Good morning, and welcome to Popular, Inc. Q1 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be opportunity to ask questions. [Operator Instructions] Please note that the event is being recorded. I'd now like to turn the conference over to Mr. Paul Cardillo, Investor Relations Officer. Please go ahead.

Thank you, Nick. Good morning, and thank you for joining us on today's call. With us today is our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page 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 us closest to you are healthy and staying safe. Before addressing our quarterly results, I'd first like to discuss the current business environment in Puerto Rico and how we're responding to the COVID-19 pandemic as outlined in the first three slides of the presentation. The COVID-19 pandemic has negatively impacted the global economy, creating significant volatility and disruption in financial markets and increasing unemployment levels. The Puerto Rico macro indicator that regularly provides remains stable through the end of February. However, the pandemic and related economic disruption has had a very dramatic impact on the markets we serve. The local response to the COVID-19 pandemic has been substantial. On March 15, the Governor of Puerto Rico mended in a strict lock down for residents and ordered all nonessential business on the island to close indefinitely. Most business establishments are closed, and those that remain open are only operating partially causing a significant disruption to the island's economic activity. Only businesses involved in providing essential services, as defined by the governor's executive order have been permitted to remain open. And even those have been curtailed in their operations. For example, banks that had to temporary suspend mortgage and auto loan originations. The severe lockdown restrictions have also disrupted commercial lending. Additionally, the Puerto Rico government has mandated its citizens to remain sheltered in place and imposed a mandatory 7:00 PM curfew. Puerto Rico was the first U.S. jurisdiction to enact this scale of lockdown. Moody's Analytics estimated approximately 80% of Puerto Rico's $105 billion GDP has been impacted by this lockdown. They estimate the economic cost through April 12 and approximately $6.3 billion. And for as long as these restrictions remain in effect, they estimate an additional…

Thank you, Carlos, and good morning. Before discussing the CECL impact and credit trends for the quarter, I would like to take the opportunity to highlight changes that have occurred in Popular credit risk profile since the last global financial crisis, which you can see on Slide 9. Although one might be tempted to view Popular in terms of the last crisis, the reality is that we are a much different company with a stronger balance sheet and better risk profile. In the U.S., we stopped sub-prime lending in 2008 and today have limited sub-prime exposure in our consumer and mortgage business. Our U.S. Bank is now a community and niche lender with a lower risk profile. In Puerto Rico, since 2007, our commercial and construction exposure have decreased from 55% of our total loan book to 37%. During the same time frame, construction lending has decreased by 86% and now stands at $164 million. On the bottom half of the slide, we also present the Puerto Rico commercial portfolio and include the net charge-off distribution by segment since 2008. The important message from the table is our commercial mix has significantly improved by reducing exposure to asset classes with historically high losses. In the consumer portfolio, we are focused on two areas: mortgage and auto lending, thereby increasing the percentage of collateralized consumer loans. We believe Popular is well positioned to operate successfully during diverse economic environments, given our monthly improved risk profile and changes in our portfolio mix. Turning to Page 10. We are closely monitoring the impact of the COVID-19 crisis on our entire loan portfolio. However, we believe that certain portfolio segments are more sensitive and are highlighted on this slide. Within nonessential retail, the shelter-in-place orders and curtailed activity of this segment. An important part…

Thank you, Lidio and Carlos, for your update. To summarize, our results for the quarter were impacted by a large increase in our provision expense, reflecting the newly adopted CECL methodology and the most recent post COVID-19 macroeconomic forecast for Puerto Rico and the U.S. However, our operating results for the first quarter were solid given the extent of the economic acceleration experienced during the second half of March. The COVID-19 global pandemic has exposed the fragility of our economic and social system and the need for greater collaboration between all sectors. I am hopeful that it will also reveal what can we accomplish when we work together in pursuit of a common goal. At Popular, the wellbeing of our customers, employees and communities is our priority. We have acted decisively to help our employees stay safe, while we continue to offer essential banking services to our customers and communities. During our 126 years, we have often operated in highly uncertain and volatile economic periods and have always managed to them successfully. Almost three years ago, we faced the impact of Hurricane Maria, which caused extensive damage and left Puerto Rico and the Virgin Islands without power, water and telecommunications, in many cases for months. We responded decisively, adapted to change and delivered favorable results even under these very difficult conditions. While each situation presents unique challenges, we have the team the experience and the financial resources to do so again, and I am optimistic about the future of our company. Despite the uncertainty we're all facing as we fight this pandemic, we are confident that with our strong liquidity position and capital levels, we are well prepared to successfully manage through the current challenges. We are now ready to answer your questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Hey. Good morning, guys.

Good morning. Carlos Vázquez: Good morning.

First off, just talking about the CECL provision here and kind of the assumptions, and really appreciate that you laid everything out here on Slide 14. But as I look at the Slide 8, where you compare the CECL reserves versus the sort of pro forma DFAST assumptions from a couple of years ago. Can you talk about the differences in the assumptions for DFAST that would cause the reserve or the charge-offs to go that much higher?

Yes. I'll take that. I think whenever you look at the construct of DFAST scenarios, it's more, I would say, it's more of an elongated U type of recovery. So we have an impact of the economic downturn for about four, five quarters, and then you started that to recovery. In DFAST, we mentioned the losses associated with a specified period, while the CECL obviously is lifetime losses, so that's going to create a difference between when you compare CESL versus a DFAST. I think the other aspect that is different is the economic scenario, which usually in the DFAST elongated U. The scenario that we're modeling today is more sort of like a W with a recovery starting in early 2021.

Okay. So in order to get you to what this slide exhibits on the stress test, you really need the recovery to be much more elongated in more of a U versus what you have modeled? So it's the length of the downturn more than anything else?

I don't think that was partly. Obviously, there has been significant changes in the credit composition and credit quality of our portfolios, those other things that also impact those comparisons.

Okay. That's helpful. And then I guess the sort of the way the ASR played out was a little confusing to me. Can you just tell us to help us square kind of what tangible book value could do in the second quarter? So you're going to receive another 2 million shares in the second quarter? And then is there an adjustment to equity as well?

No. I think that the – exactly the shares we're going to receive will depend on the execution of the termination agreement, Alex. I mean the best way to think about it is that when the ASR was terminated, the initial number of shares that were delivered to us, that part of it is sort of closed out. And then the contract itself requires that a settlement process that is also in shares, and that is what is ongoing now. The first delivery of sample 1 million shares will benefit from a discount on the original contract. The additional purchases don't. But I think the main – the more important change here is that this program, which we expected to end late this year will actually end in the second quarter. So the full effect of the ASR will be done in the second quarter as opposed to the third or the fourth. But there's no change in equity. This is accounted for already when the ASR was contracted in January.

Okay. So there will be a reduction in share count in the second quarter, which will give you the full-year's benefit of the program?

Correct.

It will not be an adjustment in equity. Okay. Carlos Vázquez: Correct. Under the original contract, that last reduction of shares would have happened late in the year, and now it's going to happen in the second quarter.

That’s great. And then just final question for me, and maybe this one is a little bit more forward thinking. But one thing that's always struck me when I go down to Puerto Rico is just how unbelievably crowded the bank branches are, especially when you compare them to branches in New York City, for example, does the ongoing crisis right now, does it cause you to rethink or give you any indications that maybe the way that banking being done in Puerto Rico could change kind of on a more sort of permanent basis down there and kind of help you rethink the way that you are allocating expenses over the next year and into 2021?

I'm not sure over the next year – this is Ignacio. I mean this pandemic will cause us to rethink almost everything. But definitely, we're going to be looking at it. But one thing people forget is that there are less branches per inhabitant in Puerto Rico than they are in the U.S. So we're not overbranched as an industry, that's the one thing. The transaction levels have remained high. Now people – this pandemic has led to more digital transactions whether that will be a permanent change, I don't know, but you don't see lines in our branches anymore, but you do see lines in our drive through. So there are still a lot of people transactioning physically. Again, another thing I want to emphasize is that as opposed to some of our markets like New York and South Florida, the cost of operating branches in Puerto Rico is not huge. Our rental expense, our occupancy expense for branches is relatively small. The biggest expense is the employees. Obviously, we've made a big push before and with the pandemic, we're making a bigger push to move people to our digital transactions. But that will take time, and we'll see how that plays out. Obviously, it's something we've been promoting. We'll continue to promote even more.

Great. Thanks for taking my questions.

Next question comes from Mark Palmer, BTIG. Please go ahead.

Yes. Thanks very much for taking my questions. First of all, with regard to the deferred payments, just wanted to ask about the mechanics of how that would work once we get back to a resumption of payments as it pertains to the overall loan balance? Will the deferred payments essentially be tacked on to the end of the loan such that the maturity schedule will be pushed back? Or is there some other approach that would be taken?

That's generally how it's going to work for our mortgage products. For some of the other consumer products, that the mortgage product has a pre computed interest, so we just move it at the end. Some of the personal loan and auto loans, although we will move at the end, they have simple interest. So the mechanics are a bit different in each product. But yes, for mortgage, it is just tacked at the end.

Okay. Thank you. And with regard to the company's provision for loan losses, how should we think about how that could evolve in the second quarter and beyond?

I’ll leave that to Lidio.

Obviously, it's going to be a function of charge-offs, portfolio growth and the economic scenarios. I think there's nothing much I can add to that. Carlos Vázquez: Yes. It’s increasingly complex to comment about the provision looking forward because we have to run the models, and we don't even know what the inputs on economic banners are going to be by the end of the quarter.

So lot of uncertainty. And obviously, this is different than some of the other economic crisis we faced. I mean, some of the models are going to be dependent on the health outcomes, right. As you saw here today, development in health can move the markets can move economic forecast. So we'll have to see what happens, how successfully economies open up or don't open up. Whether the ones that open up faster have problems. So there's a lot of question marks that are out there that are left to be answered.

Okay. All right. Thanks very much.

Thank you, Mark.

[Operator Instructions] Our next question comes from Gerard Cassidy, RBC Capital Markets. Please go ahead.

Thank you. Good afternoon, everyone.

Hey Gerard. How are you?

Good. Thank you. Thank you for the detail by the way. Always very, very helpful. And on Slide 10, looking at the sensitive segment to COVID-19 and you listed the deferrals. From your experience with the hurricanes that you've been through in the past and the deferral programs you've used in those time periods. What percentage of deferrals actually go back to accruing versus the ones that actually do end up on non-accrual, generally speaking? Carlos Vázquez: And I mean, I would tell you based on our experience with Maria, generally, most of our clients continue to accrue. So we did not have a negative experience to the deferment of the contrary. It was very positive, and we were able to help our clients get back to their feet.

Very good. And I know you guys have discussed on the call what the current conditions are in terms of the lock downs and stuff and I apologize if you addressed this, I had to jump off the Gulf for a brief minute. Can you tell us what the current outlook is in terms of when the restrictions will be lifted, if there is an outlook for that at this time?

Yes. It's a bit uncertain. The Governor of Puerto Rico is receiving input both from a medical task force and an economic task force. As you can imagine, their perspective is a little bit different. The medical task worth being more conservative on what they're recommending and the economic task worth being a little bit open. We're expecting her to say something, I think, by tomorrow, Saturday at the latest because the current lockdown expires on Sunday. So I think more gradual than in some of the other jurisdictions. For example, because our lockdown has been more severe than other jurisdictions. Most jurisdictions, for example, banking is an essential service, and is totally exempted. He or she has limited some of the things even banks can do, I think we've mentioned in the call, mortgage and auto loans are basically suspended. So I will anticipate it will open up somewhat probably with construction, maybe some professional services, but she's going to take it, I think, in more gradual than some of the other stakeholders. And as you know, we've been – so far, we've had a pretty successful story in Puerto Rico in terms of the number of deaths that are relatively low. Our hospitals are not overwhelmed. And in fact, we have the opposite problem, our sense is many of our hospitals are very low. So I can't complain about that. Obviously, we all want the economy to open, but we don't want to be in a situation where we have a big second wave and have people open to close again. So I think we'll begin to open, but I think it will be more gradual than some of the other U.S. jurisdictions that you've seen.

Very good. And then just lastly, on your economic scenarios on Slide 14, which again, thank you for the detail. The Q-to-Q decline in the United States with GDP I'm presuming that second quarter 2020 versus 1Q 2020, do you guys have what the estimate was that you used for the full-year 2020 decline versus 2019? Carlos Vázquez: I don't have that handy. We'll provide that to you, Gerard.

Okay. Thank you. Great. Thank you, guys.

[Operator Instructions] Our next question comes from Arren Cyganovich of Citi. Please go ahead.

Thanks. Just on your kind of W forecast, and I apologize for kind of hitting this third time, I kind of asked this question, but have the scenarios worsened from Moody's since the March 27? I mean they're using kind of a different one, I think, than some of the other banks that we've talked to have utilized, is that forecast changed much since the end of March?

I haven't really looked at the recent scenarios by Moody's. The difference – I mean, most of our peers, I think used the baseline we thought based on our benchmark, our analysis that the downside scenario, the S3 was more reflective of the reroute, and that's the one we use as of quarter end.

Yes. I would agree with that, too. The other question I had was on the deferrals. What's the process here for – and to the extent that these – that you are continued to be locked down for a while? How long can these deferrals go out before you would start to have to recognize them as underperforming loans?

That's a difficult accounting question. But normally, if you look at the mortgage loans, we do have the CARES Act, which sets the standards basically that under law any federally supported guaranteed loan we have to give a six-month deferral and a decline as for an additional six months. In Puerto Rico, they have adopted a law for most of the other consumer products that requires up to four months. I think within the terms of those limits, we should be okay from non-accrual. Those are statutory mandated across the board requirements. Other than that, it becomes more of a case-by-case analysis and present value of the payments, how much it's impacted. But within those statutory limits, I think we'll be okay.

Okay. Thank you.

Thanks Arren. This concludes our question-and-answer session. I'd now like to turn the conference back over to Popular CEO, Mr. Ignacio Alvarez. Please go ahead.

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

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