Q1 2020 Earnings Call

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Good morning, and welcome. The popular ink earnings call all participants will be in listen-only mode. Should you need assistance, please signal bulb by pressing the star key followed by zero after this presentation will be opportunity to ask questions asked the question you make press * then 1 and your telephone keypad to withdraw your question, press * then two, please note that the event is being recorded like to turn the conference over to mister Paul McCarthy low investor relations officer, please go ahead good morning and thank you for joining us on today's call with us. Today is our c e o Ignacio Alvarez our CFO Carlos Vasquez and our cro video store. They will receive the results for the first quarter and answer your question 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.

Citations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth with in today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on a web page as popular. I will now turn the call over to our CEO Ignacio Alvarez, good morning and thank you for joining the call. I hope that you and those closest to you folks are healthy and staying safe before addressing our quarterly results at first like to discuss the current business environment in Puerto Rico and how we responding to the covid-19 demek outlined in the first three slides of the presentation.

The covid-19 demek has negatively impacted the global economy creating significant volatility and disruption in financial markets and increasing unemployment levels.

The Puerto Rico macro indicator very regularly provide remain stable to the end of February. However, the pandemic and related economic disruption has had a very dramatic impact on the markets we serve.

The local response to the covid-19 pandemic has been substantial on March 15th. The governor of Puerto Rico mandated is strict lockdown for residents and ordered all nonessential back on the island to closed indefinitely.

Most businesses establishments are closed and those that remain open are only operating partially causing a significant disruption to the Islands economic activity.

Only businesses involved in providing essential Services as defined by the governor's executive order have been permitted to remain open and even those that have been even those have been curtailed in their operation. For example banks have had to Temporary suspend mortgage an auto loan origination. The severe lockdown restrictions have also disrupted commercial lending addition the Puerto Rico government has mandated mandated its citizens to remain sheltered in place and imposed a mandatory 7 p.m. Curfew Puerto Rico was the first name is Dixon to enact this scale of lockdown Moody's Analytics estimates that Approximately 80% of Puerto Rico's 105 billion GDP has been impacted by this dog Pals.

The estimate the economic costs through April 12th, and approximately 6.3 billion to 4 as long as these restrictions remain in effect the estimate an additional cost of 1.6 billion per week and reduced economic output.

Alex Wiley employment trends have remained stable through February initial unemployment claims has spiked over the past month in Puerto Rico as they have across the entire United States and as could be expected tourism has also been significantly impacted the Puerto Rico tourism company estimated total Hotel occupancy to be approximately 8% off.

according to the

Creator of the same one international airport during January and February photo Rico receive 14% more passengers than 2019. However during March break drop by 38% when compared to March 2019 dropping over 73% over the last two weeks of the month and they have continued to drop.

The curfew and stay-at-home order have also had a dramatic impact on the spending patterns of our clients customer purchase activity has been severely impacted.

Like employment trends in February were stable compared to the year ago. However for the 30 days after the curfew was enacted debit and credit sales decreased by 46% versus a table same time frame and 2019 both the local and federal governments had begun to provide relief and assistance in response to the page today. The Puerto Rico government has approved a $787 million fiscal stimulus plan additionally as part of the exact Puerto. Rico will receive approximately 5 a.m. And funds including up to 1.5 billion in direct payment.

Residents of Puerto Rico are also entitled to receive the supplemental federal unemployment benefits of $600 per week.

Our management team has been closely monitoring the spread of covid-19 and has taken measures to ensure the soundness of operations and the safety of our employees and customers.

Strengthen our business continuity plan and our executive team is constantly meeting to Monitor and Implement actions to mitigate the impacts of the pandemic.

We are communicating regularly with our employees to keep them informed of the involving business environment and to help ensure their safety. We offered alternative work arrangements for a significant portion employee base provided incremental training and it personal leave days and paid approximately 3.4 million in bonuses to front-line employees.

Branches are operating in a compressed schedule.

Emphasizing drive-through, we're available and rotating Personnel to reduce exposure. I am deeply grateful to our colleagues for the effort commitment and bravery took it under very difficult circumstances.

We're encouraging customers to use alternate banking options, which is our Digital Services smart ATM telephone banking drive-thru Services. We've increased transaction limits with multiple assets and 8 p.m. We have also weights 8 p.m. And certain other fees as well as early withdrawal penalties on CDs most importantly we are assisting customers facing financial difficulties offering payment deferrals for mortgage Auto and other consumer and Commercial loans.

Finally following the passage of the cares act. We mobilized are human in Tech resources to offer SBA Loans to affected small and medium-sized businesses.

Did more than 1.2 billion in loan representing more than 15,000 small and medium-sized businesses?

Today we have received confirmations must be a approval of 819 million of the submission.

We will continue to accept and process application until the funding is exhausted.

In our communities you have committed a million dollars to support efforts and four primary areas providing medical equipment to Health Care Professionals supporting locally-based Healthcare research project to come back covid-19, providing Financial advice and business continuity support to entrepreneur and small and medium-sized businesses and finally assisting nonprofit organization to ensure the continuity of their services.

As we continue to respond this rapidly changing situations our plans and actions will continue to evolve please turn to slide six.

The quarter's results reflect the impact of the economic disruption caused by the covid-19 pandemics.

I reported quarterly net. Income of $34 million was significantly lower than our results for the fourth quarter and and compared to the first quarter of last year.

the primary driver of this decrease was a substantially higher provision expense reflecting the newly adopted Cecil County pronouncement and the most recent post coverage map for economic forecast for Puerto Rico and the US

Aside from the increased provision. The first quarter results were characterized by higher non-interest income lower operating operating expenses and lower taxes would be offset by lower non-interest income.

In the quarter are not interest income was impacted by reduced Merchant transaction activity the waving a certain fees and service charges the suspension of mortgage and regulations as well. As low income This Is A covid-19 disruption of the last two weeks of March. Additionally, we have experienced higher expenses related to expanding remote access for employees additional employee benefits wage increase measures to protect employees and additional efforts related to customer leave programs.

Excluding the adoption of Cecil this quarter credit quality metrics through March continue to Show Stable results.

Continuing impact of covid-19 on the economy and our operations will be heavily dependent on advances in the medical Arena and how quickly economic activity can safely remove I would all turn the call over to Carlos discuss the financial results and more details. Thank you Ignacio. Good morning. Please turn to slide seven for first-quarter results. As usual additional information is provided in the appendix to the slide deck. Today's earnings, press release details various S4 from the fourth quarter net interest income for the quarter box 473 million an increase of six million from the fourth quarter, the primary driver of this increase was higher loan balances. We acquired a $74 credit card portfolio at the end of 2019. So continued growth in our Commercial Auto and these portfolios in DP PR as well.

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Mortgage portfolios in popular bank our deposit calls were down fifteen basis points in the quarter due to the effect of lower Market rates from Puerto Rico public the public an interest-bearing deposit a popular bank name for q1 was 3.94% and 11 basis-point improvement from last quarter taxable-equivalent. Basis name was 4.34% 14 basis points higher than in Q4.

However, we expect margins to decrease in Q2 previously. We have mentioned that the historical sensitivity of our net interest income to rate changes life around four to five million per quarter for every 25 basis-point change in Market Rings. This sensitivity was not evident in q1 took the change of Market rates in March happened. Very late. In the quarter you too will reflect the full effect of lower rates. Assuming no other material changes in Acid Bath as has been the case for the last couple of years. I said mix and the level of public deposit will also continue to have a material effect on our margin.

I thought the end of the first quarter Puerto Rico public deposits were roughly ten billion, which is down slightly from Q4. We still expect probably deposit balances off to come down over the long term but covered with federal assistance may increase balances in the near-term the rate of expenditure of this funds off and the timing of agreement on government on the government's debt restructuring will dictate the amount and timing of any balance reduction.

Our loan portfolio grew by 255 million in the quarter with our business accounting for approximately two hundred ten million of that increase.

Even the origination is associated with we expect loan balances to be higher in the second quarter while we have previously anticipated slight growth in loan balances in 1220 given the current environment that Outlook is now uncertain the ultimate level of loan balances for 2020 will depend on the duration of the PPP loans and the performance of the economy for the remaining of the year.

Provision expense for the quarter of 190 million reflects the adoption Cecil and incorporates the most recent coverage affected macroeconomic forecasts Palm Rico and the US the quarter-over-quarter increase in allowance for credit losses was $442 million or an increase of 93% legal will expand on this month during his credit commentary non-interest income decreased by 25.7 million nearly all three categories decreased water over quarter Insurance fax or five million lower primarily due to the seasonal nature of contingent commissions, which are higher on the second and fourth quarters.

credit and

These were five million lower and were significantly impacted by the lockdown of our Market in the last two weeks in March mortgage results were negatively impacted by devaluation adjustment of the MSR as compared to the prior quarter. We also recognize three million in mortgage hedging losses in Parts related to the government-mandated stoppage of mortgage origination Coq Rico since mid-march. Finally, we had a six million unfavorable variance in adjustments to Identity reserves on loans sold with recourse.

The closure of our of business in our Market an estimated negative effect on non-interest income of five million in q1. We currently expect that lower client activity and the waiving of various fees will have a negative effect on non-interest income of about 8 million per month the speed at which we can return to more Trend like not interest income levels which averaged 135 to 140 million per quarter over the last two years will depend on the rate of reopening of our young kids and the increase in client activity levels.

Total operating expenses were 373 million lower than the prior quarter.

Personal cost decreased by eleven point five million these increases were driven by lower incentive compensation of 15.4 million partially offset by a special package with it incentive to front-line employees or three point four million business promotion costs were nine million lower in the first quarter approximately 4.3 million of this decrease wage reflects, the traditional seasonality of advertising sponsorships and promotion reduced customer activity resulted in lower reward program expenses of 3.2 million.

These expense decreases were partially offset by slightly higher oil and other operating expenses.

In response to lower interest rate and the effect of the pandemic on our business. We will be implementing various cost savings initiatives that will affect personal related expenses professional fees business promotion and other operating expenses. We expect these efforts to result in savings of approximately 55 million in 2025. I thought we sold. We now expect average quarterly expenses for the year twenty-twenty to be around $369 million as opposed to our prior guidance or 3083 million.

Our effective tax rate for the quarter was 8% which reflects the impact of lower taxable income driven by a higher provision for credit losses due to Cecil which includes the impact of the covid-19 pandemic for 2020. We currently expect our effective tax rate to be between $14 and 18% Please turn to slide 8 a.m. Our Capital levels remain strong relative to Mainland peers as well as with respect to well-capitalized regulatory requirements.

On January 30th of this year.

We entered into an accelerated share repurchase agreement or a Sr. For $500 million dollars in common stock under the terms of the ASR our banking come back at the ability to terminate the SR if the corporation stock price drops to a specified level to decrease of our stock price resulting from the pandemic trigger this close and are a hazard was terminated on March 19th. This termination has two effects first, we realize the price discount on the original delivery or 7.1 million share second the remaining $167 million dollars yet to deliver it under the contract termination time are settled be at the delivery of additional shares acquired by our counterpart. We are continue Market purchases.

March Thirty One twenty twenty we had received a total of 7.7 million shares.

So April 24th, we have received an additional 2 million shares. We expect the complete settlement all termination of the SR to be closed out during the week.

To complete our 2020 Capital plan. We also increase our quarterly common stock dividend and redeemed are 8.25% Series be preferred stock.

Park, that creature one ratio in q1 was 15.8% down from 17.8% and tangible Book value increased in the quarter by $1.06 per share to 5617. The increase was driven by higher and realized gains on investment or quarterly. Net income and a lower share count of 7000 what they are $500 buy back the day you want effective Cecil and the payment of our dividends.

Please many Market participants participants are doing versions of burned down analysis in this slide. We include a calculation of our pro-forma Capital ratios applying the loss ratios for our last published severely adverse stress tests from 2017 in this simulation even after it severely adverse allowance for credit loss of one point seven billion dollars. We still end up with very strong safety one ratio of 13.9% these results perfect popular's robust Capital position.

The first quarter of 2020 allowing for credit losses represent 54% of our severely at birth defects loss estimate.

Are returned and title Equity was 2.9% in the first quarter affected by the previously described items. Mostly the provision. We will continue to pursue our Target at all days return home equity.

before

I tend to call over to leave.

The result to be a section of Cecil we increase our day one allowance for loan losses by 306 million. We also recognize an allowance for credit losses or approximately 13 million months related to help to maturity that security portfolio. These adjustments were recorded as a decrease to retained earnings as of January 12020 net of income taxes took approximately $17 million related to purchase credit impaired or PCI loans previously accounted for under reso p as advancing our last webcast as part of the adoption Cecil the corporation made the election to break the existing pools of purchase Credit in credit impaired or PCI loans, which in accordance of the applicable accounting guidance wage were previously excluded from non-performing status.

Once transition to the individual lone measurement. These loans are no longer exclude for not performing style resulting in increased of 283 million in as a January 1020. Let me remind you that this is a change in classification of this loan not a change in payment or performance risk. This reporting change does not in any way increase the credit risk contained in popular loan portfolio. However, the accounting treatment of this knows did result in a higher reported MPL level. We plan to finish the effects of seats on regulatory Capital over a five-year period with that. I turn the call over to leave you.

Thank you, Carlos and good morning before discussing the impact and credit transfer the quarter. I would like to take the opportunity to highlight changes have occurred in popular. I could have reached profile since the last Global financial crisis, which you can see on slide number nine.

Also one might be tempted to be popular in terms of the last crisis. The reality is that we are in much different company with a stronger balance sheet and better risk profile wage thing that we stopped subprime lending 2008. And today have limited subprime exposure in our consumer and Mortgage business are US Bank is now a community and phone number with a lower risk profile in Puerto Rico since 2007 and Commercial our commercial and construction exposure have decreased from 55% of our town to 37%

In the same time frame construction lending has decreased by 86% and now stands at 164 million.

On the bottom half of this like we also present the Puerto Rico commercial portfolio. I include the net charge of distribution by segment since 2008 the important message from Nashville. These are commercial make a significantly improved by reducing exposure to other classes with historically High losses.

To my portfolio. We are focused on two areas mortgage and auto lending. Thereby increasing the percentage of collateralized Consumer loans.

We believe as well position to operate successfully during diverse economic environments given automatically improve risk profile and changes in our portfolio, ma'am.

I need to page number ten. We are closely monitoring the impact of the covid-19 Chrysler on our entire loan portfolio. However, we believe that certain type of wage are more sensitive and are highlighted on this line.

Within non-essential retail the shelter-in-place orders are for detailed activity of this segment an important part of our shopping center portfolio in both regions are owned a long-term customer with financially strong principles that can withstand short-term disruptions in cash flow.

They Auto retailing Puerto Rico. This activity was being non-essential under the governor's looked on order and sales have decreased significantly.

Popular historically, no losses the dealer segment even during prolonged periods of the grease industry sales given the collateralized nature of this long what we expect a significant level of people request on auto dealers are allowed to reopen we expect a greater increase in demand.

In the healthcare facility segment the story divorced by geography are Puerto. Rico exposure is to hospitals were restrictions on non-essential procedures money factor emission levels and cash flows hospitals are illegible for PPP loans and other Federal programs for reimbursement of healthcare related expenses of those revenues not otherwise reimbursed we expect this segment to quickly rebound want restrictions are lifted today. There have been low levels of Department requests.

In the US or exposure is mainly to Skilled nursing facilities.

This segment is a key component of the post-acute care that will continue to experience high demand due to demographic Trends on the structure of the US Healthcare System several Federal and local government funding programs are expected to be available through the hospital Relief Fund included in the courage act the majority of our customer our strong young readers with significant global cash flows.

Our largest customers are substantial liquidity at popular bank.

In terms of the construction segment. Most of our exposure is in the US and principally in the New York Metro region. The majority of our projects are in the late stage of completion have low long to cost and normal exposure to Upper end residential.

Supposed to have liquidity have historically injected Capital not necessary today. We have received a limited number of the request in this portfolio.

We think the hospitality portfolio which includes restaurants and hotels were closely monitoring our hotel exposure Hotel balances were 280 million at home mostly in Puerto Rico.

This segment has experience elevated levels of a stress due to travel restrictions that are that are produced occupancy rates.

Also the speed up recovery some certain we believe that our business focus will serve as well as we expect business Travelers will be the first to recover.

We have received a considerable number of payment or requests from borrowers in the segment.

Restaurant balance is where 250 million end. This segment has experienced stress student by the shelter-in-place orders. The majority of our restaurant hours are taking a quick service or fast food. I've continued to operate through delivery and carryout.

I'm speaking to me. It starts to be open.

Respect this segment rebound at a faster Pace, especially the quick service restaurant.

We do not have material Curry exposure to oil Aviation or share National credits. Please turn the page number 11 to discuss credit metrics.

Non-performing assets increased by 253 million to 903 million this quarter mainly driven by a non-performing loan increase of 241 million.

The increase is driven by Puerto Rico mainly due to launch previously accounted for as purchase credit impaired this portion of our changing a bill does not in any way increase our credit risk.

Open be measured at the individual level. This one's are no longer excluded from long-term installers resulting in an increase of two hundred seventy eight million in m. P l as of January 1st, June 2020. Please increase included under forty four million in loans currently over 90 90 days past due $134 billion in loans are not delinquent payment terms with are reported as non-performing do two other credit quality considerations.

exclude exclude the same pact decreased by twenty-three million mostly related to lower mortgage and bills in the u.s. Increased by four million bucks to do a transition to purchase credit if you really launch of the taxi Medallion portfolio

Do you know the quarter the ratio of MPL to Total loans helping portfolio was 2.8% compared to 1.9% in the fourth quarter 2019.

please

flight number 12 to discuss MPL influence

Excluding the purchase quality related Transitions and telling close increase by ten million on a link or a basis driven by repurchase mortgage loans in the US influence of MPS were relatively flat quarter-over-quarter turning to slide number 13 net charge-offs amounted to sixty three million jobs, emmalise 91 basis points of average loans healthy portfolio compared to eighty two million or 1.1% in the previous quarter.

The decrease of 19 million was related to net charge of taking in the previous quarter, you know taxi Medallion portfolio reflecting agreements which with a majority of our taxi Medallion bombers off the corporation allowance for credit losses increase by phone and forty two million with the prior quarter to nine hundred twenty million during the day one impact of the adoption off trouble with changes in the macroeconomic condition from the covid-19 endemic. We provide further details of that they want and they swing box on the following slide.

The ratio how long for credit losses to launch healthy portfolio was 3.3% in the first quarter of 2020 compared to 1.7% in the previous quarter the ratio of allowance wage loss of twenty years healthy portfolios stood 120% compared to 91% in the previous quarter the provision for credit losses increase by 142 million from the bath water mainly driven by the covid-19. On the macroeconomic scenarios, the provision to make charge of ratio was 302% in the first quarter of 2020.

Please turn to slide number 14 to discuss details on the driver's of the increased or allowance worker losses under Caesar.

Yeah, dr. Cecil on January 1st 2020 since implementation allowance for credit losses related to loans has increased by phone and forty two million or 93% driven by the date one adoption impact changes to the economic scenarios and Loan portfolio grooming.

Did they wanted option impact resulted in an increase of fifty million in the ACL?

Did did they want impact was mainly driven by increases in the following Puerto Rico loan portfolio consumer by 122 million mortgage by 86 million and Commercial by 62 million.

The economic scenario utilize was based on the March 27th. Moody's Analytics S3 downside scenario.

Re scenario assumes a double dip recession starting the second quarter of 2020 the US stimulus plan enables GDP growth in the third quarter, but she claims again in the fourth quarter and it's not until the second quarter of 2021 that is sustained recovery begins under this scenario unemployment pics in a second quarter with rates of 13% in the US and 30.5% in Puerto, Rico economic activity in the second quarter declined by 25% in the US and 18% in Puerto Rico this scenario closest closest to increase by hundred thirty-four million driven by increases in Puerto, Rico consumer and Commercial.

summarized

Yeah. Option of six or methodology and the impact of the covid-19 pandemic cause significant changes in certain parameters Matrix, particularly the level of MPL the allowance on provision for credit losses and related ratios and early delinquency indicators as we stop collection efforts in the second half of March.

The effects of the covid-19 crisis continue to evolve and the full extent of the economic disruption is uncertain.

The improvement over the last few years in the risk profile of our loan portfolio positions popular to successfully operate under challenging environments. We will continue to carefully review the exposure of the portfolios to coronavirus related with changes in the economy Outlook and the effect on credit quality without I would like to turn the call over to Ignacio month for his concluding remark. Thank you. Thank you video and Carlos for your update to summarize our results for the quarter were impacted by a large increase in our provision expense reflecting the newly adopted see some methodology in the most recent post covered covid-19 micro macro economic forecast for Puerto Rico and the US however, aramco Volts for the first quarter, we're solid given the extent of the economic acceleration experienced during the second half of March.

The covid-19 global pandemic has exposed the fragility of our economic and social system and the need for greater collaboration between all sectors. I am hopeful that it will also read what can we accomplish when we work together in pursuit of a common goal at popular the well-being of our customers employees and communities is our priority. We need to decisively to help our employees stay safe while they continue to offer essential banking services to our customers and communities.

During a hundred and twenty six years we have often operated and highly uncertain and volatile economic. And I've always managed to them successfully almost three years ago. We Face the impact of hurricane Maria which caused extensive damage and left Puerto Rico and the Virgin Islands without power water and Telecommunications in many cases month. We responded decisively adapted to change and delivered favorable results even under these very difficult conditions.

Well each situation presented unique challenges. We have the team the experience and the financial resources to do so again, and I am optimistic about the future of our country despite the uncertainty. We're all facing as if I suspend a MC. We are confident that with our strong liquidity position and capital levels. We are well prepared to successfully managed to the current challenges. We're not ready to answer your question. Thank you.

When I'll begin.

Question answer session ask question. You may press star than one on your touchtone phone for using the speaker phone. Please pick up your handset before pressing the keys to withdraw your question, press * then two.

This time we will pause momentarily to assemble the roster.

First question comes from Alex purred Piper Sandler, please. Go ahead.

Hey, good morning, guys.

First off just talking about the Cecil provision here and kind of the assumptions and really appreciate the late everything out here on slide fourteen. But as I look at the slide eight where you compare the Cecil reserved versus the the sort of profile form of D fast assumptions from a couple of years ago. Can you talk about the differences in the assumptions 4D fast that would I would cause the The Reserve or the charge office to go, you know that much higher. I think whenever you look at the construction scenarios, it's more I would say more of a gated.

You type of recovery. So we have an impact of economic downturn for about $500 and then you start the road to recovery in the defrost. We measure the the losses associated with a specified. While the 6th obviously is like some losses so that certainly created a difference between wage compared diesel versus cutting the other the other aspect that is different is the economic scenario, which usually in the divorce has elevated. Yep. It's a nice sort of like a w with a recovery starting in early 2000s.

okay so in order to get you to what this slide exhibits you exhibits on the stress test you need really need the recovery to be much more elongated in more of a you vs. what your model length of the of the downturn more than anything else about those comparisons okay that's helpful and then I guess the the sort of the way the ASR played out was a little confusing to me can you just tell us off you know to help us Square kind of what tangible Book value could do in the second quarter so you're going to receive another two million shares in the second quarter and then is there an adjustment to equity as well no I think that the

the exactly the the the shares were going to receive will depend on on the execution of of the termination agreement Alex the best way you think about it is that when the when the ASR was terminated the initial

number

Delivered to us that sort of that part of it is closed out and then the the contract itself requires that the same process that is also in shares and that is why it's ongoing now the first delivery of sample 1 million shares will benefit from a big discount on the original contract. The additional purchases don't know. Um, but I think the tools the main the more important change here is that this this program which we expected to end up late this year will actually end in the second quarter. So so the full effect of of the ASR will be done in in the second quarter of supposed to the third of the 4th, but there's no change in equity. This is accounted for ready when the 8th are was contracted in January.

Okay, so so there will be a reduction in Share account in the second quarter, which will give you the full Year's benefit of the program will not be an adjustment Equity correct under the original contract that reduction that last reason for the shares would has happened late in the year now. It's going to happen second quarter.

That's great. And then just final question for me, you know, and maybe this one is a little bit more, you know, forward-thinking, you know, but you know one thing that's always struck me was a go down to Puerto. Rico is just how unbelievably crowded the bank branches are, you know, especially when you compare them to branches in New York City for example, does does the ongoing crisis right? Now? How long does it cause you to rethink? You know or give you any indications that may be the way that banking end up being done in Puerto. Rico could change kind of on a more sort of permanent basis down there and kind of help you rethink the way that you are allocating expenses, you know over the next, you know year and and into twenty Twenty-One. Well, I'm not sure over the next year this agnostic. I mean this pandemic will cause us to rethink almost everything so, you know, but definitely definitely, you know, we're we're going to be looking at it but one thing people forget is that they are are less branching off.

In Puerto Rico, then there are so we're not over branched as an industry. That's the one thing that transaction levels have remained high. Now people this pandemic has led to more digital transactions whether that will be a permanent change. I don't know but you don't see lines that are branches anymore. But you do see lines in our drive through so there are still a lot of people transaction physically again. Another thing. I want to emphasize is that as opposed to some of our markets like New York and South Florida the cost of operating branches in Puerto. Rico is not is not huge. Our our our rental expense are committed Spencer branches is relatively small. The biggest expense is the the employees. Obviously we need to make we've made a big push before and with the pandemic we're making a bigger push to move people to our digital transactions, but you know that that will take time and we'll see how that plays out, you know obvious. Yep.

Something we're we've been promoting will continue to promote even more.

Next question comes from Mark Palmer. Btig, please. Go ahead.

Yes, thanks very much for taking my question. First of all, the guards had the Deferred payments. Just wanted to ask about the mechanics of how that would work, Once we get back to our presumption of payments as it pertains to the overall loan balance will the Deferred payments, you know, essentially be tacked onto the end of the loan such that the maturity schedule will be pushed back or is there some other approach that would be taken?

Great. Thanks for taking my questions.

That's that's generally how it's going to work for our mortgage products for some of the other consumer products that you know, the mortgage products have as long as precomputed interest. So we just move it at the end some of the personal on auto loans. Although we will move in at the end. They have simple interest. So the the mechanics are a bit different in each product, but yet for more of it is just packed at the end. Okay. Thank you. And with the guard to the company's provision for loan losses, how should we think about food involved in the second quarter and Beyond?

We've got the video obviously it's going to be a function of job growth and economic scenarios am checking out to that. Yeah, it's it's it's increasingly complex to comment about the provision looking forward because you know, we had to run the models and we don't we don't know what the inputs on economic things are going to be by the end of the corridor. So a lot of uncertainty and obviously this is different than some of the other economic crisis we face. I mean the the some of the models are going to be dependent on the health outcomes, right as you saw the other day development and health can move the markets can move economic forecasts. So, you know, we'll have to see what happens how successful economies open up or don't open up whether the ones that open up faster have problems. So there's a lot of you know question marks that are out there. Yep.

I'll have to be answered.

Okay. All right. Thanks very much.

And if you have a question, please press * then 1 our next question comes from Jared Cassidy RBC Capital markets, please. Go ahead.

Thank you. Good afternoon. Everyone. Hey John, how are you? Doing? Good. Thank you. Thank you for the detail. By the way always very very helpful and slide ten months and looking at the sensitive segments to covid-19. And you listed the deferrals can you from your experience with the Hurricanes that you've been through in the past? And the whole programs have used in those time periods percentage of deferrals actually go back to accruing versus the ones that actually do end up on non crew. Generally speaking.

and

I mean, I will tell you based on my experience with Maria generally most of our clients continue to accrued so we did not have a negative experience with affirmative action was very positive and we were we were able to help our clients. Get back to their feet.

Very good, and I know you guys have discussed on the call what the current conditions are in terms of the lockdowns and stuff and I apologize if you dress this month. Um, I had to jump off the golf for a brief minute. Can you tell us what the current Outlook is in terms of when the restrictions will be lifted if there is an outlet for that at this time. Yeah. It's it's it's a bit uncertain the the governor of Puerto. Rico is receiving input both from a medical task force and a an economic passport and not imagine their their perspective is a little bit different the medical task force being more conservative from what they're recommending and the economic task force being a little more open. We're expecting her to say something I think by tomorrow Saturday at the latest because the the current lockdown expires on Sunday, so I think there will be a gradual opening but our governor has been dead.

The conservative on the health front. So I I think you're going to see our opening would be more more gradual than in some of the other jurisdictions, for example, because our law has been more severe than other jurisdictions, you know, most jurisdictions for example banking is an essential service and it's totally Exempted he or she is limited some of the things even Bank Banks can do Thursday. We mentioned the call your mortgage and auto loans are basically suspended. So I will anticipate it will open up somewhat probably with construction, maybe some Professional Services, but she's going to take off I think in more gradual than some of the other state Governors and as you know, we we've we've been have so far. We've had a pretty successful story in Puerto Rico in terms of the number of deaths have been relatively low. Our hospitals are not overwhelmed. In fact, we have the opposite problem the senses and many of our hospitals are very low so, you know dead.

I can't complain about that. Obviously. We all want the economy the open but we don't want to be in a situation. We have a big second wave and have people open to close again. So I think we'll begin to open. I think it'll be more gradual than some of the other jurisdictions that you've seen.

Very good and then just lastly on your economic scenarios and slide fourteen. Which again thank you for the detail the cube Cube decline in the United States real GDP. I'm presuming that second quarter 2020 versus one q2020. Do you guys have what the estimate was that you used for the full year twenty-twenty declined wage 2019?

I don't have that.

And we will provide that to you you are. Okay. Thank you. Great. Thank you guys.

You know, if you have a question, please press * then 1 our next question that comes from Aaron. So I got a bit of City, please go ahead. Thanks just on your life W forecast and apologize for kind of sitting there kind of ask. This question have had the scenarios worsened from Moody's since Thursday, March 27th. I think that you're using kind of a different one. I think than some of the other banks that we talked to have utilized is that forecast changed much since the end of March.

I haven't really looked at the recent scenarios buy movies the difference. I mean most of our peers I think use the Baseline. We thought based on a benchmark analysis that downside scenario. There's three was more reflective of the reality that the one we use as as of quarter-end.

Yeah, I would agree with that to the the other question. I had was on the deferrals, you know, what's what's the process here for the extent that these you know the dog continued to be locked down for a while. You know, how how long can these deferrals go out before you start to have to have to recognize them, you know, it's underperforming loss.

That's a difficult accounting questions. But normally, you know, if you if you if you look at the the mortgage loans, we do have to care Zach which sets the standards basically that you know under law any any federally supported guaranteed loan. We have to give it we have to give a six month deferral and if the client asked for an additional six months in Puerto Rico there is adopted a law for most of the other products it requires up to four months. I think within the terms of those limits we should be okay from non-accrual, you know, those are statutory mandated across-the-board requirement. Other than that, it becomes more, you know of a case-by-case analysis of the present value of the payment how much it's impacted and but you know within those statutory limits I thought you know, we'll be okay.

Thank you.

This concludes our question-and-answer session. I'm all like to turn the conference back over to popularise CEO. Mr. Ignacio Alvarez, please. Go ahead.

Thank you for joining us today. And for your questions, please stay safe and concentrate on that. We look forward to sharing our results for the second quarter in July. Thank you very much.

Conference is concluded. Thank you for attending today's presentation. You may now disconnect.