Popular, Inc. (BPOP) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Popular, Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to the Investor Relations Officer at Popular, Brett Scheiner. Please go ahead.

Good morning, and thank you for joining us on today's call. Today I am joined by: our CEO, Ignacio Alvarez; our CFO Carlos Vázquez; and our CRO, Lidio Soriano. They will review our third quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team. 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, our financial quarterly release and supplements. You may find today's press release and our SEC filings on our web page at popular.com. Please turn to the Slide 2 as I turn the call over to Mr. Ignacio Alvarez.

Good morning, and thank you for joining the call. As all of you know, last month, Puerto Rico was impacted by 2 major hurricanes, Irma and Maria. While Irma caused significant damage to the Virgin Islands and interrupted our business activity for a short time in Florida and Puerto Rico, Maria's impact on Puerto Rico was extensive. After making landfall on September 20th, all of the island's 3.5 million residents were without power and the majority were left without running water. While Puerto Rico has made meaningful progress in the gasoline and diesel supply chain, highway infrastructure and water service, we are still experiencing challenges in electricity and telecommunication services. Electric power generation is at approximately 30% of normal production, up from 10% 2 weeks ago. The long-term economic impact of the storm will be highly dependent on the pace and restoration of electricity. As electric power is restored, other important services such as telecommunication should be restored. The Governor of Puerto Rico has set a goal of near restoration of power across the island by year end, building on incremental progress in the last few weeks. While the impact of the storm was devastating on many parts -- rural parts of the island and on the electric and telecommunication infrastructure, generally speaking, concrete structures in and around urban areas fared significantly better. Key transportation infrastructure, including most state roads and highways, the largest ports and major airports are operating at near-normal capacity. Please turn to Slide 3. At Popular, our priority immediately after the storm was ensuring the safety of our employees and our customers and improving access to cash and other essential banking services through our ATM and branch network. We are relieved that we're able to account for 100% of our workforce and can confirm no loss of life. Our facilities held up very well. Of Popular's 168 branches in Puerto Rico, only 10 sustained significant damage. None of our major operation centers, including our headquarter, sustained material physical damage. The lack of electricity and telecom services pose significant challenges as we work to restore operation. However, thanks to the efforts of our colleagues, the number of branches and ATMs in operations have increased consistently. Only one week after Maria, we had 53 branches out of 168 and 150 ATMs out of 635 up and running. All digital channels remained available throughout and after the hurricane. We currently have 137 branches and 397 ATMs in operation, covering the entire island, including the central mountain region and the island municipalities of Culebra and Vieques that were severely impacted by hurricanes. In the Virgin Islands, we are currently operating 7 out of 9 branches. In order to help clients and nonclients access their funds, we temporarily waived all ATMs fees after the storm. In addition to providing relief to our customers, we have offered principal and interest payment deferrals on consumer, residential and commercial loans and waived late payment fees. The POS network has been impacted by power and telecom service interruptions. However, there has been progress in this area and we have already seen our clients' credit and debit card transactions reach approximately 60% of pre-hurricane Maria levels. These figures are up dramatically from the week after the storm. We will be watching these metrics closely, particularly as we enter the holiday spending season. Regarding potential damage to residential real estate, securing Popular's loan portfolio, while early in our assessment, our OREO portfolio, which is a reasonable sample, did not suffer wide-spread damage. Popular does not finance wood structures and all structures in properties pledged as collateral are required to have hazard insurance, both of these significantly limiting our exposure to loss. We have already begun to see insurance company make advances to our clients. The vast majority of the largest property and casualty insurance companies operating in Puerto Rico employ a significant reinsurance in their ongoing risk management. In addition, 89% of the P&C premiums in Puerto Rico were underwritten by insurers rated A- or better by A.M. Best. Popular itself does not underwrite property and casualty insurance. As to the longer-term economic impact of the hurricanes, as I said before, the pace of power restoration is key to mitigating the economic impact of the storm. Though extensive, the physical damage is less meaningful in the long run than the economic damage caused by disruption in telecom and power services that has impaired economic activity in many sectors. We do not expect the impact of the hurricane to be uniform. Certain sectors, such as retail, will suffer from the disruption in consumer spending. However, other sectors such as food services and construction have already been able to capitalize on increased consumer demand and federal contracts, leading to new lending opportunities. While the tourism and hospitality industry comprised only approximately 7% of GDP, and our exposure to this sector is not material, it does have an impact on employment, particularly during the high-tourism season. Though a number of major hotels are closed for renovation, approximately 107 of the 155 hotels on the island are operating. With those open in the San Juan metropolitan area, operating at close to 100% capacity, mostly serving federal and disaster-relief employees. Cruise ships have also begun to arrive, albeit at a reduced volume. We are hearing anecdotal evidence of some large hotels using this period as an opportunity to rebuild and upgrade their facilities, which should have a stimulative effect over time. Also, insurance payouts and federal funds, estimated to exceed $25 million, are likely to have a stimulative impact on the economy, as they have in the period subsequent to nearly every Puerto Rico and mainland storm in the past. To date, FEMA has awarded approximately $525 million in emergency relief assistance to individuals, public corporations and municipalities. The federal funds will certainly an important factor in the recovery of Puerto Rico. While some have questions whether relief effort started soon enough, the pace of the work has definitely accelerated and we're encouraged by the support and commitment of the Federal Government. Congress has already approved a relief package that includes over $4.5 billion in loans to improve the Puerto Rico government's liquidity position. There has been much discussion of a potential population decline on the island due to accelerated out-migration as a result of the hurricane. While we anticipate in the short term, the storm will accelerate out-migration, the magnitude will depend on the pace of recovery and reconstruction efforts. Some efforts -- some offsets such as high-labor demand in previously weak sectors such as construction, should have a mitigating impact. Regarding Puerto Rico's fiscal situation, we can expect that once the island has recovered the majority of necessary services, the permissible work, alongside the Puerto Rico central government, will assess the impact of the storm on future revenue expenses and reformate the island's 10-year fiscal plan. Now let me address the highlights of the third quarter. Please turn to Slide 4. In the third quarter, Popular reported net income of $21 million compared to last quarter's net income of 900 -- of $96 million. The quarter's figures include $79 million of pretax expenses related to the impact of Hurricane Maria and $37 million of loan loss provision related to the taxi medallion loan portfolio acquired in the Doral transaction. Tangible book value is $44.79, up from $44.71 last quarter. In our U.S. business, we continue to experience strong commercial loan production. Credit metrics were impaired by the disruption of payment channels, collections and loss mitigation efforts during the last 10 days of the quarter. Our CFO, Carlos Vasquez, will provide more detail on our results. But before I turn over to him, I would like to take a moment to recognize the remarkable job our employees have done. While the operating environment on the island has been challenging, the response of our people has been truly outstanding. Our people responded heroically, managing responsibilities at Popular, while tending to a taxing situation at home. We could not have made the progress we have made without their dedication and hard work. The spirit of resiliency permeates the island and is one of the reasons we remain hopeful. Now please turn to Slide 5 as Carlos discusses our financial results in further detail.

Thank you, Ignacio, and good morning. Slide 5 presents our financial results for the third quarter. Additional information is provided on Slide 6 and in the appendix. Today's earnings press release detailed variances from the second quarter, driven by higher net interest income, offset by other captions affected by the hurricanes, mainly higher provision for loan losses, lower noninterest income and higher operating expenses. Hurricane Maria negatively affected credit and debit card processing income, ATM fees, and the pace of mortgage originations. Third quarter results also include estimates of loss through the physical damage to Popular's facilities and OREO properties. Net interest income for the third quarter was $378 million, up $4 million from the second quarter on higher loan and investment volume and an additional day in the period. Higher yields on additional cash balances were partially offset by higher deposit cost. Our net interest margin was 3.96%, down from 4.02% last quarter. The reduction is mostly due to asset mix as balances increase in our lower-yielding investment portfolio. The average yield of our $1.7 billion Westernbank loan portfolio decreased to 8.5% from 8.73% last quarter. Runoff in this portfolio has slowed considerably in recent quarters. Over time, we expect this yield to decline as a result of prepayments and loan resolutions. The cost of our interest-bearing deposits was up 3 basis points to 56 basis points on higher Puerto Rico government balances and higher balances and cost of bank deposits in the U.S. Year-to-date, deposit costs remain slightly lower than for the same period last year. We continue to deliver organic commercial loan growth in our U.S. operation, with growth of 5% in the third quarter and a continued strong pipeline. For the remainder of 2017, we anticipate slight growth in overall loan balances, with U.S. growth more than compensating for the Westernbank runoff and limited growth in Puerto Rico. While new loan originations have been limited since the storms, normal extensions of credit facilities continue, leaving loan balances in Puerto Rico likely unchanged through year-end. On the island, we have offset limited organic growth with selective loan portfolio purchases over the last few years. We will continue to pursue this acquisition strategy if attractive opportunities become available. For the third quarter, noninterest income, excluding FDIC loss-share activity, decreased by $13 million, mostly due to the effect of Hurricane Maria on fees, a write-down of our MSR, somewhat offset by last quarter's OTTI loss on our securities portfolio. FDIC loss-share expense increased $3 million on lower than expected reimbursements from the FDIC. Our Puerto Rico mortgage business originated $126 million of loans in the third quarter, down from $231 million last quarter on lower new volumes earlier in the quarter and a significant impact of September originations from hurricanes Irma and Maria. Total operating expenses for the quarter were $317 million, up $10 million on the impacts of the -- from the storm including losses on premises and equipment, recovery expenses by diesel fuel for backup electric generators and relief donations. We expect Hurricane Maria to also impact fourth quarter results, though the magnitude is highly dependent on the timing of the restoration of power and telecom services. Despite offering customer-payment deferrals, we expect no noticeable impact on net interest income during the fourth quarter. Hurricane Maria's effect on noninterest income for the fourth quarter is presently estimated to be a decline of additional $5 million to $20 million, excluding any potential impact on our MSR. We anticipate operating expenses for the fourth quarter of between $320 million and $330 million due to continued storm-related expenses. We expect to provide an update on 2018 expenses next quarter, though we do not anticipate a meaningful difference from this quarter's total expense number. Bank and holding company liquidity continued to be robust. Puerto Rico consumer and commercial deposits are up over the second quarter, as cash withdrawals have been more than offset by client deposit inflows. Since Maria hit on September 20th, our deposits in Puerto Rico have increased by over $900 million to date, most of that increase coming from private and retail clients. Holding company liquidity was $426 million at the end of the third quarter with no material change in October. For the third quarter, we recorded a tax benefit due to the impact of the hurricanes on our taxable earnings for the period. We expect our fourth quarter tax rate to be between 24% and 26%. For 2018, we expect our tax rate to be between 25% and 28%, excluding any changes to U.S. federal income tax policy. Our Puerto Rico subsidiaries have a net deferred tax asset of $688 million. We expect our operating earnings in Puerto Rico going forward to be sufficient to realize the tax benefit of this asset in its entirety. Please turn to Slide 7. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers as well as with respect to well-capitalized regulatory requirements. Our Common Equity Tier 1 ratio was essentially flat to last quarter at 16.6%, reflecting our operating earnings, offset by the payment of our quarterly common stock dividend. As we discussed last quarter, we filed our Dodd-Frank Stress Test at the end of July, the strong results of which were made public this morning. While we had targeted a January update for our 2018 capital actions, we now believe the timing of any announcement has shifted into the middle of next year. We will continue to pursue our target of a double-digit return on tangible equity while keeping capital levels that are appropriate for Popular's risk profile. With that, I turn the call over to Lidio.

Thank you, Carlos, and good morning. As discussed by Ignacio and Carlos, Hurricanes Maria and Irma have had a significant impact on our Puerto Rico operations, including the reported credit quality metrics and our assessment of the allowance for loan losses. Popular's collection efforts and ability to receive payments in the last 10 days of the quarter were limited by the effects of the storms on power and telecom services. Credit quality metrics for Puerto Rico reflect higher NPLs, higher inflows to NPL, higher provision and a larger allowance for loan losses, mainly driven by the impact of the hurricanes. In the U.S., we recorded a provision for loan losses of $37 million related to our taxi medallion portfolio, impacting the U.S. credit metrics for the quarter. Excluding the taxi medallion portfolio, acquiring the Doral transaction, asset quality in the U.S. remains strong. Please turn to Slide #8 to begin the discussion. Our current outstanding direct exposure to the Puerto Rico government, municipalities, and other instrumentalities is $482 million, decreasing by $35 million from the prior quarter. The decrease is mainly driven by principal payments received from municipalities, coupled with the sale of book value of our COFINA bond exposure, discussed last quarter. At the end of the quarter, we have no direct exposure to the Puerto Rico central government or its public corporations. Our municipality exposure consists mainly of senior priority loans to a select group of municipalities whose revenues are largely independent of the central government. In most cases, the good faith credit and unlimited taxing power of each municipalities pledged to the repayments of the loans. Our top exposure are to 4 large municipalities in the San Juan metro area; Carolina, where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico; Guaynabo, the municipality with the highest per capita income; and Bayamón, the second most populous municipalities. These municipalities comprised approximately 70% of our total exposure. Our municipal borrowers typically make 2 payments annually, interest and principal on July 1, and interest on January 1. In the interim period prior to the next payment, all property taxes for mortgaged residential and commercial properties are collected in escrow by the servicing bank and remitted to a central collection agent for the municipalities. In addition, U.S. federal grants and subsidies are being directed towards a number of the cleanup efforts undertaken by many of the municipalities. This factor should provide reasonable cushion for the additional expenses incurred by the municipalities as a result of the hurricanes. We also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee, similar to associate programs in the U.S. Turn to Slide #9 to discuss credit metrics for the quarter. Nonperforming assets, including cover loans, increased by $30 million from $758 million in the prior quarter to $788 million this quarter, driven by NPL increase of $39 million, offset in part by a reduction of $8 million in other real estate owned. The increase in NPLs was mainly driven by higher Puerto Rico mortgage NPLs of $31 million, mainly due to the effects of the hurricanes. At the end of the third quarter, the ratio of NPLs to total loans held in portfolio increased slightly to 2.5% from 2.4% in the second quarter of the year. The decrease in OREOs was mainly driven by a reduction in covered and noncovered Puerto Rico mortgage properties. Please turn to Slide 10 to discuss NPL inflows. Compared to the previous quarter, NPL inflows, excluding consumer loan, increased by $13 million, mainly driven by higher inflows in the Puerto Rico mortgage portfolio of $16 million. NPL inflows in Puerto Rico were significantly impacted by the effects of Hurricane Maria. NPL inflows in the U.S. remain at low levels of $9 million, increasing by $3 million from the prior quarter. Turning to Slide #11. Net charge-offs, excluding write-downs, amounted to $53 million or annualized 93 basis points of average loans held-in-portfolio, compared to $57 million or 101 basis points in the second quarter. Net charge-offs for the prior quarter were impacted by 2 large charge-offs. Excluding those 2 items, net charge-off increased by $40 million quarter-over-quarter, driven mainly by higher charge-offs in the Puerto Rico-consumer and mortgage portfolio due to the impact of Hurricanes Maria and Irma, coupled with higher charge-offs in our U.S. taxi medallion portfolio due to its continued deterioration. The corporation allowance for loan losses increased by $105 million from the prior quarter to $614 million, driven by a $70 million increase in allowance in Puerto Rico and by a $35 million increase in the U.S. The Puerto Rico allowance now stands at 3.2% of loans. In order to estimate the credit impact on our loan portfolio due to the storm, we use a process similar to our DFAST stress testing model, incorporating assumptions about the future performance of the Puerto Rico economy. Our additional loss estimate ranged from $70 million to $160 million with our best estimate of $122 million. At the end of the second quarter, our allowance already included $58 million related to expected weakening in the Puerto Rico economy from government austerity measures. Therefore, the additional allowance for the hurricanes was a net increase of $64 million incorporated into this quarter $70 million increase in the Puerto Rico allowance. We are unlikely to have meaningful new credit information until loan payment deferrals expire at the end of December. However, we are encouraged to see approximately 2/3 of our mortgage borrowers continue to make timely loan payments through October despite the extension offer. As we receive more customer credit information, we expect to update our models and estimates of loss. The $34 million allowance increase in the U.S. is mainly driven by higher reserve for the U.S. taxi medallion portfolio. At the end of the third quarter, our taxi medallion portfolio had a principal balance of $233 million. Net of reserve, the current value of this portfolio is $93 million, or approximately 40% of its unpaid principal balance, representing less than 1% of our total loan portfolio. 95% of the taxi portfolio is in New York City, with an average current loan volume of 260,000 per medallion. The provision for loan losses increased by $108 million quarter-over-quarter, which includes the above-mentioned addition of $64 million related to Hurricane Maria's impact on the Puerto Rico loan portfolio and the $37 million related to taxi portfolio in the U.S. To summarize, Hurricanes Maria and Irma had a significant impact on the reported Puerto Rico credit quality metrics and our assessment of the allowance for loan losses for the third quarter of 2017. In the U.S., the taxi medallion portfolio impacted the credit metrics for the region. Excluding this portfolio, asset quality in the U.S. remains strong. With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Thank you, Lidio. Up to the day when Maria struck Puerto Rico, our third quarter results reflected strong margin, healthy revenues and stable credit metrics as in previous quarters. As we discussed, Maria impacted our results for the quarter, mainly credit and some revenue expense categories due to the disruption of operations following the hurricane. Some of these factors are temporary but an event of this magnitude will undoubtedly have longer-term effects. We face serious challenges but there'll also be many opportunities. Our unique franchise in Puerto Rico places us in a strong position to successfully manage both. We have the team and the experience, and we have proven that we can deliver results even under difficult conditions. We will do so once again. Earlier this month, exactly 2 weeks after Maria made landfall in Puerto Rico, we celebrated our 124th anniversary. We usually celebrate this occasion with much fanfare. This year, we celebrated in a different, yet very meaningful fashion. We did so by lending a hand to our colleagues in need. We destined all the funds that we usually spend on this occasion and made an additional contribution to the Employee Emergency Fund to offer financial assistance to our colleagues that suffered severe losses as a result of the hurricane. This is one of the many efforts we have launched to help our employees through this difficult time. We serve our customers with dedication, despite the operational and logistical challenges we are facing, offering not only banking services but also empathy and support. We are working closely with them to assess their needs, help them rebuild and take advantage of opportunities that will surely arise. We worked in our community to mobilize quickly to help severely impacted areas through our foundation. We launched the Embracing Puerto Rico fund, seeded it with $1 million donation and have obtained additional funds, thanks to the generosity of our partners, suppliers and friends. We have also participated in many other fundraising initiatives, such as Unidos Por Puerto Rico and Somos Una Voz, as well as many relief efforts for the Virgin Islands. To date, we have contributed over $2.2 million. Our foundation in Puerto Rico, which was created almost 4 years ago, has a long-standing relations with the most effective nonprofit and community organizations in Puerto Rico. This allows us to channel the totality of the funds received where they will have the most impact. We encourage you to visit embracingpuertorico.com and to support these efforts. Following the storm, I have traveled throughout the island and while deeply saddened by the human losses and material damage brought about by the hurricane, the resilience I have witnessed within and outside Popular inspires me and gives me confidence that we will recover. We believe the current situation presents a unique opportunity to make much-needed structural reforms on the island. Modernization of our electric system is clearly one of those areas but there are many others. Our efforts should not be limited to reconstructing what we had before, but instead, we should use this opportunity to rethink and improve what was not working. As a leading financial institution on the island, Popular is ready to play an important role as we have done throughout our history in efforts to build a stronger and more sustainable Puerto Rico. We look forward to updating you on our progress over the coming months. Thank you.

[Operator Instructions] The first question will come from Alex Twerdahl of Sandler O'Neill.

First off, Lidio, I was wondering if you can give us a little bit more color on how you came up with the loss estimates of $70 million to $160 million, including what kind of inputs did you have directly from your customers? And what are the key differences between the $70 million end of the range and the $160 million end of the range?

As I explained in the prepared remarks, we use a process similar to our DFAST process, and use macroeconomic scenarios from a local economic firm to try to understand the impact of this macroeconomic factors in our portfolios. The range of assumptions is based on using -- or the range of estimates is based on using different assumptions to come up with the range.

Okay, but you can't tell us exactly what the assumptions are between the low end of the range and the high end of the range?

No. We will not provide that information.

Okay, no problem. And then I was just wondering if you guys have done any sort of analysis on direct deposit data that can maybe give us some sort of sense for how payrolls have trended on the island prior to the storm versus after the storm?

This is Ignacio. We have not obtained that data, but we will try to get it for you later, but we have not obtained that data. We don't have it on hand.

Okay. And then, just final question. I think, Carlos, you said in your prepared remarks that the capital return discussion has been put a little bit on hold, which is certainly very understandable given the state of things down in Puerto Rico. But you said, I think, put on hold until the middle of next year. Would that be along with first quarter earnings in April? Or potentially along with second quarter earnings in July?

I think what is clear is it's unlikely to be in the earnings call in January. We really do not know when it's going to be, Alex. We're guessing sometime in the middle of the year, but the thing we know the most even though it's not a certain is that, it probably will not be January. So it's going to be sometime later in the year. As far as the exact timing, as the next weeks go by, if we get a clear reading, we will communicate it.

The next question comes from Ken Zerbe of Morgan Stanley.

I guess, just in terms of the accounting impact of the storm, if I understand it right, I guess, there are certain GAAP accounting guidelines that allow you to continue booking income while sort of this -- that you're dealing with the hurricane issues. Just want to make sure that's right, but also to make -- to see like how big of an impact is that having? And again I'm just going to make up a number, but like how much of like net interest income is actually income that you're booking, but you're actually not getting, if that makes sense? Am I thinking about that right? Or what are your thoughts?

This is Jorge Garcia. Certainly, with lender's money, we've essentially agreed to a different payment term with the borrowers by deferring for 3 months. Therefore, we are [ hoping the U.S. capitol will allow to approve for ] that interest that we are earning. And we expect to, but over time we have to continue to make assessments on the borrower's ability to pay that money back, just like we do before the hurricane and make any adjustment that's there. But we do not expect that this time in the fourth quarter that we would have a significant impact on our interest income accrual rate with the exception of late fees, then other benefits that we are foregoing related to the deferral process.

I also wanted to add, as I said in my prepared remarks, we're encouraged by the fact that in October, 2/3 of our mortgage customers paid even though they had the ability to take the deferral.

Gosh. Okay. Maybe I can follow up offline for that one. In terms -- did I hear you guys right saying that you wouldn't get more information? I'm assuming this is about your total loan portfolio, that you wouldn't give more information until the end of December. Can you just clarify that? And does that also imply that -- does that mean the first quarter provision expense could see an adjustment one way or the other as you have better sense of credit losses?

I mean, I was referring to loan volumes. [ Hold on a second, let me answer that. ] But I think I also mentioned in my prepared remarks that we don't have -- we will not have a lot of visibility until December in terms of our retail customer as we -- they end the deferral in December. So that is true. However, I think commercial base, we're ongoing a one-on-one assessment on each of our customer to understand how the hurricane impacted their ability to operate, whether they have insurance and what are the future plans. So in terms of the portfolio -- commercial portfolio in Puerto Rico, we'll have -- in the fourth quarter we'll have a better indication. And retail customer, we'll have to wait until the deferral is over.

Got it. Okay, and then just on the fee line, this is the last question. But on the fee line, if I take the $5 million to $20 million off your $100 million, I'm assuming that $80 million and $95 million is the right range. If that's for fourth quarter, I guess, how quickly does that rebound higher? What do you need to have happen to actually see meaningful step-up in fee income in 2018?

Well, the first question is what that number is going to be, I mean, will depend on how quickly power and economic activity restarts. Assuming things go back normally, they go back to normal so that effect now goes away. Again while we do not know the timing of that effect going away, and cannot, because it will depend on economic activity to start.

The next question comes from Gerard Cassidy of RBC.

Lidio, maybe you could share with us, when you look at the portfolio and you kind of think about what could happen over the next 6 months, I know you mentioned how you kind of did the DFAST kind of analysis. What portfolio would you say is the most exposed if the trends that you're currently seeing don't improve dramatically in the next 6 months, is it the residential mortgage portfolio, commercial? What do you guys kind of keep an eye on a little closer? I know it's challenging in all those portfolios, but does one stand out?

I will say, we will keep an eye on all of our portfolios. But having said that, 2 of our biggest exposures are in commercial and mortgage portfolios. So I think that will be top of mind. We think that part of the evolution that's going to happen, even the potential, and I think Ignacio alluded to a little bit in his remarks today on migration is, the effect of the migrations and general terms of economy in terms of asset prices. So total portfolios that we are taking a closer look on our commercial portfolios and mortgage portfolios.

Very good. And maybe, Carlos, you talked a bit about loan growth. Even prior to the hurricanes that hit, you folks were always looking to acquire loan portfolios, you touched on that in your comments. Are you seeing more or less than not enough in terms of potential loan portfolio acquisitions at the present time?

I think we are seeing the normal opportunities that pop up now and then. As you know, Gerard, we -- historically, we have been pretty active almost every year. We had purchased some portfolios in Puerto Rico somewhere. They have not worked out for the last 1.5 years or 2, but not because we have not been trying. We have not been able to find the right portfolio at the right price for the right sellers. There is always opportunities. We keep looking. But so far nothing has come to us.

I see. And can you give us an update I think you guys at one time had a relationship with the Lending Club and you put it on hold, I believe, for a little while just to reassess that relationship. Where is that today? Is it restarted? Or where are you now with the Lending Club?

We continue to have a purchase assets from Lending Club. Actually we are pleased with the performance of the portfolio, it's behaving -- actually, with good grades, it's better than we thought, but slightly worse in the lower grades. Overall, the portfolio is performing better. We have in terms of balancing our book, it is at $360 million more or less -- approximately [$360 million].

Very good. And then finally maybe, Ignacio. The island has struggled with population growth for some time, and I know it's -- the hurricanes are not that long back. But are there any anecdotal signs of more people leaving or less people leaving the island to come to the mainland? And any color there on the movement of people?

Well, yes. I mean, we were experiencing slow but steady out migration, but the hurricane obviously has accelerated that in the short-term. I think the Governor of Florida, where most of the people are moving, said they received approximately 70 -- I think 76,000, seems like that people. So it's not anecdotal, they're, actually -- a number of people have left. The real question is going to be is, how many of those people will stay in Florida? Ho1w many will come back? How many more will leave? And that's anyone's guess. It's going to be tied again, a lot of it's going to be to power restoration, which that could affect economic activity. We're going to lose in the short-term employment in certain sectors like retail and hotels that are close. There is going to be gains in employment we're seeing already in the construction industry, which for the last decade had been very depressed. They're hiring -- engineering firms are hiring. Electrical supply companies are hiring. So you're going to see a mixed bag. I think in the short-term, migration will increase. What that number will be, we really don't have a good idea. People are saying, Hunter College published an estimate, they said in the next 2 years, 450,000 people will go. I don't know how they get to that number because it's [ pie in the sky here ], it's anecdotal. I can tell you that the message you sometimes see in the newspaper is incorrect that everyone -- that every education -- educated person is leaving the island. We have a workforce of over 7,000 people. And today only approximately 37 people in our workforce have told us that they are moving as a result of the hurricane. So there's no doubt, it's something we keep an eye on. There's no doubt, it will increase in the short-term. The long-term impact will depend on how fast we can get the economy up and going.

The next question will come from Brett Rabatin from Piper Jaffray.

First, I just want to commend you guys on your response to the hurricanes and helping people on the island and customers. I wanted to, I guess, go back to the $70 million to $160 million and see if we could go maybe -- can you give us any color on how much of that might be me commercial versus consumer? And then is there any implied assumption around certain economic events like the power coming back on and what you guys have sort of put in for that number or for that date?

I would say, Brett, that you have to wait for the Q for that. I think, in the Q you will have the allowance broken down by portfolios and you can take the changes from the quarter-to-quarter basis to estimate what was the increase. But we're not providing that information today.

Okay. And can you give us any additional color around the deposits, the government deposits? How that affected your margin in 3Q? And are you looking to possibly deploy any of that excess liquidity or have any better idea of kind of stabilization of that number?

Yes, Brett. Our margin for the quarter went down 6 basis points as we reported and we commented on. This was together with an increase in liquidity we've seen in our variances of more than $1 billion in cash and near cash investment. $1 billion of cash and near cash investments has an effect on our margin of between 6 and 10 basis points depending on how well the changes happen. So it is not completely incorrect to think that most of the deterioration in margin for the quarter was the result of asset mix, meaning that we ended up with a lot more cash than we have the prior quarter. Your second question is really the hundred-thousand-dollar question, when can we deploy it? We would love deploy it soon but obviously, we want to be -- have good judgment on how we lend our money. The other thing is, of course, as some of the deposit flows are volatile, we want to make sure we have the understanding on what deposits are more permanent before we deploy them. As I mentioned only since the hurricanes to date, our deposits have increased by $1,100 million most of that, again, being for nonpublic sources. So we are managing it actively. It is accretive to net interest income but dilutive to net interest margin, but -- so we're working on it. But it does have a significant effect. And we agree, we will rather deploy it in loans at 5% than investments at 2%, but we have to find the right loans.

Okay. And then what's your sense? There's [ offered ] talk that the longer power is out, the more pronounced income, more pronounced effect it has on people's income on the island and kind of what they end up doing. What are you seeing from your customers in the past month since quarter end? And what is your expectation for power?

Well, we don't have the inside information on the progress, so we're relying basically on what's stated by the Governor and by the Corps of Engineers. As you know, the Governor has stated that by mid-November, he expected that 50% of the island -- the full power to be back and by December 15, 95%. The Corps of Engineers has said that, that's an aggressive goal, but they're going to work with the Governor to try to meet it. So little by little, power has been coming back, it's slower than we would hope. We have power now in our headquarters building here and several of our major facilities. Obviously, the lack of power affects small businesses more than large businesses. It affects all businesses. Large businesses without access to power still can have -- generally purchased or had generators, and they operated generators. And yes, their operating costs are higher with their operation. It's affecting more the small business, the beauty shop, maybe the bakery, whatever that can't really afford to have a diesel generator. Now, the restaurants that have generators are packed. So the hotels that have generators that are open are packed. This weekend I went out to dinner and I had to call 3 places to be able to get a reservation to go to a restaurant. I when to Costco over the weekend, and there was a huge line to get in. So it's a mixed bag. But really it's more -- it's hitting more the smaller business person. That's the person who is being impacted.

Okay. And then, just lastly, I was trying to understand why the buyback or thinking about DFAST and what you guys might do for a payout ratio would have to wait essentially until next summer. Why is that something that you might not be able to do sooner than that?

We're trying to do it as soon as we can. But the regulators are prudent and cautious and they -- this is sort of uncharted waters, to use a similar expression, they just want to see -- they're going to want to see the impact of the hurricane. They saw the numbers for this quarter, they're going to absorb that. So I think it's just a question of them feeling comfortable with our -- the impact of the hurricane and it could impact on us. We're going to push as fast as we can.

Next question comes from Jordan Hymowitz from Philadelphia Financial.

Before I ask the question, I just want to thank you guys for doing that -- embracing Puerto Rico in your presentation. We're going to plan to donate, and I think I would encourage all the investors and analysts to do the same. We should all support our own people.

We appreciate that from the bottom of our hearts. Thank you.

My first -- I have two questions. My first question is, historically, you have a very large market share in the island and when Scotia or others have been rumored for sale, you guys have always said, we can't do it because of the market share. Because of the hurricane, does this present you with the potential and opportunity to acquire some smaller portfolios from the island?

Well, I think, consistently, we said in the past, we emphasized now that we cannot acquire any banking franchise, it's just too big. However, probably, there will be additional consolidation in the future. And as a result of that consolidation, there may be portfolios available for sale and we would definitely be interested in taking a look at it.

Given the lack of other buyers at this point, it may provide you with an exemption why you wouldn't had have that before, you know what I'm saying?

I hear you, but I'm not sure the regulators agree with that. We'd love that. But I do believe that, being serious, that if there are other consolidations, those consolidations may result in portfolios being available if people want to finance less. Also, I think you may see some of the branches, branch activity on some of the banks that have been rumored to -- maybe, to be reduced. And that would give us opportunities to increase our market presence in a certain part of the island.

Okay. My second question is, even at the upper end of the provision you talked about next quarter you're likely to be profitable, although barely next quarter. Can you see a situation, albeit it's not impossible, but with the 80% likely that you could see a loss over the next 4 quarters being what you see today? In other words, is tangible book value where it is today, pretty much a floor the way you see it with an 80% probability?

I mean, we -- good question, Jordan. We try not to forecast difficult things, especially the future. So God knows. Again, this is -- we've included in our results the best estimate of everything we see today. And including the effects on -- the effects that we see on expenses and revenues for the fourth quarter, that's our best guess right now.

But if you can make it through that in a similar number maybe in Q1, by the time you get your stress test, you've made it through the adverse case scenario. The potential dividend return may be allowed to be much greater than it otherwise would have been because you've now been through the advanced stress test so to speak?

As we stated before, I mean we hope to begin to strengthen our capital return by both trying to increase our dividend and maybe also increasing our buyback. All of those discussions are pending our chats with our regulators right now. But it is our hope to continue to increase our capital return.

The next question will come from Joe Gladue of Merion Capital Group.

I wanted to ask a question -- I guess, about the taxi portfolio in New York. Just wondering if you're seeing much in the way of transactions in that portfolio. And if that's I guess, the portfolio is reducing and also where those loans are marked now in relation to any sell prices you're seeing in that portfolio?

I think what we are seeing is what is publicly available, Joe. So the data that is published by the New York Taxi and Limousine Commission was 95% of our portfolio is in New York, is the data point that we have. We do have conversation with our taxi operators, so we understand their situation. But basically, I mean, the information that we have on that is publicly available. In terms of our exposure, as we said in the prepared remarks, we have about $93 million of current value on an unpaid principal balance of $233 million, which is about 40% of that unpaid principal balance. And we're carrying of in New York on a preliminary basis of $260,000.

The next question will come from Matthew Keating of Barclays.

My first question is for Lidio, and it's around the forbearance program that's been offered. How do the rules work around that and could another forbearance period be offered during the fourth quarter?

Could you repeat the question, I'm sorry?

Yes. So just as it relates to the forbearance in terms of the customers having 3 months more to pay, is that something that you can do again and so it'll extend it out another 3 months during the course of this quarter and so we may not know sort of where nonperforming loans move until much later in 2018?

I mean, I will say, I'm going to answer similar to Carlos. You're self-predicting the future, which we try not to. But to [ address that ], we will continue to be flexible and we will try to meet the needs of our clients. So I mean, I will not say no. But I mean, I think that's not our intention at this point in time, but that's what we...

Okay. I understood, that's fair. I guess then related to the Puerto Rico public sector deposits. Could you remind me where those stood at the end of the third quarter and vis-à-vis their second quarter '17 balances?

Yes, hold on. I'm trying to get the number.

And while we look for that, maybe if you could just speak in general terms, is there an expectation that those public sector deposits will be drained down as the Puerto Rican government is not as active in collecting taxes? Or how are you thinking about that as we move into the fourth quarter?

Well, I think as Carlos said before, part of the problem that we have in using -- utilizing those funds is that it's been unclear. We have been anticipating for a while that those funds would be drawn down. They have not been drawn down at the pace that we expected. But yes, at some point, we expect those funds to start going down.

Okay. Nothing precipitous in the sense that if people are still paying their mortgages, presumably they're still paying their taxes. Is that the right way to think about it?

Right. Now most of the personal property -- are you talking about the real property taxes, that goes mostly to the municipality. But yes, people would be paying their -- most of them are -- real property taxes are actually deducted from your -- by your servicer [ as in ] the state. So when you pay your coupon, it's probably that is the property tax...

That's an important observation, Matt. Again, if you have a property that is financed, you actually escrow your tax payment. The tax payment is made by us, by the bank that finances you. There are very few cases made by the individual. If the property is free and clear, it will be made by the individual. So do keep in mind that a lot of those flows of taxes come from institutions and they will continue to come.

And also keep in mind that while the government will be drawing down their funds, they also will be receiving additional funds from FEMA and other federal agencies that have already started to come in.

Right. You did mention that you start to see those. So is the right way to think about it obviously, insurance proceeds have been estimated around $25 billion. Popular's deposit market share within Puerto Rico hovers close to 40% or so. So is that a fair way to think that the opportunity from deposit inflows from insurance proceeds alone could be in the billions of dollars range, how should we be thinking about that?

Well, I don't have any exact numbers for you. But anecdotally, we have seen large inflows coming from reinsurers to the depositors' account of insurance -- of local insurance companies to pay out. So that we have been seeing. And how long those deposits stay with us, we don't know because the point they're being given is so they start paying out to customers. But we are seeing flows of money coming off island from reinsurance companies to local insurance companies.

But remember, not all of that shows up at once. I mean, it will be a flow of funds that flow in over time, that claims get settled and FEMA funds activities. And then another flow of funds going out as the money is actually spent on other activities. So while the estimates, Ignacio mentioned, good estimates, it's not a day -- a point in time, day in time estimate. It's actually a flow.

Okay. And then we have those public sector deposit balances maybe just as of the third quarter, just to get an idea where it stands today?

So at the end of the second quarter, we were around $5.3 billion. And at the end of the third quarter, we were around $5.9 billion. It's important to know that we checked our number in total, so this includes central government, municipalities, universities, public corporations, a number of different government entities that's not exclusive to the central government.

Okay. Then I guess, maybe just quickly on energy. Obviously, the Whitefish Energy contract has been in the news of late. There's an estimate that the change in that contract could delay progress by 10 weeks or so. What are you guys hearing if anything on the ground about that, that would be helpful for us to know?

Well, we're not hearing a lot more than what you've heard. I mean, the contract obviously, became very controversial. It became a distraction. So they decided to cancel it. It's important to note that they had 2 big jobs, one was bringing a transmission line from the south of the island to the center, Aguas Buenas, and another one is to bring in sort of around the island all the way from Manatee to Bayamón, which is a metropolitan area. They have said, publicly, that those 2 jobs, they will finish. So it's not like they're picking up and leaving tomorrow, those 2 jobs will finish. The governor -- the Executive Director of the energy company was quoted, saying, it could be late as much as 2 weeks if, if they weren't replaced with additional resources. So the question is going to be how fast it can be replaced. The Corps of Engineers announced today a substantial increase in their contract with { floor ] from like $200 million to $800 million. And the Governor has announced that he has been in touched with governors of Florida and New York to bring additional crews. So I think there may be some delay, but that delay will be mitigated by, one, that they are committed and to finish those 2 important projects they have started, and the Corps of Engineer have increased their contract with floor. And we're hoping to get more help from Florida and New York.

Just final question, you obviously mentioned that the storm potentially creates some unique opportunity for structural change on the island, you called out energy and not just replacing the existing structure, maybe rethinking that. But what other structural changes or reforms you think might be most impactful for accelerating economic activity in Puerto Rico?

Well, I think in the long run, I think that this is more longer-term. I think this is a great opportunity when you combine the reduction in population of Puerto Rico with the disruption caused by the storm, with the fact that we have a new education secretary, I think this is very good opportunity to make real important changes to our public education system, which I think will have a very long-term impact on the island. So I'm very, very we're hopeful that will happen. I think in general also, we have seen some of the vulnerabilities of our economy, and we now recognize that we need to be -- the government, I think in general has to be more responsive, has to be smaller and I think all of us agree that we need to have smaller government, which is more efficient and can react faster to crises like this. So, electric system is one, then educational system is the other. I think the permitting system is probably another which we've talked about that has to be streamlined. I think economic development office has to be changed. You could go down the list. I think clearly it's opportunity to rethink our governmental structure that goes way back to actually to the '50s and the '60s and have a centralize government that was used to take Puerto Rico into the industrial age and it work well for a while, but it hasn't been working well for a while now. And we haven't been -- I think maybe a once-in-a-lifetime opportunity to change. Puerto Rico has gone through major changes, major hurricanes -- and often they have big hurricanes. And those hurricanes have resulted in changes to society. I think this was probably -- we were in a slow sort of downward spiral, and I think this is going to make us wake up and decide that we need to take dramatic action. So one time this hurricane obviously presents incredible challenges, but I think it's creates opportunities for the society that really rethink how we do things.

The next question will come from Jesus Bueno of Compass Point.

Just very quickly, obviously, the Dominican Republic was impacted as well by the storms. I know your holding there is off balance sheet. But can you give us an update on Banco Leon? And I guess, what the impact was there from the storms?

We can't give you an update on their financials right now. But I could tell you, that in general the storm did not have a major impact. It hits more the north. As you know, most of the major metropolitan areas are in the south. Just anecdotally from our conversations with them, we don't think it had a major impact on the operation.

Got it. Again, you're a fairly large employer in Puerto Rico, almost 8,000 employees, could you offer any color of what you see perhaps trends in October in terms of your ability to retain your workforce. Have you seen any employees perhaps leave to the mainland or any color would be helpful there.

Yes, we're actually tracking that. We've had about 37 people have left the corporation following the employee who have stated that the hurricane impacted the decision one way or the other. Some of them, they've -- a spouse was transferred to the states or -- but so far 37. So we have not seen an avalanche, most of those had been in fairly entry-level positions, i.e, tellers or telemarketing and customer service. So we certainly have not seen an avalanche, but we are keeping a close look at it. Also, I think we lost 3 from the Virgin Island. We should not -- any of it, we should not forget, we're also impacted by it.

The next question comes from Glen Manna of KBW.

Ignacio, congratulations on getting extra-thorough earnings report. It speaks volumes about the professionalism of your staff with the disaster. Just a quick question, when I look at your DFAST in BPPR, last year the loss rates were about 860 basis points, it was down to 650 in the severely adverse scenario. And if we layer in the kind of incremental above provision hurricane losses, it would still be 100 to 150 basis points below the severely adverse scenario last year. I guess, what improved DFAST to DFAST? And does your current estimate of losses give you any more confidence in that DFAST number?

I think, generally, the are more time passes -- I mean, these are models by definition, they are going to be wrong. But the more time passes, the more information you have to recalibrate the models that gives you a little more confidence in the estimate. In terms of the year-to-year change the estimate and losses in Puerto Rico, I think it reflects continued improvements in the credit quality of our portfolio, notwithstanding some of the macroeconomic environment. You'll see actually a steady improvement in the credit quality metrics of our portfolio up to the stress test of last year. So I say most of it is driven by that.

Lidio, just one more. The provision on the taxi portfolio, was that across the portfolio? Or was it related to one specific event in the quarter with 1 borrower?

That's a combination of both. I mean, we have -- there was -- some of the reserves were associated with the overall portfolio. Some of the reserves were associated with certain particular borrowers.

[Operator Instructions] The next question comes from Brett Rabatin of Piper Jaffray.

Just wanted to get 2 things. One is just you mentioned earlier in the commentary tax reform and just want to make sure you're on a different tax system obviously, than most of the banks in the U.S. with Puerto Rico. So I wanted just to get an idea of what might be the impact if the federal rate was cut to your tax rate? And then wanted to go back to the commercial growth in the U.S. and see is that concentrated in senior housing? Or can you talk maybe about some of the composition of the commercial growth in the U.S. in 3Q?

Well, I'll talk about commercial growth, while, Jorge, our Comptroller can see the numbers. But the majority of the growth in the U.S. has been in CRE. It's not senior housing, it's mostly just generally CRE. We have continued the steady strength in the health care business, which the business that we like, which is lending to assisted nursing facilities and also in the condominium association lending. But it's generally in both regions in New York and South Florida, it's been mostly commercial real estate.

In terms of the impact of changes in the U.S. corporate tax rate, certainly a decrease in the corporate tax rate will result in us having to revalue our U.S. DTA. That will result in an expense in the quarter where that occurs on a proportionate basis. So if it goes down by 1/3 and then we'll assume that 1/3 of the value of the DTA would be essentially reversed or expensed in that quarter. On a go-forward basis, you would obviously have a lower effective tax return -- effective tax rate in the U.S., so your earnings would be more accretive.

Okay. That DTA adjustment, would that be about $1 to tangible book? And then what would be the percentage decrease in your effective tax rate?

I think it just depends on what the ultimate decision of Congress is to change the tax rate.

It's going to be phased in. It won't be a onetime -- it won't be a onetime impact.

The next question comes from Josh Stirling of Off Wall Street.

I'd love to echo the comments. It's incredibly impressive how much your organization has been able to respond and move ahead dealing with this crisis. And I'm sure people of Puerto Rico have been happy, happy to have you on their side. I had 2 quick questions. One is that you mentioned really a great factoid, it was super helpful for us thinking about sort of how you -- what you're actually seeing in the trenches, which is that something like 2/3 of people are currently still paying their mortgages. I was wondering if you can share for us what similar statistic would be for October for the other big categories in your book including things like commercial loans and credit cards and unsecured personal loans?

I don't have that information with me. So I'm sorry, I cannot provide you information now.

Okay, that's fine. Maybe we can follow up offline. The other thing is more conceptual and just to clarify. So in the conversation earlier about those estimate of $70 million to $160 million, it wasn't clear to me from the comments if that's your estimate for the impact of the storm or the impact of all of the sort of potential economic challenges facing Puerto Rico, which obviously, include things like potential austerity and all of that. And I'm wondering if you could help me sort of understand, if we can be thinking about those -- what that $70 million to $160 million really includes? And then it would be super helpful to have you compare that to the DFAST estimate, which is the $1.1 billion of potential losses and maybe help us get a sense of how those 2 differ.

Multiple questions. Let me try to one at the time. I think, first of all, the $70 million to $160 million is our real assessment of the impact on the hurricane in the economy and the potential impact in our loan portfolios. We think and have been stated by both the government as well as the fiscal board that the austerity measures or the fiscal plan that was approved, needs to be redrawn, I think, by giving them enough liquidity that the government has -- will have on a going-forward basis that some of the austerity measures will not have a such a significant impact into the economy into our loan portfolio. So it's basically, the $70 million to $160 million is basically the impact of the hurricanes in the economy and, therefore, the impact into our loan portfolio. And the second part of the question related to DFAST, could you repeat that one more time, I'm sorry?

Oh, I was just -- I'm just trying to -- sort of [ leaning ] and looking from the outside, I was just trying to get a sense of maybe this is similar to a question that was asked prior. But your DFAST disclosures say that it's about $1 billion or so of a Puerto Rico related loss from what looks like sort of a modest economic downturn in Puerto Rico that you're modeling. And I was curious how you could help us, if ultimately you're forecasting this more or like $70 million to $160 million haircut, how we should sort of -- if we want to watch for yards -- measuring points like, for example, unemployment or other metrics economic metrics how we might sort of bridge between this 2 numbers? Based on the actual underlying -- under performance in the economy?

I think I understand it. But I wanted to just maybe -- the premise of your question just wanted to rephrase it because I don't think that what we model in the DFAST is a modest contraction in the economic activity. Quite the contrary, after 10-year recession, we're still modeling a contraction in 9 quarter average close to 6%. So we think that is in itself pretty significant in the economy. And we are actually increasing unemployment to close to 20% or higher than 20% as part of the scenario that we're drawing. And having said that, obviously, you need to understand that the time frames for the allowance and the DFAST are different. The losses associated with the DFAST are 9-quarter losses compared to an allowance for loan losses that mostly looks at the 1 year forward in terms of losses. Our balance today as we said in the prepared remarks, is around $614 million, the majority of the being in Puerto Rico. So I think that gives you a little bit of a data point on how to compare maybe the $1.1 billion to what we're seeing in terms of the potential impact to the economy.

[Operator Instructions] No further questions, this concludes the conference call for today. We want to thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.