Popular Inc (BPOP) 2020 Q4 法說會逐字稿

Good morning and welcome to the Popular Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions)

I'd now like to turn the call 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 Vasquez; and our CRO, Lidio Soriano. They will review our results for the full year and fourth quarter and then answer your questions. Other members of our management team will be available during the Q&A session.

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

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

Good morning, and thank you for joining the call.

I hope that you and your loved ones are well.

Despite the challenging economic environment, we generated $507 million in earnings during 2020 and ended the year on a high note with $176 million in earnings during the fourth quarter. This was one of our best quarters in our history.

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

Total nonfarm employment has increased by 6% since April when employment bottomed out but remains 8% below the December 2019 level. In 2020, new auto sales were 11% lower than the previous year, mainly a result of the restrictions on auto sales and financing from March through May. However, demand has rebounded sharply since May and remains robust. Fourth quarter sales of almost 36,000 units marked the highest recorded quarterly level going back to at least 2013. Cement sales increased by 16% in the fourth quarter as compared to the year-ago period.

Tourism and the hospitality sector are improving slowly but continue to lag other areas of the local economy. While airport traffic has been gradually increasing, arrivals during the month of December were still 45% lower than the previous year. Within Popular's clientele, debit and credit card sales in dollars increased by 18% compared to the last year's fourth quarter. For the full year, sales increased by 10%. Auto loan and lease originations at BPPR increased by 11% compared to the year-ago quarter and were only down 5% for the full year, notwithstanding the pandemic-related disruptions. Similarly, we saw continued strength in the dollar value of mortgage durations at BPPR, which were up 20% in the fourth quarter versus the third quarter and increased by 32% in 2020 as compared to 2019.

Please turn to Slide 4 for an update on PPP and other operational matters. Most of our branches are now fully operational, and we continue to take measures to ensure the safety of our employees and customers. We are also focused on supporting our customers in this uncertain environment. During the initial phase of the pandemic, we offer payment relief to our retail and commercial customers and are working with those clients who still need assistance. We continue to offer alternative work arrangements for a significant portion of our employee base. We are committed to ensure a safe transition back to on-premise activities which we currently 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 are eligible to do so.

With respect to the PPP program, $544 million of the loans originated were under $150,000 and are eligible for expedited forgiveness under the SP8's simplified process. We have deployed an online platform for customers to request loan forgiveness and have submitted approximately $500 million in forgiven requests to the FPA. Leveraging this online platform, we began accepting applications for the second phase of the PPP program last week. To date, we have received more than 3,200 applications, totaling approximately $234 million.

On the digital front, we continue to have more than 1 million monthly active users on our Mi Banco platform in Puerto Rico. We captured 71% of deposits in the fourth quarter through digital channels. For the full year, 67% of deposits in BPPR were captured digitally compared to 52% in 2019.

Finally, our customer base in Puerto Rico continues to grow, increasing by 6,000 in the fourth quarter to reach more than 1.9 million unique customers.

Please turn to Slide 5. Our annual net income of $507 million reflects a decrease of approximately 24% from our 2019 annual record net income of $671 million. The decrease was largely driven by higher provision expense, lower fees and lower net interest income related to the economic disruption caused by the pandemic 2020 results benefited from strong deposit growth and a higher level of earning assets in both Puerto Rico and the U.S. However, both of our banks 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 1 capital and Tier 1 common equity ratios at 16.3%. Our tangible book value ended 2020 at $63.07, a 14% increase year-over-year. In Puerto Rico, we grew loans by 7%, increased our deposits by 35%, and our net interest margin was 3.4%. In our U.S. operations, we grew loans by 8%, deposits by 2%, and our net interest margin was 3.21%.

Please turn to Slide 6. Our quarterly net income of $176 million was $8 million higher than the third quarter and $9 million higher than the same quarter last year. These results were driven by higher revenues partially offset by higher provision and operating expenses including pretax expenses of $23 million related to our New York branch realignment program. The increase in net interest income was driven by an increase in our investment portfolio and lower deposit costs. Credit quality trends were solid in the quarter. All in all, we are very pleased with our fourth quarter results.

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

Thank you, Ignacio. Good morning. Before we turn to fourth quarter results, I will expand on Popular's 2020 full year performance. Our net interest income decreased by 2% year-over-year to $1.86 billion as lower net interest margins were only partially offset by growth in earning assets. 2020 provision expense increased by 76% to $293 million, primarily driven by the impact of the pandemic. Noninterest income decreased by 10% year-over-year, with most segments lower in 2021, again, mostly pandemic related.

Operating expenses decreased by 1% for the year to $1.46 billion. Lower personnel cost and business promotion expenses were the primary drivers. Our capital position is robust. We ended the year with a tangible book value increasing by nearly $8 per share to $63.07. This improvement was achieved even after the repurchase of $100 million common stock, the increase in our common stock dividend and the redemption of $28 million preferred stock. Common Equity Tier 1 ratio dropped by 149 basis points year-over-year to 16.3%.

Please turn to Slide 7. Additional information is provided in the appendix to the slide deck. Today's earnings press release detailed variances from the third quarter. Net interest income for the fourth quarter was $472 million, an increase of $11 million from Q3. Noninterest income increased by $16 million to $145 million in Q4. More specifically, we generated $2.3 million higher deposit service fees, $1.2 million higher other service fees and $19.3 million in additional mortgage banking income, mainly due to negative impact in Q3 of the bulk agency mortgage loan repurchase.

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

Provision expense for the quarter was $21.2 million, which is $2 million higher than in Q3, but it includes a reclassification of $10 million for unfunded loan commitments to the provision for credit losses. This is only a change in geography in our income statement. Lidio will expand later. Total operating expenses were $376 million in the quarter, $14.9 million higher than in Q3. These include $23.2 million in the previously disclosed expenses related to Popular bank's branch closure actions. Excluding the branch closure related costs and the expense reclassification, the net increase in expenses would have been $1.7 million, primarily driven by a $6.3 million increase in personnel costs, composed of a $2.1 million severance expense related to Popular bank's branch network realignment, higher 401(k) match due to an additional bi weekly payroll and higher incentive compensation.

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

Finally, business promotion expenses increased by $1.8 million due to higher seasonal advertising expenses.

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

For 2021, we expect average quarterly expenses to be between $375 million and $280 million. While this is higher than the quarterly average we achieved in 2020, it is still below our original expense guidance for last year. This increase from 2020 is mostly driven by higher expenses in the following 3 categories: personnel, as we invest in training, compensation and related benefits, many of the savings in 2020 were cost to compensation and incentive pay; technology, as we continue to modernize our digital capabilities, cure obsolescence and address regulatory cyber and compliance needs. Some of these investments were delayed in 2020. Finally, business promotion, especially expenses related to client reward programs. Some of the growth in this category results from our revamped rewards for credit cards and from our digital offerings. Party higher technology and reward expense are related to expectations of higher levels of client activity in 2021. We will strive to come in below this expected level of expenses. Our effective tax rate for the quarter was 20%. For 2021, we expect the effective tax rate to be between 19% and 21%.

Please turn to Slide 8. Net interest income for the quarter was -- 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 level of deposits in Puerto Rico. The replacements of T-Bills with Agency MBS in the investment portfolio and lower deposit costs primarily at Popular Bank. Deposits grew by $844 million in the quarter. This increase was mostly in BPPR. NIM decreased 2 basis points to 3.4% in Q4. On a taxable equivalent basis, net interest margin was 3.35%, also a decrease of 2 basis points.

The reduction in the margin reflects an increase in the size of the investment portfolio and lower loan yields, partially offset by a decrease in deposit costs. The total loan yield decreased by 16 basis points in Q4. The bulk mortgage loan repurchase at the end of Q3 was the main driver of this decrease as these assets yield approximately 3.5%. For 2021, we expect margin to be stable. Asset mix, round 2 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 than in Q3. We continue to expect Puerto Rico public 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 will likely increase these 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 2 of the PPP program will help loan balances, but we still do not expect overall loan growth to materialize in the first half of 2021.

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

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

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

Please turn to Slide #11, which highlights these commercial segments. Within the CRE non-retail segment, the exposure in Puerto Rico is mainly comprised of office space, while the exposure in the U.S. is mainly multifamily. The average original loan-to-value in Puerto Rico is 77%, while in the U.S. is 75%. Office space and multifamily occupancy and collection have remained stable through the pandemic. Today, there has been moderate numbers of downgrades in these segments. Of the customers that have exited relief, 98% 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 skilled nursing facilities. For both regions, federal and local assistants have supported the industry operation. Today, there have been a moderate number of deferrals and downgrades in this portfolio. Within nonessential retail, the shelter in place orders who curtail activity of this segment. Notwithstanding, our customer base has experienced an increase in activity after the lockdown orders were lifted. Today, there have been a moderate number of deferrals and downgrade in this portfolio. Of the customers that have exited deferrals, 99% of accounts are current. The average [real] loan-to-value for this segment is 59%. In general, based on discussions with our major borrowers, occupancy and collection have remained stable with signs of improvement during the fourth quarter. Regarding the construction segment, most of our exposure is in the U.S. and principally in the New York metro region. The majority of our projects are in late stages of completion, have low loan to cost, an average of real loan-to-value of 64% and nominal exposure to higher end residential.

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

Our hotel exposure is mostly in Puerto Rico. At the end of the quarter, our total exposure stood at $270 million, with an average real loan-to-value of 69%. This segment has experienced elevated levels of stress due to limited business and leisure mature travel. Most of the deferrals 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 a significant number of downgrades and deferrals. Restaurant balances were $238 million at quarter end. This segment has experienced stress driven by the restriction placed on indoor dining. Despite this restriction, the majority of our restaurant borrowers, particularly quick service or fast food and continue to operate through delivery and carry out with volume improvements during the fourth quarter. Of the customers to have exited deferrals, 99% of accounts are current. To date, this segment has had a significant number of deferrals and downgrades, most within the [fast] category. To finalize, let me highlight -- let me highlight that we do not have material credit exposure to energy, airlines or are national credits.

Please turn to Slide #12 to discuss credit metrics. Nonperforming assets decreased by [$15 million] to $124 million this quarter, mainly driven by an OREO decrease of [$17 million], offset in part by an NPL increase of $3 million. The OREO decrease was driven by sales and the suspension of culture 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 in commercial NPLs. The increase in mortgage NPLs was mainly due to a delinquency progression after the expiration of the payment moratorium. We are not overly concerned with this 2 to 3 factors. First, NPLs are comparable to levels prior to the pandemic, without the natural outflows caused by foreclosure. Second, early delinquency are at the lowest levels in the last 10 years. And finally, the trend in forward roll rates for early delinquency pockets is encouraging. Thus, everything being equal, we do not believe that the fourth quarter increase in NPL inflows is the start of a trend but rather the effect of the expiration of deferrals. The commercial NPLs decrease was mostly related to impairment charge-off from previously reserved collateral dependent loans. In the U.S., NPLs decreased by $3 million due to a previously reserved construction loan that was partially charged off during the quarter. At the end of the quarter, the ratio of NPLs to total loans held in portfolio was 2.5%, flat versus the prior quarter.

Please turn to Slide #13 to discuss NPL inflows. Compared to the third quarter, NPL inflows, excluding consumer loans, increased by $2 million, driven by an increase of $19 million Puerto Rico, mainly due to mortgage delinquency progression and the expiration of the moratorium period. In the U.S., NPL inflows decreased by [$70 million] as the prior quarter included the impact of our $11 million relationship that mature and reached 90 days while in the renewal process.

Turning to Slide #14. Net charge-offs amounted to $42 million or annualized 58 basis points of average loan selling portfolio compared to $17 million or 24 basis points in the previous quarter. In Puerto Rico, net charge-offs increased by $27 million primarily driven by higher commercial net charge-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 decreased by $30 million to $896 million, driven mainly by charge-off on the previously mentioned commercial loans and an improved economic outlook, offset in part by an increase in qualitative reserve as discussed further in the following slide. The ratio of allowance for credit losses to loans held in portfolio decreased slightly to 3.05% from 3.15% in the third quarter. Excluding payment protection program loans and guaranteed mortgage loans, this ratio increases by 40 basis points to 3.45%. The ratio of allowance for credit losses to NPLs, held in portfolio, was 122% compared to 126% in the prior quarter. The provision for credit losses increased to $21 million. During the quarter, we reclassified $10 million of the expense from fund net loan commitments from other operating expenses to the provision of credit losses. Excluding this effect, the provision for credit losses on the loan portfolio decreased by $9 million mostly due to improvements in the macroeconomic scenarios.

Please turn to Slide 15 to discuss details on the drivers of the variance in allowance for credit losses. At the end of the fourth quarter, the allowance for credit losses decreased by $30 million compared to the third quarter. [Borrowings] were driven by changes to economic outlook, qualitative reserves and portfolio credit quality. As discussed in the last webcast, we enhanced our ACL framework by introducing probability weights of different scenarios to estimation process. We combine Moody's analytics as one baseline and S3 scenarios. Among the 3 scenarios, the baseline assigned the highest probability, followed by a more pessimistic S3 scenarios, given the uncertainties in the economic outlook and downside risk.

The current baseline scenario shows improvements in both 2021 GDP growth and employment rates when compared to the previous estimates. The change in macroeconomic scenarios caused the ACL to decrease by $84 million.

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

To summarize, our loan portfolio exhibited stable credit quality metrics during the fourth quarter, aided by payment deferrals, government stimulus and the resumption of collection efforts. However, as the effects of the pandemic continue to evolve and remain fluid, the full extent of the economic disruption is uncertain. The improvements over the last few years in the risk profile of our loan portfolio positions Popular to successfully operate under the challenging environment. Management will continue to carefully monitor the exposure of the portfolios to pandemic-related risk changes in economic outlook and how delinquencies and net charge offs evolve over the next few quarters.

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

Thank you, Lidio and Carlos, for your updates. 2020 was certainly a challenging year. It began with devastating earthquakes in Southwestern Puerto Rico, which were shortly followed by the unprecedented impact of the pandemic, including the substantial lockdown of the local economy. I am grateful to our employees for their commitment to serve our customers and their creativity and ability to adapt to a rapidly changing environment. Whether on the frontline or adjusting quickly to working from home, we are blessed to be part of the team of talented and dedicated colleagues who have met these challenges with courage and resilience.

We continue to grow our customer base while we remain focused on supporting our communities. I am extremely proud of what we've been able to accomplish over the past year. We recorded more than $500 million in net income and ended the year on a high note, generating one the best quarters of net income in our history. In 2020, we were also able to complete our capital plan as intended. We executed a $500 million share repurchase program, increased our quarterly dividend and redeemed $28 million in preferred stock. While there is still much uncertainty, especially for the first half of the year, I am optimistic that the vaccination process that is underway will allow an eventual return to the normalcy we so desire. We begin 2021 on a solid footing and are excited about our prospects for the year.

We are now ready to answer your questions.

(Operator Instructions) The first question will be from Alex Twerdahl of Piper Sandler.

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

Yes. You used the word flow. I think -- I mean, we're generally optimistic that FEMA finally reached an agreement with the electric power authority for about $10 billion restoration program. And with the aqueduct and sewer for about $4.5 billion. That money, really, to my knowledge, hasn't -- hasn't begun to flow. So that's yet to come. It's important it's agreed upon. They're working on implementing that. What we have seen, obviously, the $600 payment has come in as it is in the states. That's been coming in the last -- it began last week and it's continued this week. So we still have a lot of the CDBG funds that are yet to be spent. They're going out slowly, but we are very much more positive. It looks like the new administration recognizes that there's been a problem getting these funds out is going to be working closely with the local authorities to get it out faster. So I think we're going to see that accelerate during the year, but we really haven't seen it yet. So more to come. I think the economy, like in the states, we had a big pickup in the third quarter. The fourth quarter was better than before, but not quite the acceleration we had in the third quarter. I do see home purchases are increasing. I saw a report -- I don't know who put it out. So I don't want put it that home purchases in Puerto Rico went up -- home prices in Puerto Rico went up by 7%. So generally, I think we're optimistic that these flow funds will have a big impact. We really haven't seen that great other than the direct stimulus that goes to individuals. It's starting to go out slowly. We have a new administration, both at the level of the central government and many of the municipalities changed mayors. I say that because CBDV, the mayors have a big role in that. And including the Mayor of San Juan. So I think that, that's probably the number one priority, if it isn't, it should be, but I think they've all said it is to take advantage of that money. What else can I add that's -- again, the money really hasn't begun to flow that much. So we're hoping that we'll now begin in the first part of the year.

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

Above -- you mean about 1 million persons.

Yes, 1 million jobs.

Obviously, there's a couple of sectors that have been seriously impacted that our high employment sectors the tourism restaurant sector, although they don't make up a huge amount of our GDP, they do have a proportionately larger impact on employment. That sector has been impacted. I think when the economy picks up, and this won't be so much -- I mean, obviously, if the economy picks up, business travel picks up. But I think Puerto Rico will be well positioned in the leisure market because you're starting to see increasing restrictions on international travel. And I think some people will think twice about going to a foreign country for a while, if they're not sure they can get back to the United States. The other area that always has a big impact on employment is construction. And again, once you start building the infrastructure that's out there, I think that will have an impact on employment. There are things that worry people in our industry, it's become generally hard for some people to gain higher employees. I've heard people from supermarkets and people that are paying near the minimum wage are having a hard time. Because in Puerto Rico, the federal supplement for unemployment is $400 a week. So if you take a 40 hour a week, that's $10 an hour. So you're competing against that unemployment. So if you're currently unemployed, you don't have a big incentive to go out and get a job that pays less than $10 an hour. So I do think we're going to have a big pickup in the demand side for labor. It will be interesting to see how we can meet that supply, especially concerning the construction industry, whether they'll be able to get all the employees they need.

That's great color. And then as I think about the reserve, and I think about this qualitative portion that was increased in the fourth quarter, what kind of things are you looking for that qualitative portion to kind of reverse? Is it a full opening of the economy? Or are there other things that you're paying attention to? And then just over time, conceptually, should the reserve head back towards that CECL day 1 reserve level? Or is enough change that, that number has kind of moved at this point?

I would say that in general terms, the way to think about the qualitative reserves as there is more clarity as to the path forward. I think that will allow us, give us more confidence that the need for it has lessened. So that will be my first take. So as vaccination continues to evolve, we see a little open up of the economies. I think those will be indication for, in my view, qualitative reserves might let go. In terms of how to think of the reserve versus day 1 CECL, I think, I mean, there has been significant changes in portfolio composition. I mean I think that is a starting point, but I wouldn't say that, that necessarily we will revert to that. That will be my answer.

Next question is from Brock Vandervliet of UBS.

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

I will say some of it has to do with some of the -- let's call, first on employment. I mean, part of the change in unemployment also relates to the difficulty of estimating the unemployment rate in -- when you have significant crisis or significant disruption to the ability of the Bureau to do the unemployment survey. As you know, the unemployment rate is based on a house to house survey that in areas of -- when you have disruption, it gets difficult to implement. So we -- for a very long time, Moody's and economists didn't have the benefit of the March and April numbers. And many people thought that those numbers were significantly higher than they came out to be. That's why you see a significant shift in terms of the forecast for unemployment, particularly in Puerto Rico, between the third and fourth quarter baseline numbers that we use. The rest, I agree, I mean, there is -- at Moody's, particular, they are very high on the flow of funds to Puerto Rico. Particularly, I mean, the Biden administration has a very aggressive plan for Puerto Rico, and now that they control both the house on the Senate. They think that a lot of that is going to come to fruition.

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

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

So with that, as I mentioned in my prepared remarks, we do expect the balances from the government to actually go up, especially in the first half of the year. A combination of additional federal transfers and tax revenues coming in and then probably going out in the second half of the year. So that -- we'll probably have more cash to invest. Although some of that cash may be shorter term. I mean some of the things that we have in the radar that we're keeping our attention on, for example, in the government balances, is there is a lot of noise, especially in the last couple of weeks, there seems to be progress in the process of restructuring the public debt. If, in fact, that happens and there's an agreement to be implemented sometime later this year, I do not know what that will ultimately be. But the last agreement that was discussed publicly contained a onetime down payment from the government of Puerto Rico to bondholders of about $6 billion. So there's instances here where significant amounts of the balances of the deposits may move out. So we'll have to keep that in mind. The new government in Puerto Rico has expressed an interest to on their side of the equation to try to move the funds faster as well. So there may be additional outflows in normal course of business from the government of Puerto Rico. So we'll keep looking at all those things. But to summarize, yes, we will continue to consider extending somewhat in the investment portfolio, although not dying to buy assets at 1% yield.

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

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

A $10 billion in PREPA, very little of it has been spent. I mean they authorized that. But I -- we have not seen that money. For example, in our accounts with PREPA haven't changed dramatically. Neither with PRASA. We have been going through a program of improving the infrastructure. And therefore, some of our contractor clients have gotten those contracts. And the CDBG money, we have extended lines of credit for several of our contractor clients who need to advance the funds before they get reimbursed from CDBG. So again, I want to emphasize that while we're all very excited about the prospects of the money being released, to date, the release of those hurricane relief funds have been rather limited. So the expectation is that's an upside coming, we haven't really seen that money flow yet. There's a lot of talk that they -- and there's -- I think a greater disposition on the new administration to get those monies released. What we've seen more is the impact on the consumer side, where you see the direct relief that's very visible in our deposit balances going up. The PPP loans. Obviously, that -- you see our deposit commercial balances going up also. That money for hurricane relief has really -- again, it's frustrating for all of us, but they call me an eternal optimist, so I look at the bright side, which is that's money yet to be pumped into the economy. And we have made progress as much as we criticize it, these were complicated processes. And for example, the amount that's being given to -- awarded to PREPA is, I think, a record amount the team has ever given to any entity. So these are big dollars. But again, I want to make everyone [is done now], you're not really seeing that money spent yet.

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

Yes. I mean the -- on both sides, I think the outlook is a little bit clouded by $1.4 billion of PPP loans going away, Glen. So that sort of drives the whole thing. So if we successfully keep loan balances flat means that we actually originated $1.4 billion more than matured this year. Ignacio mentioned the round 2 PPP, we expect that to help, but we also do not expect that to be anywhere close to the magnitude of the original PPP. So if anything, I think the commentary we've given before will continue to hold true, Glen, which is that we're more confident that continued growth in the U.S. bank and in Puerto Rico, probably more stability.

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

Ignacio, maybe you could share with us, obviously, there's been a change in this administration that we're all obviously aware of. And in the administration, the President Obama's administration, he was opening up relationships with Cuba. And then under the Trump administration it went in the other direction, assuming this administration opens -- reopens those relationships with Cuba. Can you share with us some opportunities that may arise for Popular if you're permitted to do banking down in Cuba?

Cuba is always a difficult topic. I think that there's a great probability that Biden will revert some of the additional restrictions that President Trump put in, it may take them a while to do so through procedural hopes. When Obama opened up, we were very interested in Cuba. I think -- I don't know if you know this, but we were one of only 2 U.S. banks that issued credit cards that could be used in Cuba, and we took us a while to get to that. However, I really don't expect Cuba to have a big impact on short term. Really, it's -- people always think, from our perspective, from the U.S., I mean I don't think you're going to see meaningful change economically in Cuba, unless the government there takes a radically different approach to the economy. We haven't seen signs that that's going to happen. So I don't expect anything dramatic to happen. But I think Biden has bigger issues. So although I think he will revert some of those things, I don't think you'll see the level of enthusiasm you saw when the 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'll explore like we did last time. We invested time and money to get that credit card operating. It wasn't, by the way -- very little use on it. So it wasn't a moneymaker. So again, I don't think it's going to be a mover for us in the near future.

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

Yes. That's a really good question. We thought about it a lot. When you think about that question, your normal banker reaction will be, well, let's go back in history and look what the balances look like before the stuff happened, and that must be the right number, right? Unfortunately, when we did that, that number doesn't work because a lot of the accounts that we have from the government now, we didn't have historically because they used to sit at GDB. And when GDB went 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 GDB disappeared, we had various billions of dollars in government deposits, if you added everything up, but they were nowhere close to $15 billion. I would assume when things normalize that it's probably going to be a number somewhere between $5 million and $10 billion, but I can't get any smarter than that big range, to be frank with you.

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

Sure. A lot of the rules that we all know are really only applicable to CCAR banks. So while those rules don't necessarily apply to us, they sort of set the stage of -- it telegraphs to everybody what the Fed is willing to consider, right, conceptually. So we're watching very attentively what those rules are. At this point in time, we are planning to continue our process as we have historically, Bernard -- Gerard, I'm sorry.

(inaudible)

We'll call you Geraldo, how about that? We are in discussions with the Fed. And we go through our whole capital plan with them, get their feedback. Sometimes some adjustments are necessary. We still are hopeful that we will get whatever response we may need from them. You don't need a response for all the parts, sometimes you need response for only parts of this in time for us to make an announcement in our webcast in April. So we have not changed our process too much. We are mindful of the boundary that the Fed has made public. But we have continued our process so far, largely unchanged.

The conference has now concluded. Thank you for attending. You may now disconnect. Have a great day.