Popular Inc

NASDAQ:BPOP

Earnings Call Transcript 2020-Q4

[Operator]

Good morning and welcome to the Popular Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

[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 full-year and fourth 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 webpage at popular.com.

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

[Ignacio Alvarez, President and Chief Executive Officer]

Good morning, and thank you for joining the call. I hope that you and your loved ones are well. Despite the challenging economic environment, we generated $507 million in earnings during 2020, and ended the year on a high note with a $176 million in earnings during the fourth quarter. This was one of our best quarters in our history. These results reflect the ongoing rebound and economic activity experienced during the second half of the year and the unprecedented level of federal stimulus. Our strong results also reflect our diversified sources of revenue and prudent risk management.

Please turn to Slide 3 for an update on the current business environment in Puerto Rico. In the fourth quarter, business trends and customer activity continued to improve, building upon the momentum seen in the third quarter as many as the pandemic-related restrictions were gradually loosened. Employment trends which deteriorated rapidly in April have improved, but are still down significantly compared to last year.

Total non-farm employment has increased by 6% since April when employment bottomed out, but remained 8% below the December 2019 levels. In 2020, new auto sales were 11% lower than the previous year, mainly as a result of the restrictions on auto sales and financing from March through May. However, demand has rebounded sharply since May and remains robust. Fourth quarter sales of almost 36,000 units mark the highest recorded quarterly level of going back to at least 2013.

Cement sales increased by 16% in the fourth quarter as compared to the year ago period. Tourism and the hospitality sector are improving slowly, but continued to lag other areas of the local economy. While the airport traffic has been gradually increasing, arrivals during the month of December were still 45% lower than the previous year.

Within Popular’s clientele, debit and credit card sales in dollars increased by 18% compared to the last year's fourth quarter. For the full-year, sales increased by 10%. Auto loan and lease originations at BPPR increased by 11% compared to the year ago quarter and were only down 5% for the full-year, not withstanding the pandemic-related disruptions. Similarly, we saw continued strength in the dollar value of mortgage originations at BPPR, which were up 20% in the fourth quarter versus the third quarter and increased by 32% in 2020 as compared to 2019.

Please turn to Slide 4 for an update on PPP and other operational matters. Most of our branches are now fully operational, and we continue to take measures to ensure the safety of our employees and customers. We are also focused on supporting our customers in this uncertain environment. During the initial phase of the pandemic, we offered payment relief to our retail and commercial customers and are working with those clients who still need assistance.

We continue to offer alternative work arrangements for a significant portion of our employee base. We are committed to ensure a safe transition back to on-premise activities, which we currently planned to be no earlier than April. We have been working with local authorities to promote and facilitate COVID-19 vaccination efforts, and we are actively encouraging our employee base to get vaccinated as soon as they are eligible to do so.

With respect to the PPP program, $544 million of the loans originated were under $150,000 and are eligible for expedited forgiveness under the SBA simplified process. We have deployed an online platform for customers to request loan forgiveness, and have submitted approximately $500 million in forgiveness requests to the SBA. Leveraging this online platform, we began accepting applications for the second phase of the PPP program last week. To-date, we have received more than 3,200 applications, totaling approximately $234 million.

On the digital front, we continue to have more than 1 million monthly active users on our Mi Banco platform in Puerto Rico. We captured 71% of deposits in the fourth quarter through digital channels. For the full-year, 67% of deposits at BPPR were captured digitally compared to 52% in 2019. Finally, our customer base in Puerto Rico continues to grow, increasing by 6,000 in the fourth quarter to reach more than 1.9 million unique customers.

Please turn to Slide 5. Our annual net income of $507 million reflects a decrease of approximately 24% from our 2019 annual record net income of $671 million. The decrease was largely driven by higher provision expense, lower fees and lower net interest income related to the economic disruption caused by the pandemic. 2020 results benefited from strong deposit growth and a higher level of earning assets in both Puerto Rico and the U.S. However, both of our branches have lowered net interest margins during the year.

Credit quality remains stable throughout 2020. We are pleased with how our portfolios have performed in this difficult period. Our capital levels are strong with year-end Tier 1 capital and Tier 1 common equity ratios at 16.3%. Our tangible book value ended 2020 at $63.07, a 14% increase year-over-year. In Puerto Rico, we grew loans by 7%, increased our deposits by 35%, and our net interest margin was 3.4%. In our U.S. operation, we grew loans by 8%, deposits by 2%, and our net interest margin was 3.21%.

Please turn to Slide 6. Our quarterly net income of $176 million was $8 million higher than the third quarter and $9 million higher than the same quarter last year. These results were driven by higher revenues, partially offset by higher provision and operating expenses, including pretax expenses of $23 million related to our New York Branch Realignment program.

The increase in net interest income was driven by an increase in our investment portfolio and lower deposit costs. Credit quality trends were solid in the quarter. All-in-all, we are very pleased with our fourth quarter results.

With that, I will now turn it over to Carlos.

[Carlos Vázquez]

Thank you, Ignacio. Good morning. Before we turn to fourth quarter results, I will expand Popular’s 2020 full-year performance. Our net interest income decreased by 2% year-over-year to $1.86 billion, as lower net interest margins were only partially offset by growth in earning assets. 2020 provision expense increased by 76% to $293 million, primarily driven by the impact of the pandemic.

Non-interest income decreased by 10% year-over-year with most segments lower in 2021, again, mostly pandemic-related. Operating expenses decreased by 1% for the year to $1.46 billion. Lower personnel costs and business promotion expenses were the primary drivers. Our capital position is robust.

We ended the year with a tangible book value increasing by nearly $8 per share to $63.07. This improvement was achieved even after the repurchase of $500 million common stock, the increase in our common stock dividend and the redemption on $28 million preferred stock. Common equity Tier 1 ratio dropped by 149 basis points year-over-year to 16.3%.

Please turn to Slide 7. Additional information is provided in the appendix of the slide deck. Today's earnings press release details variances from the third quarter. Net interest income for the fourth quarter was $472 million, an increase of $11 million from Q3. Non-interest income increased by $16 million to $145 million in Q4.

More specifically, we generated $2.3 million higher deposit service fees, $1.2 million higher other service fees and $19.3 million in additional mortgage banking income, mainly due to the negative impact in Q3 of the bulk agency mortgage loan repurchase.

These items were partially offset by $3.7 million lower gains on sales securities, and $4.2 million lower earnings from portfolio investments held under the equity method. To a large extent, our non-interest income has now returned to pre-pandemic levels. We expect that to continue tracking historical levels.

Provision expense for the quarter was $21.2 million, which is $2 million higher than in Q3, but it includes a reclassification of $10 million for unfunded loan commitments to the provision for credit losses. This is only a change in geography in our income statement. Lidio will expand later.

Total operating expenses were $376 million in the quarter, $14.9 million higher than in Q3. These include $23.2 million in the previously disclosed expenses related to Popular Bank’s branch closure actions. Excluding the branch closure related cost and the expense reclassification, the net increase in expenses would have been $1.7 million, primarily driven by a $6.3 million increase in personnel cost composed of a $2.1 million severance expense related to Popular Bank’s branch network realignment, higher 401(k) match due to an additional bi-weekly payroll and higher incentive compensation.

Net occupancy expense was $16.9 million higher due to a $19 million in cost related to the termination of leases associated with Popular Bank’s branch realignment. Professional fees increased by $7.6 million, mainly due to higher advisory expenses and higher processing and technology service costs. Finally, business promotional expenses increased by $1.8 million due to higher seasonal advertising expenses.

For the full-year, our average quarterly expenses were approximately $365 million. This is $18 million lower than the initial expectation of $383 million in average quarterly expenses we disclosed during our webcast in January of 2020. In response to the pandemic, we implemented various cost savings initiatives. We have targeted $55 million in savings during the year. However, we ultimately were able to reduce 2020 planned expenses by $75 million. These savings were focused on compensation, benefits and business promotion expenses.

Most of the adjustments were in response to the pandemic and as such many of those savings will revert as the effect of the pandemic points. For 2021, we expect average quarterly expenses to be between $375 million and $380 million. While this is higher than the quarterly average we achieved in 2020, it is still below our original expense guidance for last year. This increase from 2020 is mostly driven by higher expenses in the following three categories.

Personnel, as we invest in training, compensation and related benefits, many of the savings in 2020 were cost to compensation and incentive pay. Technology, as we continue to modernize our digital capabilities, cure obsolescence and address regulatory, cyber and compliance needs. Some of these investments were delayed in 2020. Finally, Business Promotion, especially expenses related to client reward programs. Some of the growth in this category results from our revamped rewards for credit cards and from our digital offerings.

Part of the higher technology and reward expenses are related to expectation of higher levels of client activity in 2021. We will strive to come in below this expected level of expenses. Our effective tax rate for the quarter was 20% for 2021. We expect the effective tax rate to be between 19% and 21%.

Please turn to Slide 8. Net interest income for the quarter was $471.6 million, an increase of $10.6 million from Q3. The primary drivers of this increase were increased earning asset balances driven by higher level of deposits in Puerto Rico. The [indiscernible] agency MBS in the investment portfolio and lower deposit cost primarily at Popular Bank.

Deposits grew by $844 million in the quarter. This increase was mostly in BPPR. NIM decreased 2 basis points to 3.04% in Q4. On a taxable equivalent basis, net interest margin was 3.35%, also a decrease of 2 basis points. The reduction in the margin reflects an increase in the size of the investment portfolio and lower loan yields, partially offset by a decrease in deposit cost.

The total loan yield decreased by 16 basis points in Q4. The bulk mortgage loan repurchased at the end of Q3 was the main driver of this decrease as these assets yield approximately 3.5%. For 2021, we expect margin to be stable. Asset mix, round two PPP originations and the speed at which PPP loans are forgiven will drive the ultimate results.

As of the end of the fourth quarter, Puerto Rico public deposits were roughly $15 billion, about $500 million higher than in Q3. We continue to expect public deposit balances to come down over time. However, in the near-term, additional federal stimulus and tax revenues in the first half of the year would likely increase the deposit balances.

Our average loan balances increased by $757 million in the quarter. We expect loan balances will be impacted by PPP forgiveness as well as limited demand fueled by unprecedented levels of client liquidity, which may expand further with additional federal transfers. Round two of the PPP program will help loan balances, but we still do not expect overall loan growth to materialize in the first half of 2021.

Please turn to Slide 9. Our overall capital levels remained strong relative to mainland peers as well as with respect to well capitalized regulatory requirements. Our common equity Tier 1 ratio in Q4 was 16.3%, up 34 basis points from Q3. Tangible book value increased by $1.38 per share to $63.07. This increase was driven by our quarterly net income offset somewhat by dividend payments.

Our return on tangible equity was 14.5% in the fourth quarter and 10.8% for 2020. We will continue to pursue our target on maintaining and improving our double-digit return on tangible equity. As discussed last quarter, we expect to be able to make capital related announcements in April.

With that, I turn the call over to Lidio.

[Lidio Soriano]

Thank you, Carlos and good morning. Overall, our credit performance remained stable during the fourth quarter, aided by payment deferrals, government stimulus and the resumption of collection efforts. Given the uncertainty caused by the pandemic and the extent of the economic disruption, we continue to monitor the impact of COVID on our entire loan portfolio.

Turning to Slide number 10, we have provided relief to our customer through loan modifications consisting of deferrals, forbearance or extensions. We granted assistance to approximately 132,000 customer accounts, representing $8.3 billion of loans or 28% of the total loan balance. 97% of customers have exited relief, and approximately 94% of these accounts remain current. We are attentive to borrower performance across our portfolios, but in particular to the cost moratorium mortgage loss mitigation activity on certain sensitive commercial segments.

Please turn to Slide number 11, which highlights these commercial segments. Within the CRE Non-Retail segment, the exposure in Puerto Rico is mainly comprised of office space, while the exposure in the U.S. is mainly multi-family. The average original loan-to-value in Puerto Rico is 77%, while in the U.S. is 75%. Office space and multi-family occupancy and collection have remained stable through the pandemic. To-date, there have been a moderate number of downgrades in this segments. Of the customers that have exited relief, 98% of accounts remain current.

In the Health Care Facilities segment, our Puerto Rico exposure is mainly to hospitals, while our U.S. exposure is the skilled nursing facilities. For both regions, federal and local assistance have supported the industry operations. To-date, there have been a moderate number of deferrals and downgrades in this portfolio.

Within non-essential retail, the shelter-in-place orders have curtailed activity of this segment. Now withstanding our customer base has experienced an increase in activity after the long-term orders were lifted. So there have been a moderate number of deferrals and downgrades in this portfolio. Of the customers that have exited deferrals, 99% of accounts are current. The average original loan-to-value for this segment is 69%.

In general, based on discussions with our major borrowers, occupancy and collection have remained stable with signs of improvement during the fourth quarter. Regarding the Construction segment, most of our exposure is in the U.S. and principally in the New York Metro region. The majority of our projects are in late stages of completion of low loan-to-cost and average original loan-to-value of 64% and nominal exposure to high-end residential.

To-date, there have been a limited number of deferral requests and downgrades in this portfolio. The pandemic has impacted the hospitality industry with unprecedented challenges. The strategies to flatten the curve such as lockdowns, social distancing, stay-at-home orders, travel and mobility restrictions have significantly decreased the demand for these businesses. To address the risk to our loan portfolio, we continue to work with our borrowers to give them time to recover and added a qualitative reserve during the quarter.

Our hotel exposure is mostly in Puerto Rico. At the end of the quarter, our total exposure stood at $370 million with an average original loan-to-value of 69%. This segment has experienced elevated levels of stress due to limited business and leisure travel. Most of the deferrals expire in the third and fourth quarter. But given the challenges of the industry, we foresee additional extensions to support our borrowers. To-date, there have been a significant number of downgrades and deferrals.

Restaurant balances were $338 million at quarter end. This segment has experienced stress driven by the restriction placed on indoor dining. Despite this restriction, the majority of our restaurant borrowers, particularly quick service or fast food continued to operate through delivery and carry out with volume improvements during the fourth quarter.

Of the customers that have exited deferrals, 99% of accounts are current. To-date, this segment has had a significant number of deferrals and downgrades most within the past category. To finalize, let me highlight that we do not have material credit exposure to energy, airlines or shared national credits.

Please turn to Slide number 12 to discuss credit metrics. Non-performing assets decreased by $15 million to $824 million this quarter, mainly driven by an OREO decrease of $17 million, offsetting part by an NPL increase of $3 million. The OREO decrease was driven by sales and the suspension of foreclosure activity.

Operating NPLs was driven by an increase of $7 million in Puerto Rico due to higher mortgage NPLs of $44 million, offset in part by a decrease of $38 million in commercial NPLs. The increase in mortgage NPLs was mainly due to a delinquency progression after the expiration of the payment moratorium. We are not overly concerned with this due to three factors.

First, NPLs are comparable to levels prior to the pandemic without an order of outflows caused by foreclosure. Second, early delinquency are at the lowest levels in the last 10 years. And finally, the trend in forward loan rates for early delinquency buckets is encouraging. Thus everything being equal, we do not believe that the fourth quarter increase in NPL inflows is the start of a trend, but rather the effect of the expiration on deferrals.

The commercial NPLs decrease was mostly related to impairment charge-offs from previously reserved collateral dependent loans. In the U.S., NPLs decreased by $3 million due to a previously reserved construction loan that was partially charge-off during the quarter. At the end of the quarter, the ratio of NPLs to total loans held-in-portfolio was 2.5% flat versus the prior quarter.

Please turn to Slide number 13 to discuss NPL inflows. Compared to the third quarter, NPL inflows excluding consumer loans increased by $2 million, driven by an increase of $19 million in Puerto Rico, mainly due to mortgage delinquency progression and the expiration of the moratorium period. In the U.S., NPL inflows decreased by $17 million as the prior quarter included the impact of $11 million relationship that mature and reach 90 days while in the renewal process.

Turning to Slide number 14. Net charge-offs amounted to $42 million or annualized 58 basis points of average loans held-in-portfolio compared to $17 million or 24 basis points in the previous quarter. In Puerto Rico, net charge-offs increased by $27 million primarily driven by higher commercial net charge-off of $19 million, mostly related to previously reserved commercial loans.

In the U.S., net charge-offs decreased by $2 million primarily related to recoveries in the commercial portfolio. The provision allowance for credit losses decreased by $30 million to $196 million, driven mainly by charge-off on the previously mentioned commercial loans and an improved economic outflow offset in part by an increasing qualitative reserve as discussed further in the following slide.

The ratio of allowance for credit losses to loans held-in-portfolio decreased slightly to 3.05% from 3.15% in the third quarter. Excluding Payment Protection Program loans and guarantee mortgage loans, this ratio increases by 40 basis point to 3.45%. The ratio of the allowance for credit losses to NPLs held-in-portfolio was 122%, compared to 126% in the prior quarter. The provision for credit losses increased to $21 million.

During the quarter, we reclassified $10 million of the expense for unfunded loan commitments from other operating expenses to the provision for credit losses. Excluding this effect, the provision for credit losses on the loan portfolio decreased by $9 million, mostly due to improvements in the macroeconomic scenarios.

Please turn to Slide 15 to discuss details on the drivers of the variance in allowance for credit losses. At the end of the fourth quarter, the allowance for credit losses decreased by $30 million compared to third quarter. For instance, we are driven by changes, economic outlook, qualitative reserves and portfolio credit quality.

As discussed in the last webcast, we enhanced our ACL framework by introducing probability weight of different scenarios to our estimation process. We combine Moody’s Analytics S1 baseline and S3 scenarios. And on the three scenarios, the baseline will find the highest probability followed by a more pessimistic S3 scenarios, given the uncertainties in the economic outlook and downside risk. The current baseline scenario shows improvements in both 2021 GDP growth, unemployment rates when compared to the previous estimates. The change in macroeconomic scenarios caused the ACL to decrease by $84 million.

During the quarter, we added $68 million in qualitative reserve to address specific risks, including the exposure to the hospitality industry and the potential risk to the macroeconomic conditions in the Puerto Rico market. Portfolio changes driven mainly by credit quality and volume mix caused the ACL to increase by $28 million.

To summarize, our loan portfolio exhibited stable credit quality metrics during the fourth quarter, aided by payment deferrals, government stimulus and the resumption of collection efforts. However, as the effects of the pandemic continue to evolve and remain fluid, the full extent of the economic disruption is uncertain. The improvements over the last few years in the risk profile of our loan portfolio positions Popular to successfully operate under challenging environments.

Management will continue to carefully monitor the exposure of the portfolios to pandemic-related risks, changes in the economic outlook and how delinquencies and net charge-offs evolve over the next few quarters.

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

[Ignacio Alvarez, President and Chief Executive Officer]

Thank you, Lidio and Carlos for your updates. 2020 was certainly a challenging year. It began with devastating earthquake in Southwestern Puerto Rico, which was shortly followed by the unprecedented impact of the pandemic, including the substantial lockdown of the local economy.

I am grateful to our employees for their commitment to serve our customers and their creativity and ability to adapt to a rapidly changing environment. Whether on the frontline or adjusting quickly to working from home, we are blessed to be part of the team of talented and dedicated colleagues who have met these challenges with courage and resilience.

We continue to grow our customer base while we remain focused on supporting our communities. I am extremely proud of what we've been able to accomplish over the past year. We recorded more than $500 million in net income and end the year on a high note, generating one of the best quarters of net income in our history.

In 2020, we were also able to complete our capital plan as intended. We executed a $500 million share repurchase program, increased our quarterly dividend and redeem $28 million in preferred stock. While there is still much uncertainty, especially for the first half of the year, I am optimistic that the vaccination process that is underway will allow an eventual return to normalcy we still desire. We begin 2021 on a solid footing and excited about our prospects for the year.

We are now ready to answer your questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Alex Twerdahl of Piper Sandler. Please go ahead.

[Alexander Twerdahl, Piper Sandler & Co.]

Hey. Good morning, guys.

[Ignacio Alvarez, President and Chief Executive Officer]

Good morning.

[Carlos Vázquez]

Good morning.

[Alexander Twerdahl, Piper Sandler & Co.]

So first off I was just hoping for maybe some more high level thoughts on the Puerto Rican economy. You gave some good numbers in the slide deck, but sometimes the numbers don't tell us everything. So for example, I know we've seen some increase in flows of federal money to the Island recently to help rebuild the grid. I was wondering if you could comment on whether the hiring has started for those projects yet. And then also maybe things like wage inflation and home prices on the Island, maybe some more anecdotal data.

[Ignacio Alvarez, President and Chief Executive Officer]

Yes. You use the word flow, I think, I mean, we're generally optimistic that the FEMA finally reached an agreement with the Electric Power Authority for about $10 billion restoration program. And with the [indiscernible] consumer 4.5, that money really to my knowledge hasn't begun to flow. So that's yet to come. It's important as we agreed upon. They're working on implementing that. What we have seen, obviously the $600 payment has come in as it is in the states that's been coming in the last – beginning of last week and it continued to this week.

So we still have a lot of the CDBG funds that are yet to be spent. They're going out slowly, but we are very much more positive. It looks like the new administration recognizes that there's been a problem getting these funds out is going to be working closely with the local authorities to get it out faster. So I think we're going to see that accelerate during the year, but we really haven't seen it yet. So more to come. I think the economy, like in the states, we had a big pickup in the third quarter. The fourth quarter was better than before, but not quite the acceleration we had in the third quarter. I do see home purchases are increasing. I saw our report. I don't know who put it out, so I don't know – home purchases in Puerto Rico went up – home prices in Puerto Rico went up by 7%.

So generally I think we're optimistic that these slow funds will have a big impact. Really haven't seen that great other than the direct stimulus that goes to individuals. It’s starting to go out slowly. We have a new administration both at the level of the central government and many of the municipalities changed mayors. I say that because [CDV], the mayors have a big role in that and including the mayor of San Juan. So I think that that's probably the number one priority. If it isn't, it should be better, but I think they've all said it is to take advantage of that money. What else can I add? Again, the money really hasn't begun to flow that much, so we're hoping that will now begin in the first part of the year.

[Alexander Twerdahl, Piper Sandler & Co.]

When you look at the unemployment or I guess the employment numbers maybe sort of remain, and obviously you're coming out of the pandemic, but they remain kind of stubbornly below 1 million jobs. Do you think that that money flowing is going to be the ticket to getting the employment numbers above $1 million in a more sustainable basis?

[Ignacio Alvarez, President and Chief Executive Officer]

You mean above 1 million persons? Yes. Definitely, I mean…

[Alexander Twerdahl, Piper Sandler & Co.]

Yes. 1 million jobs.

[Ignacio Alvarez, President and Chief Executive Officer]

Obviously, there's a couple of sectors that have been seriously impacted that are high employment sectors. The tourism restaurant sector, although they don't make up a huge amount of our GDP, they do have proportionally a larger impact on employment. That sector has been impacted. I think when the economy picks up and this won't be so much, I mean, obviously if the economy picks up, business travel picks up. But I think Puerto Rico will be well positioned in the leisure market because you're starting to see increasing restrictions on international travel. And I think some people will think twice about going to a foreign country for a while, if they're not sure they can get back to the United States.

The other area that always has a big impact on employment is construction. And again, once you start building the infrastructure that's out there, I think that will have an impact on employment. There are things that worry people in our industry. It's become generally hard for some people to gain – hire employees. I've heard people from supermarkets. And people that are paying near the minimum wage are having a hard time because in Puerto Rico, the federal supplement for unemployment is $400 a week. So if you take a 40-hour week, that's $10 an hour, so you're competing against that unemployment. So if you're currently unemployed, you don't have a big incentive to go out and get a job that pays less than $10 an hour. So I do think we're going to have a big pickup in the demand side for labor. It'll be interesting to see how we can meet that supply, especially concerning the construction industry whether they will be able to get all the employees they need.

[Alexander Twerdahl, Piper Sandler & Co.]

That's great color. Thank you for that. And then as I think about the reserve and I think about this qualitative portion that was increased in the fourth quarter. What kinds of things are you looking for that qualitative portion to kind of reverse? Is it a full opening of the economy? Or are there other things that you're paying attention to? And then just over time, conceptually, should the reserve head back towards that CECL day-one reserve level or is enough change that that number is kind of moot at this point?

[Carlos Vázquez]

I would say that in general terms, the way to think about their quality reserve is there is more clarity to the path forward. I think that will allow us give us more confidence that the need for it has lessened. So that would be my first pick. Vaccination continues to evolve. We see a lid open up of the economies. I think those will be indication for – in my view, the qualitative reserves might be let go. In terms of how to think of the reserve versus day-one CECL, I think, I mean, there has been significant changes in portfolio composition. I mean, I think that is a starting point, but I wouldn't say that [indiscernible] revert to that. That'd be my answer.

[Alexander Twerdahl, Piper Sandler & Co.]

Perfect. Thank you for taking my questions.

[Ignacio Alvarez, President and Chief Executive Officer]

Thank you.

[Operator]

The next question is from Brock Vandervliet of UBS.

[Brock Vandervliet, UBS]

Great. Thanks very much for the question. Going to Slide 15 and maybe following up on that last question. I just wanted to clarify some of these figures because it looks like some of the improvement in the Puerto Rican macro is pretty material even in your baseline. In other words, the baselines are improving from Q3 to Q4 if I'm reading this correctly. In addition, you've got GDP growth significant in itself 2.5% next year, 3.4% the year after. And employment, it looks like unemployment has dropped in your baseline 300 basis points from the third to the fourth quarter. Can you comment on those figures?

[Carlos Vázquez]

I would say some of it has to do with some of the – let's go, first, unemployment, the part of the change in unemployment also relates to the difficulty of estimating the unemployment rate in – when you have a significant crisis or significant disruption to the ability of the bureau to do the unemployment survey. As you know, the unemployment rate is based on a house-to-house survey, that in areas of – when you have disruption, it gets difficult to implement. So we – for a very long time, Moody's and economists, they didn't have the benefit of the March and April numbers. Many people thought those numbers were significantly higher than they came out to be. That's why you see a significant shift in terms of the forecast for unemployment, particularly in Puerto Rico between the third and fourth quarter baseline numbers that we use.

The rest, I agree. I mean, there is – Moody's particular, they are very high on the floor front to Puerto Rico, particularly. I mean, the Biden administration has a very aggressive plan for Puerto Rico, now that they control both the House and the Senate. They think that a lot of that is going to come to fruition.

[Brock Vandervliet, UBS]

Got it. Okay. Thank you. And shifting to NII and the margin, I heard you on – margin is stable, I'm assuming that's from the fourth quarter. Loan growth doesn't sound like we should expect much especially in the first half, I guess, that points to securities balances. How are you feeling about taking up those levels here given the right backdrop?

[Carlos Vázquez]

Yes. I mean we redeployed about $3 billion of cash in the third quarter into securities – longer-term securities, Brock. We continue to – as we get more clarity, we continue to consider that doing more of that [indiscernible] probably do some more of that in 2021. Not dying to extend in the securities portfolio and what we're getting is like 110 basis points, frankly. But it's 100 basis points better than 10 basis points, right? So we will continue to consider that.

As I mentioned in my prepared remarks, we do expect the balances from the government to actually go up, especially in the first half of the year a combination of additional federal transfers and tax revenues coming in, and then probably going out in the second half of the year. So that will probably have more cash to invest. Although some of that cash maybe shorter term, I mean, some of the things that we have in the radar that we're keeping our attention on, for example, in the government balances is, there is a lot of noise especially in the last couple of weeks that there seems to be progress in the process of restructuring the public debt.

If in fact that happens and there's an agreement to be implemented sometime later this year, I do not know what that will ultimately be, but the last agreement that was discussed publicly, contained a one-time down payment from the government of Puerto Rico to a bond holders of about $6 billion. So there's instances here where significant amounts of the balances in the public deposits may move out. So we'll have to keep that in mind.

The new government in Puerto Rico has expressed an interest to – on their side of the equation to try to move the funds faster as well. So there maybe additional offers in normal course of business from the government of Puerto Rico. So we'll keep looking at all those things. But to summarize, yes, we will continue to consider extending somewhat in the investment portfolio, although, not trying to buy assets at 1% yield.

[Brock Vandervliet, UBS]

Got it. Okay. Thanks for the color.

[Ignacio Alvarez, President and Chief Executive Officer]

You're welcome.

[Operator]

The next question is from Glen Manna of Keefe, Bruyette & Woods.

[Glen Manna, Keefe, Bruyette & Woods, Inc.]

Hi. Good morning.

[Ignacio Alvarez, President and Chief Executive Officer]

Good morning, Glen.

[Carlos Vázquez]

Good morning.

[Glen Manna, Keefe, Bruyette & Woods, Inc.]

Ignacio, thanks for the color on the economy down in Puerto Rico. And I was just wondering if maybe you could give a couple of specific examples where the federal aid that came down on the Island and the $10 billion that was approved previously, where BPOP has been able to service some clients and maybe take advantage of that money that came down there?

[Ignacio Alvarez, President and Chief Executive Officer]

Yes. Well, again, the $10 billion in PREPA, very little of it has been spent. I mean, they authorize that, but we have not seen that money. For example, in our accounts with PREPA haven't changed dramatically. Neither with the PREPA now – PREPA has been going through a program of improving their infrastructure, and therefore, some of our contractor clients have gotten those contracts. And the CDBG money, we have extended lines of credit for several of our contractor clients who need to advance the funds before they get reimbursed in CDBG.

So again, I want to emphasize that while we're all very excited about the prospects of the money being released, today the release of those hurricane relief funds have been rather limited, so the expectation is that an upside coming. We haven't really seen that money flow yet. There's a lot of talk that they – I think, a greater disposition on the new administration to get those moneys released. What we've seen more is the impact on the consumer side, where you see the direct relief, that's very visible in our deposit balances going up.

The PPP loans, obviously that you see our deposit commercial balance is going up also. That money for hurricane relief has really – again, it's frustrating for all of us, but I – they [indiscernible]. So I look at the bright side, which is that's money yet to be pumped into the economy. And we have made progress as much as we criticize it. These were complicated processes. And for example, the amount that's being given to – awarded to PREPA is I think, a record amount that team has ever given to any entity. So these are big dollars. Again, want to make everyone's done down here. You're not seeing that money spent yet.

[Glen Manna, Keefe, Bruyette & Woods, Inc.]

Okay. Thank you. And Carlos, thanks for the guidance. In the past, on the loan growth guidance, you've kind of split it up between what you expected in Puerto Rico and what you expected on the mainland. And I was wondering if you could kind of do that again for 2021 on what the outlook is?

[Carlos Vázquez]

Yes. I mean the – on both sides, I think the outlook is little bit clouded by $1.4 billion of PPP loans going away, Glen. So that's how it drives the whole thing. So we successfully keep doing [indiscernible] means that we actually originated $1.4 billion more than that matured this year. Ignacio mentioned the round two PPP. We expect that to help, but we also do not expect that to be anywhere close to the magnitude of the original PPP. So if anything, I think that the commentary we’re doing before will continue to hold true Glen, which is that we are more confident that continued growth in the U.S. bank, and in Puerto Rico, probably more stability.

[Glen Manna, Keefe, Bruyette & Woods, Inc.]

Okay. Thank you. Thank you for taking my question.

[Operator]

The next question is from Gerard Cassidy of RBC Capital Markets.

[Gerard Cassidy, RBC Capital Markets, LLC]

Good morning, everyone. How are you?

[Ignacio Alvarez, President and Chief Executive Officer]

Good morning, Gerard. How are you?

[Gerard Cassidy, RBC Capital Markets, LLC]

Good. I hope it's sunny. I hope it's sunny and 85 down there. Well, I'm in a snow storm up here. So two different parts of the world.

[Ignacio Alvarez, President and Chief Executive Officer]

It's beautiful today. Okay, sorry about that.

[Gerard Cassidy, RBC Capital Markets, LLC]

No surprise. You guys are lucky. Ignacio maybe you could share with us, obviously there's been a change in this administration that we're all obviously aware of. And in the administration – the President Obama's administration, he was opening up relationships with Cuba and then under the Trump administration that went in the other direction. Assuming this administration reopens those relationships with Cuba. Can you share with us some opportunities that may arise for Popular if you're permitted to do banking down in Cuba?

[Ignacio Alvarez, President and Chief Executive Officer]

Yes. Cuba is always a difficult topic. I think that there's a great probability that Biden will revert some of the additional restrictions that President Trump put in. It may take him a while to do so through procedural hoops. When Obama opened up, we were very interested in Cuba. I think, I don't know if you noticed that we were one of only two U.S. banks that issued credit cards that could be used in Cuba and it took us awhile to get to that.

However, I really don't expect Cuba to have a big impact on short-term. Really it's – people always think from our perspective from the U.S. I mean, I don't think you are going to see meaningful change economically in Cuba unless the government there, it takes a radically different approach to the economy. We haven't seen signs that that's going to happen, so I don't expect anything dramatic to happen. I think Biden has bigger issues. Although I think he will revert some of those things, I don't think you'll see the level of enthusiasm you saw when President Obama was in power. And it was like the beginning of the new era. I'm not that optimistic.

So really I don't see that much opportunity for us, frankly. Again, if it does begin to open, we'll explore like we did last time. We invest in the time and money to get that credit card operating. It wasn't by the way very little use to that – on it. So it wasn't a moneymaker. So again, I don't think it's going to be a mover for us in the near future.

[Gerard Cassidy, RBC Capital Markets, LLC]

Okay. Thank you. Carlos, you answered one of my questions with the public deposits and what could draw them down. And you mentioned the repayment of some of the debt. What would you guys estimate as a normal level of those public deposits once we get to normalcy whenever that is?

[Carlos Vázquez]

Yes. That's a really good question. We talked about it a lot. When you think about that question that your normal banker reaction will be, oh, well, let's go back in history and look what the balances looked like before this stuff happened and that must be the right number, right? Unfortunately, when we did that that number doesn't work. Because a lot of the accounts that we have from the government now, we didn't have historically, because they use to say that GDB, and when GDB went bankrupt, then a lot of those accounts moved to us. So we don't have that historical flows of those accounts.

So I realized I'm giving you a very big range, but before GDB disappeared, we had various billions of dollars of carbon deposits if you add it everything up. But they were nowhere close to $15 billion. I would assume when things normalize that it's probably going to be a number somewhere between $5 billion and $10 billion. But I can't get any smarter than that big range to be frank with you.

[Gerard Cassidy, RBC Capital Markets, LLC]

Okay. Thank you. And then just finally, I know you can't give us the actual dollar amount of your capital action plans that you plan to announce. I think you said April. Can you just tell us the process because it's changed obviously for the DFAST, CCAR banks with the reintroduction of share repurchases within income limit? Can you just share with us what your process will be with the Fed to announce your capital action plans?

[Carlos Vázquez]

Sure. A lot of the rules that we all know are really – are only applicable to seek our banks. So while those rules on that is hardly applied to us. They sort of set the stage. It telegraphs to everybody what the Fed is willing to consider right, conceptually. So we're watching very attentively what those rules are. At this point in time, we are planning to continue our process as we have historically Bernard so – Gerard, I'm sorry.

[Gerard Cassidy, RBC Capital Markets, LLC]

[Indiscernible]

[Carlos Vázquez]

We'll call you [indiscernible]. We are in discussions with the Fed. We go through our whole capital plan with them. Get their feedback. Sometimes some adjustments are necessary. We still are hopeful that we will get whatever response we may need from them given their response for all the parts, sometimes we get response are only part of this in time for us to make an announcement in our webcast in April. So we have not changed our process too much. We're mindful of the boundaries that the Fed has made public, but we have continued our process, so far largely unchanged.

[Gerard Cassidy, RBC Capital Markets, LLC]

Very good. Thank you, Carlos.

[Carlos Vázquez]

Thank you.

[Operator]

And this concludes our question-and-answer session. I would now like to turn the conference back over to Ignacio Alvarez for any closing remarks. [Technical Difficulties] The conference has now concluded. Thank you for attending. You may now disconnect. Have a great day.