Popular Inc (BPOP) 2020 Q3 法說會逐字稿

Good day, and welcome to the Popular Inc. Third Quarter conference Call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Paul Cardillo, Investor Relations Officer. Please go ahead.

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session.

Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn it over to our CEO, Ignacio Alvarez.

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

We generated $168 million earnings in the third quarter, notwithstanding the uncertain economic environment. These results reflect a rebound in economic activity experienced during the period due to further opening 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 3 for an update on the current business environment in Puerto Rico. Following a strict lockdown between mid-March and late May that helped curtail the initial spread of the pandemic, many of the restrictions that were in placed were gradually loosened. We have seen a revival of business activity as the economy reopened. Economic trends and customer activity continue to improve. Employment trends, which deteriorated rapidly in April, are still down significantly compared to last year but have also begun to improve.

Total nonfarm employment has increased by 7% since April, but remains 8% below September 2019 level. New auto sales have rebounded sharply, and in the third quarter were up 18% year-over-year. While demand for automobiles remain strong, lack of inventory may impact sales going forward. Cement sales increased 29% in the third quarter, both sequentially and as compared to the year ago period. Debit and credit card sales increased by 32% compared to the second quarter of 2020 and by 27% versus last year's third quarter. Year-to-date sales were up 7% compared to 2019.

Similarly, BPPR's third quarter mortgage originations have rebounded, increasing by 69% compared to the third quarter of 2019.

Tourism is improving slowly but it continues to lack other areas of the local economy. Hotel occupancy bottomed at 8.5%. However, as restrictions were lifted, occupancy levels increased to 43% to the end of July. While airport traffic has been gradually increasing, arrivals during the month of September were still 48% lower than the previous year.

Please turn to Slide 4. We are offering full banking services at 94% of our branches. As a management team, we continue to take measures to ensure the soundness of our operations and the safety of our employees and customers. We are offering alternative work arrangements for a significant portion of our employee base. We have further strengthened our return to work protocol to ensure a safe transition back to on-premise activity when possible, which we currently plan will be no earlier than January 2021.

During the quarter, we paid a second special bonus to our branch employees in recognition of the unique challenges they face during this period. We are also focused on supporting our customers in this uncertain environment. During the initial period of pandemic, we offered payment relief to our retail and commercial customers and continue to work with those clients who still need help.

With respect to the PPP program, we have deployed an online platform for customers to request loan forgiveness. 86% of the total loans originated are below $50,000, qualifying them for the simplified process. We expect that the forgiveness process will be substantially completed during the fourth quarter of 2020.

We continue to have more than 1 million monthly active users on our Mi Banco digital platform in Puerto Rico. We captured 70% of deposits in the third quarter through digital channels. Year-to-date, 66% of our deposits have been captured digitally compared to 52% in 2019. Finally, and most impressively, given Puerto Rico's recent demographic trends, our customer base continues to grow, increasing by 41,000 in the third quarter to 1.9 million customers.

Please turn to Slide 5. Our quarterly net income of $168 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 as the economic outlook is still uncertain. In the quarter, we completed a series of bulk mortgage repurchase transactions from our GSE servicing portfolio, totaling $808 million. These transactions, along with a shift of a portion of our short-term investments to agency mortgage-backed securities, were excluded in order to deploy liquidity to increase interest income and improve our margins.

Please turn to Slide 6. Before turning it over to Carlos, I want to comment on 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 closed. We anticipate the closure of these locations to be completed by the end of January. These actions will impact 83 employees who will be receiving severance and transition assistance.

We remain committed to the New York Metro market and will maintain our presence in most of the current communities, providing critical [accessibilities] to financial products and services that our customers rely on. 8 of the branches we are closing are within 2 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, branch proximity, customer needs and accessibility of supplemental services. The branch realignment will allow us to reduce operating expenses, leverage resources to focus on small and medium-size businesses and enhance our digital offering to support changing customer behaviors.

As a result of these actions, we expect to record a pretax charge of approximately $25 million, with $23 million to be reflected in the fourth quarter of 2020. Going forward, we estimate annual savings will be $13 million with an expected payback period of approximately 2 years. We are confident that our branch repositioning strategy will strengthen our operations in New York as we continue 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 Carlos.

Thank you, Ignacio. Good morning.

Please turn to Slide 7. As usual, additional information is provided in the appendix of the slide deck. Today's earnings press release details variances from the second quarter.

Net interest income for the third quarter was $461 million, an increase of $10 million from the second quarter. Noninterest income increased by $16.7 million to $128.8 million in Q3, driven by the reinstatement during the quarter of 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, mainly in Puerto Rico, due to higher transaction volumes. And other 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 of $5.3 million to indemnity reserves on previously sold loans mainly due to reserve release that's related to the mortgage loan repurchases. These items were partially offset by lower mortgage banking income by $13.3 million, primarily driven by a negative MSR adjustment and the impact of the bulk loan repurchases. While not yet there, we continue to move towards our historical normalized noninterest income run rate of $135 million to $140 million per quarter.

In the short term, we may settle at a slightly lower quarterly levels as high deposit balances continue to reduce some deposit-related fees. Provision expense for the quarter was $19.4 million, which is $44 million lower than in Q2. Lidio will 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 cost. We had a higher volume-related -- we had higher volume-related expenses in 2 categories: processing and technology, by $5.5 million; as well as card processing and interchange by $1.9 million.

Equipment expenses increased by $3.2 million, mainly due to higher amortization expense. We also had an increase in reserves for operational losses of $4.7 million and a higher provision for unused commitments by $4.4 million. These increases were partially offset by lower audit and tax fees as well as lower write-downs of foreclosed auto and 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 targeted $55 million in savings during 2020. And project our average quarterly expenses for the year to be around $365 million, lower than our prior guidance of $369 million per quarter and lower than our original expense guidance for the year of $383 million per quarter.

In Q4, we are forecasting operating expenses of approximately $378 million, excluding the costs 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 8. Before I move to net interest income and margin dynamics, I'd like to discuss in more detail the bulk mortgage repurchase transactions that were completed in Q3. Delinquencies and deferrals have increased the population of service loans eligible for repurchase. In Q3, we executed $808 million of bulk mortgage repurchases from our GSE 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 $10.9 million during the quarter. The impact is reflected in various lines of our income statement, as noted in the slide. The most significant portion of the charge is related to the MSR asset as well as interest payments we had advanced to the Ginnie Mae pools that we do not expect to collect under the FHA guarantee. These expenses were offset by servicing income for these loans and the release of the indemnity recourse reserve for the acquired Fannie Mae loans. Based on a net yield of 3.5% for the repurchase assets, we expect to recover the expense in less than 6 months through net interest income.

Please turn to Slide 9. The net interest income for the quarter was $461 million, an increase of $10 million from Q2. The 3 primary drivers of this increase were increased balances in the investment portfolio primarily driven by higher levels of deposits in Puerto Rico, income recognized from loans issued under the PPP program by $10.3 million, $4 billion higher than Q2 and lower deposit costs, primarily at Popular Bank.

We saw deposit 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 deposits, not public deposits. About $700 million of this increase was related to our bulk mortgage repurchases and left the bank early in the fourth quarter. NIM decreased by 19 basis points to 3.06% in Q3.

On a taxable equivalent basis, net interim margin was 3.37%, a decrease of 19 basis points. Loan yields and deposit cost dropped by similar amounts, 8 basis points and 7 basis points, respectively. Just like in Q2, the lower NIM is related to asset mix, the increase in average deposits, which are invested mostly in overnight Fed Funds and short-term U.S. treasuries and higher average balances in PPP loans of $1.4 billion compared to $913 million in Q2.

For the fourth quarter, NIM will be impacted by the speed at which PPP loans are forgiven and also by additional changes in our asset mix. The remaining unamortized portion of the fees related to PPP loans is approximately $41 million.

As of the end of the third quarter, Puerto Rico public deposits were roughly $14.5 billion, about $500 million higher than in Q2. We continue to expect public deposits to come down over the mid to long term. Under the CARES Act, for example, assistance funds provided to the Commonwealth of Puerto Rico must be used by year-end. However, the potential for assistance -- assist additional COVID-related federal assistance could increase balances 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 loans, partially offset by lower levels of higher-yielding consumer balances at BPPR. Ending balances also increased by a portion of the mortgage repurchases completed at the end of the quarter.

In Q3, we continue to see strong demand in mortgage and auto loans and leases, while balances in our personal loan and credit card portfolios continue 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 balances to move lower due to PPP forgiveness as well as limited demand, fueled by unprecedented levels of client liquidity.

Please turn to Slide 10. Our capital levels remain strong relative to mainland peers as well as with respect to well-capitalized regulatory requirements. Our common equity Tier 1 ratio in Q3 was 15.9%, up 20 basis points from Q2. Annual book value increased by $1.56 per share to $61.69. This increase was driven by our quarterly net income, offset somewhat by dividend payments. In this slide, we repeat an update in calculation of our pro forma capital ratios, applying the loss ratio of our last published DFAST Severely Adverse Stress Test from 2017. In this simulation, we still end up with a very strong CET1 ratio of 14.7%. This calculation is a point-in-time estimate, not a full-blown stress test. So it does not include the 9 quarters of future PPNR that is difficult on a full stress test.

For the third quarter 2020, and our allowance for credit losses represents 52% on of this DFAST loss estimate. Our return on average tangible equity was 14.2%.

We will continue to pursue our target of double-digit return on tangible equity. As discussed last quarter, we expect to engage with our regulators about our capital plan early next year and continue to target being able to make capital-related announcements in April of 2021.

With that, I turn the call over to Lidio.

Thank you, Carlos, and good morning.

Overall, our credit performance remained stable during the third quarter of 2020, aided by payment deferrals, government stimulus and the resumption of collection efforts. Given current uncertainties, we're monitoring the impact of the pandemic of our entire loan portfolio. Yet certain commercial segments are more sensitive, are highlighted on Slide #11.

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 multifamily. The average original loan-to-value in Puerto Rico is 78%, while in the U.S. it's 72%. Office space and multifamily occupancy and collection have remained stable through the pandemic.

To date, there have been a moderate number of downgrades in the segments. The utilization of deferrals mainly relates to customer strategy to strengthen liquidity. Of the customers that have accident relief, 98% of accounts are current. In the health care facility 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 have supported the industry operations. Today, there have been a limited number of deferral requests and downgrades in this portfolio.

Within nonessential retail, the shelter in place orders curtailed activity of this segment. As a result, we have experienced a significant number of deferrals and downgrades, most within [DFAST-rated] category. Of the customers that have active deferrals, 99% of accounts are current. The average original loan-to-value for this segment is 59%.

In general, based on borrower surveys conducted in the second quarter, occupancy has remained stable compared to pre-COVID levels. Strip malls reported an 86% occupancy, 83% collection rate, while shopping centers reported an 86% occupancy and a 64% collection rate.

Regarding auto retail in Puerto Rico, this activity was subject to a lockdown order and sales decreased significantly in the second quarter. Upon the authorization to resume sales, the segment reported strong sales during the third 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-stage of completion, have low loan to cost, an average original loan-to-value of 75% and nominal exposure to higher-end residential. To date, there have been a limited number of deferral requests and downgrades in this portfolio.

During the quarter, inflow of NPLs increased by $31 million, driven by 2 relationships: one in Puerto Rico; and one in New York. Both relationship exhibited difficulties prior to the COVID crisis and the risk profile continued to deteriorate, which prompted our decision to place them in nonaccrual status.

Our hotel exposure is mostly in Puerto Rico. At the end of the quarter, our total exposure stood at $372 million with an average original loan-to-value of 69%. This segment has experienced elevated levels of stress due to limited business and leisure travel. Most of the original deferrals expire in the third quarter. But given the challenges of the industry, we foresee additional extensions to support our borrowers. During the quarter, we downgraded $52 million of accounts in this segment after having downgraded $269 million in the second quarter.

Restaurant balances were $342 million at quarter end. This segment has experienced stress given by the shelter in place order. The majority of our restaurant borrowers, particularly quick service or fast food, have continued to operate through delivery and carry out. In the Governor's latest lockdown order, restaurants can operate at 55% capacity. Once the economy fully reopens, we expect this segment to rebound at a faster pace, especially the quick service restaurants.

Of the customers that have [exited] deferrals, 98% of accounts are current. To date, this segment has had a significant number of deferrals and downgrades, most within DFAST category.

To finalize, let me also discuss the segment to which we are not exposed to. We do not have a material credit exposure to energy, airlines or shared national credits.

Turning to Slide #12. We have provided relief to our customer through loan modifications, consisting of deferrals, forbearance or extension. We granted assistance to approximately 131,000 customer accounts, representing $8.6 billion of loans and 29% of total balances. 95% of customers have exited relief, and approximately 95% of these accounts remain current. Although encouraged by these trends, most of the deferrals, which ended in the third quarter, impacted delinquency levels favorably. We remain attentive to delinquency trends and expect their visibility next quarter.

Please turn to Page #13 to discuss credit metrics. Nonperforming assets decreased by $42 million to $839 million mainly driven by an NPL decrease of $26 million, coupled with another decrease of $13 million. The NPL decrease was driven by a reduction of $33 million in Puerto Rico, due to lower mortgage by $27 million, auto by $14 million and commercial by $12 million, offset in part by the $22 million construction NPL inflow previously mentioned.

In the U.S., NPLs increased by $7 million, driven by the $9 million construction relationship mentioned earlier. The order decrease was driven by the resumption of debt activity and the suspension of foreclosure activity.

At the end of the quarter, the ratio of NPLs to total loans was 2.5% compared to 2.6% in the previous quarter.

Please turn to Slide #14 to discuss NPL inflows. Compared to the second quarter, NPL inflows, excluding consumer loans, increased by $6 million, driven by an increase of $19 million in the U.S. due to the previously mentioned construction loan, coupled with an $11 million relationship that mature and reach 90 days while in the renewal process.

The loan renewal was completed during the quarter, and the loan was returned to accrual status before the quarter ended. The increase was offset in part by a decrease of $14 million in Puerto Rico, driven by a decrease of $41 million in mortgage, offset in part by an increase in the commercial construction inflows of $28 million due to the construction relationship mentioned earlier.

Turning to Slide #15. Net charge-offs amounted to $17 million or an annualized 24 basis points compared to $65 million or 92 basis points in the previous quarter. In Puerto Rico, net charge-off decreased by $48 million, mainly due to lower consumer by $36 million, mostly related to auto loans. The government stimulus, deferrals granted and the resumption of collection activity has had a significant impact in the delinquency of our portfolios.

About 70% of our credit clients in Puerto Rico also have deposit relationships at the bank. On average, these clients have increased our liquidity by 20% since the pandemic began. We do not expect to see changes in net charge-off onto the first half of next year. Everything else being equal, given the season methodology, net charge-offs are already -- are reflected in our reserve, and thus, the P&L impact has been accounted for.

The corporation allowance for credit losses increased slightly by $7 million to $926 million, driven mainly by an increase in the U.S. CRE portfolio. The ratio of allowance for credit losses to loans held in portfolio remained flat at 3.15% in the third quarter. The ratio of allowance for credit losses to NPLs was 126% compared to 121% in the prior quarter. The provision for credit losses decreased by $44 million to $19 million due to significantly lower net charge-offs. The provision to net charge-off ratio was 115% compared to 97% in the previous quarter.

Please turn to Slide 16 to discuss the allowance for credit losses. We adopted CECL on January 1, 2020. Since adoption, allowance for credit losses related to loans has increased by $440 million or 92%, driven by the day 1 adoption impact, changes to macroeconomic scenarios and loan portfolio changes. At the end of the third quarter, the allowance for credit losses increased by $7 million compared to the prior quarter.

Variances were driven by economic outlook, changes to portfolio balances and portfolio credit quality. While we use single economic scenarios in Q1 and Q2, given that one economic outlook is inherently uncertain, we enhanced our process for the third quarter and introduced probability weights of different scenarios in our estimation. We combine Moody's Analytics' September's S1 optimistic, baseline and S3 pessimistic scenarios. Probability weights were applied to each scenario outputs as part of the ACL estimation process. When compared to the second quarter baseline scenario, the third quarter baseline assumes a more favorable increase in economic activity from the first quarter of 2020 through the second quarter of 2021 with continued growth thereafter.

Among the 3 scenarios built in the ACL, the baseline scenario defines the highest probability, followed by the S3 scenario, given the uncertainties in the economic outlook and downside risk. The S1 scenario is considered but carries the lowest weight.

The implementation of probability weights and changes in macroeconomic scenarios caused the ACL to increase by $31 million. This increase was offset in part by the net charge off activity and portfolio changes.

To summarize, our loan portfolio exhibited stable credit quality metrics during the third quarter, aided by the payment deferrals government stimulus and the resumption of collection efforts. However, as the effects of the pandemic continue to evolve and remain fluid, the full extent of economic disruption is uncertain.

We 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.

Thank you, Lidio and Carlos, for your update. While the economic scenario remains uncertain, we generated $168 million in earnings in the third quarter, reflecting 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 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 marked Popular's 127th anniversary. And despite the current challenges, we have much to celebrate. We are blessed to be part of a team of talented and dedicated colleagues who have met 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 1 of only 7 banks nationwide to receive the 2020 Community Commitment 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 questions.

(Operator Instructions)

The first question is from Alex Twerdahl from Piper Sandler.

First off, I wanted to circle back to something you said, Lidio, in your prepared remarks. I think you said that you didn't expect net charge-offs to -- and the level of net charge-offs to change meaningfully into the middle of next year. I was wondering, one, if I heard that correctly; and two, if based on the loans that are coming off deferral and collection efforts and things like that, what gives you the confidence that the net charge-off levels will remain low and if we should extrapolate that into progression of the provision over the next couple of quarters as well?

I mentioned the changes were meaningful. I mentioned change. We expect changes to net charge-off in 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 and significantly low level of charge-offs in the third quarter. So you can try to use those guideposts onto the first half of next year.

Okay. And then I noticed that mortgage activity, you said mortgage activity was pretty strong, and we've seen some reports recently on high-end real estate and Puerto Rico rebounding pretty meaningfully year-over-year. I was wondering if you can give us some commentary on what you're seeing in the housing market, just in general in Puerto Rico, if it is rebounding and strong, the way we see state side?

Yes. And this is exactly -- yes, in general, it is rebounding. I mean, obviously, you've read about the high end of [Dorado and Bahia]. I made clear they are very strong, but we have seen a recovery across many of the different areas and especially in the metropolitan area. So generally, we're seeing demand up for housing. There hasn't been a lot of supply, new supply in the recent years. So that is, it is increasing. We've seen it in our operations. The originations are way up. Applications are way up. We've seen it in our OREO sales.

So we're definitely seeing improvement in the residential market, especially in the metro area, especially in the middle and higher income neighborhoods, but really across the board, but I would say mostly in the metropolitan area.

All right. That's helpful. And then just a final question for me. Just Carlos, as we think about the moving parts in NII, obviously, the NIM is going to be pretty volatile with PPP 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 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 providing a little bit more juice to NII?

Yes. I mean, when you look at the margin, actually, this quarter was not too different from last quarter, in that overall, the totality of the vast majority of our reduction in margin was really linked to asset mix as opposed to rates or anything else.

With respect to deposit cost, we have -- there's 2 answers to that question, Alex. When you look at Puerto Rico where we have interest-bearing deposit costs of 24 basis points, total deposit cost of 18 basis points, that's our best-in-class. And while there's always room, and we will continue to look at opportunities, there is not an immense amount of room to continue to lower deposit costs in Puerto Rico. We have had more room in the States, and that's where a lot of the deposit cost drop happened this quarter. We dropped around 20 basis points in total deposit cost in the U.S. this quarter. So we will continue to pursue the effort in the U.S. So is there opportunity? Yes, but the opportunity is 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 were some rumors that Evertec was potentially exploring the sale. And that's obviously a pretty big unrealized 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 could return?

Yes. Again, I wouldn't want to speculate what's going to happen to Evertec. But obviously, we have more capital, that would come into our capital plan, and we'd look at it. I wouldn't necessarily assume that any onetime capital shot we get from any sort if fed will necessary let us distribute it out immediately. So that's about what I think I can say on that.

The next question comes from Brock Vandervliet from USB (sic) [UBS].

Just a big picture question first. Anything new in terms of population growth trends on the island?

No. We haven't seen anything. The most recent -- the most recent migration trend showed that the number of people leaving the island have decreased dramatically. I don't know how much that is tied to the pandemic. Obviously, airport traffic in general is down. Definitely, people -- to the extent that economic opportunities in the state are great right now, it's less of an incentive for people to leave and also the federal stimulus was very generous. So it's natural to see why that decreased. Those statistics lag a little bit. And there hasn't been much movement on new birth, which is obviously something that's very important, too. I mean our bravery has gone down as in many parts of the world. But that is something we haven't been able to change very much. So I think in general, it's a positive, less migration. But still, the birth rate is generally low.

And despite the sort of flat -- by the way, if you know, compared to the last 10 years, flat population is pretty good for us. But it's always important to not forget that even though we have flat, roughly flat population rate probably for the last 1.5 years or 2, we continue to [serve] our clients.

Yes. And I think one thing people don't realize that even with the flat population scenario, home -- households do increase. Obviously, not at the same rate. So independent household, their children go out, they buy their own homes. And we're seeing that in Puerto Rico. We've talked about it earlier. There is a healthy demand now for mortgages, but in -- as opposed to in the States where maybe 70-30 refinance, in Puerto Rico we're still about 50-50.

So this is how strong demand for homes. There hasn't been a lot of supply. So even if the household increase slowly, that's creating good momentum 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 and the mix between Puerto Rico and U.S. and average loan to cost?

Our total -- the loan book is $936 million, of which the majority is in the U.S., $740 million -- $740 million is in the U.S. So the rest will be in Puerto Rico. Loan to cost, I mean, I didn't provide that in my prepared remarks, but we'll be in the 6. It starts with a 6, thereabouts.

The next question comes from Gerard Cassidy from RBC.

Can you give us an update? I think the Trump administration came out in September and announced a $13 billion aid package for Puerto Rico from Hurricane Maria. Is that money in addition to what was promised Puerto Rico when the hurricane hit about 3 years ago? Or is this just part of that original plan? And 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 dispersed. So that the difference is there to be dispersed.

Also independent of the hurricane relief, we have the CARES Act relief for the COVID, which was about $13.9 billion. And this is -- these estimates are not as strong as the first ones that we get from the website, but we estimate about $9.2 billion of that has been spent.

So there's about $50 billion. That number you heard is about $50 billion of federal aid left to be spent. Now I believe -- I don't believe the pace of this picking up. As you saw, they reached an agreement with the federal government for the restoration of the electrical system, which is the single biggest ticket item out there. And it's progressing, albeit slowly, but it's progressing faster than it was. These monies, especially hurricane relief money, will not be spent in a year, 2 years, 3 years, even 4 years. I mean, it may take 7, 8, 10 years to spend this money. So it'll be there for a while.

The COVID relief is a bit different. A lot of that was supposed to be spent by December 31. So we'll see what happens with that. Either we'll rush to spend it or we lose some of it or gets extended. So that's -- obviously, that -- there's a lot of money to be spent there. And that's ex, if there's a federal stimulus package for the whole country, and if we get [2 year] more or less equally to the States as we were in the last one, we could expect there will be a lot more money come in the way also.

And could you quickly -- what's the gross state product of Puerto Rico, just to put it in context because, obviously, it's an enormous amount of money that will put a support to the economy over a multiyear period. Do you have about -- what the gross state product is of Puerto Rico?

Yes. The gross domestic product, we exclude pharmaceuticals, and that is about $70 billion.

Great. Okay. And you mentioned in your prepared remarks that cement sales were quite strong. Can you kind of just share with us, is it 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 related?

I think there's a little -- I want to give you a sort of a political answer. It's a little bit of everything. There are, obviously, some of the FEMA money is beginning to come out for infrastructure projects and municipal projects. But you're also seeing an immense amount of home improvement in Puerto Rico as you are in the States. As people couldn't get out and they couldn't travel, people are fixing up their homes, they're building pools, they're doing things that require cement. So -- and you're seeing buildings being rebuilt after the hurricanes, some from insurance, believe it or not, that came out a year ago.

So for example, the Ritz Hotel in Isla Verde has just announced that they had settled with the insurance companies not too many months ago. It hadn't even begun to rebuild. So we really have a little bit of everything. It's just not government. There is a lot of competitors, a lot of home rebuilding going on in Puerto Rico right now. Home improvement.

Very good. And then shifting over to comments about the branch closures in the 5 boroughs of New York. Can you share with us when the COVID problem accelerate plans to close these branches? And what metrics do you use to determine to close these branches? Was it foot traffic? I know you mentioned lower profitability, but one metric that you guys focused on. And could you use any of this type of an analysis in either Florida or even on the island in Puerto Rico to make it more efficient?

Well, we looked at a number of metrics. Like you said, foot traffic, the level of deposits, probability, sales in those branches. We looked at all those. And basically, these were our most underperforming branches. So we really -- in the end, we felt that they probably subtracted more than they added to the retail, the strength of the retail franchise. And so it was a very detailed analysis. We do this kind of analysis for all our branches. We don't see -- in Florida, we have only 11 branches and all our branches in Florida are profitable. So we don't really see much there.

And in Puerto Rico, the same thing. I mean, in Puerto Rico, we -- our branches are a source of strength. They are large deposit gatherers. But even more importantly, they are large centers of sales for our consumer loan products. People don't recognize that the percentage of branches in Puerto Rico compared to the United States is much lower.

In the United States, the most recent numbers I saw is that we had 33 branches for every 10,000 inhabitants. In Puerto Rico, that number is 11. In Puerto Rico since 2010 with the consolidation, the population for Puerto Rico has decreased by 7%. The number of branches have decreased by 33%. So our branches still in Puerto Rico have a lot of transactional activity. They're sales generators. And they're very low-cost to operate compared to the New York market. Our real estate costs are very low and even our personnel costs are lower. That's not to mean we're always looking, and maybe there could be a handful of branches down the road that we could close. But we are looking at the same metrics, but they just pan out differently in both Puerto Rico and Florida.

Great. And just final question, Carlos, I think in your prepared remarks, you touched on the capital action plans will be addressed in the spring of 2021. Right now, as we all know, the Federal Reserve for the largest banks have suspended share repurchase programs through the end of the year. If that suspension remains in place through, let's say, June of next year, would that influence your guys' decision on your capital action plans of doing another buyback, for example?

Well, I mean, we're going to -- by the end of the year, when the Fed comments on the CCAR resubmission of the largest banks, we're going to get a lot more information on how the Fed is thinking about banks and capital plans and dividends and share repurchases. So we'll add that to our analysis and how we structure our discussions with them. There are increasingly, there is -- while the restriction is there and very clear for the largest banks, there's an increasing number of banks, smaller banks that have reinstituted their buybacks and an increasing number of banks over $10 billion.

In the beginning, they were all under $10 billion in assets. Now a significant number of banks over $10 billion are [instituting] it. And while the Fed has been very clear that they want to be conservative on bank capital, they've also stated the intent to continue to make the key decisions on a bank-by-bank basis.

So at the end of the day, no banks in our asset range that I know of have tested that intent. And with 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 that starting point will be reflected in our discussions with them.

(Operator Instructions)

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

We heard anecdotally from a bank on the mainland that the SBA had hired about 1,600 people to work on the loan forgiveness program, which, I guess, given the size of the program, that they're going to be really busy. So what gives you confidence that the bulk of the forgiveness process will be substantially completed by 4Q '20?

Well, it's basically, that is our best estimate or guess based on our consultation with our clients. Many of our clients are eager to get this done. Now that's not a guarantee. We -- this is a new process. We've put it in a portal. It's beginning. And we'll see how fast the SBA can process these things. But it was basically based mostly on our conversations with clients and their desire to get this thing backed up as quickly as possible.

Okay. And I guess, regardless of the timing, I would assume that you guys would be getting a pretty big check from the federal government from all these loan forgivenesses and that would kind of increase your excess liquidity. Would you have any plans for kind of deploying that? Would you put into the securities book? Or would you kind of -- I know some of the excess liquidity has been kept short-term related to the government deposits, but is this something that you might feel a little bit more comfortable kind of extending duration on?

Okay. I'll let you answer that.

Yes. I mean, we have already done some of that, Glen, and it's a little bit lost because you're looking at variances in our investment portfolio in more aggregate level. But we have already moved some of the cash and the investments we had in shorter-term treasuries to longer-duration agency MBSs. That -- we shifted about $3 billion that way in the third quarter. We always, in our weekly ALCO Committee, we continue to reassess. We should extend more of our cash, and those decisions are made dynamically.

But the answer to your question, we've done some of that already, and we will continue to reassess if we should do more moving forward. And we have to be attentive as we mentioned -- As Ignacio mentioned, the government of Puerto Rico has a lot of money in their accounts related to the CARES Act. And again, theoretically, if that is not used by year-end, it is supposed to be given back some way. Now the Congress may legislate to extend that. A lot of things may change between now and then. But there could be significant outflows that happen and we have to be attentive to that as well. But bottom line, yes, we are -- we dynamically reassess our investment portfolio. Yes, we actually have extended maturity already during the third quarter for a significant amount, and we will continue to consider it in the fourth quarter.

Okay. Great. And just remind me again, we're -- we have the possibility of a change of administrations here on the mainland and one of the candidate's plan 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?

Yes. That is correct. What you have to keep an eye on is that our legislators in Puerto Rico tend to be a little bit of copy cats. So sometimes when the rates go up in the States, they want to follow suit. But as it stands now, the -- that is correct. The change in federal taxes will affect only the income in or U.S.-based -- mainland U.S. based income.

But keep in mind that our corporate tax rates in Puerto Rico are higher. So I don't think they'll go down that road here.

I would hope not. It would almost get confiscatory at some point, right, over 37.5%.

Yes. Higher rate really in Puerto Rico. So...

The next question is a follow-up from Gerard Cassidy from RBC.

One last question, Carlos. On your Slide 10, which is very helpful in looking at capital relative to your DFAST losses. You guys have an idea when you may update the DFAST 2017 number to a more updated number?

Yes. I mean we referred to that one simply because it is the last one we published, Gerard. We actually have done DFAST stress -- severely adverse stress test every year since 2017. 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 publish this, we haven't published it. But one of the reasons we felt okay with using this number is that while we haven't [posted details] on the later ones, they're in the right ballpark. So you can use that number with some level of comfort.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Ignacio Alvarez for any closing remarks.

Thank you for joining us today and for your questions. Please continue focus on the health and be diligent about your safety. We look forward to share our results for the fourth quarter and the full year in January. Take care.

The conference has now concluded. Thanks for attending today's presentation. You may now disconnect.