Q3 2020 Popular Inc Earnings Call

[music].

Good day and welcome to the popular Inc. third quarter conference call.

<unk> estimates will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now.

I like to turn the conference over to Pocatello Investor Relations Officer. Please go ahead.

Good morning, and thank you for joining with.

With us on the call today is our CEO Nazi all brands.

Carlos Vasquez endorse your old video surreal.

They will review our results for the third quarter and then answer your questions.

Other members of our management team will also be available during the <unk> session.

Where 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 so.

Subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward looking statements.

Fourth within today's earnings press release and are detailed in our filings.

Find today's press release, and RCC filings IR webpage at <unk>.

I'll turn the call over to our CEO Ignacio offerings.

Good morning, and thank you for joining the call I hope that you and your loved ones are well.

We generated 116 million earnings in the third quarter, notwithstanding the uncertain economic environment.

These results reflect the rebound in economic activity experienced during the period due to further weakening of the economy 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 three for an update on the current business environment in Puerto Rico.

Following a strict locked down between mid March in late May.

Help curtailing interest spread the pandemic many.

Many that are sticky as their workplace, we're gradually loosen.

We have seen a revival in business activity and the economy, we open.

Economic trends and customer activity continued to improve.

Employment trends, what's deteriorated rapidly in April are still down significantly compared to last year, but have also begun to accrue.

Total nonfarm employment has decreased by 7% since April.

I remain 8% below September 2019.

New auto sales have rebounded sharply in the third quarter were up 80% year over year.

Well the name for automobiles really strong lack of inventory me back sales going forward.

Net sales increased 29% in the third quarter, both sequentially and up compared to the year ago period.

Debit and credit card sales increased by 32% compared to the second quarter 2020 and.

And by 27% versus last years third quarter.

Year to date sales are up 7% compared to 2019.

Similarly, DPP, our third quarter mortgage originations have rebounded increasing by 69% compared to the third quarter of 2019, [laughter] tourism is improving slowly but he continues to like other areas of the local economy hotel.

Hotel occupancy bottom in April.

However, as restrictions were lifted.

I can see levels increased to 43% at the end of July.

Waterfront property has been gradually greeting arrivals during the month of September we're still 48% lower than the previous year.

Please turn to slide four.

We are offering full banking services at 94% of our branches.

The management team, we continue to take measures to ensure the soundness of our operation and the safety of our employees and customers.

We are offering we'll try to work great for a significant portion of our employee base.

We have further strengthened our return to work protocol to ensure it say transition back to our friends that it'd be when possible. What you're currently plan will be no earlier than January 2021.

During the quarter, we pay second special bonus to our branch employees.

In recognition of the unique challenges they face during this period.

We're also focused on supporting our customers in this uncertain environment.

During the initial period the pandemic, we offer payment really to our retail and commercial customers and continue to work with those clients who still need help.

With respect to the PPD program, you have to wait an online platform for customers to request no forgiveness.

86% of the total loans originate are below $50000.

Qualify them for that simplified process.

We expected the forgiveness process will be substantially completed during the fourth quarter of 2020.

We continue to have more than 1 million monthly active users Army Bunko did your platform in Puerto Rico.

We captured 70% of deposits in the third quarter to digital channels.

Year to date, 66% of our deposits have been captured digitally compared to 52% in 2019.

Finally, and most impressively you know, Puerto Rico's meet the demographic trends.

Our customer base continues to grow increasing by 41000 in the third quarter to 1.9 million customers.

Turn to slide five.

Our quarterly net income of 116 million was 41 million higher than the second quarter and $3 million higher than the same quarter last year.

Third quarter results were driven by higher revenues and lower provision, partially offset by higher operating expenses.

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. However, we remain vigilant I can economic outlook is still uncertain.

In the quarter, we completed a series of bulk mortgage repurchase transaction.

Well my view, yet the servicing portfolio totaling 80 $808 million.

These transactions along with a shift of a portion of our short term investments to agency mortgage mortgage backed securities.

Excluded in order to deploy liquidity to increased interest income and improve our margins.

Turning to slide six.

Before turning it over to Carlos I want to comment a series of actions to realign our New York Metro Branch network.

As part of this realignment 11 of our lower performing branches in the New York Metro area will be close.

Disappointed to close or these locations to be completed by the end of January.

Using these actions will in fact 83 employees will be receiving severed and transition assistance.

We remain committed to the New York Metro market.

He will maintain our presence in most of the current community.

Our body critical accessibility to financial products and services that our customers rely on.

Eight of the branches. We are closing are within two miles of another one of our branches.

We will continue to operate 27 branches throughout the New York Metro area, our largest retail network in the mainland United States.

This difficult decision was made following a detailed review of our current network, including foot traffic rights proximity customer need and accessibility of supplemental services.

The branch realignment will allow us to reduce operating expenses.

Leverage we've <unk> resources to focus on small and medium size businesses.

In our hands, our digital offering to support changing customer behavior.

As a result of these actions, we expect to record a pre tax charge of approximately $25 million.

With 23 million to be reflected in the fourth quarter of 2020.

Well before we estimate annual savings will be $13 million with an expected payback period of approximately two years.

We are confident that our breast repositioning strategy will strengthen our operations in New York.

That's because you get to meet the growing and diverse needs of our customers.

Employees and the communities that we serve I will now turn the call over to Karla.

Yeah. Good morning, Please turn to slide seven that's usual additional information is provided in the appendix to the flight deck todays earnings press release detailed variances from the second quarter and.

Noninterest income for the third quarter was 461 million an increase of 10 million from the second quarter.

Non interest income increased by 16.7 million to 128.8 million in Q3, driven by the reinstatement during the quarter Oh certain service charges and late fees, which were waived in Q2 as part of our response to the pandemic.

Deposit service charges were higher by 6.7 million, maybe in Puerto Rico due to higher transaction volumes and although service fees were also higher by 17.8 million as customer activity increased debit and credit card fees by 13.4 million. In addition, there was a positive adjustment.

5.3 million to Indemnity research research on previously sold loans, mainly due to reserve release, that's related to the mortgage loan repurchases.

These items were partially upset by lower mortgage banking income by 13.3 million, primarily driven by negative MSR adjustment and the impact of the bulk loan repurchases.

Well not yet there we continue to move towards our historical normalized non interest income run rate, a 135 to 140 million per quarter.

In the short term, we may settle slightly lower quarterly level, that's higher deposit bonds has continued to reduce some deposit related fees.

Provision expense for the quarter was 19.4 million, which is 44 million lower than in Q2, we deal would expand later.

Total operating expenses were 361 million 13 million higher than the prior quarter.

As client activity increased during the quarter, we saw a corresponding increase in associated costs.

We had a higher volume related we had higher <unk> expenses in two categories processing and technology by 5.5 million, that's what else card processing and interchange fees.

1.9 million.

Equipment expenses increased by 3.2 million mainly.

Mainly due to higher amortization expense.

We also had an increase in research corporation or a loss of 4.7 million on a higher probation for unused commitment by 4.4 million.

These increases were partially offset by lower audit and tax fees. That's we're not lower write downs Oh for close auto.

Personnel costs, which decreased by 3.2 million due to lower comp expense, partially offset by higher production related commissions and bonuses.

In the first quarter, we announced that in response to lower interest rates and the effect of the epidemic, we implemented various cost saving initiatives.

We now expect to exceed the target is $55 million in savings right Twentytwenty I'm projects are already average quarterly expenses for the year to be around 365 million.

Lower than our prior guidance of 365 million 69 million per quarter and lower than our original expense guidance for the year up 383 million per quarter.

In Q4, we are forecasting operating expenses of approximately 338 million, excluding the cost associated with the branch actions announced today.

Our effective tax rate for the quarter was 20%.

In Q4, we expect our effective tax rate to be between 19 and 22%.

Please turn to slide eight.

Before I moved to net interest income and margin dynamic I'd like to discuss in more detail. The bulk mortgage repurchase transactions that were completed in Q3 then.

Delinquencies on deferrals have increased the population of service loans eligible for repurchase in Q3, we executed 808 million of bulk mortgage repurchase has from our DFI loan servicing portfolios in order to limit future servicing advances and sundry losses and to increase.

Interest income.

These transactions resulted in a net expense of pain point for 10.9 million during the quarter.

The impact is reflected in various lines of our income statement I noted in the slide them.

The most significant portion of the charge is related to the MSR asset that's what interest payments, we had advanced to the Ginnie Mae pools that we do not expect to collect although the FHLB guaranteed.

These expenses were offset by servicing income for this launch and the release of the then new the recourse reserve for the acquired Fannie Mae loans.

Based on the net yield of 3.5% for the repurchase assets, we expect to recover the expense in less than six months through net interest income.

Please turn to slide nine.

The net income interest income for the quarter was 461 million an increase of 10 million from Q2.

The three primary drivers of this increase were increased balances in the investment portfolio, primarily driven by higher levels of deposits in Puerto Rico income.

Income recognized from notes issued under the PPP program by 10.3 million four.

4 billion higher than Q2, and lower deposit costs, primarily a popular back.

We saw the positive growth of 2.2 billion in the quarter.

This increase was once again across all client segments in Puerto Rico, but in Q3. It was led by retail and commercial deposit not public deposits.

How about 700 million of this increase was related to our bulk mortgage repurchase that I left the bank early in the fourth quarter.

Named decreased by 19 basis points to 3.06% in Q3.

Taxable equivalent basis net interest margin was three point, 37% a decrease of 19 basis points.

Loan yields and deposit costs dropped by similar amounts eight basis points and seven basis points respectively.

Just like in Q2, the lower NIM, it's related to asset mix.

The increase in average deposits, which are investing mostly in overnight fed funds and short time use treasuries and higher average advances in PPP loans of 1.4 billion compared to 913 million in Q2.

For the fourth quarter name will be impacted by the speed of which 50 p. loans are forgiven and also by a default <unk> additional changes in our asset mix there.

The remaining unamortized portion of the fees relate to PPP laws, it's approximately $41 million.

I thought the end of the third quarter, Puerto Rico public deposits were roughly 14.5 billion, how about 500 million higher than in Q2.

We continue to expect public deposits.

To come down over the mid to long term.

Under the current stock for example assistance funds provided to the call with the Puerto Rico must be used by year end.

However, the potential for assistance [laughter] additional cover every day, the federal assistance could increase bounces in the near term.

Our average loan balances increased slightly in the quarter growing by $263 million.

This growth was primarily driven by lower yielding PPP, those partially offset by lower levels of higher yielding consumer bond says I'd be PPR.

Ending balances also increased by a portion of their mortgage repurchase was completed at the end of the quarter.

In Q3, we continued to see strong demand in mortgage and auto loans and leases.

Bob that's in our personal loans and credit card portfolios continued to show net prepayments.

Economic health and business uncertainties make it difficult to predict loan balances for the fourth quarter and onwards.

We expect loan bonuses to move lower due to PPP forgiveness as well as limited demand fueled by unprecedented levels of client liquidity. Please.

Please turn to slide 10.

Our capital levels remain strong where I think the main appears I was wondering with respect to well capitalized regulatory requirements. Our common equity tier one ratio in Q3 was 15.9% up 20 basis points from Q2.

No book value increased by $1.56 cents per share to one to 60 Onesixty nine.

This increase was driven by our quarterly net income offset somewhat by dividend payments.

In this slide we repeat an update a calculation of our pro forma capital ratios applying the loss ratio over our last published the fast severely adverse stress test from 2017.

In this simulation, we still end up with a very strong C. P. One ratio of 14.7%.

This calculation is a point in time estimate not a full blown stress test. So it does not include the nine quarters or future PPNR set its typical on a full stress test.

For the third quarter 2020, and our allowance for credit losses represent 52% of this the fat loss estimate.

Our return ever at tangible equity was 14.2% we will continue to pursue our target a double digit return on tangible equity.

This cost last quarter, we expect to engage with our regulators about our capital plan early next year and compared to target being able to make a couple of related announcements in April of Twentytwenty, one with that I turn the call over to leave.

Thank you Carlos and good morning.

Overall, our credit performance remained stable during the third quarter of 2020.

Aided by paying in the federal government stimulus on the resumption of collection efforts.

Given current uncertainties.

We are monitoring the impact of the pandemic our entire loan portfolio.

Yet certain commercial segments are more sensitive are highlighted on slide number 11.

We think this year right now in the retail segment exposure in Puerto Rico is mainly comprised of coffee space well the exposure in the U.S., mainly multifamily yeah.

Yeah, rich or you're not providing Puerto Rico 78.

Person wanting to U.S., it's 72%.

Office space on multifamily occupancy on collection I've remained stable through they've been having.

Today, there have been a moderate number of downgrades in this segment.

He says you have the feral mainly relates to cost of my strategy to strengthen liquidity.

The customers that have exited relief, 98% of accounts our current.

In the health care facility segment, our Puerto Rico exposure, it's mainly to hospitals, what are you s. exposure with the skilled nursing facilities.

For both regions federal and local assistant not support that the industry operations. So they are being a limited number of April requests on downgrades in this portfolio.

We think nonessential retail.

Just three place orders curtailed activity of this segment.

That's a result, we have experienced a significant number of deferrals on downgrades most within the past rated category.

I'll pick off the worst that have exited the barrels.

99% of accounts are carving.

The average loan to value for this segment is 59%.

In general based on borrowers surveys conducted in the second quarter.

Okay, let's see I've remained stable compared to previous levels strip malls report that an 86% 86% occupancy.

83% collection rate wont shopping centers report that I, maybe 6% occupancy how many 64% collection rate.

Regarding what are we doing Puerto Rico.

Dr. Do a subject we looked on order and sales decreased significantly in the second quarter.

On the authorization to read some sales there.

My report that strong sales during the third quarter.

Regarding the construction segment most.

Most of our exposure is in the U.S. I'm pretty badly in the New York Metro region.

The majority of our projects are in late stage of completion has no loan to cost.

I wish to value of 75% a nominal exposure to our residential.

To date, there have been a limited number of people request I'm downgrades in this portfolio.

During the quarter inflows of Npls increased by 31 million.

Driven by two relationships wanting Puerto Rico, and one in New York.

Both relationship actually if if it's difficult fish prior to the credit crisis.

On the risk profile continued to deteriorate, which prompted our decision to place them in nonaccrual status.

Our hotel exposure is mostly in Puerto Rico.

You another quarter, our total exposure stood at $372 million, we got coverage.

Volume of 69%.

This segment has experienced elevated levels of stress.

What do you mean, the business and they should drop.

Most of that you really felt the perils expire in the third quarter, but.

Well given the job and just update the street, we foresee additional expenses to support our borrowers.

During the quarter, we downgraded 50 tomato.

In this segment after having downgrade it dawned on 69 million in the second quarter.

Right. So on balance that's worth 342 million at quarter end.

This segment has experienced stress even by the children place order there.

Majority of our restaurant borrowers, particularly quick service or fast food I can do you have to operate through delivery and carry out.

In the governors late this quarter.

Restaurants can operate up 55% capacity.

Oh the economy fully reopened we expect this segment to rebound at a faster pace, especially the quick service restaurants.

Well, if the customers that have exit the Farrell.

90, 898% of accounts our current.

To date, the SEC might help out a significant number of peafiel and downgrades most within the past category.

To finalize I may also discuss the segment, which were not exposed to.

We do not know how it might you look what exposure to energy.

Lines or shared national credits.

Turning to slide number 12.

We have provided relief to a customer it was a modification consisting of the perils forbearance or extension.

We granted ethic assistance, so approximately 31000 customer accounts.

Representing 8.6 billion of loans.

In the 9% of total balances.

95% of growing of customers exit it really.

Okay, My 395% will be tuck ons remained current.

Although encouraged by these trends.

Most of the big barrels we should end up in the third quarter in fact that delinquency levels favorably, we remain up that big but then of course the threats and.

Spec beverage you really see next quarter.

Please turn to page number 13 to these cost of credit metrics.

Nonperforming assets decreased by putting domain Liam.

339 million.

Mainly driven by NPL peak weeks of 26 million, coupled with a number of decrease of 30 million.

MPL decrease was driven by a reduction of 33 million in Puerto Rico.

Lower mortgage by 27 million auto by 14 million and commercial by 12 million.

Offset impart.

By the way people made a construction I'm getting flow previously mentioned.

In the U.S. Npls increased by 7 million.

Driven by the 9 million construction relationship mentioned earlier.

They already Greece was very much in recent years, I'll say, what baby under suspension of of course Europe everything.

On the other quarter the ratio of Npls to total loans was 2.5% compared to 2.6, but that's a person in the previous quarter.

Please turn to slide number 14 to these costs and billing.

Compared to the second quarter.

NPL inflows, excluding consumer loans increased by six made him.

We've been buying increase up might be made in the U.S.

Due to the previously mentioned construction on coupled with I mean, let me have relationship I'm not sure I reach 90 days wanting the renewal process.

The long run well was completed during the quarter and they don't watch return to accrual status before the quarter ended.

The increase was offset in part by a decrease of 40 million in Puerto Rico.

Driven by a decrease of $41 million in mortgage.

Set in part by an increase in the commercial construction construction inflows of 28 million.

Construction relationship mentioned earlier.

Turning to slide number 415.

Net charge offs amounted to 17 million.

All right I'm on slide 24 basis points, compared to 65 million or 92 basis points in the previous quarter.

In Puerto Rico, net charge offs decreased by 48 million mainly.

Mainly due to lower consumer by 36 million, mostly related to auto loans.

The government stimulus deep.

The perils granted on the resumption of collections Pvp has had a significant impact in delinquency of our portfolios.

About 70% of our credit Clos in Puerto Rico.

Also have deposit relationships at the bank.

On average this kind of increase the liquidity.

20% things maybe yeah.

We do not expect to see changes in net charge off onto the first half of next year everything else being equal you're going to see some methodology net charge offs are already reflecting our reserve on those.

I'd be accounted for.

The corporation allowance for credit losses increased slightly by 7 million bound on 26 million.

But mainly by an increase in the U.S. CRV portfolio.

Hey, Richard <unk> dollar for credit losses.

Well, it's helping portfolio remained flat at three point, 15% in the third quarter the.

There are as you point out west from credit losses to Npls was under 26% compared.

Compared to 121% in the prior quarter.

We have a very losses decreased by 44 million to 19 million.

Due to significantly lower net charge off supervision they charge off ratio was on their 15% compression.

<unk>, 97% in the previous quarter.

Please turn to slide 16 lease costs the allowance for credit losses.

We adopted diesel on July 31st 2020.

Seems adoption our allowance for credit losses related to loans I think ways by 440 million.

Or 92% driven.

Driven by the day, one adoption by changes to microeconomic scenarios on portfolio changes.

At the end of the third quarter.

Got off of credit losses increased by $7 million compared to the prior quarter.

For instance were driven by economic outlook changes to the portfolio Beilenson I'm portfolio credit quality.

Well, we use single economic scenarios in Q1 Q2.

Even while one economic outlook is inherently uncertain.

We have our process for the third quarter.

Sure those probably to do weights uptick.

Different scenarios our estimation.

We combine Moody's analytics septembers, that's why I'm optimistic baseline.

Yes, three pessimistic scenarios.

Well, he's the weights were up like to wish.

As part of the Hcl estimation process.

When compared to the second quarter baseline scenario.

Third quarter basically assumes a more favorable increased economic activity from the fourth quarter, putting 20 through the second quarter of 2021, we continue growth there are.

Thereafter.

I'm on that you said that three scenarios using the Hcl.

The baseline scenario is a fine the highest brought me to be followed by the S. Three scenario given the uncertainties in the economic outlook.

Downside risk.

That's one thing I was going through their brokerage and always wait.

Implementation will probably be weights and changes in macroeconomic scenarios cost the EBITDA increased by 31 million.

This increase was offset in part by a net charge of activity and portfolio changes.

To summarize our loan portfolio attributed to stable credit quality metrics during the third quarter.

Like the payment deferrals garb.

Carbon steam on us and the resumption of collection efforts.

However, the effects of the pandemic continues to evolve I remain for the weight there that looks out economic that disruption is uncertain.

We will continue to look at putting money for the exposure of the portfolios the pandemic related risk genius and economic outlook I hope in England see I'm going to charge off evolve.

Evolve over the next few quarters, we that I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Thank you Lydia and Carlos for your update.

Well the economic scenario remains uncertain we.

We generated 168 million and earnings in the third quarter.

I think the economic rebound fueled by the unprecedented level of federal stimulus.

Our strong results also reflect our diversified sources of revenue and our prudent risk management.

Deposits continue to grow and our capital liquidity levels are robust.

We are well positioned to continue to serve our customers as they manage through these uncertain times.

This month, Mark Papa Lars 127th anniversary Ed.

And despite the current challenges we have much to celebrate.

Well, we are blessed to be part of a team of talented and dedicated colleagues.

Net the current challenges with courage and resilience.

We have a loyal customer base that continues to grow.

And we are an integral part of the communities we serve.

This commitment was recognized earlier in the month by the American Bankers Association, which selected US as one of only seven banks nationwide to receive the 22020 Kmiec Amendment Award for our financial Education program, We're very proud of this achievement.

For all these reasons, we look forward to the future with a renewed sense of purpose and optimism.

We're now ready to answer your question.

We will now begin the question and answer session.

Good question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

The first question is from Alex Twerdahl from Piper Sandler. Please go ahead.

Good morning, guys morning, right.

First off I wanted to circle back to something you said Lady on your prepared remarks, I think you said that you didn't expect net charge offs.

The level of net charge offs to change meaningfully into the middle of next year.

Just wondering one if I heard that correctly into it based.

Based on the yeah, the loans that are coming off deferral and collection efforts and things like that what gives you the confidence that the charge off levels will remain low and if we should extrapolate that into a into progression of the provision over the next couple of quarters as well.

I think I mentioned, they can use the word meaningful eyes [laughter] I mentioned change yeah, we expect changes to net charge offs in.

During the first half of next year everything else being equal I think we had a significant high level of charge off in the second quarter significantly low level of charge offs.

Third quarter.

So you're going to try to use those like I guide posts on through the first half of next year.

Okay.

And then I noticed a mortgage activity you said mortgage activity was pretty strong and I've seen some reports recently on high end real estate in Puerto Rico rebounding pretty meaningfully year over year I was wondering if you could give us some commentary on what you're seeing in the housing market just in general on Puerto Rico, It's if it is rebounding and strong.

The way, we see stateside.

Oh, yes. It is yes in general is rebounding I mean, obviously, you've read about the high end to derive them by yeah. They clearly are very strong, but we have seen a recovery across many of the.

For areas, especially in the Metropolitan area. So generally we're seeing demand for housing there hasn't been a lot of supply new supply. This year. So that is it is increasing we see we've seen in operations. The originations are we up applications are way up.

We see Oreo sales, so we definitely see an improvement in the residential market, especially in the Metro area.

Especially in the middle and high income neighborhoods, but but really across the board.

But I would say, mostly the metropolitan area.

All right. That's helpful. And then just a final question for me just Carlos as you think about the moving parts and and I. Obviously, the NIM is going to be pretty volatile with TPP forgiveness over the next couple of quarters.

But when I look at your margin and I look at the amount of cash and liquidity on the balance sheet, and then I sort of pair that up.

Against.

Some time deposits that still seem like they're paying rates that are much higher than you'd expect given the rate environment does that represent a pretty big opportunity over the next couple of quarters for the cost of deposits to continue coming lower and and providing all the more juice to eni.

Yeah, I mean when.

When you look at the margin actually this quarter was not too.

Two different from last quarter and up almost the totality of although the vast majority of our production in margin, what's really linked to two asset mix as opposed to.

Two rates or anything else.

With respect to deposit cost we.

We have.

There's two answers to that question Onyx when you look at Puerto Rico, a we have an interest bearing deposit costs of 24 basis points total deposit cost of 18 basis points, that's our best in class.

And then well do there's always room, and we will continue to to look at opportunities. There. There is not an immense amount of room to continue to lower deposit costs in Puerto Rico, We have had a more room in the states you know and that's where a lot of the public caused a drop happened this quarter.

We dropped about 20 basis points.

In total <unk> deposit cost in the in the U.S. This quarter. So we will continue to pursue the effort in the U.S.

So is there opportunity yet, but if the opportunity is is a larger in our smaller deposit book, which is the one in the states.

Okay and then just a final question for me during the quarter. There are some rumors that evertec with potentially exploring the sale and that's obviously a pretty big on a realized gain on your balance sheet, if that were to happen would that change.

The ability to return capital for you guys in 2021.

Or the amount of capital you can return yes.

Well again, I wouldn't I wouldn't want to speculate on what's going to happen everything but obviously.

Obviously, if we had more capital that would that would that would.

That will come into our capital plan and we look at it I wouldn't necessarily assume that any any any one time capital shall we get from any source that the fed will necessarily let us.

Distributed out immediately.

So that's about it.

Yes.

Thank you for taking my questions. Thanks.

Thanks, Alex.

The next question comes from Brock Vandervliet from U.S.B. Please go ahead.

Oh, thank you.

Mark.

Hey, just a big Big picture questions first anything.

In terms of population growth.

Trends on the island.

No we haven't seen anything that the most recent did.

Most recent.

Uh huh.

[noise] migration trends showed that.

The number of people, leaving the island had decreased dramatically I don't know how much that is tied to the pandemic.

Obviously, if we're trying to get it was down definitely people you know that to the extent that economic opportunities in the states are great right now it's less of an incentive for people to lead and also the federal stimulus was very generous so.

So it's natural to see why that Greece, those those those so.

This is lagging a little bit and there hasn't been much movement on a new birth, which is obviously something that's very important to our breakthrough. It has gone down the many parts of the world, but you know that is a something we haven't been able to change very much.

So I think in general is a positive less migration, but still the birth rate is generally though.

And despite the sort of flat Oh by the way if we don't compared to the last 10 years five population is pretty good for us.

But you know it's always important to not don't forget that even though we have a slap up roughly flat population right probably for the last year and a half or two we continue to grow our clients. Yeah. I think one thing people don't realize that even with a flat population scenario home.

Household new Green do increase obviously not at the same rate. So independent household chilled children go out and buy their homes and were seeing that in Puerto Rico you know.

Well, we've talked about it earlier there is a healthy demand now where mortgage is but you know.

As opposed to in the states, where maybe 70 30 refinancing for equals to about 50 50. So this is how strong demand for home there hasn't been a lot of supply.

So even as the household or increase slowly that's creating good momentum for the households for the housing sector.

Got it okay and.

Shifting over to the loan book, if you could just remind me what your total construction book is in the mix between Puerto Rico.

Wes and average loan to cost.

Yes.

Our total loan book is now down 36 million.

Oh for which.

Yeah, the majority thing.

The U.S. and I'm 40 million throwing around $40 million in the U.S. the rest.

Being in Puerto Rico.

I love to call something I didn't provide out in my prepared remarks, but were being to fix it starts with a six.

About.

Got it okay. Thank you thanks for the color.

Yeah.

The next question comes from Gerard Cassidy from RBC. Please go ahead.

Good morning, gentlemen, Hello, how are you there.

Good.

Can you give us an update I think the Trump administration came out in September.

And Nancy $13 billion aid package for Puerto Rico from Hurricane urea.

Is that money. In addition to what was promised Puerto Rico when the hurricane it about three years ago or is this just part of that international plan.

How do you see the money flowing into the economy.

No that was actually part of the original plan I mean, the numbers, we have right now basically for hurricane relief is about.

62 billion was allocated.

And about 17 billion has been disbursed.

So that the difference is there to be disbursed also independent of the hurricane.

We have the cares accurately for the cobot, which about was about 13.9 billion.

And this is these estimates are not as strong as the first one do we get from the website.

About about nicely to that since then so there isn't you know there's about 50 billion debt number you you you heard is about $50 billion of.

Federal aid left to be spent.

Now.

I believe I don't believe the pace is picking up as you saw they reached an agreement with the federal government for the for the restoration of the electrical system, which is the single biggest ticket item out there.

And it's progressing, albeit slowly but is progressing faster than it was.

They these monies, especially the hurricane we need money will not be spending a year two years three years, even four years I mean, it may take.

Seven 810 years to spend this money.

So it will be there for a while.

The cold it really is a bit different a lot of that was supposed to be spent by December 31st. So we'll see what happens with that little rush to spend it or.

[noise] loosen a little bit or gets extended.

So that's obviously that there is a lot of money to be spent there that's X if theres a federal stimulus package.

For the whole country, and if we get treated more or less equal to the states as we were in the last one.

I would expect it to be a lot more money coming into Wales.

Okay and could you quickly what's the gross state product of Puerto Rico, just to put it in context, because obviously, that's an enormous amount of money that will put us support to the economy under a multi year period do you have about what the gross state product is of Puerto Rico.

Yeah, the gross domestic product meets the pharmaceuticals, and that is about 70 $70 billion.

Great. Okay, and then you mentioned in your prepared remarks that cement sales were quite strong.

Can you kind of share with us is that more due to several programs like we're talking about now or is it more in the private sector and is it more commercial versus consumer.

Ladies.

I think there was a little you know I'm going to give you a sort of a political answer it's a little bit of everything you know we there are obviously some some some of the theme of money is beginning to come out for infrastructure projects and municipal projects, but you're also seeing a an immense amount of home improvement in Puerto Rico as you are in the state as People's anyway.

Up and they couldn't travel people are picking up their home building pools are they're doing things that require summit.

So and you're seeing buildings being rebuilt after the hurricanes. Some some from insurance believe or not that came out a year ago.

So for example, the rich hotel and any so varied has just announced that they had settled the insurance Duffy not too many months ago haven't even begun to rebuild so we really have a little bit of everything. It's just not government. There is a lot of a lot of architecture is a lot of home rebuilding going on in Puerto Rico.

Hello.

Very good and then shifting over to <unk> comments about the branch closures in the five boroughs of New York.

Can you share with us.

When did the cold main problem accelerate plans to close these branches and.

What metrics do you use to determine.

To close these branches versus foot traffic I know you mentioned lower profitability, but what metrics are you guys focused on could you use any in this type of analysis in either Florida worries and then you know you know even on the island in Puerto Rico.

To make it work.

Well, we looked at a number of metrics that can set foot traffic the level of deposits probability sales in those branches, we looked at all those.

And basically these were most underperforming branches so we really.

Yes.

They probably subtracted more they added to the retail district franchise.

And so you know it was a very detailed how we do this kind of analysis for all our for all our for all our branches Oh, we don't see Florida, we have only 11 branches and they're all our branches in Florida are profitable. So we we don't really see much there and Puerto Rico. The same thing I mean in Puerto Rico.

Oh, we.

We our branches are a source of strength.

They are large deposit gathering, but even more importantly, there are lot of sensors of sales for our consumer loan products people don't recognize that the the percentage of branches in Puerto Rico compared to United States is much lower in the United States. The most recent numbers I saw was that you had 33 branches for every 10000.

It habits in Florida that number is 11 in Puerto Rico since 2010 with the consolidation the popular patient population for Eagle has decreased by 7% the number of branches that decreased by 33%. So.

Our branches still product will have a lot of transactional activity there.

Their theaters sales generators.

And they're very low cost upper to operate compared to New York market real estate costs, you're very low even our personnel costs and lower that doesn't mean, we're always looking at it maybe it could be a handful of branches down the road that we could you could close but I. We are looking at the same metrics, but they just pan out differently in both Puerto Rico and Florida.

Great and just kind of question currently so I think in your prepared remarks, you you touched on the.

The capital action plans will be addressed in the spring of 2021, right now, but as we all know that kinda reserves the largest banks in suspended share repurchase programs through the end of the year.

Is that suspension remains in place through let's say June of next year.

I didn't foods your guidance decision on your capital action plans.

Do we have another buyback for example.

Well I mean, what we're going to be by the end of the year when the fed comments on the sea CCAR Resubmission of the largest banks were going to get a lot more information on how they're thinking about how about banks and capital plans and dividends and share repurchases. So we'll add that to our analysis on.

Okay, and how we structure our discussions with them there are.

Increasingly there is a large well well do the restriction is there I'm very clear for the largest banks gradually increasing number of banks smaller banks that are ripe reinstituted or buybacks, an increasing number of banks over 10 billion in the beginning they were all under 10 billion in assets no significant number of banks over 10 billion.

And how is it putting it on and while the fed has been very clear that they want to be conservative on bank capital. They've also stated they intend to continue to make the kid the fishes on a bank like bank basis. So you know the <unk> at the end of the day No bank seen our profit range that I know Uh huh.

Tested that intent.

And with them the information, we'll gain between now and year end, we'll try to make an intelligent judgment of what makes sense. Obviously, we have a very strong capital position.

And and that's starting point will be reflected in our discussions with them.

Great. Thank you everyone.

Thanks.

Again, if you have a question. Please press Star then one.

The next question comes from Glenmont off from Keefe Bruyette <unk> Woods. Please go ahead.

Hi, good morning, good morning learning.

We heard anecdotally from a bank on the mainland that the S.P.A. had hired about 1600 people to work on the loan forgiveness program, which I guess given the size of the program. They are going to be really busy. So what gives you confidence that the.

Bulk of forgiveness process will be substantially completed by by Fourq was 20.

Well, it's basically this is our best estimate or gas based on our our our consultation with our clients. Many our clients are.

Eager to get this done now that's not a guarantee a week. This is a new process. We've put in a portal [noise] beginning with you how fast the SBK prophecy thing.

But.

Basically based mostly on our conversations with clients and their desire to get this thing.

It up as quickly as possible.

Okay, and I guess, regardless of the timing of it would assume that you guys would be getting a pretty big check from the federal government from all these these loan forgiveness is and that we kind of increase your excess liquidity up. It would you have any plans for for kind of deploying that would you put it into the securities book or would you kind of I know some of the excess squeeze been kept.

Short term relate to the government deposits, but is this something that you might feel a little bit more comfortable kind of extending duration huh.

Okay.

I mean, we are we have already gotten some up some of that Glenn.

And it's it's a little bit lost because you're looking at variances in our investment portfolio and be more aggregate level, but we have already moved some of the cash and the.

In business, we had a shorter term treasuries to longer duration agency MBS it.

That's a lot we shifted about $3 billion that way in the third quarter.

Well, we always been in our weekly Aldo Alco Committee with Google compute to reassess.

We should extend more of our cash and does decisions are made dynamically.

The other question, we've done some of it already and ER and we will continue to reassess it we should do more moving forward.

We have to be attentive as as we mentioned I think that's why I mentioned.

Yeah for the government of Puerto Rico has a lot of money in their account related to the cares Act and and again theoretically if does not use by year end. It is supposed to be given back some way no. The congressmen legislation to extend that a lot of things may change between now and then but.

But the <unk> there.

There could be significant outflows that happen now we have to be attentive to the flow, but bottom line. Yes. We are we dynamically reassess our investment portfolio, yes, we actually have extended maturity already during the third quarter, a four significant amount and we will compare to consider it in the fourth quarter.

Okay, great. Thanks, and just remind me again, where we have the possibility of a change of administrations here on the mainland and one of the candidates plant could be an increase in the corporate tax rate and just remind me again that increase in the rate would only be applicable to your mainland sourced.

Income, but yes that is correct or not what you have to keep us keep an eye on is that our legislators in Puerto Rico tend to be a little bit of a copy cats. So yeah.

Sometimes when the rates go up and if they want to follow suit, but but as it stands now the that is correct. The change here Pell, Texas would affect only the income Hey, Ari U.S. based not mainland U.S racing, but keep in mind that our corporate tax rate in Puerto Rico are higher so I.

I don't I don't think they'll they'll go down that route here.

I would hope not he went almost got confiscatory at some point over 37.5% you have higher rates already if weather is good [laughter].

Okay. Thank you for taking my questions. Thanks, Glenn.

The next question is a follow up from Gerard Cassidy from RBC. Please go ahead.

Thank you.

Last question gross I'm on your slide 10, which is very helpful and looking at capital today.

Your defense losses.

Hi, just had the nine year when you money updating these past 2017 number two more updated number.

Yeah, I mean, the we refer to that one simply because there is a lots one we published Gerard we actually have done thief, a threat severely adverse stress test every year since its 10-K 17, it's just that we haven't published it.

And we're in the process of doing it right now for this year as well because we're not required to punish is we haven't published that but you know one of the reasons. We felt okay with using this number is that while we haven't probably to tell the later ones there in the <unk> in the right ballpark. So <unk>. So you can you can use.

That number a work with some level of comfort.

No problem.

Thank you.

Thanks.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Agnes you algorithms for any closing remarks.

Thank you for joining us today and for your questions.

Please continue to focus on your health and begin to be diligent about your safety.

Look forward to share our results for the fourth quarter and the full year in January take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

[noise] [noise].

[music].