Q4 2020 Popular Inc Earnings Call
Good morning, and welcome to the popular fourth quarter of 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask.
Good question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then to 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.
Good morning, and thank you for joining.
With us on the call today is our CEO Ignacio Alvarez, our CFO, Carlos Vazquez, and our Sierra video story on it we'll 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 todays 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 Dot com.
I will now turn the call over to our CEO Ignacio Alvarez.
And thank you for joining the call I hope that you and your loved ones are well.
Despite the challenging economic environment, we generated generated $507 million in earnings during 2020, and then to ear in a high note with 176 million and earnings during the fourth quarter. This was one of our best quarters in our history.
Results reflect the ongoing rebound in 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 three 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 him to third quarter as many of the pandemic related restrictions are gradually loosened.
Climate 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 remains 8% below the December 2019 levels.
In 2020, you auto sales were 11% lower than the previous year, mainly as a result of the restrictions on auto sales and financing from March to play. However, demand has rebounded sharply since may and remains robust.
Fourth quarter sales of almost 36000 units Mark the highest recorded quarterly level going back to at least 2013.
So net sales increased by 16% in the fourth quarter as compared to the year ago period.
Tourism in the hospitality sector are improving slowly but continues 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 clientele debit and credit card sales in dollars increased by 18% compared to last year's fourth quarter for the full year sales increased by 10%.
Auto loan and lease originations at BBB are increased by 11% compared to the year ago quarter and were only down 5% for the full year notwithstanding the pandemic related disruptions. Similarly, we saw continued strength in the dollar value of mortgage durations.
D V P R, 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 four for an update on PPP and other operational matters.
Most of our branches are now fully operational and.
And we continue to take measures to ensure the safety of our employees and customers.
We're also focused on supporting our customers in this uncertain environment.
The initial phase to the pandemic, we asked for payment relief to our retail and commercial customers 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 premises on premise activities, which we currently plan 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're eligible to do so.
With respect to the PPP program.
144 million of the loans originated more than $150000 and are eligible for expedited forgiveness under the sba's simplified process.
We have deployed an online platform for customers to request loan forgiveness and have submitted approximately $500 million and forgiveness requests to S. P. A.
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 3200 applications totaling approximately $234 million.
On the digital front, we continue to have more than 1 million monthly active users on army Banco platform in Puerto Rico.
We captured 71% of deposits in the fourth quarter through digital channels for the four years 67 per cent of deposits to PPP are recaptured digitally compared to 52% in 2019.
Finally, our customer base in Puerto Rico continues to grow increasing by 6000 in the fourth quarter to reach more than one 9 million unique customers.
Please turn to slide five alright.
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 high reported 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 asset in both Puerto Rico and the U S.
However, both of our brands had lower net interest margins during the year.
Credit quality remained 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 one capital and tier one common equity ratio at 16, 3%.
Our tangible book value ended 2026 to $3 seven a 14% increase year over year.
In Puerto Rico, we grew loans by 7%.
Increased our deposits by 35% and our.
Our net interest margin was three 4%.
In our U S operation, we grew loans by 8%.
Deposits by 2% and our NIM, our net interest margin was $3 to 1%.
Please turn to slide six.
Our core 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 pre tax 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 cost.
Credit quality trends were solid in the quarter.
All in all we are very pleased with our fourth quarter results and with that I will now turn it over to Carlos Thank.
Thank you Ignacio good morning, before we turn to fourth quarter results I will expand on popular 'twenty to 'twenty full year performance.
Our net interest income decreased by 2% year over year to one point 86 billion as lower net interest margins were only partially offset by growth in earning assets.
'twenty to 'twenty provision expense increased by 76% to to $193 million or margin driven by the impact to 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 personal cost and business promotion expenses were the primary drivers.
Our capital position to this robust we ended the year with a tangible book value increasing by nearly $8 per share to <unk> 63 year old seven.
This improvement was achieved even after the repurchase of 500 million common stock to increasing our common stock dividend and the redemption, how to one 8 million in preferred stock.
Common equity tier one ratio dropped by 149 basis points year over year to 16, 3%.
Please turn to slide seven.
All information provided in the appendix to 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 moving in Q4.
More specifically, we do their weighted coupon 3 million higher deposit service fees $1 3 million higher other service fees.
$19 3 million. In addition to the mortgage banking income mainly due to negative impact in Q3 of the bulk agency mortgage loan repurchase.
These items were partially offset by $3 3 million lower gain on sale of securities and $4 2 million lower earnings from our portfolio of 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 compete with 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 to our income statement <unk> 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 will have been $1 7 million, primarily driven by a $6 3 million increase in personnel cost composed of a $2 1 million of severance expense related to popular bank's branch network realignment higher four one 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 branch realignment.
<unk> fees increased by $7 6 million mainly due to.
To higher advisory expenses, and higher processing and technology service cost finally business promotional expenses increased $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.
$83 million in average quarterly expenses, we disclosed during our webcast in January of 'twenty to 'twenty.
In response to the pandemic, we implemented various cost savings initiatives.
We have targeted $55 million 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.
Fact of the pandemic wanes.
For 2021, we expect average quarterly expenses to be between $375 million to $280 million.
Well this is hired under probably a ratio we achieved in 2020. It is still below our origin original expense guidance for last year.
This increase from 'twenty to 'twenty is mostly driven by higher expenses in the following three categories.
Personnel as we invest in training compensation and related benefits mainly.
Many of the savings in 2020, where cost to compensation and incentive pay.
Technology as we continue to modernize our digital capabilities cure obsolescence and address regulatory cyber and compliance needs.
These investments were delayed in 'twenty to 'twenty.
Finally business promotion.
Especially expenses related to client to reward programs.
Some of the growth in <unk> results from our revamped rewards for credit cards and from R&D to offerings.
The higher technology and reward expense are related to expectations of higher levels of client activity in 2021.
We will strive to come in below with respect to the level of expenses.
Our effective tax rate for the quarter was 20 per cent for 'twenty to 'twenty, one we expect to be effective tax rate to be between 19 and 21%.
Let's turn to slide eight.
Net interest income for the quarter was seven sorry 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 levels of buses in Puerto Rico. The replacements of <unk> agency MBS in the investment portfolio and lower deposit cost primarily at popular bank debt.
Deposits grew by $844 million in the quarter. This increase was mostly in <unk>.
NIM decreased two basis points to three 4% in Q4 on a taxable equivalent basis net interest margin was 335% also a decrease of two basis points there.
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 book.
Book mortgage loan repurchase at the end of Q3 was the main driver of this decrease.
These assets yield of approximately three five per cent.
For 'twenty to 'twenty, one we expect margin to be stable ASP.
Asset mix ground to PPP originations and the speed at which PPP loans are forgiven will drive the ultimate result.
As of the end of the fourth quarter, Puerto Rico public deposits were roughly 15 billion about 500 million higher debt in Q3.
We continue to expect Pollo deposit balances to come down over time, however, in the near term additional further 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 balance, but we still do not expect overall loan growth to materialize in the first half of 'twenty to 'twenty one.
Please turn to slide nine.
Our overall capital levels remain strong relative to mainland peers with respect to World Cup all of life's regulatory requirements, our common equity tier one ratio in Q4 was 16, 3% up 34 basis points from Q3.
Tangible book value increased by $1 38 per share to $63 7 million. This increase was driven by our quarterly net income offset somewhat by dividend payment.
Our return on tangible equity was 14, 5% in the fourth quarter and 10, 8% for 2020.
We will continue to pursue our target of 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'll turn the call over to Leo.
Thank you Carlos good morning.
Overall, our credit performance remains favorable during the fourth quarter.
<unk> 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 call it on our entire loan portfolio.
Turning to slide number 10.
We have provided relief to our customer to loan modifications consisting of referrals forbearance or extensions.
We ramped it up a system to approximately 132000 customer accounts, representing $8 3 billion of loans or 28% of the total loan balance.
<unk> 97 per sale customers have exited relief on approximately 94% of these accounts remained card.
We are attentive to borrower performance across our portfolios.
In particular to the post moratorium mortgage loss mitigation activity and certain sensitive commercial segment.
Please turn to slide number 11, which highlights these commercial segments.
We think the CRE non retail segment.
Sure in Puerto Rico is mainly comprised of office space.
While the exposure in the U S is mainly multifamily.
The average loan to value in Puerto Rico is 77% while in the U S to 75 per cent.
Office space, our multifamily occupancy and collections have remained stable through the pandemic.
Today, there has been mother numbers of downgrades in this segment.
With a customer that exited relief 98 per cent of accounts remain current.
In the health care facility segment.
Our Puerto Rico exposure is mainly to hospitals.
While our U S exposure is to the skilled nursing facilities.
For both regions further local assistance or support that the industry operation today, there have been a number of deferrals and downgrades in this portfolio.
Well, we think nonessential retail.
The shelter in place orders were curtailed activity of this segment.
Notwithstanding our.
Our customer base has experienced an increase in activity after the lockdown orders were lifted to.
I've been a moderate number of deferrals and downgrades in this portfolio.
Of the customers that are exited to deferrals.
99% of accounts are current.
The average loan to value for this segment is 69%.
In general based on discussions with our major borrowers Occupancies and collections have remained stable with signs of improvement during the fourth quarter.
Regarding the construction segment.
Most of our exposure is in the U S. I am pleased.
Principally in the New York Metro region.
The majority of our projects are in late stages of completion.
Low loan to cost.
On average a real loan to value of 64%.
Our nominal exposure to higher end residential.
To date, there are being a limited number of deferral requests on downgrades in this portfolio.
The pandemic has impacted the hospitality industry with unprecedented challenges.
The strategy is to flatten the curve. So just lockdowns social distancing stay at home orders and travel related restrictions how significantly decreased the demand for these businesses to.
To address the risk to our loan portfolio, we continue to work with our borrowers.
Give them time to recover.
A qualitative reserve during the quarter.
Our hotel exposure is mostly in Puerto Rico.
The another quarter, our total exposure stood at $370 million.
With an average loan to value of 69%.
This segment also experienced elevated levels of stress book.
To limit the business and leisure travelers.
Most of them if they fail to expire in the third and fourth quarter.
But given the challenges of the industry.
We foresee additional extension to support our borrowers.
To date, there have been significant number of downgrades and referrals.
Restaurant balances were $238 million of quarter end.
This segment has experienced stress.
And by the restrictions placed on indoor Diamond.
Despite this restriction.
The majority of our restaurant borrower borrowers.
Particularly quick service or fast food continue to operate to delivery and carryout with volume improvements during the fourth quarter.
Of the customers to have exited deferrals, 99% of accounts are garnering.
To date, the second rounds out a significant number of deferrals and downgrades, mostly within the past category.
To finalize let me highlight let me highlight that we do not have material credit exposure to energy airlines, which very much on credit.
Please turn to slide number 12 to these cost credit metrics.
Nonperforming assets decreased by 15 million to.
$124 million this quarter.
Mainly driven by in order to decrease of 70 million offset in part by an NPL increase of $3 million.
The decrease was driven by sales and the suspension of our promotional activity.
The rising 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 income.
In commercial Npls.
The increase in mortgage Npls was mainly due.
To a delinquency progression after the exploration of the payment moratorium.
We are not overly concerned with this.
Due to three factors.
First <unk>.
Npls are.
Our comparable to levels prior to the pandemic.
Felt and that drove outflows cost by foreclosure.
Second early delinquency are the lowest levels in the last 10 year finally.
The trend in Fuller roll rates for early delinquency buckets is encouraging.
Dos everything being equal weighted.
We do not believe that the fourth quarter, increasing NPL inflows.
To start of a trend.
Royalty effect, obviously ratio on deferrals.
The commercial Npls decrease was mostly related to impairment impairment charge offs.
From previously reserve collateral dependent loans.
In the U S npls decreased by $3 million.
Due to our previously reserve construction loan.
Was partially charge offs during the quarter.
At the end of the quarter the ratio of Npls to total loans held in portfolio.
<unk> to 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 $90 million, Puerto Rico, mainly due to mortgage delinquency progression on the expiration of the moratorium period.
In the U S NPL inflows decreased by $70 million.
As the prior quarter included the impact of $11 million relationship to mature and reached 90 days volume the renewal process.
Turning to slide number 14.
Net charge offs amounted to $42 million.
Or analyzed 58 basis points of our loans held in portfolio.
Compared to $17 million or 24 basis points in the previous quarter.
Puerto Rico net charge offs increased by $27 million.
Primarily driven by higher commercial net charge offs 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 corporation allowance for credit losses increased by $30 million.
$396 million.
The remaining by charge offs on the previously mentioned commercial loans.
And an improved economic outlook offs.
Set in part by an increase in qualitative reserve I'll discuss further in the following slides.
The ratio of allowance for credit will also start to loans held in portfolio.
Decreased slightly to three to a 5% from 315% in the third quarter.
Excluding payment protection program loans and guarantee mortgage loans.
This ratio increased by 40 basis points to 345 per cent.
The ratio of allowance for credit losses to Npls held in portfolio was unknown to 82% 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 per unfunded loan commitments from other operating expenses to a 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 our allowance for credit losses.
At the end of the fourth quarter.
The allowance for credit losses decreased by $30 million compared to the third quarter borrowings, which were driven by changes to economic outlook qualitative reserves on portfolio credit quality.
As discussed in the last webcast we Inc.
Our ACL framework by introducing probability weights of different scenarios to estimation process recombined Moody's analytics as one baseline.
There's three scenarios I'm.
Among the three scenarios.
Basically I need to find the highest priority.
Slowed by a more pessimistic scenarios given the uncertainties in the economic outlook on downside risk.
Yeah, Glenn baseline scenario shows improvements in both 2021 GDP growth unemployment rate when compared to the previous estimates.
The change in macroeconomic scenarios cost the ACL to decreased 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 microeconomic conditions in the Puerto Rico market.
Portfolio changes through mainly by credit quality and volume mix cost the ACL to increase by $28 million to.
To summarize our loan portfolio exhibited stable credit quality metrics during the fourth quarter aided.
Aided by payment deferrals government stimulus and the resumption of collection efforts.
However, as the effects of that debt and continue to evolve and remain fluid.
Jeff will expand on the economic disruption is uncertain.
The improvements over the last few years and the risk profile of our loan portfolio.
<unk> popular to successfully operate under challenging environments.
<unk> will continue to carefully monitor the exposure of the portfolios.
<unk> related risk changes in economic outlook, and our delinquencies are Mitch our job to evolve over the next few quarters.
That I would like to turn the call over to Ignacio for his concluding remarks. Thank you. Thank you <unk> and Carlos for your updates 2020 was certainly a challenging year.
It began with devastating earthquakes and southwestern Puerto Rico, which were shortly followed by the unprecedented impact of the pandemic.
Including the substantial lockdown of the local economy.
I'm 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 a 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 reported more than $500 million and net income and ended the year on a high note Jeremy wanted to best quarters of net interest of net income in our history.
In 2020, we were also able to complete our capital plan is intended we.
We executed a $500 million share repurchase program increased our quarterly dividend and redeemed $28 million and 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.
To allow an eventual return to the enormous heat we so desire.
We begin 2021 on a solid footing and excited about our prospects for the year.
We are now ready to answer your questions.
We will now begin the question and answer session to.
Ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble our roster.
The first question will be from Alex toward all of Piper Sandler. Please go ahead.
Hey, good morning, guys. Good morning regarding the volume.
First off I was just hoping for maybe some more a high level thoughts on the Puerto Rican economy.
Gave some good numbers in the 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.
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 at home prices on the island.
Maybe some more anecdotal data.
Yes, it will.
You used the word flow I think I mean, we're generally optimistic that.
The FEMA finally reached agreement with the with the electric power authority for about $10 billion restoration program and with the aqueduct consumed $4 $4 five that money really to my knowledge hasn't begin to hasnt begun to flow. So thats yet to come it's important as agreed upon their working on implementing that.
What we have seen obviously to $600 payment has come in.
Is it in the states that have been coming in the last to began last week and it to continue to this week.
So we still have a lot of the <unk> funds that are are yet to be spent there going out slowly, but we are very much more positive. It looks like the new administration recognizes that there has been a problem in 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 pick up in the third quarter. The fourth quarter was met was.
This was better than before but not quite the acceleration we had in the third quarter.
To see home home purchases are increasing ISR reported I don't know who put it outside of unknown, what the debt home purchases in Portugal went up home prices and put it to that went up by 7%.
So generally I think we're optimistic that these growth plans, we will have a big impact really haven't seen that great other than the direct stimulus to it goes to individuals is 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 and I say that because <unk> have a big role in that.
And including the mayor of San Juan So I.
I think that Thats, probably the number one priority if it isn't it should be but I think they've all said it is to take advantage of that money.
Wells can add.
That's net.
Again, the money really hasnt begun to flow that much. So we're hoping that will.
Now I'll begin to in the first part of the year.
But when you look at the unemployment or I guess, the employment numbers, maybe sort of remain and obviously, we're coming out of a pandemic, but they remain kind of stubbornly.
Below a million jobs do you think that that money flowing is going to be the the ticket to getting to the employment numbers above a million dollars in a more sustainable basis.
And thus you mean about 1 million persons, yes definitely.
Million jobs.
Obviously, there is a couple of sectors.
That had been seriously impacted.
R R.
Our high employment sectors, the tourism in the restaurant sector.
Although they don't make up a huge.
The amount of our GDP they do haven't.
A proportionately larger impact unemployment that sector has been impacted.
I think when to 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.
We'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 United States.
The other area that always has a big impact on employment as construction and again once you start.
Building the infrastructure.
And Thats out there I think that will have an impact on unemployment.
They are they are things that worry people in our industry, it's become gender.
Generally hard for some people to.
Gain higher employees I've heard people from supermarkets.
People that are paying near the minimum wage are having a hard time because in Puerto Rico to federal supplement for unemployment is $400 a week.
Weak. So if you take a 40 40 hour week, that's $10 an hour or.
So youre competing against that unemployment, so if you're currently unemployed.
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 <unk>.
And the demand side for labor.
It'll be interesting to see how we can we can meet that supply, especially concerning the construction industry.
Whether there'll be able to.
All the employees they need.
That's great color. Thank you for that and then as I think about the reserves.
And I think about this qualitative portion that was increased in the fourth quarter what kinds of things are you looking for for that qualitative portion to kind of reverse as it is a full opening of the economy or are there other things that are that you're paying attention to.
And then just over time conceptually should the reserve head back towards that seasonal day one.
Reserve level.
Or is enough change that that number is kind of a moot at this point.
I will say I will say the.
Yeah.
In general terms.
<unk>.
The way.
To think about the quality the reserve is.
There is more clarity as to about four to allow us to give us more confidence.
The need for it has lessened.
So that will be my my first fix was vaccination.
As to evolve.
We see overall.
<unk> I think those would be to indication for my son in my view.
According to the reserves.
We let go.
In terms of.
How to think of the reserve versus day, one seasonal.
I think I mean, there has been significant changes in portfolio composition.
I think that as a starting point, but I wouldn't say about that.
We will revert to that.
That'd be my my answer.
Perfect. Thank you for taking my questions.
Thank you.
The next question is from Brock Vandervliet of UBS.
Oh, great. Thanks.
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.
These figures are because it looks like.
You know some of the improvement in the Puerto Rican.
Macro is pretty material even in your debt.
Even in your baseline.
The baselines are improving from Q3 to Q4, if I'm reading this correctly.
In addition, you've got.
GDP growth significant in itself, you know, 2% to 5% next year to viewpoint for the year after.
Employment.
It looks like unemployment has dropped in your baseline 300 basis points from the third to the fourth quarter.
And can you can you comment on those.
Figures.
I would say to some of it has to do with some of the.
Let's go first of all unemployment at par of the change in a day.
The unemployment also relates to the difficulty of estimating the unemployment rate in.
When you have to.
Significant crisis or significant disruption to the ability of the bureau to to the O&M the.
And sort of as you know the unemployment rate is based on a house to House survey.
The areas of.
When you have disruption it gets difficult to implement so we are for a very long time.
Moody's economy, just didn't have the benefit of the margin April numbers.
And many people thought to those some of them 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 ratio I agree I mean, there is.
Yeah.
And moodys, particularly to a very high on the flow of funds.
Puerto Rico, particularly I mean goodbye to administration of a very aggressive plan for Puerto Rico to another.
Control, both the house and the Senate, they think that I alluded to that is going to come to fruition.
Okay.
Got it okay.
Okay. Thank you.
Shifting to.
NII and the margin I heard you on margin stable.
To me that's from the fourth quarter.
Loan growth it doesn't sound like we should expect much especially in the first half I guess that points to.
Securities Securities balances you know how are you how are you feeling about taking up those those levels here given the rate backdrop.
Yes.
We redeployed.
Both <unk> and also cash in the third quarter into securities longer term Securities book.
Yes.
We continue to to as we get more clarity, we'll continue to consider that.
Doing more of that going on.
So reasonable to assume we will probably do some more of that in 2021.
Yes.
Dying to extend in the securities portfolio and while we're getting is like 111 hundred 10 basis points frankly.
But it is a 100 basis points better than 10 basis points right. So.
We will continue to consider that.
As I mentioned in.
In my prepared remarks.
We do expect the balances from the government to actually go up, especially in the first half of the year.
Combination of additional federal transfers and tax revenue is coming in.
And then probably going out in the second half of the year.
So that will probably have more cash to to invest although.
Although some of that cash maybe.
Charter term some of the things that we have in day rate or is that we're keeping.
Our attention on for example, the government balances.
There is a lot of noise, especially the last couple of weeks.
There seems to be progress in the process of restructuring to public debt.
If in fact debt.
That happens and there was an agreement to implement to sometime later this year.
Not nowhere diagram will ultimately be but the law.
The agreement.
<unk> discussed publicly.
Pain.
A one time down payment from the government of Puerto Rico to bondholders or about $6 billion.
So there is instances here.
Significant amounts of the balances as opposed to buses may move out so we'll have to keep that.
In mind.
The new garden in Puerto Rico has expressed.
Interest to two.
To.
On the other side of the equation to try to move to the funds faster as well. So there may be additional outflows to the normal course of business.
From the government of Puerto Rico, So, we'll keep looking at all of those things but to summarize.
We will continue to consider.
Extending some margin in the investment portfolio.
Although.
Not trying to buy assets as 1% yield.
Okay.
Got it okay. Thanks to the color.
Youre welcome.
The next question is from Glen Manna of Keefe, Bruyette <unk> Woods.
Hi, good morning, good morning.
Larry.
Ignacio Thanks for the color on the the economy down in Puerto Rico, and I was just wondering if maybe you could give a couple of specific examples where you know the federal aid that came down on the island and the $10 billion that was approved previously where we're be pop has been able to servicing clients and maybe take advantage of of that money that came down there.
Yes, well again.
The $10 billion in PREPA.
Very little revenue has been spent I mean, they authorize that.
But I.
We have not seen that money.
For example, in our accounts with PREPA haven't changed dramatically.
Neither with the process.
Profit has been going to.
Program of improving their infrastructure and therefore, some of our contractor clients have gotten those contracts and the <unk> money we have extended.
Lines of credit for several of our contract to clients, who need to advance the funds before they get reimbursed and CABG.
Again.
I wanted to emphasize that while we're all very excited about the prospects of the money being released to date to release.
<unk>.
Hurricane relief funds have been rather limited.
So the expectation is an upside coming we haven't really seen that money flow yet there is a lot of talk that day and.
And there is I think a greater disposition on the new administration to.
To get those monies are released.
What we've seen more is the impact on the consumer side, where you see the direct relief debt.
Very visible in our deposit balances going up the PPP loans, obviously that you see our deposits commercial balances going up also.
That that money for hurricane relief.
Has really again, it's frustrating for all of us but.
And detailed internal offs to this 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 can criticize it these were complicated processes.
And for example to the amount that's being given to awarded to PREPA is I think a record amount the team has ever given to any entity. So these are big dollars.
But again wanted to make everyone is that now youre not really seeing that money spent yet.
Okay.
Okay. Thank you and Carlos Thanks for the 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 try to do that again for 2021 on on what the outlook is.
Yeah I mean.
On both sides I think the outlook fill to get clouded by $1 4 billion of PPP loans going away Glenn.
So that's all to drive the whole thing.
So.
We successfully keep blow meiosis flat means that we actually originated $1 4 billion more than debt matured this year.
Ignacio mentioned.
Brown to PPP, we expect that to help with what we also do not expect that to be anywhere close to the magnitude of the original PPP.
So if anything I think the commentary again before we will continue to to hold true Glenn Richard is that we are more and more confident that continue to growth in the U S Bank.
And in Puerto Rico, probably more stability.
Okay. Thank you. Thank you for taking my question.
The next question is from Gerard Cassidy of RBC capital markets.
Good morning, everyone. How are you good morning, Gerard how are you.
Good I hope, it's funny I hope, it's sunny and 85 down there.
Most of them up here, so to different parts of the world.
I know, it's beautiful today [laughter], sorry about that.
Oh, no no surprise you guys to Lucky dogs.
<unk>, maybe you could share with us.
Obviously, there's been a change in this administration that we're all obviously aware of yeah in the Administrated to the President Obama's administration. He was opening up our relationships with Cuba, and then under the Trump administration to more than the other direction. Assuming this administration opens reopens those relationships with.
But can you share with us some opportunities that may arise for popular you're permitted to do banking down in Cuba.
Do you have as always.
A difficult topic.
I think debt there is a great probability debt debt bite and will reverse some of the additional restrictions that president Trump put in it may take them, a while to do so through procedural heaps.
Obama opened up we were very interested in Q I think I don't know if you noticed that we were one of only to U S banks debt.
Debt issued credit cards that can be used in Cuba and we.
To us awhile to get to that.
However, I really don't expect to Cuba to have a big impact on short term really it's.
People always think.
From our perspective from the U S. I mean there.
I think youre going to see a meaningful change economically in Cuba.
Unless the government there takes a radically different approach to the economy.
We haven't seen signs that thats going to happen.
So I don't expect.
Anything dramatic to happen I think biden has bigger issues. So although I think it will reverse some of those things I don't think youll see the level of enthusiasm you saw when President Obama was in power and it was like the beginning of a 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 will explore like we did last time.
We invest at a time and money to get that credit card operating it wasn't by the way.
Very little use.
So it wasn't it wasn't a moneymaker. So again I don't think it's going to be a mover for us in the near future.
Okay. Thank you.
Carlos you answered one of my questions with the public deposits.
I could draw them down and you mentioned.
Repayment of some of the debt what would you guys estimate is a normal level of those public deposits once we get to normalcy whenever that is.
Yes.
That's a really good question, we've thought about it a lot.
When you think about that question.
Normal banker reaction will be well, let's go back in history and local debt balances. It looked like before this stuff happened and that mostly to 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 didnt have historically, because they're used to say to JV and.
I'm going to do maybe when bankrupt then a lot of those accounts moved to us. So we don't have the historical flows of those accounts. So.
I realize I'm, giving you a very big range.
But.
Before.
<unk>.
This appeared to Barb, we had various billions of dollars to the government deposits if you add everything up.
But there were nowhere close to $215 billion.
I would assume.
When things normalize that part.
Are we going to be a number is somewhere between $5 billion to $10 billion, but.
Can we get any smarter than standard big range, so to be Frank with you.
Okay. Thank you and then just finally.
No 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 to the.
The DFAST CCAR banks with the.
The reintroduction of share repurchases with the income limit.
Can you just share with us what your process will be with the fed to.
Now to your capital action plans.
A lot of the rules that we all know.
Really cost.
Concentrate only applicable to CCAR banks. So so while those rules on this early apply to us they sort of set the stage of that.
Telegraph, so everybody what the fed.
It is willing to consider right conceptually so so we're watching.
Very attentively, what those rules are at this point in time, we are planning to continue our our process as we have historically Bernard so.
Gerard I'm sorry.
We will.
[laughter].
We will call you hit out of though how's that.
Yes.
We are in discussions with the fed.
And we go through our whole capital plan with them.
To get their feedback sometimes some adjustments are necessary.
We still are hopeful that we will get whatever responds we may need from them.
We had a response from all of the parts sometimes go to every sponsor ought to be part of this.
In time for us to make an announcement in our webcast in in April. So we have not changed our process to too much. We are mindful of the boundaries of the fed has made public.
But we have compared to our process so far.
Stay unchanged.
Very good thank you Carlos.
Thank you.
And this concludes our question and answer session I would now like to turn the conference back over to Ignacio to growth.
Closing remark to implement that'll maybe desperate Inc. Ddos to common data split them to say they see they put aside to live sports sustaining pizza English to Sandeep PCP to quote Sally's does not go to that Ms. Gabby Mustang, which tends to cool Sally's Greenfield North gestation I mean, that's about a day better tableau to students axial Nissan got yes tallies Cuomo.
Yeah.
Yeah.
Yeah.
The conference has now concluded. Thank you for attending you may now disconnect have a great day.
Yeah.
[music].