which is close to best-in-class. But we do still have some room to bring deposit costs down in Popular Bank. There, we've done a pretty good job. We're down to total cost of deposit of 47 basis points from probably a few quarters back. So there's still a little bit more room in the U.S. But also keep in mind that it's a smaller portion of our deposit book. So the overall effect of even getting some savings there in total will be muted.

[Alex Twerdahl, Piper Sandler]

Great. And then just a final question for me, which I think I asked last year as well, but just so that everyone on the call understands the accounting behind the ASR. My understanding is that we've seen the full impact of the $350 million come out of equity already, but we've only seen about 80% of the shares come out of the share count. And so we should see an adjustment at the end of the third quarter where we could see the share count reduced a bit further, but there shouldn't be much of an impact to equity. Is that correct?

[Carlos Vázquez, EVP & CFO]

Your understanding is correct. You described it well.

[Operator]

The next question is a follow-up from Brock Vandervliet of UBS.

[Brock Vandervliet, UBS]

Carlos, if you could just review the guide on expenses and kind of walk us up from what looked like around $370 million this quarter to the $385 million -- back to the $380 million, $385 million guidance? What's changing there?

[Carlos Vázquez, EVP & CFO]

Yes. I tried to sort of list what the components are going to be. But the main drivers are going to be 3 things. First, we do expect our compensation expenses to go up. Part of that is normal course of business. For example, we do our major increases in the year in July. So naturally, in the second half of the year, we'll have higher personnel expenses. The compensation is also affected by the overall performance of the company. So if we continue to outperform as we have for the first couple of quarters, that would increase compensation expenses as well.

And lastly, the competition for talent is real, and we're not excluded from that in Puerto Rico. So we're seeing that also affect what we have to offer for new employees, what to have to offer our existing employees, so that they stay happy and want to stay with the bank. So all those components will continue to contribute to higher compensation expense. The -- in the second quarter, we actually have gotten a little bit of a break on that front because we're also a little bit behind in our hiring of the people that we need. You may have seen that our number of employees went down slightly. So maybe we got a little bit of a break in the second quarter that expenses that should have been in this line did not show up simply because we haven't been able to hire all the people we need and want to hire. Hopefully, we can correct that, and that again will reflect on higher compensation expenses.

Second is timing. There are some projects and expenses that we had sort of scheduled in to be 1/4 of the expense every quarter. And some of those projects or expenses just simply haven't started or have been delayed. So these activities that are related to those projects continue. So we expect those activities to still happen. They're just happening later in the year. So we think that will end up in higher expenses.

And lastly, it's a little bit of a normal course of business. As our clients feel better and do more transactions, our processing costs will go up. And like every other bank in the world, there's nothing that will keep your technology costs from going up. Between compliance and cyber and regulatory stuff, technology cost seems to be something that will continue to go up. And unfortunately, we are no exception to that trend. So the combination of all those things will increase our overall expense base. As you know, we normally describe our expense on an average quarterly number. You are correct that we were slightly below the range we have described in the first two quarters of the year, and that will by necessity means that we will be above that range in the second two quarters of the year. And that's our best guess on expenses right now. We hope to beat that by the way. We hope to do better, but this is our best guess on what expenses will be.

[Brock Vandervliet, UBS]

Okay. And just separately on credit. Given where net charge-offs are, the economic backdrop, what would you need to see to get conviction that perhaps looking ahead we're looking at a much lower net charge-off pattern than you've seen historically and you'd have the flexibility to further reduce reserves? Just trying to better understand how you're thinking about the reserving.

[Lidio Soriano]

Well, for 1 thing, reserve is I mean slightly more scientific than it used to be in the past. So a lot of it is model driven. So we have certain latitude, but maybe not as much as you think in terms of how we can feel comfortable or not with low-end reserve. Having said that, I mean, the allowance for credit losses is driven by the performance -- past performance, credit quality, and economic outlook and taking into account environmental factors. If the trends that we have seen continues in which losses continue to be low, credit quality continue to improve and the economic outlook continue to be -- continue to improve, we should reasonably expect that the allowance should continue to grow -- trend lower as we progress through the rest of 2021 into 2022.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Ignacio Alvarez for closing remarks.

[Ignacio Alvarez, President, CEO & Director]

Thank you for joining us today and for all your questions. We look forward to updating you on our progress in our October call. Thank you very much. Have a great weekend.

[Carlos Vázquez, EVP & CFO]

Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.