Q2 2021 Popular Inc Earnings Call
Good morning, and welcome to the popular Inc. Second quarter 2021 earnings conference call all participants will be on listen only mode.
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And I'd like to turn the conference over to Paul Cardillo Investor Relations Officer. Please go ahead.
Good morning, and thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our CFO, Carlos Vazquez, and our CRO Liddy, Oh, sorry on them. They will review our results for the second quarter and then answer to 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 for.
Looking statements that are based on management's current expectations and are subject to risks and uncertainties and 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.
May find today's press release, and our SEC filings on our webpage and popular dot com.
I will now turn the call over to our CEO Ignacio Alvarez and good morning, and thank you for joining the call.
Second quarter was another strong quarter, and which we achieved net income of $218 million.
Our results reflect the continued rebound and economic activity and the unprecedented level of federal stimulus.
And it also reflects our diversified sources of revenue and prudent risk management.
Please turn to slide 3.
According to net income of $218 million was 45 million lower than the first quarter and $90 million higher than the same quarter of 2020.
The quarter over quarter variance was driven by a lower benefit and the provision for credit losses compared to last quarter higher revenues and lower expenses the.
The increase and net interest income was driven by higher income from our investment portfolio and lower deposit cost.
Our noninterest income increased due to higher volume of credit and debit card transaction.
And at quality trends were positive and the quarter with lower Npls and net recoveries.
During the quarter to continue to return capital to our shareholders and late April we entered to enter into a $350 million accelerated share repurchase program and on July <unk>, we paid a dividend of 45 per common share an increase of 5.
Please turn to slide 4.4 and update on various business metrics.
Our customer base and Puerto Rico continues to grow increasing by 17000, and the second quarter and by nearly 30000 and year to date to reach more than $1.9 million unique customers.
Adoption of digital channels, among our retail customers continues to be strong.
Active users on army Banco platform exceeds $1.1 million and have grown by 18% since March 2020.
We captured 66% of our deposits and our second quarter to digital channels.
As expected these trends have adjusted slightly lower compared to the levels seen over the past year, but remains significantly higher than pre pandemic levels.
With respect to the PPP program, we funded nearly 50000 loans totaling $2.1 billion across both rounds.
We originated more than 29000 loans are $1.4 billion and round, 1 and nearly 21000 loans were 678 million and round 2.
In Puerto Rico, we funded 62% of all PB loans that were originated on the island.
On the loans originated and round, 1 close to $965 million or 68% had been forgiven as of the end of June.
We then popular is clean and tell the dollar volume of credit and debit card sales have continued to trend higher Inc.
Increasing by 17% compared to last quarter and by 45 per cent compared to the second quarter of 2019.
Auto loan and lease origination to MVP PPR increased by 8% and our second quarter compared to the first quarter and by 32% compared to the second quarter of 2019.
Similarly, we are continuing to see strength and housing market.
The dollar volume of mortgage originations and Banco popular increased by 6% compared to last quarter and by 63% compared to the second quarter of 2019.
Please turn to slide 5 for an update on the current macro environment and Puerto Rico.
And the second quarter business strength and customer activity continued to improve.
Building upon the momentum seen in recent quarters as most of the Covid related restrictions that were in place have been either relaxed or eliminated.
Puerto Rico has continued to make solid progress on the vaccination front.
According to the CDC website, $1.9 million or 66% on the population over 12 years old had been vaccinated and $2.2 million or 76% on.
Population over 12 years old have received at least 1 dose.
Neil on our sales continue to reflect strong consumer demand with sales of more than 35 units in the second quarter.
Year to date auto sales have more than doubled compared to the first 6 months on 2020 and.
We're up 31% from the same period and 2019.
So net sales have remained strong year to date sales to may were higher than the level of sales that we're seeing doing.
During the same time periods and 2018 and 2019 when the item was rebuilding following the 2017 hurricanes.
The improvement and the tourism and hospitality sector has been extraordinary.
With much of the World travel still somewhat limited, Puerto Rico continues to be a popular destination from mainland residents that have become more and more comfortable with traveling.
Additionally earlier this month the CDC improved its assessment of the risk of contracting Covid and Puerto Rico to level to our moderate.
This action should help to further stimulate travel to the islands.
Wholesale demand has picked up dramatically and June occupancy rates and Puerto Rico were nearly 79%.
Additionally, the revenue per available room reached $216.
And the highest level on record and compares to $129 and June of 2019.
Airport traffic has to compete has continued to improve at a rapid pace.
Year to date passenger traffic is 75% higher than last year and is.
Down only 6% compared to 2019.
And the month of June traffic was up 372% compared to the same month, a year ago and was 14% higher and in June 2019.
In fact June was the highest level of passenger traffic scene at the airport since it was privatized and 2013.
Cruise ships and now scheduled to recommence.
During the first week of August and.
Employment levels have improved but are still below pre pandemic levels.
Total non farm employment has increased by 2% since December 2020, and by 7% since June 2020.
We are extremely pleased with our results from the second quarter, we continue to be very optimistic about the economic recovery, but we will remain attentive to.
Evolving health situation may impact the economic outlook.
I will now turn the call over to Carlos for more details on our financial results. Thank.
Thank you Ignacio good morning, Please turn to slide 6 as usual additional information is provided in the appendix to the slide deck.
Today's earnings press release details variances from the first quarter.
Net interest income for the second quarter was 488 million and increase of $9 million from Q1, driven by increased balances in the investment portfolio and lower deposit cost.
Noninterest income increased by 1 million to 155 million and Q2 cost.
And to these results were higher credit card interchange fees of $4 million close to 4 million higher net earnings from investments held on to the equity method along with various other smaller positive variances.
This was almost entirely offset by $9.9 million lower mortgage banking income, primarily due to a negative quarter over quarter variance and MSR valuation of $6.8 million versus a positive variance of $9.2 million in Q1.
The provision for the second quarter was a benefit from 17 million and this was 6 if I may on lower than the $82 million benefit recorded in the first quarter.
<unk> will expand on credit related matters.
Operating expenses were 368 million this quarter down 7 million from Q1.
The decrease was primarily due to lower employee compensation cost by $5 million, mostly driven by seasonality of compensation plans and lower other operating expenses by $4 million, primarily due to a reserve release on our mortgage servicing business.
This was partially upset by higher customer reward perm expense of $3 million, resulting from increased credit card transactions as well as slightly higher advertising cost.
For the full year 2021, we now expect our average quarterly expenses to be $380 million to $385 million 5 million per quarter higher and our.
Our estimate.
A number of factors contributed to this increase.
We expect compensation expense to be higher due to continued business outperformance as well as increased competition for talent some projects and activities that were delayed and the first half of the year should materialize and the second half and finally, we also expect higher processing and technology costs.
Our effective tax rate for the quarter was 25% compared to 23% and the first quarter.
This increase was primarily due to a higher proportion of taxable income and Puerto Rico.
For 2021, we now expect.
The tax rate to be 22, and 4 to be 5%, which is an increase from our prior range of 20% to 24%.
Please turn to slide 7.
And on a taxable equivalent basis was $541 million 11 million and higher and in the first quarter.
The primary drivers of the increase were higher interest income from investments from the investment portfolio by $13 million due to a $4.4 billion increase in average balances.
Lower deposit cost by 2 million and on an additional 4 million of income due to 1 more day and the quarter debt.
Deposits grew by $5.9 billion and the quarter. This increase was spread across all business lines and majority of the growth was in Puerto Rico government deposits, but similar to Q1, our retail and commercial deposits increased by $1.9 billion.
NIM decreased by 16 basis points to 2 point and 91% and Q2.
On a taxable equivalent basis name was 342% a day.
Kris of 17 basis points.
The lower margin is due to asset mix, meaning higher balances of low yielding money market and investment securities.
The total loan yield decreased by 2 basis points in Q2.
As a result of lower typically related income of $13.9 million compared to $23.1 million and the first quarter.
PPP loans yielded approximately 445% this quarter compared to $7, 21% last quarter.
The reduction and yield was due to slower accelerated recognition of fee income on forgiveness.
The remaining on amortized portion of fees for the PPP portfolio.
<unk> 60 million.
We believe most of the remaining $354 million first from PPP loans will be forgiven during the third and fourth quarters of this year and.
And then majority of the $670 million second round of PPP loans by the middle of next year.
We expect margin will continue to drop in Q3 due to continued high levels of deposits, but should recover towards year end.
The Ultimate result will depend on our asset mix and the rate of forgiveness of typically falls.
That's up to the end of the second quarter, Puerto Rico public deposits were roughly $19 billion and increase of just over 4 billion from last quarter.
These balances reflect the most recent cares act federal stimulus, including assistance to state and local governments.
We continue to expect probably to the bus deposits to come down overtime, driven by outlays of funds advanced from the carriers and jobs acts the restructuring our public sector debt and to return to current debt service.
Our ending loan balances decreased by $69 million on the quarter.
This decline was due to a 224 million decline in PPP loans, partially offset by and.
And increase of 139 million in the auto and lease portfolio.
First route typically loans dropped by $418 million, while second round disbursements were approximately $192 million.
Excluding the impact of PPP loans balances grew by $170 million.
We continue to see strong demand.
And net portfolio growth and auto loans and leases.
While our other loan portfolios are either flat of have decreased since the first quarter.
We expect low biases will continue to be impacted by typically forgiveness as well as limited demand resulted from unprecedented levels of clients' liquidity.
As such we do not expect overall loan growth to materialize until next year when demand, resulting from expected economic growth should outpace forgiveness of PPP loans, Please turn to slide 8.
Our capital levels remain strong relative to mainland peers, and well capitalized regulatory requirements, our common equity tier 1 ratio in Q2 was 16, 6% down 60 basis points from Q1, primarily due to capital actions and.
And April the corporation entered into a $350 million accelerated share repurchase transaction as a result, we recognized and shareholders equity approximately $280 million and treasury stock and $70 million is a reduction of capital surplus to final accounting treatment for the program will depend on the App.
Average price of the stock during the term of the ASR is scheduled to close in Q3.
Our EPS in Q2 increased by 8.
Cause of this transaction.
We will continue to explore opportunities to manage our capital during the remainder of 2021 and in future periods. However, we do not expect further dividend increases or common stock repurchases. This year.
We have returned to our normal capital planning scheduled this year.
Fully resulting in an announcement of popular 2022 capital actions no later than our January 2020 to webcast.
Our stockholders' equity decreased in the quarter, primarily due to the impact of the $350 million ASR.
However, our tangible book value per share increased by $1.8 to <unk> to $63.24. This increase was driven by our quarterly net income higher cumulative unrealized gains on investments and.
And the lower share count.
Our return on tangible equity was 17, 6% and the second quarter with that I'll turn the call over to Lydia.
Thank you Carlos and good morning.
During the second quarter.
Corporation continued to exhibit strong credit quality metrics and <unk>.
Cost driven by the improving economic environment.
Please turn to slide number 9 to discuss credit metrics.
Nonperforming assets decreased by 7 million to $777 million this quarter.
Mainly driven by by and NPL decrease of 13 million offs.
And part of an increase of $5 million and Npls to held for sale.
In Puerto Rico and.
And pls decreased by $9 million mainly.
Mainly due to lower mortgage npls of 20 million.
Resulting from lower inflows and co.
Continued improvements in early delinquency trends, coupled with lower consumer npls, mainly in the auto portfolio.
These increases were offset in part by higher commercial npls of $17 million.
Mainly due to the inflow from a single $32 million non COVID-19 related clients.
This increase was offset in part by the resolution of a $9 million NPL relationship that resulted in a significant recovery.
And the U S npls decreased by 4 million most.
Mostly related to a construction loan transferred to held for sale.
The ratio of Npls to total loans held in portfolio was 2.4% flat versus the prior quarter.
Please turn to slide number 10 to as cost NPL inflows.
Compared to the first quarter and.
And bill inflows, excluding consumer loans increased by $11 million.
Driven by an increase of 17 million and Puerto Rico.
Mainly due to the previously mentioned commercial relationship.
This increase was offset in part by lower mortgage NPL inflows of $15 million.
And the U S NPL inflows decreased by $6 million.
And as the prior quarter included a 12 million construction loan that reached 90 days to renew.
And what process was current at the end of the quarter.
Turning to slide number 11.
Net charge offs amounted to a net recovery of $1.3 million.
Our annualized and they've got a 2 basis point of average loans held in portfolio.
Compared to net charge offs of $21 million.
Or 29 basis points and the previous quarter.
The results for the quarter were aided by the recovery of $7.9 million related to the resolution of the above mentioned nonperforming relationship.
Excluding this net debt.
Charge off ratio would've been 9 basis points, which is lowered on strength and pre pandemic levels.
In Puerto Rico, net charge offs decreased by 21 million.
Primarily driven by $8.4 million of lower commercial net charge offs.
Due to the resolution of the NPL relationship.
Lower mortgage net charge offs by 7.4 million.
And lower construction net charge offs by $6.4 million.
As the prior quarter included.
A $7 million charge offs related to a previously reserved.
In the U S net charge offs decreased by $1.3 million quarter over quarter.
Yes.
Allowance for credit losses decreased by 15 million to.
To surround on $86 million driven.
Driven mainly by improved credit quality and releases from our hospitality portfolio is qualitative reserve as discussed and the following slide.
The ratio of allowance for credit losses to loans held in portfolio.
<unk> to 2.7%.
From 275% and the prior quarter.
Excluding payment protection program loans and guaranteed mortgage loans. This ratio is 3 zero to 2%.
The ratio of allowance for credit losses to Npls hub and portfolio.
115% flat to the prior quarter.
Please turn to slide number 12 to discuss details on the drivers of the volumes and our allowance for credit losses.
The allowance for credit losses decreased by $15 million when compared to the previous quarter.
Our interest were driven by changes to qualitative reserves and economic outlook.
And as well our portfolio credit quality and mix.
While a strong recovery is evident.
We also consider more averse adverse outcomes given uncertainties.
Around the impact of the new virus strength and the Puerto Rico government's ability to utilize available federal system.
As a result, we continue to assign the highest probability from the baseline scenario followed by a more pessimistic as to recent area.
Our microeconomic forecast uses a number of economic variables with the unemployment rate and GDP.
And the largest drivers.
And the current baseline scenarios shows a slight improvement and both ways and they want GDP growth and unemployment rates when compared to the previous estimates.
However.
Revisions to historical microeconomic indicators conducted by the Puerto Rico plant and board.
Contributed to increases in the allowance for credit losses, and Puerto Rico.
This revisions cost ACL to increase by $21 million.
During the quarter, we released $10 million from our quality data reserve from debt by the economic environment and improvements and borrower performance.
Total portfolio changes cost ACL to increase by $27 million.
Portfolio changes include fluctuations and credit quality volume and mix.
To summarize our loan portfolio activity and improved credit quality metrics during the second quarter.
Aided by the government stimulus and on improving economic environment.
We will continue to monitor the exposure of the portfolios to pandemic related risk and changes and the economic outlook with that I would like to turn the call over to Ignacio for his concluding remarks. Thank you. Thank you Lydia and Carlos for your updates.
Our results for the first half to 2021 were strong driven by solid earnings improved credit quality record deposit levels continued consumer growth and our capital actions.
We are optimistic about the economic outlook.
In addition to the unprecedented level of federal stimulus related to Covid, Puerto Rico still has a significant amount of hurricane recovery funds that have yet to be dispersed, which we expect will now start flowing at a faster pace.
Combined impact of these factors and improved consumer confidence should generate considerable economic activity and many sectors for the coming years, and we are well positioned to benefit from such activity.
And we're looking forward to having the entire team together and office again, even progress and the vaccination process, a general improvement and health conditions and sound safety protocols and our facilities we.
We will begin to bring back to the office our colleagues that are still working remotely.
Managers and supervisors will be returning and mid August and the remainder of our workforce will return after labor day, we will however be offering eligible employees a hybrid work arrangement.
In June.
We released our second annual corporate sustainability report and <unk>.
Highlights our commitment to progress and achievements and our initiatives to operate as a responsible ethical and sustainable company.
We are mindful of the responsibility, we have as Puerto Rico's, leading banking institution and in fact to all the communities we serve.
We have and FERC commitment to continue to expand our levels of transparency. However on.
And our ESG practices and we will continue working to ensure we have a positive impact on all of our stakeholders you can find a report on our website.
We're now ready to answer your questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to us.
Draw from the question queue. Please press Star then to.
Our first question comes from Brock Vandervliet of UBS. Please go ahead.
Hi, there good morning.
Good morning, Brian.
If you could.
Talk more about about loan growth and what you what you see I think Carlos Youre very clear you're not expecting growth until next year, I guess I'm trying to put together.
And what appears to be multiple economic data points pointing toward.
Resurgence of economic growth and.
And the lack of it.
And the loan book.
If you could talk about utilization or origination pipelines anything that could kind of help us.
Triangulate.
Thanks.
Sure.
Well.
First.
Comment on loan growth is that I think our bankers and doing a pretty good job on originated loans. If you take out the effect of PPP and this quarter, who equity grew loans by $170 million.
That's a nice start.
And the reason, we keep pointing to net loan growth in 'twenty 2 is that even though our bankers are doing pretty good job.
We still have a number 1 clients with very high levels of liquidity and the <unk>.
Average commercial and retail clients per cooler than average balance has grown by more than 40% to February of last year.
Our average client has a significant amount of liquidity on their accounts and the other is just the normal flow of our business you think so far a moment broke debt.
And the FERC PPP 1 to whatever is left of it which is on $350 million goes away by year, and that's probably and the right ballpark.
We have our all of the Western bank portfolio done on more price is about $25 million per quarter. So that's on a 50 and the normal amortization schedule of our mortgage book is so large despite the fact that our organization is doing very well.
Phil and negative number is probably in excess of $300 million a quarter.
A quarter. So when you take those 3 pieces alone. There is a lot of other moving pieces, obviously, you have a portfolio on debt.
On the natural flow alone will come back on down about $500 million. So.
And our bank is a bang up job they make that up but the net growth they have to make that up and then do some more so the reason we are still thinking about 'twenty..2 is a combination of clients with a significant amount of liquidity and.
And the fact that we still have to to overcome to natural run off of our book now. This is 1 and which we hope we're wrong I hope the the growth shelf shows up earlier than that.
I think that our best guess right now is that when there's bound to start going the other way, we will probably be early 'twenty 2.
Okay, I appreciate that color and anything under the Hood in terms of.
Loan.
Okay.
Efforts to open new lines of credit on the on the C&I side that haven't been drawn yet as a result of.
And some of the economic pick up we're seeing.
Okay.
I think.
And the activity as Ignacio to trader activity, we're seeing is pretty normal I think many of our clients as Carlos as have.
Many of our existing clients have existing lines and the 1 area I would say you'd probably see more activity as youre seeing more I think investor interest and Puerto Rico again, So I think we're seeing more new activity like acquisition loans, we're buying business or buying properties and more than lines of credit because most of our commercial clients like I said have plenty of liquidity.
And they have available lines, so they don't really need new lives, but.
And we are seeing more and more activity on the acquisition front.
Okay alright, thank you.
The next question is from Gerard Cassidy of RBC. Please go ahead.
Thank you and good morning, Nash and Carlos how are you guys and good morning Gerard.
Okay.
Carlos and coming back to the liquidity comment and you were making about your customers.
Can we tie that to the deposit growth as well ex to government deposit growth.
What do you think is driving that liquidity to the is it primarily the stimulus programs meeting P. P. P. And then on the consumer side with stimulus checks.
Or is there something else going on and.
Addition to that that is driving net liquidity and therefore, you are still seeing these nice deposit levels are higher deposit levels.
This is ignacio.
I think you know.
Theres no doubt to the stimulus payments had a big effect I mean, a lot of money came directly into People's accounts and 10 day didn't spend it all I also think debt for awhile.
People didn't have the ability to really spend their money they could travel they couldnt do other things that werent community. So they saved on gas. So there was a number of things that people I think we're building on liquidity. So I would expect that going forward you know.
That liquidity to build it it's not going to continue because this was a special period, but.
There's still there's still a lot of money and the bank to to actually to my surprise there you're hearing a lot of stories about people buying cars and refrigerators and by the way. We know they are doing that but they still have money and the bank.
Yes.
Go ahead and Carlos.
You can actually see the client activity continues to go up.
And you look at our the usage of our debit and credit cards. So they are continuing to spend that money.
But but.
It will probably take them a few months before the other.
To the other interesting thing to think about it is is remember that when and when.
It spends money.
And when a retail client spends and money they have and their account with us.
Better than not chance that that becomes to deposit and the commercial account on our clients to loss.
<unk>.
So there is there.
And there is a secular effect that debt.
And some.
While the money is moving you may not see and net and net.
The reduction in our deposit balance to simply because it's moving back and forth.
Now the flip side of that is also true.
And the client spend that money in and Walmart.
Close to the states right.
And so it's a combination of things but.
But there is a little bit of flow here that goes from 1 type of account to another to.
Very good.
And your line officers or when you and when you when.
When you guys go out and talk to your clients.
Is there any determination yet debt.
Because from what we've come through and now they have these higher levels of liquidity could this be permanent where let's say like your auto dealers you are obviously very big and the auto business.
And then just run with lower inventory levels permanently and just use higher margins any sense of that yet that this could be a permanent shift and not something temporary.
Well I can tell you I have been getting out more and you see clients and I havent heard debt.
I think inventory levels, and a relatively low and large part because they can't get more inventory.
But.
I don't think thats going to happen and I think.
And once the market levels off again, theyre going to be very competitive pressures for people to reduce their margins and so I don't I don't.
<unk>.
It'll level I also expect.
Many of our clients went through a difficult period, where liquidity was king right. When you are and when youre in a tough situation. So I think there.
They will always hold more liquidity probably yes.
Think about the experience and Maria but also I think they are waiting to see to.
And this recovery to take hold and then many of them will.
And whether they need to invest and expand and Thats why I think Carlos was saying, we expect to see more loan growth.
A little later on because.
People are not going to want to Miss business. So right now they are stretching their capacity to generate the demand is there at some point, they're going to have to increase their capacity and not just stretch it.
So that's why we're waiting for.
Very good and then and as a follow up question. Maybe this is per linear.
The large credit that went on non accrual this quarter, if you could maybe give us some color.
What caused it to go on and what type of credit and it is and then second I think you also mentioned that a large construction loans that was 90 days past due and the first quarter went back to performing status and maybe some color on how you did that and then the third part of the question in your outlook for the allowance.
1 is that in the first quarter baseline the unemployment rate assumption and Puerto Rico for 'twenty, 1 was 8% and <unk>.
Now in the second quarter and the baseline unemployment rate is 8.4%, which I found on considering all the positive economic trends. We are hearing about in Puerto Rico. So if you don't mind, if you could address those questions. Thank you.
Let me see if I can remember all 3.
Okay.
And I'll help you.
Thank you so much.
As I mentioned on the prepared remarks.
The non performing relationship was non COVID-19 related at Wassa pharmaceutical.
The company, who is 1 of its main product went off patent and they have also issues related to trying to get new.
New products due to approve.
So that's really the issue behind that 1 company.
And this.
Second question was related to the cost structure and that comes from construction loan.
We mentioned on the loss webcast and this was a relationship that.
While in the renewal process when path and 90 days maturity and.
And therefore, giving and our policy.
We enter into non accrual, but it was refinance.
Or restructure with them at the end of the quarter. So that's why I went back to.
Being current.
Total tax and administrative technical.
Delinquency.
And then as it relates to the.
The unemployment rate as you know as Youre aware, we use Moody's services.
To estimate.
On employment I think when you look at the baseline even though it's true that you went up in 2021 actually went down in 2020 to so overall when you look overall unemployment rate for Puerto Rico for the whole.
The reasonable and supportable period, it actually went down and that's why we mentioned that.
Looking at economic forecasts from quarter to quarter with a slight improvement from 1 to you.
Yes.
And thank you thank you and linear next.
Next quarterly I'll ask a 4 part question for you Sanjay and on that 1 per well.
Thank you guys.
Yes.
And.
And Dan if you have a question. Please press Star then 1 and next question is from Alex <unk> with Piper Sandler. Please go ahead.
Hey, good morning, good morning.
And just wanted to go back to some of the different components of loan growth expectations as my understanding that there's some rather large construction projects potentially being sponsored somewhat by the <unk> money that potentially could come on line and the next couple of quarters and.
C disbursements that could potentially meaningfully impact construction loan balances across the banks and obviously what to expect you guys to get more than your fair share of that can you talk about some of those projects and the expectations for the timing.
Some of those disbursements and whether that's something that we can expect this year.
Yeah. This is ignacio.
The FEMA processes.
And quite complicated so there's a large number of.
Public projects, they're going to be done.
And they.
And they run it.
And across a gambit of some that'll be done by the state such as road and Highway authority.
Some that will be through <unk>, which is now loom I will handle the funds and some will be aqueduct and sewer authority.
And some will be the municipalities.
And I always tell people that 2021 is the year, where you're not going to see a lot of this person's because although FEMA has finally approved and signed off on the budgets for many of these projects and assign them and them out.
And they still have to go through the design process. They have to go through a permitting process.
And debt.
And they have to sign and construction contract all of that requires biddings and FEMA. So in terms of the federal funds. I think 2021 is more a preparatory sort of stage and I don't think we'll see big dollars and there'll be dollars going out because obviously it would be dollars going out to.
Architects and people that are working on that.
And some of the smaller scale municipal projects Youll see outlay, but I think the big projects you are not going to see big outlays until 2020 to just because that's the way to process works. It's a lengthy process it requires.
Bidding and every every stage you have to bid for the architectural work you have to bid for the construction work you have to permit and.
And Fortunately in Puerto Rico, we probably to now set the gold standard for the permitting process, so that complicates everything.
So.
And I don't think and in private sector.
You will see more home I think residential construction and the residential market is very hot.
And it takes time again, you got to find the land you got to get to permit.
I think and definitely we seen not only and the public side, but I think you're going to see and the private side.
Residential construction and its very the market is very very very tight right now there's very very little.
Using supply available so youll see developers that takes time again, partly be and island theres not a lot of.
Zona more land available. So it takes time to get to land together and get to permit.
Don't think only about the PMI, yeah, that's going to be huge but to also be private construction I think coming along.
And I don't see much of that happening until 2020 to 2.
On the big disbursements.
And when you're talking about the big disbursements can you give us some sort of sense for what sort of the magnitude of some of those projects might be and like how big a component.
Pop would be willing to to finance.
And I don't have it on on <unk>.
Project price project basis, but $10 billion has been assigned to the power authority for improvements and the power rate.
<unk> 3 billion has been assigned to the Aqua Duck Conservatory for improving that so those are big projects.
On.
Highway and I don't have the number on highway but highway added another couple of hundred millions of dollars.
So most of what we have been doing this and a lot of that is being financed by federal funds.
Our biggest participation to date has not been like project financing, but it has been financing and the contractors, who do the work so and many of these projects.
They have to put out to work and advanced funds before they get reimbursed. So much of what we anticipate will have and is that our construction climb.
Clients will have to increase their lives drama around to do these projects are really on.
On the private side is a little bit differently, we will finance to construction there, but on the public side I don't think that really is the case and.
And it will be financing more of the people involved.
Contractors the architects.
Suppliers of materials and.
And that type of thing and I think that's where it's going to be our sweet spot instead of traditional project financings.
Okay understood and then what about we've heard a lot about the residential market being pretty hot right now a lot of the mortgage loans that you guys are doing or performing and you're selling on but is the jumbo market coming back and a more meaningful way and is that something that could help to offset more of that residential run offs as we look out to <unk>.
Couple of years.
Yes.
I think there's a couple of things there I mean I think.
Wireless and video can add to this but I think theres a limit on how much we want to do non conforming I don't think we have a problem right now feeling up our appetite for non conforming.
And.
1 of the things we are managing is because of this incredible demand, we've seen and Puerto Rico, we're seeing this on.
Seeing a big jumbo market develop.
And where it really wasn't there before and we are playing very heavily on as you've probably heard dorado.
And these are housing, we're making mortgages 3.4 or $5 million and we never did and our history. So our biggest issue there is not so much getting that is.
Adjusting our risk tolerance for how much that we can have its debt.
Totally healthy but.
And this kind of low rate interest environment, we want to make too big a bet on holding mortgages.
And our balance sheet and apart from the risk of.
On the residential market really really be hot now.
We've seen things, we've never seen in our lifetime and blurry.
Houses are selling for $30 million $20 million.
We never seen it and we never saw that and I'd like to turn.
Well.
A couple of other questions from me just when I look at the deposit flows.
And at $19 billion of public deposits I know you guys expect that to eventually come down over time.
Do you have any better sense for I mean, I know, we have about $7 billion slug that once the geos reached resolution.
Could flow out, but you know and other other chunks in terms of the timing of those deposits is there any way we can kind of 10 different chunks here and there is as is.
Something that can flow out later this year.
Right.
I think that the biggest chunk to the Covid money comes in and goes out pretty fast.
So I don't have.
So I think the biggest the biggest needle mover is going to be to plan of adjustment.
The plan of adjustment not only has money to pay the geos and about $7 billion, but theres other disbursements.
And I think they were talking about this person is up to $10 billion.
As part of that plan of adjustment. So that's going to be the biggest mover and it's going to probably change to perspective, and a couple of ways..1 big chunk of money will go out.
Progress has to be made on that front and it has taken forever, but it's probably 1 of the most complex bankruptcy proceedings and the history on each day.
And it's finally finally, making progress.
Recently and agreement was reached with the unsecured creditors Committee, which is a big deal because they were very active and very aggressive.
And they seem to have almost if not already reached to deal with most of the Monoline insurers, which also was a big issue.
So as they move forward really no 1 big issue lapses, how you handle the pensions and as you know there is there is a provision in there.
The amount of any pension that's above $500 a month.
8% of it.
We will be reduced.
And there has been very controversial with the government.
And they claim they claim day, except that so.
It's really the last big piece of the puzzle to left.
So most people are expecting debt, we should have a resolution of that by the end of the year or early next year.
The judges moving to calendar so.
So I think I think we're finally looking at it very possible solution at lease involving the vs.
And the central government debt I'm not sure if PREPA.
Done.
No.
We're pretty optimistic on that and so that's going to be the big outflow of funds and then secondly, I think once the government of Puerto Rico.
And knows what you can count on.
And then you can expect that it will start.
Maybe using its funds are investing and sounds a little bit differently. So we'll have to see when that happens but.
Literally right now they don't know what they can count on and so they just talking to the money with us but.
I think entering more normal environment, where they know where they can count on.
I think you can expect from them to make perhaps changed how they handle their money somewhat.
Got it and then.
And.
And sticking on the topic of deposits and.
In terms of the rates that you guys are paying I imagine there is not a whole lot of room.
To reduce the rates, but maybe there is from opportunity to it.
Increased fees related to deposits I mean can you talk about whether or not that is the case and sort of how you're thinking about that.
And I hope.
And you got to be careful there because.
Yeah.
Deposit franchise as a long term assets and you don't want to get and reputation as a nickel and diming. Your deposit clients, just because you know low low deposit market.
Already getting hurt.
With the.
With a low interest we're paying so.
I think I don't think there in terms of deposit fees no, but obviously as the economy picks up and you saw this quarter. We do expect our other sources of fee income to to improve we saw a nice.
<unk> and <unk>.
Fees related to debit and credit card.
I think insurance over time, we will continue to go up as people recognize the value and the need of insurance.
And we continue to build out our business. There. So we are definitely looking for fees.
Not.
We cannot put in and arrest evaluate deposit franchise, so, especially within the fintech and everybody else competing so I.
And I don't think it will be come from deposit fees and there'll be more from other services, where we can where we can get a fee by providing value to our clients. That's really that's really what we strive for.
On the cost to deposits.
The you're correct is hard and Puerto Rico is hard to do is to bring it down our total cost of the cost of those 14 basis points, which is so close to best in class, but we do still have some room to bring deposit cost.
Cost down and popular bank there we've done a pretty good job.
And we're down to total cost of the puzzle of 47 basis points from from.
Probably.
Sorry.
A few quarters back.
So there are still a little bit more room and the U S. But also keep in mind that as well.
It's a smaller portion of our deposit book so the overall effect on even getting some savings there and had total wood will be will be muted.
Great and then just to final question from me, which I think I asked last year as well, but just so that everyone on the call understands the accounting behind the ASR.
My understanding is that we've seen the full impact and the 350 million come out of equity already and we've only seen about 80% of the shares come out of the share count and so we should see and adjustment at the end of the third quarter, where we can see the share count reduced a bit further but there shouldn't be much of an impact to equity is that correct.
Sure.
Understanding is correct.
Due to described it went up.
Fantastic. Thank you for taking my questions.
Thanks.
The next question is a follow up from Brock Vandervliet of you. Yes. Please go ahead.
Thanks.
And also if you could just true to the guide on on expenses and kind of walk us up from.
And what looked like around $3.70, this quarter to yes.
The 385 back to the 380.385 guidance and whats.
And what's changing there.
Yeah.
Yes.
And I tried to sort of flow.
What what the components are going to be but.
The main drivers are going to be.
3 things first.
We do expect our compensation expenses to go up.
Part of that is normal course of business. For example, we do are very minor increases and the year in July so naturally to the second half of the year, we'll have higher personnel expenses.
The compensation was also affected by the overall performance of the company. So we can share to outperformance we have for the first couple of quarters.
And would increase.
Compensation and expenses as well and lastly.
And the competition for talent is real and we are not not excluded from that and Puerto Rico. So we're seeing that also effect.
We have to offer from your employees want to have to to offer our existing employee survey.
Happy and want.
Stay with the bank. So all of those components will continue to contribute to higher compensation expense.
And the.
And the second quarter, we went actually.
Got on a little bit of a break on that front.
Because we're also a little bit behind and our.
Irene on the people that we need you might have seen and a number of employees went down slightly so so maybe we got a little bit of a break and the second quarter debt expenses that should have been and this line did not show up simply because we have been able to to hire all the people, we need and want to hire and hopefully we can correct that and that again will reflect on.
Compensation expenses second is timing.
There are some projects and expenses that we had.
So our schedule and to be.
And 1 fourth of the expense every quarter and some of those projects on expenses just simply have had.
Having started on or have been delayed.
Some activities that are related to those projects continue so we expect those activities to still happen because they're just happening later in the year. So we think that will end up and higher expenses.
And lastly.
A little bit of a normal course of business.
And our clients feel better and do more transactions.
And our processing cost will go up.
And.
Like every other bank and the world.
Nothing that will keep your technology cost from going up.
And compliance and cyber and regulatory and stuff technology cost seems to be.
And that's something that we'll continue to go up and Unfortunately, we are no exception to that trend. So the combination of all those things.
We'll increase our expense base.
And once you know we we normally describe our expense on an average quarterly number.
You are correct that we were slightly below the range. We have described in the first 2 quarters of the year and that will vary by necessity mean that we will be above the range and the second 2 quarters of the year.
And that's our best guess on which business right now we hope to beat that by the way, we hope to do better but this is our best guess on what to expect this will be.
Okay and did you.
And separately on credit.
Given net charge offs are the economic backdrop.
Would you.
Need to see to.
Get conviction that perhaps looking ahead and we're looking at a much lower net charge offs pattern and you've seen historically and you'd have to.
Flexibility to further reduce.
Reserves, just trying to better understand how you're thinking about the reserving.
Yeah.
Well for 1 thing re service.
I mean slightly more scientific than it used to be in the past. So there's a lot of it is small model driven.
We have certain attitude, but maybe not as much as you think in terms of.
And how we come to come.
Comparable or not with lower and reserve on.
And said that I mean, the allowance for credit losses is driven by.
The performance cost performance credit quality.
Economic outlook, and taking into account and environmental factors and.
And if the trends that we have seen continuous and which also has continued to be low.
Credit quality continued to improve on that.
On the economic revenue continue to be continue to improve.
And we should reasonably expect their loved ones, who continued to trend.
Lower as we progress through the rest of trying to unwind to try to add to.
Okay, great. Thanks for taking my questions.
Thanks Mark.
This concludes our question and answer session I would like to turn the conference back over to Ignacio Alvarez for closing remarks.
Thank you for joining us today and for all your questions. We look forward to updating you on our progress and our October call. Thank you very much hungry weekend. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.