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Popular Inc (BPOP) Q1 2020 Earnings Call Transcript

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BPOP earnings call for the period ending March 31, 2020.

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Popular Inc (BPOP)
Q1 2020 Earnings Call
Apr 30, 2020, 11:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to Popular, Inc. Q1 2020 Earnings Call. [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.

Paul Cardillo -- Senior Vice President, Investor Relations Officer

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 Vazquez; 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

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

Ignacio Alvarez -- President and Chief Executive Officer

Good morning, and thank you for joining the call. I hope that you and those 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 indicators that we regularly provide remained 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 mandated a strict lockdown 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 that have been -- even those have been curtailed in their operations. For example, banks have 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 a lockdown. Moody's Analytics estimated approximately 80% of Puerto Rico's $105 billion GDP has been impacted by this lockdown. They estimate the economic costs through April 12th at approximately $6.3 billion. And for as long as these restrictions remain in effect, they estimate an additional cost of $1.6 billion per week in reduced economic output.

While employment trends have remained stable through February, initial unemployment claims have spiked over the past month in Puerto Rico as they have across the entire United States. And as could be expected, tourism has also been significantly impacted. The Puerto Rico Tourism Company estimates their total hotel occupancy to be approximately 8%.

According to the operator of the San Juan International Airport, during January and February, Puerto Rico received 14% more passengers than 2019. However, during March, arrivals dropped by 38% when compared to March 2019, dropping over 73% over the last two weeks of the month, and they have continued to drop. The curfew and stay-at-home order have also had a dramatic impact on the spending patterns of our clients.

Customer purchase activity has been severely impacted. Like employment, trends through February were stable compared to the year-ago period. However, for the 30 days after the curfew was enacted, debit and credit sales decreased by 46% versus the same time frame in 2019. Both the local and federal governments have begun to provide relief and assistance in response to the pandemic.

To date, the Puerto Rico government has approved a $787 million fiscal stimulus plan. Additionally, as part of the CARES Act, Puerto Rico will receive approximately $5 billion in funds, including up to $1.5 billion in direct payments. Residents of Puerto Rico are also entitled to receive the supplemental federal unemployment benefit of $600 per week.

Our management team has been closely monitoring the spread of COVID-19 and has taken measures to ensure the soundness of our operations and the safety of our employees and customers. We've strengthened our business continuity plan and our executive team is constantly meeting to monitor and implement actions to mitigate the impact of the pandemic.

We are communicating regularly with our employees to keep them informed of the evolving business environment and to help ensure their safety. We offered alternative work arrangements for a significant portion of our employee base, provided incremental training, added personal leave days, and paid approximately $3.4 million in bonuses to frontline employees.

Branches are operating under compressed schedules, emphasizing drive-through where available and rotating personnel to reduce exposure. I am deeply grateful to our colleagues for the efforts, commitment and bravery exhibited under very difficult circumstances. We are encouraging customers to use alternative banking options such as our digital services, smart ATMs, telephone banking and drive-through services.

We've increased transaction limits for remote deposits and ATMs. We have also waived ATM and certain other fees as well as early withdrawal penalties on CDs. Most importantly, we are assisting customers facing financial difficulties, offering payment deferrals for mortgage, auto and other consumer and commercial loans.

Finally, following the passage of the CARES Act, we mobilized our human and tech resources to offer SBA loans to affected small and medium-sized businesses. We have submitted more than $1.2 billion in loans, representing more than 15,000 small and medium- sized businesses. To date, we have received confirmation of SBA approval of $819 million of these submissions. We will continue to accept and process applications until the funding is exhausted.

In our communities, we have committed $1 million to support efforts in four primary areas: providing medical equipment to healthcare professionals; supporting locally based healthcare research projects to combat COVID-19; providing financial advice and business continuity support to entrepreneurs; and small and medium-sized businesses; and finally, assisting non-profit organizations to ensure the continuity of their services. As we continue to respond to this rapidly changing situation, our plans and actions will continue to evolve.

Please turn to Slide 6. The quarter's results reflect the impact of the economic disruption caused by the COVID-19 pandemic. Our reported quarterly net income of $34 million was significantly lower than our results for the fourth quarter and compared to the first quarter of last year. The primary driver of this decrease was a substantially higher provision expense, reflecting the newly adopted CECL accounting pronouncement and the most recent post-COVID macroeconomic forecast for Puerto Rico and the U.S.

Aside from the increased provision, the first quarter results were characterized by higher net interest income, lower operating expenses and lower taxes, partially offset by lower non-interest income. In the quarter, our non-interest income was impacted by reduced merchant transaction activity, the waiving of certain fees and service charges, the suspension of mortgage originations, as well as lower income due to the COVID-19 disruptions over the last two weeks of March.

Additionally, we have experienced higher expenses related to expanding remote access for employees, additional employee benefits, increased measures to protect employees and additional efforts related to customer relief programs. Excluding the adoption of CECL this quarter, credit quality metrics through March continued to show stable results.

The continuing impact of COVID-19 on the economy and our operations will be heavily dependent on advances in the medical arena and how quickly economic activity can safely resume.

I will now turn the call over to Carlos, who will discuss the financial results in more detail.

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

Thank you, Ignacio. Good morning. Please turn to Slide 7 for first quarter results. As usual, additional information is provided in the appendix to the slide deck. Today's earnings press release details variances from the fourth quarter.

Net interest income for the quarter was $473 million, an increase of $6 million from the fourth quarter. The primary driver of this increase was higher loan balances. We acquired a $74 million credit card portfolio at the end of 2019, saw a continued growth in our commercial, auto and lease portfolios in BPPR as well as in the construction and mortgage portfolios in Popular Bank.

Our deposit costs were down 15 basis points in the quarter due to the effect of lower market rates on Puerto Rico public deposits and interest-bearing deposits at Popular Bank. NIM for Q1 was 3.94%, an 11 basis point improvement from last quarter. On a taxable equivalent basis, NIM was 4.34%, 14 basis points higher than in Q4. However, we expect margins to decrease in Q2.

Previously, we have mentioned that the historical sensitivity of our net interest income to rate changes hovers around $4 million to $5 million per quarter for every 25 basis point change in market rates. This sensitivity was not evident in Q1 because the change of market rates in March happened very late in the quarter. Q2 will reflect the full effect of lower rates assuming no other material changes in asset mix. As has been the case for the last couple of years, asset mix and the level of public deposits will also continue to have a material effect on our margin.

As of the end of the first quarter, Puerto Rico public deposits were roughly $10 billion, which is down slightly from Q4. We still expect public deposit balances to come down over the long-term, But COVID-related federal assistance may increase balances in the near- term. The rate of expenditure of these funds and the timing of agreements on the government's debt restructuring will dictate the amount and timing of any balance reduction.

Our loan portfolio grew by $255 million in the quarter, with our U.S. business accounting for approximately $210 million of that increase. Given the originations associated with PPP, we expect loan balances to be higher in the second quarter. While we had previously anticipated slight growth in loan balances in 2020, given the current environment, that outlook is now uncertain. The ultimate level of loan balances for 2020 will depend on the duration of the PPP loans and the performance of the economy for the remainder of the year.

Provision expense for the quarter of $190 million reflects the adoption of CECL and incorporates the most recent COVID-affected macroeconomic forecast for Puerto Rico and the U.S. The quarter-over-quarter increase in allowance for credit losses was $442 million or an increase of 93%. Lidio will expand on this during his credit commentary.

Non-interest income decreased by $25.7 million. Nearly all three categories decreased quarter-over-quarter. Insurance fees were $5 million lower, primarily due to the seasonal nature of contingent commissions, which are higher in the second and fourth quarters. Credit and debit card fees were $5 million lower and were significantly impacted by the lockdown of our markets in the last two weeks in March.

Mortgage results were negatively impacted by devaluation adjustment of the MSR as compared to the prior quarter. We also recognized $3 million in mortgage hedging losses in part related to the government-mandated stoppage of mortgage origination in Puerto Rico since mid-March.

Finally, we had a $6 million unfavorable variance in adjustments to indemnity reserves on loans sold with recourse. The closure of business in our markets had an estimated negative effect on non-interest income of $5 million in Q1. We currently expect that lower client activity and the waiving of various fees will have a negative effect on non-interest income of about $8 million per month. The speed at which we can return to more trend-like non-interest income levels, which averaged $135 million to $140 million per quarter over the last two years, will depend on the rate of reopening of our markets and the increase in client activity levels.

Total operating expenses were $373 million, $18 million lower than the prior quarter. Personnel costs decreased by $11.5 million. These decreases were driven by lower incentive compensation of $15.4 million, partially offset by a special COVID-related incentive to frontline employees of $3.4 million.

Business promotion costs were $9 million lower in the first quarter. Approximately $4.3 million of this decrease reflects the traditional seasonality of advertising, sponsorships and promotion. Reduced customer activity resulted in lower reward program expenses of $3.2 million. These expense decreases were partially offset by slightly higher OREO and other operating expenses.

In response to lower interest rates and the effect of the pandemic on our business, we will be implementing various cost savings initiatives that will affect personnel-related expenses, professional fees, business promotion and other operating expenses. We expect these efforts to result in savings of approximately $55 million in 2020. As a result, we now expect average quarterly expenses for the year 2020 to be around $369 million as opposed to our prior guidance of $383 million.

Our effective tax rate for the quarter was 8%, which reflects the impact of lower taxable income, driven by a higher provision for credit losses due to CECL, which includes the impact of the COVID-19 pandemic. For 2020, we currently expect our effective tax rate to be between 14% and 18%.

Please turn to Slide 8. Our capital levels remained strong relative to mainland peers as well as with respect to well-capitalized regulatory requirements. On January 30 of this year, we entered into an accelerated share repurchase agreement, or ASR, for $500 million in common stock. Under the terms of the ASR, our banking counterpart has the ability to terminate the ASR if the corporation's stock price drops to a pre-specified level.

The decrease of our stock price resulting from the pandemic triggered this clause, and our ASR was terminated on March 19th. This termination has two effects. First, we realized a price discount on the original delivery of 7.1 million shares. Second, the remaining $167 million yet to be delivered under the contract at termination time are settled via the delivery of additional shares acquired by our counterpart via continued market purchases.

At March 31, 2020, we had received a total of 7.7 million shares. Through April 24th, we have received an additional 2 million shares. We expect the complete settlement of termination of the ASR to be closed out during the second quarter. To complete our 2020 capital plan, we also increased our quarterly common stock dividend and redeemed our 8.25% Series B preferred stock.

Our common equity Tier 1 ratio in Q1 was 15.8%, down from 17.8% and tangible book value increased in the quarter by $1.07 per share to $56.17. The increase was driven by higher unrealized gains on investments, our quarterly net income and a lower share count, offset somewhat by our $500 million buyback, the day one effect of CECL and the payment of our dividends.

These many market participants are doing versions of burn-down analysis. In this slide, we include a calculation of our pro forma capital ratios, applying the loss ratios of our last published DFAST severely adverse stress test from 2017. In this simulation, even after a severely adverse allowance for credit losses of $1.7 billion, we still end up with very strong CET1 ratio of 13.9%. These results reflect Popular's robust capital position.

The first quarter of 2020 allowance for credit losses represents 54% of our severely adverse DFAST loss estimate. Our return on tangible equity was 2.9% in the first quarter, affected by the previously described items, mostly the provisions. We will continue to pursue our target of double-digit returns on tangible equity.

Before I turn the call over to Lidio. As a result of the adoption of CECL, we increased our day one allowance for loan losses by $306 million. We also recognized an allowance for credit losses of approximately $13 million related to held-to-maturity debt securities portfolio. These adjustments were recorded as a decrease to retained earnings as of January 1, 2020, net of income taxes, except for approximately $17 million related to purchased credit impaired or PCI loans previously accounted for under SOP.

As announced in our last webcast, as part of the adoption of CECL, the corporation made the election to break the existing pools of purchased credit impaired or PCI loans, which, in accordance with the applicable accounting guidance, were previously excluded from non-performing status. Once transitioned to the individual loan measurement, these loans are no longer excluded from non-performing status, resulting in an increase of $283 million in NPLs as of January 1, 2020.

Let me remind you that this is a change in classification of these loans, not a change in payment or performance risk. This reporting change does not, in any way, increase the credit risk contained in Popular's loan portfolio. However, the accounting treatment of these loans did result in a higher reported NPL levels. We plan to phase in the effects of CECL and regulatory capital over a five-year period.

With that, I turn the call over to Lidio.

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

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's credit risk profile since the last global financial crisis, which you can see on Slide number 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 that 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 markedly improved risk profile and changes in our portfolio mix.

Turning to Page number 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 have curtailed activity of this segment. An important part of our shopping center portfolio in both regions are owned by long-term customer with financially strong principles that can withstand short-term disruptions in cash flow.

In terms of the auto retail in Puerto Rico, this activity was being nonessential under the Governor's lockdown order, and sales have decreased significantly. Popular has had historically low losses in the dealer segment, even during prolonged periods of decreased industry sales given the collateralized nature of these loans. While we expect a significant level of deferral requests, once auto dealers are allowed to reopen, we expect a gradual increase in demand.

In the healthcare facilities segment, the story differs by geography. Our Puerto Rico exposure is to hospitals, where restrictions on nonessential procedures have impacted admission levels and cash flows. Hospitals are eligible for PPP loans and other federal programs for reimbursement of healthcare-related expenses or lost revenues not otherwise reimbursed. We expect this segment to quickly rebound once the restrictions are lifted. Today, there have been low levels of deferment requests.

In the U.S., our exposure is mainly to skilled nursing facilities. This segment is a key component of the post-acute care that will continue to experience high demand due to demographic trends and the structure of the U.S. healthcare system. Several federal and local government funding programs are expected to be available through the hospital relief fund included in the CARES Act. The majority of our customers are strong regional operators with significant lower cash flows. Our largest customers have substantial liquidity at Popular Bank.

In terms of 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 the late-stage of completion, have low loan-to-cost and nominal exposure to upper end residential. Overall, principals have liquidity and have historically injected capital as necessary. Today, we have received a limited number of deferral requests in this portfolio.

Within the Hospitality portfolio, which includes restaurants and hotels, we are closely monitoring our hotel exposure. Hotel balances were $380 million at quarter end, mostly in Puerto Rico. This segment has experienced elevated levels of distress due to government restrictions that have reduced occupancy rates. Although the speed of recovery is uncertain, we believe that our business focus will serve us well, as we expect business travelers will be the first to recover. We have received a considerable number of payment deferral requests from borrowers in this segment.

Restaurant balances were $350 million at quarter end. This segment has experienced stress driven by the shelter-in-place orders. The majority of our restaurant borrowers, particularly quick-service or fast food, have continued to operate through delivery and carry out. Once the economy starts to reopen, we expect this segment to rebound at a faster pace, especially the quick-service restaurants. We do not have material credit exposure to oil, aviation or shared national credits.

Please turn to Page number 11 to discuss credit metrics. Nonperforming assets increased by $253 million to $903 million this quarter, mainly driven by a non-performing loan increase of $241 million. The increase in NPLs is driven by Puerto Rico, mainly due to loans previously accounted for as purchased credit impaired. This portion of our change in NPLs does not in any way increase our credit risk.

Upon being measured at the individual loan level, these loans are no longer excluded from nonperforming status, resulting in an increase of $278 million in NPL as of January 1st, 2020. This increase included $144 million in loans currently over 90 days past due, $134 million in loans that are not delinquent in their payment terms but are reported as nonperforming due to other credit quality considerations.

Excluding this impact, NPLs decreased by $23 million, mostly related to lower mortgage NPLs. In the U.S., NPL increased by $4 million due to the transition to purchased credit deteriorated loans of the Taxi Medallion portfolio. At the end of the quarter, the ratio of NPLs to total loans held in portfolio was 2.8% compared to 1.9% in the fourth quarter of 2019.

Please turn to Slide number 12 to discuss NPL inflows. Excluding the purchased credit deteriorated loans transition, NPL inflows increased by $10 million on a linked-quarter basis, driven by repurchased mortgage loans. In the U.S., inflows of NPLs were relatively flat quarter-over-quarter.

Turning to Slide number 13. Net charge-offs amounted to $63 million or annualized 91 basis points of average loans held in portfolio compared to $82 million or 1.21% in the previous quarter. The decrease of $19 million was related to net charge-offs taken in the previous quarter in our Taxi Medallion portfolio, reflecting agreements reached with the majority of our Taxi Medallion borrowers.

The corporation allowance for credit losses increased by $442 million from the prior quarter to $920 million, driven by the day one impact of the CECL adoption, coupled with changes in the macroeconomic condition from the COVID-19 pandemic. We provide further details of the day one and day two impacts on the following slide.

The ratio of allowance for credit losses to loans held in portfolio was 3.3% in the first quarter of 2020 compared to 1.7% in the previous quarter. The ratio of allowance for credit losses to NPLs held in portfolio stood 120% compared to 91% in the previous quarter. The provision for credit losses increased by $142 million from the prior quarter, mainly driven by the COVID-19 impact on the macroeconomic scenarios. The provision to net charge-off ratio was 302% in the first quarter of 2020.

Please turn to Slide number 14 to discuss details on the drivers of the increase to our allowance for credit losses under CECL. We adopted CECL on January 1, 2020. Since implementation, our allowance for credit losses related to loan has increased by $442 million or 93%, driven by the day one adoption impact, changes to the economic scenarios and loan portfolio growth.

The day one adoption impact resulted in an increase of $315 million in the ACL. The day one impact was mainly driven by increases in the following Puerto Rico loan portfolio; Consumer by $122 million, mortgage by $86 million and commercial by $62 million.

The economic scenario realized was based on the March 27th Moody's Analytics S3 downside scenario. This scenario assumes a double-dip recession starting in the second quarter of 2020. The U.S. stimulus plan enables GDP growth in the third quarter, but the economy declines again in the fourth quarter. And it's not until the second quarter of 2021 that a sustained recovery begins. Under this scenario, unemployment peaks in the second quarter with rates of 13% in the U.S. and 13.5% in Puerto Rico.

Economic activity in the second quarter declines by 25% in the U.S. and 18% in Puerto Rico. This scenario causes the allowance for credit losses to increase by $134 million, driven by increases in Puerto Rico consumer and U.S. commercial.

To summarize, the adoption of CECL methodology and the impact of the COVID-19 pandemic caused significant changes in certain credit metrics, particularly, the level of NPLs, the allowance and provision for credit losses and related ratios and early delinquency indicators as we stopped collection efforts in the second half of March.

The effects of the COVID-19 crisis continue to evolve and the full extent of the economic disruption is uncertain. The improvement over the last few years in the risk profile of our loan portfolio positions Popular to successfully operate under challenging environments. We will continue to carefully reduce the exposure of the portfolios to coronavirus-related risks, changes in economic outlook and the effects on credit quality.

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

Ignacio Alvarez -- President and Chief Executive Officer

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 deceleration 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 well-being 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 through 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.

Questions and Answers:


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

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey. Good morning, guys.

Ignacio Alvarez -- President and Chief Executive Officer

Good morning.

Alexander Twerdahl -- Piper Sandler -- Analyst

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?

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

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 a recovery. So we have an impact of the economic downturn for about four or five quarters, and then you start the road to recovery.

And in DFAST, we measure the losses associated with a specified period, while the CECL obviously is lifetime losses, so that certainly create a difference between when you compare CESL versus DFAST. But I think the other aspect that is different is the economic scenario, which usually in the DFAST is an elongated U. The scenario that we're modeling today is more -- sort of like a W with a recovery starting in early 2021.

Alexander Twerdahl -- Piper Sandler -- Analyst

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

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

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

Alexander Twerdahl -- Piper Sandler -- Analyst

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?

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

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 sort of -- 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 7.1 million shares will benefit from a VWAP 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.

Alexander Twerdahl -- Piper Sandler -- Analyst

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, but there will not be an adjustment in equity. Okay.

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

Correct. The -- under the original contract, that reduction -- that last reduction of shares would have happened later in the year, and now it's going to happen in the second quarter.

Alexander Twerdahl -- Piper Sandler -- Analyst

That's great. And then just a 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?

Ignacio Alvarez -- President and Chief Executive Officer

Well, I'm not sure over the next year -- this is Ignacio. I mean everything -- this pandemic will cause us to rethink almost everything. So -- 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 there are in the U.S. So we're not over-branched 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 and we'll continue to promote even more.

Alexander Twerdahl -- Piper Sandler -- Analyst

Great. Thanks for taking my questions.


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

Mark Palmer -- BTIG -- Analyst

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?

Ignacio Alvarez -- President and Chief Executive Officer

That's generally how it's going to work for our mortgage products. For some of the other consumer products, the mortgage product has precomputed interest. So we just move it at the end. Some of the personal loan and auto loans, although we will move them 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.

Mark Palmer -- BTIG -- Analyst

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?

Ignacio Alvarez -- President and Chief Executive Officer

I leave that to Lidio.

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

Okay. Obviously, it's going to be a function of charge-offs, portfolio growth and the economic scenarios. I don't think there's nothing much I can add to that.

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

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 scenarios are going to be by the end of the quarter. So...

Ignacio Alvarez -- President and Chief Executive Officer

There's a lot of uncertainty. And obviously, this is different than some of the other economic crises we've faced. I mean -- some of the models are going to be dependent on the health outcomes, right? As you saw the other day, development in health can move the markets, can move economic forecasts. 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.

Mark Palmer -- BTIG -- Analyst

Okay. All right. Thanks very much.

Ignacio Alvarez -- President and Chief Executive Officer

Thanks Mark.


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

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. Good afternoon, everyone.

Ignacio Alvarez -- President and Chief Executive Officer

Hey Gerard. How are you?

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good. Thank you. Thank you for the detail by the way. Always very, very helpful. And on Slide 10, looking at the sensitive segments to COVID-19 and you listed the deferrals can you -- 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 nonaccrual, generally speaking?

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

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 with deferment. To the contrary, it was very positive and we were able to help our clients get back to their feet.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And I know you guys have discussed on the call what the current conditions are in terms of the lockdowns and stuff, and I apologize if you've addressed this. I had to jump off the call 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?

Ignacio Alvarez -- President and Chief Executive Officer

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 force being more conservative on what they're recommending and the economic task force being a little more 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 there will be a gradual opening, but our Governor has been very conservative on the health front. So I think you're going to see our opening will be 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 state Governors.

And as you know, we've been had -- so far, we've had a pretty successful story in Puerto Rico in terms of the number of deaths have been relatively low. Our hospitals are not overwhelmed. And in fact, we have the opposite problem. The census in many of our hospitals is 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.

Gerard Cassidy -- RBC Capital Markets -- Analyst

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's 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?

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

I don't have that handy. We'll provide that to you, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

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


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

Arren Cyganovich -- Citigroup, Inc. -- Analyst

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

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

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 and our analysis that the downside scenario, the S3, was more reflective of the reality, and that's the one we used as of quarter end.

Arren Cyganovich -- Citigroup, Inc. -- Analyst

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?

Ignacio Alvarez -- President and Chief Executive Officer

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 they can ask 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 OK from non-accrual. Those are statutory and mandated across-the-board requirements. Other than that, it becomes more of a case-by-case analysis of the present value of the payments, how much it's impacted. And -- but within those statutory limits, I think we'll be OK.

Arren Cyganovich -- Citigroup, Inc. -- Analyst

Okay, thank you.

Ignacio Alvarez -- President and Chief Executive Officer

Thanks Arren.


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

Ignacio Alvarez -- President and Chief Executive Officer

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.

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

Thank you.


[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Paul Cardillo -- Senior Vice President, Investor Relations Officer

Ignacio Alvarez -- President and Chief Executive Officer

Carlos J. Vazquez -- Executive Vice President and Chief Financial Officer

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer Corporate Risk Management Group

Alexander Twerdahl -- Piper Sandler -- Analyst

Mark Palmer -- BTIG -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Arren Cyganovich -- Citigroup, Inc. -- Analyst

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