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

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; 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 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 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 a $176 million in earnings during the fourth quarter. This was one of our best quarters in our history. These results reflect the ongoing rebound and 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 as 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 non-farm employment has increased by 6% since April when employment bottomed out, but remained 8% below the December 2019 levels. In 2020, new auto sales were 11% lower than the previous year, mainly as 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 mark the highest recorded quarterly level of 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 continued to lag other areas of the local economy. While the airport traffic has been gradually increasing, arrivals during the month of December were still 45% lower than the previous year. Within Popular’s clientele,…

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 number 10, we have provided relief to our customer through loan modifications consisting of deferrals, forbearance or extensions. We granted assistance 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 cost moratorium mortgage loss mitigation activity on certain sensitive commercial segments. Please turn to Slide number 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 multi-family. The average original loan-to-value in Puerto Rico is 77%, while in the U.S. is 75%. Office space and multi-family occupancy and collection have remained stable through the pandemic. To-date, there have been a moderate number of downgrades in this segments. Of the customers that have exited relief, 98% of accounts remain current. In the Health Care Facilities segment, our Puerto Rico exposure is mainly to hospitals, while our U.S. exposure is the skilled nursing facilities. For both regions, federal and local assistance have supported the industry operations. To-date, there have been a moderate number of deferrals and downgrades in this portfolio. Within non-essential retail, the shelter-in-place orders have curtailed activity of this segment. Now withstanding our customer base has experienced an increase in activity after the long-term orders were…

Thank you, Lidio and Carlos for your updates. 2020 was certainly a challenging year. It began with devastating earthquake in Southwestern Puerto Rico, which was 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 end the year on a high note, generating one of 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 redeem $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 normalcy we still desire. We begin 2021 on a solid footing and excited about our prospects for the year. We are now ready to answer your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Alex Twerdahl of Piper Sandler. Please go ahead.

Hey. Good morning, guys.

Good morning. Carlos Vázquez: Good morning.

So 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, maybe some more anecdotal data.

Yes. You use the word flow, I think, I mean, we're generally optimistic that the FEMA finally reached an agreement with the Electric Power Authority for about $10 billion restoration program. And with the [indiscernible] consumer 4.5, that money really to my knowledge hasn't begun to flow. So that's yet to come. It's important as we 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 – beginning of last week and it continued to 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 our report. I don't know who put it out, so I don't know – 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 slow funds will have a big impact. 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 [CDV], 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 better, but I think they've all said it is to take advantage of that money. What else can I add? Again, the money really hasn't begun to flow that much, so we're hoping that will 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 the 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 in a more sustainable basis?

You mean above 1 million persons? Yes. Definitely, I mean…

Yes. 1 million jobs.

Obviously, there's a couple of sectors that have been seriously impacted that are high employment sectors. The tourism restaurant sector, although they don't make up a huge amount of our GDP, they do have proportionally a 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 – hire 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 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'll be interesting to see how we can meet that supply, especially concerning the construction industry whether they will be able to get all the employees they need.

That's great color. Thank you for that. And then as I think about the reserve and I think about this qualitative portion that was increased in the fourth quarter. What kinds 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-one reserve level or is enough change that that number is kind of moot at this point? Carlos Vázquez: I would say that in general terms, the way to think about their quality reserve is there is more clarity to the path forward. I think that will allow us give us more confidence that the need for it has lessened. So that would be my first pick. Vaccination continues to evolve. We see a lid open up of the economies. I think those will be indication for – in my view, the qualitative reserves might be let go. In terms of how to think of the reserve versus day-one 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 [indiscernible] revert to that. That'd be my answer.

Perfect. Thank you for taking my questions.

Thank you.

The next question is from Brock Vandervliet of UBS.

Great. Thanks very much for the question. Going to Slide 15 and maybe following up on that last question. I just wanted to clarify some of these 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, it looks like unemployment has dropped in your baseline 300 basis points from the third to the fourth quarter. Can you comment on those figures? Carlos Vázquez: I would say some of it has to do with some of the – let's go, first, unemployment, the part of the change in unemployment also relates to the difficulty of estimating the unemployment rate in – when you have a 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. Many people thought 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 – Moody's particular, they are very high on the floor front to Puerto Rico, particularly. I mean, the Biden administration has a very aggressive plan for Puerto Rico, now that they control both the House and the Senate. They think that a lot of that is going to come to fruition.

Got it. Okay. Thank you. And shifting to NII and the margin, I heard you on – margin is 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 right backdrop? Carlos Vázquez: Yes. I mean we redeployed about $3 billion of cash in the third quarter into securities – longer-term securities, Brock. We continue to – as we get more clarity, we continue to consider that, doing more of that, as a result we’ll probably do some more of that in 2021. Not dying to extend in the securities 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 we will continue to consider 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 will probably have more cash to invest. Although some of that cash maybe 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 that 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 one-time down payment from the government of Puerto Rico to a bond holders of about $6 billion. So there's instances here where significant amounts of the balances in the public 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 maybe additional offers 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 trying to buy assets at 1% yield.

Got it. Okay. Thanks for the color.

You're welcome.

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

Hi. Good morning.

Good morning, Glen. Carlos Vázquez: Good morning.

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?

Yes. Well, again, the $10 billion in PREPA, very little of it has been spent. I mean, they authorize that, but we have not seen that money. For example, in our accounts with PREPA haven't changed dramatically. Neither with the PREPA now – PREPA has been going through a program of improving their 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 in CDBG. So again, I want to emphasize that while we're all very excited about the prospects of the money being released, today the release of those hurricane relief funds have been rather limited, so the expectation is that an upside coming. We haven't really seen that money flow yet. There's a lot of talk that they – I think, are a greater disposition on the new administration to get those moneys 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 balance is going up also. That money for hurricane relief has really – again, it's frustrating for all of us, but I’m [indiscernible] internal office there. 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, want to make everyone's done down here. You're not seeing that money spent yet.

Okay. Thank you. And Carlos, thanks for the guidance. In the past, on the loan growth guidance, you've kind of split it up between what you expected in Puerto Rico and what you expected on the mainland. And I was wondering if you could kind of do that again for 2021 on what the outlook is? Carlos Vázquez: Yes. I mean the – on both sides, I think the outlook is little bit clouded by $1.4 billion of PPP loans going away, Glen. So that's how it drives the whole thing. So we successfully keep doing [indiscernible] means that we actually originated $1.4 billion more than that matured this year. Ignacio mentioned the round two 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 that the commentary we’re doing before will continue to hold true Glen, which is that we are more confident that continued growth in the U.S. bank, and in Puerto Rico, probably more stability.

Okay. Thank you. Thank you for taking my question.

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

Good morning, everyone. How are you?

Good morning, Gerard. How are you?

Good. I hope it's sunny. I hope it's sunny and 85 down there. Well, I'm in a snow storm up here. So two different parts of the world.

It's beautiful today. Okay, sorry about that.

No surprise. You guys are lucky. 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 that went in the other direction. Assuming this administration 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?

Yes. 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 him a while to do so through procedural hoops. When Obama opened up, we were very interested in Cuba. I think, I don't know if you noticed that we were one of only two U.S. banks that issued credit cards that could be used in Cuba and it took us awhile 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 are going to see meaningful change economically in Cuba unless the government there, it 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. I think Biden has bigger issues. Although I think he will revert some of those things, I don't think you'll see the level of enthusiasm you saw when President Obama was in power. And it was like the beginning of the 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 invest in the time and money to get that credit card operating. It wasn't by the way very little use to that – 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.

Okay. Thank you. Carlos, you answered one of my questions with the public deposits and 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 normalcy whenever that is? Carlos Vázquez: Yes. That's a really good question. We talked about it a lot. When you think about that question that your normal banker reaction will be, oh, well, let's go back in history and look what the balances looked like before this 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 use to say that GDB, and when GDB went bankrupt, then a lot of those accounts moved to us. So we don't have that historical flows of those accounts. So I realized I'm giving you a very big range, but before GDB disappeared, we had various billions of dollars of carbon deposits if you add it 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 billion and $10 billion. But I can't get any smarter than that big range to be frank with you.

Okay. Thank you. 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 within income limit? Can you just share with us what your process will be with the Fed to announce your capital action plans? Carlos Vázquez: Sure. A lot of the rules that we all know are really – are only applicable to seek our banks. So while those rules on that is hardly applied to us. They sort of set the stage. 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 so – Gerard, I'm sorry.

[Indiscernible] Carlos Vázquez: We'll call you [indiscernible]. We are in discussions with the Fed. 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 given their response for all the parts, sometimes we get response are only part 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're mindful of the boundaries that the Fed has made public, but we have continued our process, so far largely unchanged.

Very good. Thank you, Carlos. Carlos Vázquez: Thank you.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Ignacio Alvarez for any closing remarks. [Technical Difficulties] The conference has now concluded. Thank you for attending. You may now disconnect. Have a great day.