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Popular Inc (NASDAQ:BPOP)
Q4 2020 Earnings Call
Jan 28, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Popular Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [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.

Paul Cardillo -- Investor Relations Officer

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vazquez; 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.

Ignacio Alvarez -- Chief Executive Officer

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 then in the year on a high note with $176 million in earnings during the fourth quarter. This was one of our best quarters in our history. These results reflect the ongoing rebound in economic activity experienced during the second half of the year and the unprecedented level of federal stimulus. Our strong results also reflect our diversified sources of revenue and prudent risk management.

Please turn to Slide 3 for an update on the current business environment in Puerto Rico. In the fourth quarter, business trends and customer activity continued to improve. Building upon the momentum seen in the third quarter, as many of the pandemic related restrictions were gradually loosened. Employment trends which deteriorated rapidly in April have improved, but are still down significantly compared to last year. Total non-farm employment has increased by 6% since April, when employment bottomed out, but remained 8% below the December 2019 level. In 2020, new auto sales were 11% lower than the previous year, mainly the result of the restrictions on auto sales and financing from March through May. However, demand has rebounded sharply since May and remains robust. Fourth quarter sales of almost 36,000 units marked the highest recorded quarterly level going back to at least 2013.

Cement sales increased by 16% in the fourth quarter as compared to the year ago period. Tourism and hospitality sector are improving slowly but continue to lag other areas of the local economy. While airport traffic has been gradually increasing, arrivals during the month of December were still 45% lower than the previous year. Within Popular's clientele, debit and credit card sales in dollars increased by 18% compared to the last year's fourth quarter. For the full year, sales increased by 10%. Auto loan and lease originations at BPPR increased by 11% compared to the year-ago quarter and were only down 5% for the full year, notwithstanding the pandemic-related disruptions. Similarly, we saw continued strength in the dollar value of mortgage durations at BPPR which were up 20% in the fourth quarter versus the third quarter and increased by 32% in 2020 as compared to 2019.

Please turn to Slide 4 for an update on PPP and other operational matters. Most of our branches are now fully operational and we continue to take measures to ensure the safety of our employees and customers. We are also focused on supporting our customers in this uncertain environment. During the initial phase of the pandemic, we offered payment relief to our retail and commercial customers, and working with those clients who still need assistance. We continue to offer alternative work arrangements for a significant portion of our employee base. We are committed to ensure a safe transition back to on-premise activities, which we currently plan to be no earlier than April. We have been working with local authorities to promote and facilitate COVID-19 vaccination efforts and we are actively encouraging our employee base to get vaccinated as soon as they are eligible to do so.

With respect to the PPP program, $544 million of the loans originated were under $150,000 and our eligible for expedited forgiveness under the SBA's simplified process. We have deployed an online platform for customers to request loan forgiveness and have submitted approximately $500 million and forgiveness request to the SBA. Leveraging this online platform, we began accepting applications for the second phase of the PPP program last week. To-date, we have received more than 3,200 applications totaling approximately $234 million. On the digital front, we continue to have more than one million monthly active users on our Mi Banco platform in Puerto Rico. We captured 71% of deposits in the fourth quarter through digital channels. For the full year, 67% of deposits at BPPR were captured digitally compared to 52% in 2019. Finally, our customer base in Puerto Rico continues to grow, increasing by 6,000 in the fourth quarter to reach more than 1.9 million unique customers.

Please turn to Slide 5. Our annual net income of $507 million reflects a decrease of approximately 24% from our 2019 annual record net income of $671 million. The decrease was largely driven by higher provision expense, lower fees and lower net interest income related to the economic disruption caused by the pandemic. 2020 results benefited from strong deposit growth and a higher level of earning assets in both Puerto Rico and the U.S. However, both of our brands have lower net interest margins during the year. Credit quality remained stable throughout 2020. We are pleased with how our portfolio have performed in this difficult period. Our capital levels are strong with year-end Tier 1 capital and Tier 1 common equity ratios at 16.3%. Our tangible book value ended 2020 at $63.07, a 14% increase year-over-year.

In Puerto Rico, we grew loans by 7%, increased our deposits by 35% and our net interest margin was 3.4%. In our U.S. operations, we grew loans by 8%, deposits by 2% and our net interest margin was 3.21%.

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

With that, I will now turn over to Carlos.

Carlos Vazquez -- Chief Financial Officer

Thank you, Ignacio. Good morning. Before we turn to fourth quarter results, I will expand on Popular's 2020 full year performance.

Our net interest income decreased by 2% year-over-year to $1.86 billion, as lower net interest margins were only partially offset by growth in earning assets. 2020 provision expense increased by 76% to $293 million, primarily driven by the impact of the pandemic. Non-interest income decreased by 10% year-over-year with most segments lower in 2021, again mostly pandemic related. Operating expenses decreased by 1% for the year to $1.46 billion. Lower personnel costs and business promotion expenses were the primary drivers. Our capital position is robust. We ended the year with a tangible book value increasing by nearly $8 per share to $63.07. This improvement was achieved even after the repurchase of $500 [Phonetic] million common stock, the increase in our common stock dividend and the redemption of $28 million preferred stock. Common equity Tier 1 ratio dropped by 149 basis points year-over-year to 16.3%.

Please turn to Slide 7. Additional information is provided in the appendix of the slide deck. Today's earnings press release details variances from the third quarter. Net interest income for the fourth quarter was $472 million, an increase of $11 million from Q3. Non-interest income increased by $16 million to $145 million in Q4. More specifically, we generated $2.3 million higher deposit service fees, $1.2 million higher other service fees and $19.3 million in additional mortgage banking income, mainly due to the negative impact in Q3 of the bulk agency mortgage loan repurchase. These items were partially offset by $3.7 million lower gains on sale of securities and $4.2 million lower earnings from portfolio investments held under the equity method. To a large extent, our non-interest income has now returned to pre-pandemic levels. We expect that to continue tracking historical levels.

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

Net occupancy expense was $16.9 million higher due to a $19 million in cost-related to the termination of leases associated with Popular Bank's branch realignment. Professional fees increased by $7.6 million, mainly due to higher advisory expenses and higher processing and technology service costs. Finally, business promotion expenses increased by $1.8 million due to higher seasonal advertising expenses. For the full year, our average quarterly expenses were approximately $365 million. This is $18 million lower than the initial expectation of $383 million in average quarterly expenses we disclosed during our webcast in January of 2020. In response to the pandemic, we implemented various cost savings initiatives. We have targeted $55 million in savings during the year. However, we ultimately were able to reduce 2020 planned expenses by $75 million. These savings were focused on compensation benefits and business promotion expenses. Most of the adjustments were in response to the pandemic, and as such many of those savings will revert as the effect of the pandemic points.

For 2021, we expect average quarterly expenses to be between $375 million and $380 million. While this is higher than the quarterly average we achieved in 2020, it is still below our original expense guidance for last year. This increase from 2020 is mostly driven by higher expenses in the following three categories. Personnel, as we invest in training, compensation and related benefits, many of the savings in 2020 were cost to compensation and incentive pay. Technology, as we continue to modernize our digital capabilities, cure obsolescence and address regulatory cyber and compliance needs. Some of these investments were delayed in 2020. Finally, business promotion, especially expenses related to client reward programs. Some of the growth in this category results from our revamped rewards for credit cards and from our digital offerings. Only higher technology and reward expense are related to expectations of higher levels of client activity in 2021. We will strive to come in below this suspect the level of expenses. Our effective tax rate for the quarter was 20%. For 2021, we expect the effective tax rate to be between 19% and 21%.

Please turn to Slide 8. Net interest income for the quarter was $471.6 million, an increase of $10.6 million from Q3. The primary drivers of this increase were increased earning asset balances, driven by higher levels of deposits in Puerto Rico. The replacements of PBLs with agency MBS in the investment portfolio and lower deposit costs primarily at Popular Bank. Deposits grew by $844 million in the quarter. This increase was mostly in BPPR. NIM decreased 2 basis points to 3.04% in Q4. On a taxable equivalent basis, net interest margin was 3.35%, also a decrease of 2 basis points. The reduction in the margin reflects an increase in the size of the investment portfolio and lower loan yields, partially offset by a decrease in deposit costs. The total loan yield decreased by 16 basis points in Q4. The bulk mortgage loan repurchase at the end of Q3 was the main driver of this decrease as these assets yield approximately 3.5%.

For 2021, we expect margin to be stable. Asset mix, round two PPP originations and the speed at which PPP loans are forgiven will drive the ultimate result. As of the end of the fourth quarter, Puerto Rico public deposits were roughly $15 billion, about $500 million higher than in Q3. We continue to expect public deposit balances to come down over time. However, in the near term, additional federal stimulus and tax revenues in the first half of the year will likely increase the deposit balances. Our average loan balances increased by $753 million in the quarter. We expect loan balances will be impacted by PPP forgiveness as well as limited demand fueled by unprecedented levels of client liquidity, which may expand further with additional federal transfers. Round two of the PPP program will help loan balances. We still do not expect overall loan growth to materialize in the first half of 2021.

Please turn to Slide 9. Our overall capital levels remained strong relative to mainland peers as well as with respect to well capitalized regulatory requirements. Our common equity Tier 1 ratio in Q4 was 16.3%, up 34 basis points from Q3. Tangible book value increased by $1.38 per share to $63.07. This increase was driven by our quarterly net income offset somewhat by dividend payment. Our return on tangible equity was 14.5% in the fourth quarter and 10.8% for 2020. We will continue to pursue our target of maintaining and improving our double-digit return on tangible equity. As discussed last quarter, we expect to be able to make capital-related announcements in April.

With that, I turn the call over to Lidio.

Lidio Soriano -- Chief Risk Officer

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 portfolio, but in particular to the post moratorium, mortgage loss mitigation activity and 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-volume Puerto Rico is 77%, while in the U.S. is 75%. Office space, our multi-family occupancy and collection have remained stable through the pandemic. Today, there has been moderate numbers of downgrades in these segments. Of the customers that have exited relief, 98% of accounts remain current.

In the healthcare facilities segment, our Puerto Rico exposure is mainly to hospitals, while our U.S. exposure is to skilled nursing facilities. For both regions, federal and local assistance has supported the industry operations. Today, 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. Notwithstanding, our customer base has experienced an increase in activity after the lockdown orders were lifted. Today, we have been a moderate number of deferrals and downgrade in this portfolio. Of the customers that have exited deferrals, 99% of accounts are current. The average original loan-to-value for this segment is 59%.

In general, based on discussions with our major borrowers, occupancy and collection have remained stable with signs of improvement during the fourth quarter. Regarding the construction segment, most of our exposure is in the U.S., and principally in the New York Metro region. The majority of our projects are in late stages of completion, have low loan-to-cost and average original loan-to-value of 64%, a nominal exposure to higher end residential. To-date, there have been a limited number of deferral requests and downgrades in this portfolio. The pandemic has impacted the hospitality industry with unprecedented challenges. The strategy is to flatten the curve, to adjust lockdowns, social distancing, stay-at-home orders, travel, and really the restrictions have significantly decreased the demand for these businesses. To address the risk to our loan portfolio, we continue to work with our borrowers to give them time to recover and added a qualitative reserve during the quarter.

Our hotel exposure is mostly in Puerto Rico. At the end of the quarter, our total exposure stood at $270 million with an average original loan-to-value of 69%. This segment has experienced elevated levels of stress due to limited business and lesser travel. Most of the deferrals expired in the third and fourth quarter, but given the challenges of the industry, we foresee additional extensions to support our borrowers. To-date, there have been a significant number of downgrades and deferrals.

Restaurant balances were $238 million at quarter end. This segment has experienced stress, driven by the restriction placed on indoor dining. Despite this restriction, the majority of our restaurant borrowers, particularly quick service or fast food have continued to operate, to delivery and carry out with volume improvements during the fourth quarter. Of the customers that have exited deferrals, 99% of accounts are current. To-date, this segment has had a significant number of deferrals and downgrades, most within the past category. To finalize, let me highlight that we do not have material credit exposure to energy, airlines or shared national credits.

Please turn to Slide number 12 to discuss credit metrics. Non-performing assets decreased by $15 million to $824 million this quarter, mainly driven by an OREO decrease of $17 million, offset in part by an NPL increase of $3 million. The OREO decrease was driven by sales and the suspension of foreclosure activity. The rise in NPLs was driven by an increase of $7 million Puerto Rico, due to higher mortgage NPLs of $44 million, offset in part by a decrease of $38 million in commercial NPLs. The increase in mortgage NPLs was mainly due to a delinquency progression after the expiration of the payment moratorium.

We are not overly concerned with this due to three factors. First, NPLs are comparable to levels prior to the pandemic without the natural outflows caused by foreclosure. Second, early delinquency are the lowest levels in the last 10 year. And finally, the trend in forward run rates for early delinquency buckets is encouraging. Thus everything being equal, we do not believe that the fourth quarter increase in NPL inflows is the start of a trend, but rather the effect of the expiration deferrals. The commercial NPLs decrease was mostly related to impairment charge-offs from previously reserved collateral dependent loans. In the U.S., NPLs decreased by $3 million due to a previously reserved construction loan that was partially charged-off during the quarter. At the end of the quarter, the ratio of NPLs to total loans held in portfolio was 2.5% flat versus the prior quarter.

Please turn to Slide number 13 to discuss NPL inflows. Compared to the third quarter, NPL inflows excluding consumer loans increased by $2 million, driven by an increase of $19 million Puerto Rico, mainly due to mortgage delinquency progression at the expiration of the moratorium period. In the U.S., NPL inflows decreased by $17 million as the prior quarter included the impact of our $11 million relationship that mature and reached 90 days, while in the renewal process.

Turning to Slide number 14, net charge-offs amounted to $42 million or annualized 58 basis point of average loans held in portfolio compared to $17 million or 24 basis points in the previous quarter. In Puerto Rico, net charge-offs increased by $27 million, primarily driven by higher commercial net charge-offs of $19 million, mostly related to previously reserved commercial loans. In the U.S., net charge-offs decreased by $2 million, primarily related to recoveries in the commercial portfolio. The corporation allowance for credit losses decreased by $30 million, $896 million, driven mainly by charge-offs on the previously mentioned commercial loans and an improved economic outlook, offset in part by an increase in qualitative reserve, I'll discuss further in the following slide. The ratio of allowance for credit losses to loans held-in-portfolio decreased slightly to 3.05% from 3.15% in the third quarter. Excluding Payment Protection Program loans and guaranteed mortgage loans, this ratio increases by 40 basis points to 3.45%.

The ratio of allowance for credit losses to NPLs held in portfolio was 122% compared to 126% in the prior quarter. The provision for credit losses increased to $21 million. During the quarter, we reclassified $10 million of the expense for unfunded loan commitments from other operating expenses to the provision for credit losses. Excluding this effect, the provision for credit losses on the loan portfolio decreased by $9 million mostly due to improvements in the macroeconomic scenarios.

Please turn to Slide 15 to discuss details on the drivers of the variance in allowance for credit losses. At the end of the fourth quarter, the allowance for credit losses decreased by $30 million compared to the third quarter. Variances were driven by changes to economic outlook, qualitative reserves and portfolio credit quality. As discussed in the last webcast, we enhance our ACL framework by introducing probability weights of different scenarios to estimation process. We combine Moody's Analytics' S1, Baseline and S3 scenarios. Among the three scenarios, the Baseline is assigned the highest probability, followed by a more pessimistic S3 scenarios, given the uncertainties in the economic outlook and downside risk. The current baseline scenario shows improvements in both 2021 GDP growth and unemployment rate when compared to the previous estimates.

The change in macroeconomic scenarios cause the ACL to decreased by $84 million. During the quarter, we added $68 million in qualitative reserve to address specific risks, including the exposure to the hospitality industry at a potential risk to the macroeconomic conditions in the Puerto Rico market. Portfolio changes driven mainly by credit quality and volume mix cause the ACL to increased by $28 million.

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

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

Ignacio Alvarez -- Chief Executive Officer

Thank you, Lidio and Carlos, for your updates. 2020 was certainly a challenging year. It began with devastating earthquakes in southwestern Puerto Rico, which were shortly followed by the unprecedented impact of the pandemic, including the substantial lockdown of the local economy. I'm 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 front line 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 continued to grow our customer base while we remain focused on supporting our communities. I am extremely proud of what we've been able to accomplish over the past year. We recorded more than $500 million in net income and ended the year on a high note, generating one 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 under way will allow an eventual return to the normalcy we so desire. We begin 2021 on a solid footing and excited about our prospects for the year.

We are now ready to answer your questions.

Questions and Answers:

Operator

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.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, good morning, guys.

Ignacio Alvarez -- Chief Executive Officer

Good morning.

Carlos Vazquez -- Chief Financial Officer

Good morning.

Lidio Soriano -- Chief Risk Officer

Good morning.

Alex Twerdahl -- Piper Sandler -- Analyst

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, some -- maybe some more anecdotal data?

Ignacio Alvarez -- Chief Executive Officer

Yeah. You used the word flow, I think, I mean we're generally optimistic that FEMA finally reached agreement with the Electric Power Authority for about $10 billion restoration program, and with the Aqueduct and Sewer $4.5 billion. That money really to my knowledge hasn't begun to flow, so that's yet to come. It's important to agree upon it. They're working on implementing that. What we have seen obviously the $600 payment has come in as it is in the state that's been coming in the last -- it began last week and it continued this week. So we still have a lot of the CDBG funds that are yet to be spent. They're going out slowly, but we are very much more positive. It looks like the new administration recognizes that there has 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 pick up in the third quarter. The fourth quarter was better than before, but not quite the acceleration we had in the third quarter. I do see home purchases are increasing. I saw a report. I don't know who put it outside, so I don't know on what percent [Phonetic], home purchase in Puerto Rico went up -- home prices in Puerto Rico went up by 7%. So, generally, I think we are optimistic that these flow of funds will have a big impact. We really haven't seen that great other than the direct stimulus that goes to individuals. It's starting to go out slowly. We have a new administration both at the level of the central government and many of the municipalities changed mayors. I say that because CDBG, the mayors have a big role in that, and including the mayor of San Juan. So I think that that's probably the number one priority. If it isn't, it should be, but I think they've all said it is to take advantage of that money. Well, I was going to add, that's -- 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.

Alex Twerdahl -- Piper Sandler -- Analyst

When you look at the unemployment or I guess the employment numbers maybe sort of remain, and obviously will come 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?

Ignacio Alvarez -- Chief Executive Officer

You mean, above 1 million persons. Yeah, definitely, I mean...

Alex Twerdahl -- Piper Sandler -- Analyst

Yeah, I mean a million jobs.

Ignacio Alvarez -- Chief Executive Officer

Obviously, there is 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 a proportionately larger impact on employment. That sector has been impacted. I think when the economy picks up, and this won't be so much -- I mean, obviously, if the economy picks up, business travel picks up, but I think Puerto Rico will be well positioned in the leisure market, because, you're starting to see increasing restrictions on international travel, and I think some people will think twice about going to a foreign country for a while, if they're not sure they can get back to the United States.

The other area that always has a big impact on employment is construction. And again if once you start building the infrastructure that's out there, I think that will have an impact on employment. They are things that worry people in our industry. It's become generally hard for some people to gain and 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 will be interesting to see how we can meet that supply, especially concerning the construction industry whether they'll be able to get all the employees they need.

Alex Twerdahl -- Piper Sandler -- Analyst

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 that you're looking for, for that qualitative portion to kind of reverse. Is there 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 toward that CECL day one reserve level or is there enough change that that number is kind of moved at this point?

Carlos Vazquez -- Chief Financial Officer

I will say that in general terms the way to think about the qualitative reserve is there is more clarity as to the path forward. I think that will allow us, give us more confidence that the need for it has lessened. So that will be my first take. So as vaccination continues to evolve, we see already opening up of the economies. I think those will be indication in my view that qualitative reserves might let -- 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, that necessarily will revert to that. I remind my answer.

Alex Twerdahl -- Piper Sandler -- Analyst

Perfect. Thank you for taking my questions.

Ignacio Alvarez -- Chief Executive Officer

Thank you.

Operator

The next question is from Brock Vandervliet of UBS.

Brock Vandervliet -- UBS -- Analyst

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 -- looks like unemployment has dropped in your baseline 300 basis points from the third to the fourth quarter. And can you comment on those figures?

Lidio Soriano -- Chief Risk Officer

I will say some of it has to do with some of the scope. First of all, unemployment, a part of the change in the unemployment also relates to the difficulty of estimating the unemployment rate when you have significant crisis or significant disruption to the ability of the Bureau to do the unemployment survey. As you know, the unemployment raise 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 economies didn't have the benefit of the March and April numbers. Many people thought that those somehow 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. There is -- I agree, I mean there is -- they are more particular, they are very high on the flow of funds for Puerto Rico, particularly, I mean the Biden administration has a very aggressive plan for Puerto Rico that now that they control both the House and the Senate, they think that a lot of that is going to come to fruition.

Brock Vandervliet -- UBS -- Analyst

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

Carlos Vazquez -- Chief Financial Officer

Yeah. 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 will continue to consider that, doing more of that as a result, and so we'll probably do some more of that in 2021. And we're dying to extend in the securities portfolio and what we're getting is like 110 basis points frankly, but 100 basis point is better than 10 basis points, right; so yes, 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 financial [Phonetic] transfers and tax revenues coming in, and then probably going out in the second half of the year; so that we will probably have more cash to invest, although some of that cash may be shorter term. I mean some of the things that we have in the radar, that we're keeping our attention on for example in the government balances is there is a lot of noise, especially in the last couple of weeks that there seems to be progress in the process of restructuring the public debt.

If in fact that happens and there is 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 contain a one-time down payment from the government of Puerto Rico to bondholders of about $6 billion. So there is instances here where significant amounts or the balance of the cost of deposits may move out. So we'll have to keep that in mind. The new government in Puerto Rico has expressed an interest to -- on their side of the equation to try to move the funds faster as well. So there may be additional outflows in normal course of business from the government of Puerto Rico. So we'll keep looking at all those things. But to summarize, yes, we will continue to consider extending somewhat in the investment portfolio, although not dying to buy assets at 1% yield.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay, thanks for the color.

Carlos Vazquez -- Chief Financial Officer

You're welcome.

Operator

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

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Hi, good morning.

Ignacio Alvarez -- Chief Executive Officer

Good morning, Glen.

Carlos Vazquez -- Chief Financial Officer

Good morning.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Ignacio, thanks for the color on the economy down in Puerto Rico. And I was just wondering if maybe you should give a couple of specific examples where you know the federal aid that came down on the island in 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?

Ignacio Alvarez -- Chief Executive Officer

Yeah. Well, again, the $10 billion in PREPA, very little bit has been spent. I mean they authorize that, but I -- we have not seen that money. For example, our accounts with PREPA haven't changed dramatically, neither with PRASA now. PRASA has been going through a program of improving the infrastructure and therefore some of our contractor clients have gotten those contracts. And the CDBG money we have extended lines of credit for several of our contractor clients who need to advance the funds before they get reimbursed from CDBG. So again, I want to emphasize that while we're all very excited about the prospects of the money being released, 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 is a lot of talk that the -- and there is, I think, a greater disposition on the new administration to get those monies released.

What we see more is the impact on the consumer side, where you see the direct relief. That's very visible and our deposit balance is 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 detailing on the internal office there; so I look at the bright side, which is that's money yet to be pumped into the economy. And it -- and we have made progress as much as we criticized it; these were complicated processes, and for example, the amount that's being given to -- awarded to PREPA is I think a record amount the team has ever given to any entity. So these are big dollars, but again, I want to make everyone [indecipherable], you're not really seeing that money spent yet.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

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 Vazquez -- Chief Financial Officer

Yeah. 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 what drives the whole thing. So if we successfully keep loan balances flat means that we actually ordinated $1.4 billion more than 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 the commentary we've given before will continue to hold true, Glen, which is that we are more confident that continue growth in the U.S. Bank, and in Puerto Rico, probably more stability.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

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

Operator

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

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, everyone. How are you.

Ignacio Alvarez -- Chief Executive Officer

Good morning, Gerard. How are you?

Carlos Vazquez -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

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

Ignacio Alvarez -- Chief Executive Officer

You are hearing to know, it's beautiful today. Sorry about that.

Gerard Cassidy -- RBC Capital Markets -- Analyst

No surprise, you guys are lucky dogs. Ignacio, maybe you can share with us, obviously there has been a change in this administration that we're all obviously aware of. And in the administration, the President Obama's administration, he was opening up relationships with Cuba. And then under the Trump administration, it went in the other direction. Assuming this administration opens -- reopens those relationships with Cuba, can you share with us some opportunities that may arise for Popular if you're permitted to do banking down in Cuba?

Lidio Soriano -- Chief Risk Officer

Cuba is always a difficult topic. I think that there is 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 sort of procedural loops [Phonetic]. When Obama opened up we were very interested in Cuba. I think, I don't know if you noticed, but we were one of only two U.S. banks that issued credit cards that could be used in Cuba and took us a while to get to that. However, I really don't expect Cuba to have a big impact on short-term, really it's -- people always think from our perspective from the U.S., I mean I don't think you're going to see meaningful change economically in Cuba unless the government there takes a radically different approach to the economy. We haven't seen signs that that's going to happen. So I don't expect anything dramatic to happen. I think Biden has bigger issues. So, although I think he will revert some of those things.

I don't think he will 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 will explore like we did last time. We invested time and money to get that credit card operating. It wasn't by way very little use on it. So it wasn't a moneymaker. So again, I don't think it's going to be a mover for us in the near future.

Gerard Cassidy -- RBC Capital Markets -- Analyst

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

Carlos Vazquez -- Chief Financial Officer

Yeah, that's the -- that's a really good question. We thought about it a lot. When you think about that question that you are a normal banker, we actually be -- well, let's go back in history and look what the balances looked like before the stuff happened and that must be the right number, right. Unfortunately, when we did that, that number doesn't work, because a lot of the accounts that we have from the government now, we didn't have historically because they used to say that GDB. And when GDB -- when bankrupt, they allow those accounts move to us. So we don't have the historical flows of those accounts. So, I realize I'm giving a very big range. But before GDB this appeared but we had various billions of dollars of government deposits, if you added everything up. But they were nowhere close to $15 billion. I would assume when things normalize that -- it's probably going to be a number somewhere between $5 billion and $10 billion, but I can't get any smarter than that big range to be frank with you.

Gerard Cassidy -- RBC Capital Markets -- Analyst

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 with an income limit. Can you just share with us what your process will be with the Fed to announce your capital action plans?

Carlos Vazquez -- Chief Financial Officer

Sure. A lot of the rules that we all know are really considered or only applicable to CCAR banks. So while those rules, one that's hardly apply 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 the rules are. At this point in time, we are planning to continue our process as we have historically, Bernard -- so Gerard, I'm sorry, we will...

Gerard Cassidy -- RBC Capital Markets -- Analyst

[Speech Overlap]

Carlos Vazquez -- Chief Financial Officer

We will call you Gerardo [Phonetic]; how's that. We are in discussions with the Fed and we go through our whole capital plan with them to get their feedback sometimes some adjustments are necessary. We still are hopeful that we will get whatever response we may need from them. Again, they have response for all the parts, sometimes they response 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 are mindful of the boundaries that the Fed has made public, but we have continued our process, so far largely unchanged.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. Thank you, Carlos.

Carlos Vazquez -- Chief Financial Officer

Thank you.

Operator

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.

Ignacio Alvarez -- Chief Executive Officer

[Video being played]

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Paul Cardillo -- Investor Relations Officer

Ignacio Alvarez -- Chief Executive Officer

Carlos Vazquez -- Chief Financial Officer

Lidio Soriano -- Chief Risk Officer

Alex Twerdahl -- Piper Sandler -- Analyst

Brock Vandervliet -- UBS -- Analyst

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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