First BanCorp.
Q2 2013 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to the First BanCorp Second Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. John Pelling, Investor Relations Officer. Mr. Pelling, please go ahead.
- John Pelling:
- Thank you, Emmy. Good morning everyone and thank you for joining First BanCorp's conference call and webcast to discuss the Company's financial results for the second quarter 2013. Joining me today are Aurelio Aleman, President and CEO; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today's call, it's my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from the forward-looking statements made due to important factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by First BanCorp this morning, or the webcast presentation, you can access it at the company’s website www.firstbankpr.com. At this time, I would like to turn the call over to our CEO, Aurelio Aleman. Aurelio?
- Aurelio Aleman-Bermudez:
- Thank you, John and good morning everyone. And thank you for joining us again today to discuss our second quarter results just came out this morning. On the call with me today as usual is Orlando Berges, our CFO. Orlando will provide -- give the business and our financial results. There is a lot of detail that we need to discuss today. I will initially walk through some of the highlight and then Orlando will get into those details. And then we will do the usual Q&A. Please turn to slide number 5. Well, this is a very busy slide and this was a very decent and significant quarter for us as we continue the setting of our strategic plan. As we have discussed in prior calls, we continue to move forward with dual focus, one, asset quality improvement this is given on the balance sheet and number two, in parallel with the same strength continue to work only -- co-ordinate our franchise which continued to show improvements. On the asset quality side, this is a second quarter hence we have completed above sale. We also saw during the quarter a fairly large $40 million relationship, which was not held for sale in the prior quarter. In addition, we also add the write-off of the Lehman collateral. Definitely these items created noise that we need to explain and as part of this call. We reported a net loss of $122 million and excluding the bulk sale and the Lehman, we did earn a $16.8 million compared -- that compares to the $4.6 million loss in the prior quarter. Regarding the franchise, we are really very happy. We continue to make progress on those metrics net interest margin extra 4.04%, 8 basis points increase, another increase in core deposit, our journey towards increasing core deposits continues with decreasing brokered CDs as we want to achieve this quarter. The originations were really nice and I’m going to cover on that area written over $1 billion where we include the credit card volume and the second quarter it might – the 13th consecutive quarter of reductions in NPA. NPAs/assets of 5.9% lowest levels in 2010 but we recognized definitely that there is still work to do in writing those NPA down. And our DTA valuation increased to $523 million a significant amount, which represent around $2.55 per share. Please turn to slide 6, so I can go over the loan portfolio activity for you. As I said, very nice quarter in originations over $1 billion for the second quarter, we continue to focus in our three key business, consumer markets and commercial. And actually, we achieve improvement in the three areas. This quarter we include the volume that we have in all our three regions Puerto Rico, Florida and VI. On the residence side with $262 million strong quarter increase of $33 million compared to Q1. Again, our goal here is to continue to gain origination market share. We don’t see the growth in the portfolio because obviously we also achieved the sale of the mortgages at that point in time. And we also being a significant part of that volume is confirming that we sell into second where you like it. On the commercial side, strong origination, I have to say that some of the volume it will move on to an important component and we also we achieve incremental volume (inaudible) which also contributed to stronger originations in the commercial and we continue – we continue therefore on building a stronger pipeline. On the consumer, auto was very strong $157 million up $11 million and we continue to grow stronger in that business where we have evaluation position. Credit card activity was better and it’s also seasonal, $96 million for the quarter. Let’s turn to slide 7, now. So I can tell a little bit about deposits. This quarter, we continue this journey, I call it a journey because this is a long-term objective as we continue to replace our non-core or broker with core, every quarter we continue to achieve our primary goal which is to achieve some growth and also reduce the cost. The cost went down to 81 basis points, again, the lowest we ever had. In addition, we launched to the market two new products on the depository that’s cash vault and the other one a non-deposit capsule both products targeted to commercial clients and targeted to support our efforts in more cross-selling activities. This is a journey and we continue to put a lot of focus on this area as we continue to enhance on our sales equity. Before I hand the call to Orlando, I would like to touch on the Puerto Rico economy. I think it’s important with all the things that are happening. And I’m sure you do live in the North Zone and you are probably aware of all the changes from prior calls. But, again, we shared these things, the use of the business community, we believe the economic environment continue to show signs of stabilization. We also believe that incremental for the investment is contributing to that. Given the portfolio sales, the asset sales, we continue to see some inflow of investors into Puerto Rico which are supporting that economy again. During the first half of the year, the government approved certain (apprise) and initiatives that we consider were really focused on supporting the fiscal side of the equation. We view the news are positive from a Puerto Rico grading standpoint. On the other hand, we have to say that if we don’t clear what impact the new taxes will have on the economic development going forward. After dedicating great effort to the first half of the year on the fiscal matters, now we believe the government will focus and will shift the actions to those that we will achieve better economic improvement much faster. For our own planning purpose, I have to share with you that we are operating under the assumption of (fragility) in our planning horizon for 2013 and 2014. I’m now going to hand the call over to Orlando and then we will go back to the Q&A. Orlando?
- Orlando Berges:
- Okay. Thanks Aurelio. Before going through the details of the quarter, it is important to cover a few significant events that affected results for the quarter. As you probably are aware, we announced on May 13 that our motion for summary judgment in the Lehman model was denied as a result of that we took an uncut charge of $66.6 million associated with the write-off of the recurring amount of securities as well as any accrued interest on those securities. We are continuing to pursue collection of the securities to move to utmost process as well as a proof of claim on (inaudible) code as we have been doing for certain time. But due to results on the case, we took the charge this quarter. Also in June, we announced the sale of our non-performing residential mortgage, we sold portfolio of $203.8 million of non-performing loans as well as $19.2 million of OREOs that the book value in both cases. For a total cash price of $128 million and that resulted in a loss of $73 million including operating expenses and fees which were recollected in the other spent categories. Also one of the loans we moved to out for sale in the first quarter, we completed that sale of the $40.8 million of non-performing commercial mortgage loan and that transaction was completed at recurring amount. The only significant item and we will touch upon more details in other parts of the presentation are the changes on the Puerto Rico internal revenue tax codes. But the major components that affect us would be the increasing corporate tax rates from 30% to 39%. In there, in our case, the impact it’s mostly reflect that on a significant increase in the deferred tax asset as well as deferred tax asset valuation allowance since we have been in a loss position, we’re not recognizing any tax benefits associated with the changing in those rates on the deferred tax asset. The second change is the 1% tax from gross proceeds which in the case of financial institutions also has credit of about 50 basis points depending on circumstances that that it will go against the income tax and I will touch up on the expense side because you’re going to see the impact. The third significant one would be the sale tax changes on business-to-business activities that would be only for some business-to-business activities and we estimate that that impact for the institution would be somewhere between $1 million and $1.5 million per year based on the components that have been declined. The last item, it’s an increasing in the carryforward period from 10 to 12 years, which in our case would be applicable to tax years between 2005 and 2012 losses on those years. Large part of our losses as you know happened between 2009 and 2012 for our case. So, that that extends our period from 10 to 12. Results for the quarter as Aurelio mentioned we had a net loss of $123 million or $0.60 a share largely due to the significant events I’d mentioned excluding the Lehman matter as well as the loss on the bulk sale. We had a net gain of $16.8 million or $0.08 a share, which compared to a loss of $4.6 million, adjusted out there eliminating the effect of the bulk sale in the first quarter which resulted in a $68 million loss. Net interest income for the quarter was expanded, we are pleased with the increase, the total net interest income was $126.9 million comes from $124.5 million in the prior period. Margin, net interest margin on a GAAP basis expanded to go forward compares to 3.96 for the last quarter and this is approximately 58 basis point higher on the same quarter last year, the second quarter of 2012. The increase driven by an increasing increment on $1 million increase in interest income and investment securities, mostly from deployment of some excess liquidity our $136 million were invested this quarter. We still have a large cash position at the end of the quarter; cash and money market equivalence are $800 million but this maybe because of a tax month, sorry interest rate scenario that we (inaudible) that the expansion rates will raise. So, we haven’t invested as much as we would have liked. On the interest income side, we did have an offset on the loan interest income on $1 million, which has several factors including cash collections on loans that were non-performing, lower this quarter part of it because of some of the sales we did in two quarters. We had a higher migration in residential mortgage non-performing and average balance of our credit card portfolio is lower as we continue to work through a process to complete the conversion of the portfolio through an earnings system. On the other hand, we had $3 million reduction in interest expense which $1.7 million is reduction in the average cost of deposits with the remaining balance primarily related to reductions in -- for our Home Loan Bank advances because of maturities that we had -- we did not redo in the quarter. Cost of funds, the average cost of funds went down 8 basis points for the quarter, total cost of funds and on non-brokered deposits, the interest bearing checking accounts savings and so on gained 5 basis points to a 93 basis points during the second quarter. And with this is 20 basis points lower than what it was in the second quarter of 2012. Same way, the average cost of brokered CDs decreased by 12 basis points during the second quarter. This quarter, we paid about $482 million of maturing brokered CDs with cost of about 158, while reinsurance were $402 million and the cost of 72 basis points so significant benefit from the way market grades are. We now have outstanding of about $1.8 billion in brokered CDs that mature within the next 12 months at an average cost of 1.28. And for renewals the turn rate should be at approximately 75 basis points on those achievement rates where they are. Also, as I Aurelio mentioned before OREO cost of deposits still in brokers decreased to 81 basis points while the first quarter, we increased those deposits by $73 million. We continue the execution of that strategy. Looking more closely on net interest income, net interest income was a little bit noisy because of accounting treatment and presentations that you saw that the loss on the Lehman which considered an impairment charge this quarter for the income category. So other income -- other non-interest income showing $51.7 million loss. We exclude that other non-interest income was $14.3 million for the quarter, which is down $4.9 million from the first quarter, which is basically related to two items. One is, one of the loans we transferred in the first quarter through few loans will help us sale one of the loans. We were able to achieve a restructuring and we see some properties in partial satisfaction of the debt in the other foreclosure. And that resulted in a charge of $3.4 million which is shown on the other non-interest income category. Also deferred value of the residential performing loans held for sale was down $1.8 million, remember we don’t reflect any value of service and grades or anything like that in fair valuation. So that was also reflected in the quarter and affected the number. When other variance in there which is the equity on the unconsolidated entities, we made last quarter, we had a loss of $5.5 million, this quarter we had a gain of 6.48 and again it’s a business came under accounting method called the books, if a hypothetical book liquidation model which basically assumes with the entities liquidated each quarter and that was – in fact in this quarter was positive. Expenses for the quarter, (inaudible) we had a $13.3 million growth in expenses and they are largely related to credit matters, as you can see in the chart credit related expenses grew $8.1 million with the main components were $1.9 million loss on the sale of the OREOs – on the bulk sale of the OREOs, which are included as part of the other real estate expenses. The second thing we had a large write-down of $5.3 million write-down on sort of commercial OREOs in the Virgin Islands, which basically, this make a 96% of the commercial OREO properties we have in the VI and they made significant change in valuation on those properties. So, the carrying amount of these OREOs now is about $14 million. So we took pretty large hit -- much higher than the typical hits we have been taking on top of these properties, commercial OREOs properties. The other large variance and that has to do with the taxes we were talking, taxes -- other income -- other taxes, not income taxes but other taxes increased by $3.25 million mainly, basically all related to the gross receipts tax. And as I was explaining, mentioning before the gross receipts tax allow you to take a credit against income tax assuming all accounting requirements are met and on that credit is reflected on the income tax categories. So, in essence, this quarter we are showing $3.2 million in expense category, out of that almost $1.7 million belongs to the revenues of the first quarter because this was reflected to generate first and on the other hand, we took approximately $1.6 million of benefits on the income tax line so that affects comparability of resource. The other large item you see there, it’s the outsource of -- outsourcing of technology services as we -- as mentioned before we outsourced our technology services to FIS and that, it showing almost $3 million increase mostly related to FIS. On the other hand, we do have some credits for reductions in personnel that would transfer as well as some maintenance fees that offset part of the cost. Overall, those have some increase in cost but the benefits of accelerating some of the strategies -- functions are going to be seen in the future. We look at this credit related expenses the way we’re seeing them the second half of the year, we expect those to be lower by approximately $10 million compared to the first half of the year. Asset quality, Aurelio mentioned already, we had significant improvements in there total non-performing assets declined $335 million or 31% compared to a first quarter. Non-performing loans decreased by $230 million or 28%. These two non-performing asset to total asset ratio is 5.9% down from 8.4% in the first quarter. This obviously reflects the effect of the bulk sale and the universal sale of our loans that I’d mentioned before. Inflows of non-performing decreased by $78 million in the quarter compared to last quarter was 44% and this was primarily attributable to the impact of this quarter of the inflow of the two commercial mortgage relationship that are added to $85 million as we have discussed in last quarter’s call. Total TDRs for the quarter were $613 million at June 30, which is down a $100 million or 4% but those were included on the bulk sale and $400 million of those -- $410 million to be precise are accruing TDRs. Also on the low right-hand side of the chart, you can see what remains of the commercial non-performing portfolio, our $432 million mortgage, which are carried that on the (board) after charge-offs on provision at $0.57 on the (board). Regarding charge-offs, charge-offs because of the loan -- the bulk sales were significant, net charge-offs for the second quarter were $129 million or 5.25% of average loans, which compares $404 million in the first quarter 8.1% those quarters had bulk sales, which amounted to an impact of $98 million in the first -- in the second quarter and $134 million in the first one. Adjusted net charge-offs excluding the effects were $31 million in this quarter or an annualized 129% of loans, which decreased $38.6 million compared to the first quarter. This basically also reflects of impact of $25 million charge-offs related for a single C&I relationship we took in the first quarter you might remember. The ratio of the allowance to loans was 3.19 as of June 30 compared to 3.58 as of March primarily due to a reduction in non-performing loans resulting from the sales. Net provision for the quarter was a total provision of $87 million compared to $111 million last quarter again those reflect impact of the two bulk sales excluding that impact the provision for the quarter was $19.6 million, which compares with $37 million in the first quarter. The allowance to non-performing loans from the end of the quarter increased to 59.5% compared to 50.2% at the end of March. Our capital ratios remained strong, we, they were impacted by the loss in the quarter and changes in the comprehensive -- all the comprehensive income because of the value of the investment security portfolio. You can see there that after the heads; we still have a strong total capital ratio of 16.6%, Q1 capital ratio 15.3% and a leverage ratio of 11.3%, tangible common is about 8.6% and Tier-1 common its at 12.3%. So, all very strong capital ratios. We’ll now like to turn the call back to Aurelio and we’ll back to answer any questions you could have on what we have just discussed. Thanks.
- Aurelio Aleman-Bermudez:
- Thank you, Orlando. Before we end up for questions, I would like to highlight maybe I will make a few comments. Definitely in – we will see organic opportunities in both sides of our strategy, the core franchise and risking of the balance sheet, the analysts that would be risking, we’re top priority there. It’s really moving out some of the loans that we took losses in the first half. We have about $100 million held for sale and we have large chunk of OREOs that we already have adjusted. So the focus is to move out battle the balance sheet through sales in addition we need to continue with our asset quality portfolio management to make sure that we can control migration going forward. On the franchise, the core metrics will continue to improve organically and we continue to see opportunity. There are still reduction in the cost of funds both on the brokered CD side and the core. As Orlando mentioned, we expect to have achieved credit related expenses reduction in the second half and then other non-recurring items that we consider will not show in the second half. The growing core deposits should continue and will continue and origination we have the capabilities and we have the guidelines to continue showing a stronger origination throughout the year. For the first time, you saw that the commercial book achieved some growth in the quarter about $1 million. We also have to achieve some growth in the consumer and obviously the mortgages, it doesn’t work the same way due to the fact that we sell a significant part but the origination part is really what we are going after. And our capital conversation, we remain strong to support the execution of our plan. Now I will open the call for questions.
- Operator:
- Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Alex Twerdahl with Sandler O'Neill. Go ahead please.
- Alex Twerdahl:
- Hey, good morning guys.
- Aurelio Aleman-Bermudez:
- Good morning, Alex.
- Alex Twerdahl:
- First of, I was just wondering, can you give us a little bit more detail on the complexion of NPLs specifically on the commercial side with respect to the size of average loans recurring value of some of your biggest loans in the NPL bucket?
- Aurelio Aleman-Bermudez:
- Turn to slide 15. You have a better way around
- Orlando Berges-Gonzalez:
- Yes. You see on slide 15, on the lower right-hand side, you can see what’s recurring the book value of the different portfolios. We now have $129 million on total C&I loan performing that’s after charge-off with equal reserves. And those are carried on the books at $0.57 on the dollars. The CRE portfolio, it’s $178 million and that’s carried on the book at 67% on the dollar after research. Construction is down to 11.2 and $125 million right at $0.47 cents. Reality the majority of these loans have been severely hit the largest non-performing loan we have on the book at this point it’s $39 million loan (inaudible) under a data month.
- Aurelio Aleman-Bermudez:
- And that’s (inaudible). It is important to comment that I believe is enough sales already.
- Orlando Berges-Gonzalez:
- You can help my sale rate. That is correct.
- Alex Twerdahl:
- Okay. I mean if you had a sort of ballpark in average size per loans in that portfolio just to kind of get a sense for how much granularity there is, would it be -- other more loans in sort of $30 million range or they much shorter than that or for instances for how many loans are in there?
- Orlando Berges-Gonzalez:
- The majority of the loans are in the range of $6 million to $25 million.
- Alex Twerdahl:
- Okay. That’s – go ahead.
- Aurelio Aleman-Bermudez:
- No. I was going to comment, obviously you know part of our portfolio and we do have lumping up in the portfolio, its typical of local – this market, okay. But we have did most of those already as we continue what is remaining on the asset quality, yes, on the NPA.
- Alex Twerdahl:
- All right. Yes. I know you sold off a lot of the smaller ones. And then, Orlando could you just give us a little bit more color into the $10 million in expense reductions in the back half of the year, is that assumed to be $5 million per quarter and is that coming out of salaries and professional fees or is that more OREO related expenses?
- Orlando Berges-Gonzalez:
- This is mostly OREO related expenses and what I said its in million that’s not so much on the salary. It’s done, nothing is going to be equal per quarter because as I mentioned there were some significant items in the quarter. One of them was obviously was the $1.9 million loss on the sale of OREOs, which was about sales, the other were some of the adjustments in fair values of the properties were much higher than typically we have and we only expect that to happen. So, I think it‘s going to be a little bit more about the first quarter and then some more in the fourth quarter.
- Alex Twerdahl:
- Okay.
- Orlando Berges-Gonzalez:
- And here I’m sorry. We are talking basically all the taxes, maintenance, legal fees and things like that associated within guidance.
- Alex Twerdahl:
- So that, if you sort of strip out some of the items in the third quarter that weren’t necessarily non-core but may not be recurring like this, like the charge related to the commercial real estate properties in the Virgin Islands, that kind of is included in the $10 million, is that correct?
- Orlando Berges-Gonzalez:
- Yes, it is.
- Alex Twerdahl:
- Okay, thanks. And then my last question, can you just maybe give us a little bit of update commentary on recapturing of the DTA evaluation allowance after the change in the tax codes and sort of where that or what revenues that might relate to versus some of the charges that have caused you to report negative earnings in the past two quarters?
- Orlando Berges-Gonzalez:
- Okay. Originally a large part of that -- large chunk of the DTA its related to NOLs. And when you look back, a significant part of the losses between 2009 and 2011 were related to charge-offs taken on the construction loan portfolio which by now its been significantly reduced. Obviously, we have had losses associated with some of the other portfolios but not to the extent of the construction side. We captured as we have mentioned that cost of function of earnings trend, typically you use that 3-year cumulative loss rules which has been changed obviously as our older year go out. Clearly, we still would – the decisions to execute some of the sales and accelerate some of the reduction in non-performing, it’s affecting the earnings trend we were showing in the second half of 2012 and that has to be taken into account in the analysis We feel that it’s not a 2013 event, we feel it’s an event that probably you can justify and look through more clearly at the end of 2014. And we continue to work trying to have that as early as possible recognizing that we -- our process continues to be improving the franchise.
- Alex Twerdahl:
- Great. That was very helpful. Thank you.
- Operator:
- Our next question is from Joe Gladue with CV Brokerage, go ahead.
- Joe Gladue:
- Hi, looks one of the, I guess just based on the Lehman receivable, just wondering if you are giving any thought -- maybe showing that the claim or you think you are more likely to continue perusing the legal avenues and hopes of recovery there?
- Aurelio Aleman-Bermudez:
- Well, those are processes that are still going regarding the legal in two different courts. We still need to hear from the Regional Bank of Securities and that’s pending. So we have thought about it. We haven’t made decisions about it. There have been some movement in the market on that sense mainly but we haven’t made decisions about it.
- Joe Gladue:
- Okay. Just wondering if you could, I guess you mentioned some of the efforts in the Florida market, just wondering if you could give us a little more color on how things are progressing there and what the outlook is for your operations so far?
- Aurelio Aleman-Bermudez:
- As we announced late last year, early this year, we hired some regional stuff on the commercial teams both in the middle market and the corporate and (inaudible) Puerto Rico largest corporate team and we see opportunity in that market for investment grade based on that level of corporate paper. We see an opportunity on the deposit front. We have rolled out actually more products in Puerto Rico already on the cash management and transactional banking services. We have done some restructuring of our branch network. Our focus is really Miami-Dade and Broward. We are not looking into other areas of Florida at this stage. We want the business concentration meets with the local business community is -- when you look at the tranche probably that is recovering faster than Puerto Rico, which is a property values in terms of new operations coming in terms of activity, economic activity moderated by a lot of foreign investment that continues to take place. So, we are feel optimistic about the market. It’s also a great source of our core deposits for us we continue to replace our brokerage.
- Joe Gladue:
- Okay. And I guess, I will just ask for a little bit of – maybe repeat of information if you don't mind, I just heard Orlando mention the inflows to non-performers going down and just not sure I caught all the details just wondering what that decline was?
- Aurelio Aleman-Bermudez:
- Sure.
- Orlando Berges-Gonzalez:
- Yes, a large, most of it is in the commercial real estate portfolio or a significant part of it. If you -- what I mentioned in the second quarter, we had two large relationships that went into non-performing, two of them are $85 million and those two relationships that affect significantly migration in the quarter. So, in essence, we ended up reducing non-performing, I mean migration in this quarter as compared to last quarter by $78 million. If you take those two it’s a fairly flat in terms of migration, it’s about the same amount in the two quarters clearly, the first quarter affected by those two cases.
- Joe Gladue:
- Okay. All right. Thank you. That’s all I had.
- Operator:
- Our next question is from Brian Klock with Keefe, Bruyette & Woods. Go ahead.
- Brian Klock:
- Keefe, Bruyette & Woods. Thanks guys, good morning.
- Orlando Berges-Gonzalez:
- Good morning, Brian.
- Aurelio Aleman-Bermudez:
- Hello, Brian.
- Brian Klock:
- So, Aurelio, I guess just maybe a couple of follow-up questions on Joe’s questions about the commercial growth and I mean, obviously it looks like the workout on the derisking the balance sheet working for you guys had some very strong originations. When I look at table eight and your release the loan portfolio by geography, but I know you did some reclasses, it looks like more in Puerto Rico, it looks like you moved some things into commercial real estate from C&I. It looks like United States, C&I growth was very strong this quarter. So, one might reading that correctly and maybe you can talk about where you are seeing that tick up -- from the new teams that you brought over?
- Aurelio Aleman-Bermudez:
- Yes, I did make a comment on – we talk about loan portfolio prior to loan portfolio definitely focus of the first half of the year was a building up – it’s a new book. So there is no repayment primarily on the new paper. We feel optimistic about that segment when you look at probably that might get us very large banks and very, very small banks. So kind of position ourselves in the middle. And I think this brings a lot of contacts, a lot of a good marketing network and we’ve been able to associate good names into our portfolios.
- Brian Klock:
- Okay. It looks like this – price you are getting are pretty good because you are, you’re yield on the commercial portfolio actually were up slightly on the linked quarter, I know that’s commercial mortgage and C&I, so let’s take, you’re putting in some good credits and getting some good price as well.
- Orlando Berges-Gonzalez:
- Yes. Part of it is also the reflection of the sale in the first quarter which it reflected in the second quarter also due to obviously, we removed certain NPAs within – in the commercial mortgage in the first quarter, yes.
- Brian Klock:
- That’s right. That’s right. Since I mean, I guess thinking about that with the margin, the margin expanded nicely this quarter, you’re getting good C&I growth. You talked about the excess liquidity there. It doesn’t make sense to put it into securities portfolio but it feels like the run off in the loan portfolio is maybe starting to abate somewhat, so maybe you can start to point some of the excess liquidity into new loans. So should we thinking about maybe work at that inflection point be and loans so we can see maybe a net gross in loans. And so that may we should continue to see some expansion in the NIM going forward?
- Orlando Berges-Gonzalez:
- Yeah, it is. Looking at the right portfolio we obviously estimate the most loan – held for share loans that are there. Definitely the focus had continued to move that other balance sheet. Our goal is to try to keep the portfolio closer to the $10 million, right now it’s about $9.6 million. We think that we see that turning point probably not this year also continue to grow loans out of the balance sheet. We see as more – probably early 2014. In terms of the liquidity obviously now with the Basel rules stress testing process all that those sessions are taking place that would be a lot of voluntary exchange of expectations and guidance. Now, there will be more clarity, bank strength of $15 billion, we are already working on the stress testing process and we are going to be (inaudible) first quarter next year. So, even we have a little more clarity and that would be I guess – that would be defining in the first half of the year, how much of that liquidity (inaudible) to do.
- Brian Klock:
- Okay. You may not pull down some of that excess liquidity this year but it seems like on the margin side even without that sort of potential benefit there, you guys highlighted again, that you took up some funding levers. So it seem like you should be able to protect the margin from any of sort of repricing pressures or release maybe you can keep this margin flat to up that sounds better?
- Aurelio Aleman-Bermudez:
- Yes. We feel comfortable over the money. Just go ahead.
- Brian Klock:
- All right. Thanks for taking my questions.
- Operator:
- (Operator Instructions) Our next question is from Robert Greene with Sterne Agee. Go ahead please.
- Robert Greene:
- Good morning.
- Aurelio Aleman-Bermudez:
- Good morning, Robert.
- Orlando Berges-Gonzalez:
- Good morning, Robert.
- Robert Greene:
- Just a follow-up question on expenses, even normalizing for I guess the valuation adjustments on OREO, it looks like you are running closer to a – caught mid-90s absolute expense level which is certainly higher than the back half of 2012. I’m just wondering, sort of thinking about it on a core expense base, why we are not seeing, I guess more improvement on expenses and sort of what your outlook is as far as I guess core (inaudible) going forward?
- Aurelio Aleman-Bermudez:
- Yes. I think, it’s important to call. Orlando did mention some of the – there is difficult identifying some of the items and so forth the certification of one-timers are none. Definitely there is a lot more going into it. Orlando did mention some credit-related expenses, keep in mind that we are still, we did not mention any reduction in actually related expense there. What really we continued supporting servicing some of the portfolios that were sold until even at the end of the third quarter. So those estimates are not there definitely it’s our focus to improve our efficiency ratio. We have to be at par of the industry and even though we are not making – we are not providing guidance on it right now. You know the process are on their way and it’s the focus of the corporation to achieve efficiencies.
- Robert Greene:
- Okay. So, I mean, I guess another way to think about it would be, I mean, looking at the efficiency ratio. I mean, do you think that that might come from improvements in the top-line as the impact of the run-off sort of diminishes or do you think its more of cutting absolute expenses in a quarter-to-quarter basis?
- Orlando Berges-Gonzalez:
- We are targeting both side of the income statement Robert, clearly the revenue side is one item as we go through some of the slide we used on touch management things like that that related to the (profit) account that Aurelio mentioned and some of the other business revenue generating strategies would change that part of the income statement but also includes the efforts on the expense side. We continue to service some of this non-performing sales that just happened. So it’s a process and its going to take some time to go through that whole thing.
- Robert Greene:
- Okay. That’s helpful. Just a clarification question on the DDA valuation allowance and maybe I’m not thinking about this the right way. But with the increase I’m just wondering why didn’t it flow through the P&L this quarter or if you could just explain the mechanics behind that.
- Orlando Berges-Gonzalez:
- Sure. See in a – on a normal scenario on institution that it’s making money or that doesn’t have the three year cumulative loss decision that we had. Basically any deferred tax asset that they have would have been revalued and now they are 39. And would code basically a tax benefit which would improve their earnings. In our case, because we are in a position, the credit tax asset went up obviously like everyone else and speaking of the evaluation at 39. But at the same time, we had to go through a process of evaluating the deferred tax asset valuation allowance, which in our case its basically 100% specifically on the bank side. So, what ended up happening is that the TDA went up, which for other people would have been then corresponding credit income, in our case, it’s a corresponding credit valuation allowance that we see a number going up significantly which is a combination of the extension rates and the results of the quarter. And now the TDA went up about $523 million, the valuation allowance fees. And that was a $386 million, I recall on the last quarter. But that said, its in our view, the typical credit to income that on a normal scenario we would charge in our case went through a evaluation allowance.
- Robert Greene:
- Okay. That’s helpful. And then one last, actually the question, thing about your effective tax rate going forward, changes to the Puerto Rican budget with a higher I guess the proposed corporate tax rate. How do we think about sort of modeling out your tax rate going forward?
- Orlando Berges-Gonzalez:
- That’s a difficult question in the sense that I would – we have been – the number at the (inaudible) combination of what’s the percentage of tax exempt income you have on the books, which is they are not going to come from investment securities. On a little bit, from the lending side specifically any government lending or some specific purchase. And at one point in time, when taxes were 39% and we had a much valued portfolio, the tax rate was about 26%. At this point I would anticipate that tax paid once we get to a taxable position should be more on the 31% to 33% but its tough for me to give you a very precise answer obviously.
- Robert Greene:
- No, that’s very helpful. I appreciate it. Those are all my questions. Thank you very much.
- Aurelio Aleman-Bermudez:
- Thank you.
- John Pelling:
- Thanks Robert.
- Operator:
- (Operator Instructions) Our next question is from Taylor Brodarick with Guggenheim Securities. Go ahead please.
- Taylor Brodarick:
- Okay. Thank you. Most of my questions have been answered. I guess, the last one is, we got to breakdown and run off in the brokered CDs, do you have similar numbers or do you get some color for the retail CDs?
- Orlando Berges-Gonzalez:
- I don’t have that number to give you exactly we haven’t disclosed that. But, it’s not a significant as the brokered CDs were through (inaudible) those CDs mature than the brokered CDs. But, still you can see that we had some reductions on the regular CDs. So we expect some benefits out of that but not as much as we will see on the brokered CDs.
- Taylor Brodarick:
- Okay. Great. That’s it for me. Thank you.
- Aurelio Aleman-Bermudez:
- Thank you, Taylor.
- Operator:
- This concludes our question-and-answer session. I would now like to turn the conference back over to Aurelio for any closing remarks.
- Aurelio Aleman-Bermudez:
- Thank you, Emmy. Thank you for your support today. I thank everyone for joining us today. And we really thank you for your support to the corporation and the interest and we are continuing with our (office) communication dialogue with all of you. Thanks. You all have a nice day.
- Operator:
- This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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