Good day, and welcome to the Popular Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Paul Cardillo, Investor Relations Officer of Popular Inc. Please go ahead sir.

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 second 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 your loved ones are healthy and staying safe. Before addressing our quarterly results, I'd first like to discuss the current business environment in Puerto Rico as outlined in the first two slides of the presentation. The pandemic and related economic disruption continues to have a significant impact on the markets we serve particularly in Puerto Rico. The strict lockdown mandated by the governor of Puerto Rico on March 15th, helped curtail the initial spread of the pandemic. As a result, starting on May 26, many of the restrictions that were in place were gradually loosened and the local economy largely reopened over the past couple of months. As the economy reopened, we had started to see a revival in business activity especially in the month of June. However, the recent surge in positive cases and hospitalization led the governor on July 16th to announce the rollback of some business and recreational activities and to impose further restrictions on inbound travel. While affecting a much smaller portion of economy than the original lockdown these restrictions will undoubtedly have a significant impact on the hotel and restaurant segment, the severity of which will depend on the length of these restrictions. Employment trends deteriorated rapidly in April and are still down significantly compared to last year, but they have begun to stabilize. The peak in unemployment claims to date in 2020 was during the first week of April. Nonfarm employment improved by nearly 5% from April to June. New auto sales had been severely impacted by the lockdown and were 49% lower in the second quarter as compared to the second quarter 2019. However, June was the best month of auto sales in the past decade and auto sales…

Thank you, Carlos, and good morning. Before discussing the CECL impacts and credit trends for the quarter, I would like to take the opportunity to highlight changes in Popular's credit risk profile since the global financial crisis which you can see on Slide number 9. Also one might be tempted to view Popular based on the last crisis in 2008. We are a different company with a stronger balance sheet and more conservative risk profile. In the U.S. we shifted from being a lender with significant subprime and construction exposures to a community and niche lender with a lower risk profile. In Puerto Rico, we also shifted our commercial mix to segments with lower losses and collateralized consumer loans, mortgage and auto. We believe Popular is well positioned to operate successfully during diverse economic environment given our improved risk profile and changes in our portfolio mix. Turning to slide number 10. We are monitoring the impact of the COVID-19 crisis on our entire loan portfolio, yet certain portfolio segments are more sensitive and are highlighted on this slide. 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 comprised of multi-family. Office space and multi-family occupancy and collections have remained stable throughout the pandemic. Today, there have been limited numbers of downgrades in this segment. The level of deferrals mainly relates to customers' liquidity strategies. In the health care facilities segment, our Puerto Rico exposure is mainly to hospitals, while our U.S. exposure is to skilled nursing facility. For both regions, federal and local assistance has supported the industry operation. Today there have been a limited number of deferral requests and downgrades in this portfolio. Within non-essential retail, the shelter-in-place orders have curtailed the activity of…

Thank you, Lidio and Carlos for your update. After 126 years in the banking business, we know success requires that we act quickly and decisively putting people first. I want to express my gratitude to our employees for their commitment to serve our customers and their creativity and ability to adapt to a rapidly changing situation. We continue to support the communities we serve through these difficult times by providing payment deferrals to more than 116,000 customers and also provided assistance to the health care professionals and non-profit organizations as they battle the pandemic. I would also like to thank our customers for their continued trust and for adapting to this new reality. They have accelerated their adoption of digital channels. Our market-leading digital offering in Puerto Rico helped us surpass an important milestone more than one million active users on our digital banking platform. We are aware that there remains much uncertainty as to the future of the economy. Economic performance will continue to be tied to developments on the health front which are very difficult to predict. If the health situation deteriorates leading to a new round of restrictions on businesses, this will obviously hamper the economic recovery. However, the strength of our balance sheet levels of capital and liquidity place us in a strong position to continue to serve our clients and whether the challenges that may lie ahead. We are now ready to answer your questions. Thank you.

Thank you. [Operator Instructions] And today's first question comes from Arren Cyganovich with Citi. Please go ahead.

Thanks. I was wondering if you could just talk a little bit more about the decision to change your Moody's scenario that you used. I know you addressed it somewhat in your prepared remarks that it looks like the total economic in the new baseline is a little worse, but the recovery happens a lot earlier. I'm just curious as to why not stick with the more of a double-dip recession that you previously had?

Yes. Well we -- based when we were down -- doing the first quarter scenarios, we felt that Moody's was playing catch up. They had not adjusted their scenarios rapidly enough to the rapidly changing situation. When we shut down for the second quarter as we mentioned, we -- our view was different. I think they have for the most part catch up. And I will characterize the second quarter scenario as being an elongated U type of recovery in which growth happens much later into -- our growth happen much later than 2021. I think as we mentioned in the prepared remarks, both I think scenarios are similar in terms of cumulative impact to the main economic variables although in the past different from one to the other.

Okay. And on the deposit growth that you had obviously some boost from the public deposits. But in general the large level that has occurred, how much of that do you view as somewhat temporary and would -- you wouldn't be able to really deploy that into higher earning assets?

Well I think it's -- obviously we've had trouble predicting the public deposits in the past and I hesitate to predict how they're going to be deploying in the future. But generally, we've seen a lot of liquidity in the system from the federal stimulus payments as opposed to like hurricane relief many of these payments went directly to people. So between the $1,200 and the unemployment benefits there's been a lot of liquidity going through the system. The PPP loans put a lot of liquidity into the system. We -- it's hard for us to predict. Some of that money will -- obviously will be spent. Some of it will come back with us and goes off island obviously when you consume things off island. I think it's very difficult yet for us to get a good handle on those flows at this time. So and the return for taking risk and going out longer is not very attractive at this time. So we're trying to get a better feel before we make fundamental changes in our investment approach.

Okay. And then lastly, the growth in card volume was pretty astounding in June. I think you said it was up about 42% or 43%. A – Ignacio Alvarez : 43%.

Was that really just pent-up demand because of the lockdown? What was driving the really strong growth there? A – Ignacio Alvarez : I mean it's hard to pin one thing. But obviously there was pent-up demand. People were locked up in their houses. I think we saw some of that in China when in the first coronavirus when people got out for the first time they started spending. Also they've got money in their pockets. I mean again, I don't want unnecessary [ph] a lot of people in Puerto Rico that were making minimum wage or close to minimum wage were getting checks of $5000 and $6000 on unemployment. Yes, they were getting $600 a week, but they were getting the checks were delayed in many states. And by the time they got the checks it was retroactive. They were really getting checks of $5000 something they would never have in their lives. So a lot of money in the system there's pent-up demand. And I think consumer demand picked up faster than we actually anticipated. People started going back to restaurants to stores. So we'll have to see how this recent surge affects that. But I think the consumer came back a lot faster than I would have thought.

Okay. Thank you. A – Ignacio Alvarez : Thanks.

Our next question today comes from Alex Twerdahl with Piper Sandler. Please go ahead. Q – Alex Twerdahl: Good morning. A – Ignacio Alvarez : Good morning. Q – Alex Twerdahl: Just wondering maybe if you can give us a little bit more color on the downgrades that you guys did during this quarter and the reserve that was associated with them. And I guess what I'm trying to figure out is when you do the downgrades what assumptions were you making about the economy where we are you at the point where things are trying to reopen and the expectation was that they're going to remain opened, or is there a slightly more pessimistic view taken especially in some of like the hotels and the restaurants and some of the higher downgraded buckets? A – Lidio Soriano: I think as I also mentioned in the prepared remarks most of the downwards that we compared during the quarter were in the -- within the past category. However, having said that there were certain segments in which given the information that we had available for us, given the prospect of the industry we did downgrade to substandard or worse. We mentioned that we downgraded about $200 million -- $190 million to substandard or worse. As we always do we take into account, how the company is doing the prospect for the company on a going-forward basis. The ability to withstand further disruption caused by the pandemic, but we're not making adjustment in terms of the economic outlook. We think that things are pretty uncertain. But it's more based on the current ability of the organization to withstand further crisis and the liquidity position. Q – Alex Twerdahl: Okay. Thanks for that. And then one topic that I think a lot of…

That's helpful. Thanks for taking my questions.

Thanks Alex.

Our next question today comes from Joe Gladue with Alden Securities. Please go ahead.

Hey good afternoon.

Hey Joe.

Just a couple of quick ones. Just regarding the PPP loans just wondering what your guess or assumptions are as to when forgiveness starts to come through and when most of that has completed this?

I think our assumption -- and I have -- it's going to be that most of our clients are going to try to get the loan from what we've talked to our clients most are going to go for 100% forgiveness. So, I think as soon as the SBA comes out with a clear guideline to how you do that I think it's going to happen within the next -- they've extended the period you can use the funds to now 24 weeks. So, I think it will happen by the third quarter -- end of the year at least. I would say end of the year. Carlos Vázquez: It's a good chance a significant part of all the portfolio will be gone by the end of the year.

Yes. So…

All right. I just -- I know you've touched on it both in the prepared remarks and in some of the past questions. But the liquidity and the deposits on the balance sheet a lot of that is some of the PPP funds and such. Have you gotten any -- in the last month or two any insight in the -- just is that coming off gradually, or do you think that's going to come off more in chunks, or just any insight you might have so far in the -- to what you're seeing as how those funds are being drawn down? Carlos Vázquez: No, I'm not sure there is a lot of clarity Joe. Some of the expenditures by the government will be in big chunks. But what ends up happening with a lot of those big chunks is they move from a government account at the bank to individual or corporate accounts at the bank. So, we do recapture some of that. So, while there may be a big chunk of funds transferred in assistance, for example, by the government, you may not see the same effect in drop in our overall deposits because it just moves to other deposit accounts. So, it's hard to get a handle of it. The government has taken a long time to actually start disbursing the assistance money. So, a lot of that money is very new getting to people in the last month or so. So, it's very early days. Hopefully we'll have more clarity by the end of the third quarter.

Yes, I think a lot on the private deposits is going to depend on what the new federal stimulus package looks like. A lot of people have a lot of liquidity if they have to start using that liquidity and the unemployment benefits run out or go down substantially or there's not a new PPP program or it's not extended the businesses that got that liquidity will have to use it and has done a replacement for it. So, I think a lot of it's also going to depend on this next stimulus program.

Okay. All right. Last question. I appreciate the information on the PPP loans that went to some of your sensitive lending segments. Just ask one additional detail on that. Do you have a sense of how many -- or what percentage of the deferrals the borrowers benefited from some of the government programs PPP in particular?

I don't think, we -- do we have that? No, no he wants to know what percentage of our clients in the deferral programs obtained PPP loans, do we have that?

I don't have that information. Carlos Vázquez: Sorry we didn't...

I don't think we have that...

Let's take that question another time.

Yes. We'll -- maybe we'll incorporate it next time in the sensitive segment slide. Thank you for the feedback.

All right. Well, thank you.

Thank you.

And our next question today comes from Glen Manna with Keefe Bruyette & Woods. Please go ahead.

Hi, good morning.

Good morning. How are you Glen?

Good. Thanks Lidio. Carlos, thank you for the detailed information on the NIM. Just if I could follow-up is it -- could you break out the part of the NIM move that was attributed to rates, the excess liquidity and then the PPP loans this quarter basically the 79 basis point drop in the FTA? And also with respect to the PPP loans, given your prior comments that your anticipation is that 100% could be forgiven by the end of the year. What rate did you use on those loans for the current quarter? Carlos Vázquez: The -- as far as breaking up the drop, it's very hard to do Glenn because you have to make assumptions as far as where the additional funding on the new funding was invested. So there's a gazillion assumptions you have to make to answer your question, your very good question intelligently from our part. We have taken a shot at that and our estimate at this point in time is that roughly big picture, two-thirds of the drop in NIM was a result of the change in mix and the increase in the balance sheet. And the other one-third roughly was linked to rates or asset mix or other things. So, it's roughly two-thirds, one-third. Again depending on your assumptions you can call out with a different number, but that's the best we could do. As far as the PPP the yield that we have on is 2.50...

2 85. Carlos Vázquez: 2 55?

2 85. Carlos Vázquez: 2 85 Glen.

Okay. And then, just qualitative and maybe this is a big picture across the industry, but given the rapidity of the moves from the fed, do you think this cycle that NIMs reached trough levels a little bit sooner than they did in the last cycle? And I know, you gave your guidance was for stable to maybe slightly up in the back half of the year and some of that could be from PPP loans rolling off. But just like longer-term and maybe just qualitatively, I'd like to hear your thoughts on that. Carlos Vázquez: Yes. I mean that will really be a very bank-specific situation. For example, we have been -- as you saw in the results, we have been successful in moving our deposit cost down. But we -- in an environment like the one we have with significant uncertainty, we tend to be also cautious in the way that we're doing that. There may be other banks that are being a lot more aggressive on the way they approach the reduction in deposit cost. So that's one consideration. The other consideration depending on your deposit book your -- the lag, the effect -- the lag in the -- when the drop in rates gets flowed through your deposit book may be different. Not all our deposit rates went down on March 1. So the full effect of the drop in rate will affect part of the second quarter not the whole second quarter. So, hopefully we'll benefit from a slightly -- more of that in the third quarter. So, very bank specific, I would assume. And within -- by the end of the third quarter, most people will have seen a lot of the effect. In our case, as you know, the NIM varies more because of other things like asset mix and deposit levels than it does because of rates. So in our case there may be -- the drivers are somewhat different.

Okay. And then if I may just one for Lidio. Thank you for the information on the deferrals. I noticed in the press release that you said deferrals were going to start to roll off in July through September. I guess we're a month through July now, what are you seeing on re-deferral rates from customers and also maybe if you could just highlight some of the differences in deferral policies on the island versus those on the mainland?

I would say a couple of things. The first thing you asked I mean, I don't have up-to-date information to provide you in terms of re-deferral rates for some of our customers. So we will provide details to the market on our next webcast. In terms of some of the differences, I think to a certain extent – there are two things that I would say. I mean we have gone through crisis in the past and we have offered deferral programs to customer to the whole island before. So they're used to having deferral programs and taking advantage of it. The other item that I will say particularly related to our commercial portfolio, in the U.S. banking industry you have seen a lot of line utilization as part of our customer liquidity strategies. In Puerto Rico, we haven't really seen that. What they have done is use deferral programs as part of their liquidity strategy. So rather than hitting the line they have used deferrals to just keep cash within their operation.

Yes. I would add then – this is Ignacio. I would add then on the consumer front as opposed to most U.S. jurisdictions, in Puerto Rico there were mandated deferrals for consumer products beyond mortgage. I know some jurisdictions had mortgage relief and the CARES Act, obviously had mortgage relief. But basically in Puerto Rico, we had mandated moratoriums and deferrals for all consumer products. All the client had to do was basically state that he had been impacted by the pandemic with no further evidence. So that's a major substantive difference.

Okay. Thank you very much for taking my question.

Thank you.

[Operator Instructions] Today's next question comes from Gerard Cassidy with RBC Capital Markets. Please go ahead.

Thank you. Good morning, Ignacio and Carlos, how are you?

Good morning. Carlos Vázquez: Fine. How are you doing?

Good. I got a couple of questions. Clearly you talked about the outlook on the Moody's economic forecast, which of course influences the provision for loan losses, particularly with CECL now. If we continue to see a stable outlook for the economy according to Moody's and whatever you adjust for your own overlay, should the provision for loan losses essentially then be just the provisions you need for maybe some reratings that go on within the portfolio and loan growth and therefore, we won't possibly see elevated provisions going forward? Carlos Vázquez: Assuming – and that is a big assumption a stable economic forecast I think what you said makes sense. Yes.

Okay. I know that's a big assumption. Carlos Vázquez: Yes. It will be loan growth charge-offs and change in mix and downgrades.

But the charge-offs, you wouldn't have to replace since you've already said – assuming they go according to your internal plan on what charge-offs should be. Carlos Vázquez: Only if we grow the book in at the same time.

Okay. And then second question was in the deferral programs that you guys gave us the detail on, when you look at the nonessential retail and hotel properties that are in deferral, what's the typical loan-to-value for those types of properties?

I would say, I mean, we typically underwrite loans to 70%, 75% loan-to-value. Guessing value today, I don't know. So it's difficult for me to tell you what are the current loan-to-values because I don't know what is the value equation today. But typically we underwrite 70%, 75%.

I see. And then lastly, I don't know, if you guys have talked to the New York Fed, but do you get any sense from the fed when their support of the deferral programs, where you don't have to reclassify those loans when that support will be eliminated? Any idea when that may happen?

They haven't communicated. I think their communications are basically the industry-wide communications that they've given out. I think, they've been – I think they've been pretty open and clear that you have to have customers within the reasonable and prudent parameters. I don't see any pressure coming from the Fed in that area.

I see. And then, I guess just as a follow-up to that. Through, the end of the year, when the accountants have to sign off on SEC documents, if the deferral program is still in place for all the banks not just you guys, and the fed is still supportive, is there any potential kind of conflicts with the accountants and the SEC versus the regulators on deferral loans?

Hi, good morning. This is Jorge Garcia. I mean, the regulatory – and the SEC have kind of come together in adding clarity. They haven't suspended any of the accounting rules. So we're still subject to evaluating the TDRs et cetera, and that's really where you would – that's the risk where you have to classify these as troubled debt restructuring. But I don't expect the conflict. I think the information that's out there now is just converging and clarifying how to apply it. And certainly, we're complying with that.

Yeah. And again, the deferral programs are not being generally extended to the end of the year. They have come to an end. Obviously, the CARES Act is federally mandated for mortgages and we'll follow that. But other than the CARES Act, most – most broad uniform deferral programs have now expired.

I see. All right. Thank you, guys.

Thank you.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you for joining us today, and for your questions. Please continue to focus on your health and be diligent about your safety. That's the most important thing. We look forward to sharing our results for the third quarter in October. Take care.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.