First BanCorp.
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Good morning and welcome to the First BanCorp Q3 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 John Pelling, Investor Relations Officer. Please go ahead.

[John Pelling:]

Thank you, Jessica. Good morning everyone and thank you for joining First BanCorp’s conference call and webcast to discuss the company’s financial results for the third quarter 2013. Joining me today are Aurelio Aleman, President and Chief Executive Office; and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today’s call it is 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 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 or webcast presentation issued by First BanCorp this morning 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:]

Thank you, John. Good morning everyone and thank you for joining us again to discuss our third quarter results. On the call with me today is Orlando Berges, our Chief Financial Officer. Orlando as well will provide the details on the financial results. I will cover some of the key highlights for the quarter and then we’ll get into the Q&A also. Please move to slide five of the deck. I am really pleased with our results this quarter. We continue to move forward. As we said we focus on a dual track, first of all improving asset quality by continued de-risking of the balance sheet and parallel to that strengthening the core franchise and we did show progress again in this quarter in both. In addition this quarter two important events I want to highlight. One we successfully completed the secondary offering with the U.S. Treasury. And second we also completed very important step in our business strategy by completing the credit card conversion of the portfolio that we purchased last year. Now we have a portfolio that we can market and we can continue to grow. Net income for the quarter was $15.9 million and that includes about $3.4 million in non-recurring expenses that were related to the secondary offering and the credit card conversion. Excluding these items net income would amount to $19.3 million. Actually this result was further impacted by an addition of $8.9 million of expense noise related to the loss on the [inaudible] and 3 million increase in tax reserve. The franchise continue to make good progress. Margin increased 16 basis points to 420, deposits grew $78 million, brokered CDs declined $102 million, originations were really good at $920 million and expenses were down nicely as we spoke in the last call, including credit related expenses, slight reduction in FDIC premium. And importantly the third quarter mark our 14th consecutive quarter in reduction in NPAs. It is a journey, as we said we need to continue our work on working the NPA out. Our capital position was further strengthened by earnings under DTA valuation allowance, $520 million represent now $251 per share assuming 100% recapture. Moving to slide six just to cover a little bit more on the loan portfolio as I said it was a good quarter for originations. It was not better than the prior one but it was better than the same quarter last year. Originations at $920 million for the third quarter including credit cards. We continue our focus, we have some opportunities in growing the consumer book. We have some opportunities in growing the commercial book following the bulk sales that we completed in the first half of the year. The commercial book grew $74 million and we saw increasing originations compared to the second quarter driven by primarily the loans in Puerto Rico and new originations in the Florida market which were actively participating. We really need to continue working very hard sustaining the pipeline, that’s a reality, especially in the resi side. The market has shown a reduction in volume this quarter. Our originations in mortgage declined to 177. In part it’s happening not only in Puerto Rico but hike in rates have impacted have all to do with the state of our economy. Lastly consumer originations were very strong and as I mentioned before now we have a portfolio of credit cards that we are looking to grow in the quarter ahead. Moving to slide seven deposits with continued continuation of the strategy we have to put a lot of effort on this strategy every quarter. The goal is to grow quarter-over-quarter and reduce the cost. The reality is we grew $78 million primarily from the government and we did reduce the cost additionally also we were able to reduce the brokered CDs and we took $102 million down from there. And really this is the strategy that we continue in our three territories, Puerto Rico, Florida and the VI. So before moving into the detailed financials I want to cover on slide eight our exposure to the Puerto Rico government. As we all know since the Barron article in August there has been too many stories covering in the pressure regarding the Puerto Rico economy and the fiscal situation as we have said before we feel the steps the government has taken, fiscal year positive after approving the budget, reforming the pension system, enhance and diversify the revenue on different of the political operations. Obviously they communicated recently they project no short-term liquidity needs. But we are saying that but our internal budget projects a flat economy so we have been in recession for six year and we are saying that we continue to plan as having a flat economy. We have to answer one of the question we have received from investor regarding our exposure we have provided the following information that is in this page. We have just over $395 million in between securities and loans, $70 million securities, $325 million in direct loan exposure outstanding as of September 30. In addition we have close to $200 million in indirect exposure to the Tourism Development Fund which guarantees some of the borrowers the hotel’s investments that we have. We believe our exposure is conservative and probably is among the most conservative among the local banks. So there is still room to help the government and work with the government in supporting the strategies. On the deposit side we have a nice $585 million from various entities and this is distributed among probably 100 relationships, 52% of these are transaction accounts or core operating accounts of different government entities or municipalities. We are pleased with the progress that we already has made the information provided in the recent webcast hosted by DDB we believe was a very positive step in addressing investor concerns and we hope that markets continue to react positively. Definitely we have to show, the government have to show progress in executing this strategy, they have to show progress in making the revenues and making the spend commitment. It is a journey and we see the political will to address these challenges. Now I am going to hand over the call to Orlando to discuss the detailed results of the quarter.

[Orlando Berges:]

Good morning everyone. So Aurelio mentioned at the beginning of the call we posted an income of $15.9 million for the quarter, $0.08 a share. That compares to a loss of almost $123 million or $0.60 a share last quarter which obviously was affected by the bulk sales and Lehman adjustment we posted in the second quarter. The results for this quarter include two items that are sort of one-time items $1.7 million in expenses associated with a secondary stock offering which was completed in August on the sale of treasure shares as well as $1.7 million in credit card conversion cost as we completed the migration of the credit card system. We adjust for the effect for these items net income for the quarter was $19.3 million or $0.09 a share which compares to $16.8 million last quarter in the second quarter, if we exclude the effect of the bulk sale and the Lehman securities. So it is a $3 million, normal $3 million improvement in the results. This quarter also had a couple of other significant items. We had a $5.9 million loss on the equity in earnings of the unconsolidated entity which is the venture that we have on the loans were sold back in 2011, which as we have discussed in the past is accounted for on their hypothetical liquidation model and it’s some of the fair value adjustment change it could affect the accounting entries we need to post on that component. The other significant thing was a $3 million additional reserve we posted on certain tax positions which are attributable – attributed to an extension of the administrative appeals process we’ve had for a while. On the other hand if we look at some of the other components the results for the quarter show a $4 million improvement in net interest income, a 1.7 million improvement in other income, other non-interest income and a reduction of $12 million in operating expense. Looking at the net interest income for the quarter was a $130.9 million which is $4 million higher than the $126.9 we had in the prior quarter or a 3% increase. Net interest margin for the quarter expanded to 420 compared to 404 last quarter and it’s also 22 basis points higher than same quarter of last year. So we’ve been continues to – as we had discussed in the past our margin has continued to show steady pace of improvement. Increase for the quarter is driven to a large extent by a $2.2 million increase in interest income and investment securities, that relates to pre-payments speed changes as well as re-investment of some liquidity into a higher gilding instruments as the market rates spiked a bit. And we also had a $2.5 million reduction in interest expense mostly basically old deposits [1.4] million that was deposits as we have re-priced broker CD’s and for our home loan bank advances that have come up. Also keep in mind that as we completed the sale of the non-performing residential mortgage loans in the second quarter a number of non-accruing loans in that area and there was a cash component coming in as part of the transaction. Funding cost for the quarter overall was nine basis points lower than last quarter from 128 to 119. The average rate paid on non-brokered deposits which include all interest bearing check-in accounts savings, CDs and so declined three basis points to reaching 90 basis points for the quarter. And if we compare it to the same quarter of last year it’s 13 basis points lower than the third quarter of 2012. The average cost of brokered CDs decreased 23 basis points and the balance also decreased about a $100 million. During the quarter we had $744 million of matured broker CDs with all-in cost of 186 and new issuances were at $642 million at an all-in cost of 82 basis points. So Aurelio mentioned our cost of deposit, overall cost of deposits, excluding brokered, continue to decrease, amounted to 79 basis points for this quarter and we have continued to achieve some growth on the deposit base. One important component it’s, obviously we have done significant re-pricing on brokered CDs and some of the other deposits. We don’t expect that cost reductions will be as significant in the future quarters based on the level of reductions and re-pricing we have achieved over the quarter. Still have some in brokered CDs we have over the next six months, about $800 million mature, $797 million to be exact, at a 94 basis points which at current rates we could still issue at a sort of the same 82 basis points level. And a little bit of a pickup could come up with some of the other time deposits but not to the same extent we had in prior quarters. The non-interest income for the quarter was, we had couple of items one, remember that last quarter we had a $3.4 million impact related to a restructuring of a commercial mortgage loan held for sale. On the other hand we had decreases in this quarter on the mortgage banking business as the market gains have reduced overall the combined component was an increase of $1.7 million in those items. Looking at expenses we had a significant reduction in expenses in the quarter. They were down 12 million, large part of it is credit related expenses as we had mentioned during the last call, last quarter. Credit related expenses declined $7.5 million for the quarter. It’s a combination of lower losses on OREOs, specifically $4.9 million in write-downs on the value of OREOs, reduction of that $4.9 million in the write downs. And then we also had a $1.7 million reduction in operating OREO operating expenses, that include repairs maintenance legal and some of the other components. The quarter also, couple of other things to remember, we booked last quarter the government enacted some new tax laws, well some of them retroactive to January 1st and the gross receipts tax for the first half of the year was about $3.2 million, 1.6 million of those were related to the first quarter so that’s obviously a reduction quarter-to- quarter and we had reductions in the FDIC premium and other regulatory fees. As you know the FDIC formula includes a number of components so they have changed average balances, the relation of leverage facilities and so we have continue to achieve reductions in those expenses. Again as I mentioned before Aurelio mentioned in the call this quarter expenses included $3.4 million in the secondary stock offering expenses and the credit card conversion cost and last quarter included about $5 million of bulk sale related expenses. If we normalize those components expenses for the quarter would have been $95.8 million or $8.9 million lower than expenses for last quarter. In terms of asset quality non-performing loans for the quarter including non-performing held for sale decreased by $22.5 million or 4% while non-performing assets decreased by $25.1 million or 3%. Non-performing assets reached $726 million in the quarter. Reduction was combination of $6 million of payoff construction loans held for sale in the quarter resulting from specifically sale of those items. We had commercial TDR $6.8 billion TDR restored to accrual status based on performance over the term. We had a reduction of OREO balances of $6 million basically driven by sales and some per value adjustments and the other component where the chart shows the largest was 7.8 million in non-performing commercial loans that had been previously reserved and were charged-off this quarter. The inflows of non-performing for the quarter decreased by $20 million from about $97 million to $77 million or a 21%, reduction, large chunk of it was in the residential portfolio. Adversely classified commercial and construction loans held for investment decreased by $32 million amounting to $632 million at the end of the quarter or 5% less. And important thing is that you have asked in the past composition and I like to mention that included in the adversely classified assets, there are $232 million of accruing classified loans basically composed of seven relationships which ranged between $10 million and $60 million so it’s the extent of the size of that portfolio. The commercial non-performing portfolios we discussed continues to be carried on the books at about $0.565 on the dollar and for the quarter TDRs held for investments were $636 million which are almost $24 million higher than June. Of those $427 million are on accrual status. Regarding charge-offs, charge-off for the quarter were 39 million or 141 [inaudible] which compares to 129 million last quarter or 525. Remember again that was driven by the bulk sale in the second quarter. If we exclude the impact of the bulk sale net charge-off for the quarter were 2.9 million higher than the second quarter. Primarily it’s related to our residential mortgage loan, 4 million residential mortgage loan charge-off in the Florida market. Provision for the quarter was up $22.2 million, that compares to $87 million in the second quarter but if we adjust that for the bulk sale that was a 19.6 million provision. So we had about a $2 million more provision in the quarter compared to last quarter on a normalized basis. The allowance for loans, for percentage of loans ended up at 304, slightly lower than the 319 in the quarter. Last quarter the realties that we some of the charge-offs taken or most of the charge-off taken were related to impaired loans which had already established reserve as of the end of the prior quarters. Our ratio of allowance to non-performing decreases slightly to 58.1 from 59.5, it’s basically flat from last quarter. Looking at capital levels, they remain strong. Revenue generation for the quarter improved regulatory capital ratios a little bit impacted for book value per share for the changes in other comprehensive income on the value of the securities but other than that strong capital ratio as you can see in this chart and again as we have mentioned in the past we are framing our calculations also that we will be full compliance of Basel III ratios as we completed the fully phased in implementation of that. We should expect disclosure of these items at the end of the year or beginning of next year. At this point I would like to turn the call back to Aurelio.

[Aurelio Aleman:]

Thank you, Orlando.

[Orlando Berges:]

Questions are little bit later.

[Aurelio Aleman:]

Thank you. Before we open for questions just a few highlights I want to comment. Definitely we continue our focus in the dual track. The risking, is still work to do there, core franchise still opportunities, innovation, you know we’ll make sure we’ll continue working closely with the government and GDB supporting the economy again and providing update for information to our investor community. Our top priority remains the asset quality improvement. You know we have to recognize, we have steps to do in reserve loan sales, we have OREO to move out of the balance sheet. We did close to $200 million of between OREOs and held for sale. Inflows were better for the quarter about $20 million better but we still have a sizeable classified asset book that we need to closely monitor. Franchise metrics continue to improve and we still have expenses opportunities that we are taking. We also have the new credit card portfolio which haven’t been marketed over the last, you know there is no marketing in this portfolio for the last three years as it was managed prior by FIA so that is an opportunity for us and the execution of the core deposit strategy continues to be in top of the list. Loan originations were healthy and we feel good about the pipeline so that is a key element of the execution. The DPA obviously you know the questions get asked. We’ll continue to work closely on our profitability and we’ll provide more clarity on the DTA as we continue to move on but it’s a significant number we’ll like to have in the capital structure as soon as possible. So now we will open the call for Q&A.

[Operator:]

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Erika Najarian, Bank of America. Please go ahead.

[Erika Najarian:]

Yes, good afternoon. My first question is on the allowance against the exposure that you detailed directly to the Puerto Rican government and the tourist industry, could you give us a sense of how much you have reserved for in terms of the $327 million in direct lending exposure and the other $199 million of tourist and liquid exposure?

[Orlando Berges:]

The government loans that we have on the books at this point are all what we would call past weighted loans. What we do with all past weighted loans including government is they go through a general valuation allowance that we estimate based on experience and losses on the portfolio. We don’t treat the government separately from our commercial portfolio. So general valuation allowances are applied to that portfolio. At this point I don’t have the exact number but it’s probably going to be somewhere around one, half percent or so of that portfolio would be the reserve amounts.

[Erika Najarian:]

And could we extrapolate the same for $199 million, that’s separate from that $327?

[Orlando Berges:]

Well the $199, are you referring to the TDM parent fees? Those are the loans [Technical Difficulty] purpose we judge the loans based on whatever the type of loan that is behind the guarantee. So the reserves are established based on the risk associated with the loan, most of them probably would have a similar general valuation allowance but there could be some differences in one or the other depending on the final assessment we do on the case.

[Erika Najarian:]

Okay, and my second question is on your expense run-rate, clearly you have made significant progress quarter-over-quarter and as you think a about 66% efficiency ratio and a core expense run rate of $96 million could you tell us what your near term goals are over the next few quarters in terms of where you can drive this efficiency down to or if you are more comfortable, where you can drive that expense run rate to?

[Orlando Berges:]

Well the efficiency ratio today its 70% for the quarter. If you adjust for this components of related $3.4 million in expenses as well as venture number that would have been close to 65. As we had mentioned in last quarter’s call we expect that credit related expenses to go down about $10 million in the second half of the year as compared to the first half. They were down $7.5 million. We still feel that there are some opportunities in there to achieve those $10 million and that we should see. And some of the other components as we have done discussed in the past are related to eventually FDIC instruments reduction and some of those other items. So it’s all, I mean to some extent it’s related to the non-performing portfolio and how we are going to – how things continue to move along in terms of legal and other expenses. But clearly we mentioned at one point that we were targeting long-term 55% efficiency. We won’t see that this year but we should be between in that range of 60 to 65 for the latter part of the year assuming those reductions.

[Erika Najarian:]

Great. Thank you so much for taking my questions.

[Orlando Berges:]

Thanks.

[Operator:]

Our next question comes from Matthew Clark with Credit Suisse. Please go ahead.

[Matthew Clark:]

Hey good morning guys. Can you give us some more color as it relates to the underlying activity in that unconsolidated entity, the moving parts there and I guess our expectation going forward, just trying to forecast that better?

[Orlando Berges:]

I am sorry Matthew, that wasn’t clear, what was the question there?

[Matthew Clark:]

Question relates to the loss of the unconsolidated entities and debenture that you guys have, I am just curious how general line activity there and how we should think about that line item going forward?

[Orlando Berges:]

We are projecting that line item it’s a challenge to be honest, Matthew. The accounting doesn’t really follow the economics in this specific component. So fluctuations have come a lot from any changes that are done. Remember that debenture it’s managed by independent group, which are the minority owners. So any changes in their estimated timing or strategy of a specific case could change based on the discounted cash flow components what’s the value. Our exposure in here it’s limited to investment we had with the different charges we have taken, that number it’s down to about $13 million today. So to some extent the maximum amount we could charge down assuming the fair value changes, discounted fair value changes are this space would be those $13 million. But it would be very, very difficult for me to tell you specifically when. We were expecting this year to have our losses on accounting components related to the venture based on the cash flow estimates that we have seen, but some, to be honest have been higher, little bit higher than we expected. So again it’s $13 million exposure that we have that could affect few quarters. You probably saw the second quarter we had a profit of about $600,000, the first quarter we had a loss so it’s been very lumpy in terms of impact in results.

[Matthew Clark:]

Okay. And then can you talk maybe a little bit to just any incremental change in customer behavior since the economy’s been under some pressure and you had a change in tax loss and it looks like your, for example you resi mortgage number has pumped up but then your inflows were down, accounting for, I think the larger portion of that $20 million decline. So just trying to get a sense for any kind of incremental change among your customers and even your business customers as well?

[Aurelio Aleman:]

Yeah I will say, this is Aurelio, Matthew, I will say the two primary events that we can classify for September, is number one the originations of mortgages and number two the OREO sales. OREA sales in Puerto Rico went down 11% in September. It’s usually the third quarter is slower because of occasions and all that but this was much lower than anyone anticipated. So I will say those are from a consumer reaction and consumer confidence, those were the two primary events that we saw happening in the quarter. From an NPA level we did not experience any of the trends that we can say was different from that behavior, is really from originations. We will see the last quarter of the year is usually a better one but we were closely monitoring it.

[Matthew Clark:]

Okay. And then I guess on your expectation for regulatory release and getting out of the consent order, I know it’s always difficult to gauge something like that with regulators but just curious as to what you think the headlines down there have maybe pushed that out a little bit?

[Aurelio Aleman:]

Well we continue to comply and we have complied with everything requested in the order, including having a significant portion of the capital ratios. And it’s really when they will [relate] to decide to add the judgment. The judgment also includes what’s happening in the environment. So we cannot tell when they would be reacting on it, because we are complying with everything that has been in the question and including the most important components which are ratios and level of classifying loans.

[Matthew Clark:]

And then maybe just one last one, I guess the incremental borrowing that you are lending, I am sorry lending that you are doing to the government. I guess can you just give us a sense for the types of terms you are getting and your comfort level with I know your exposure there are still to probably still somewhat underweight that exposure but just curious what gives you confidence on lending?

[Aurelio Aleman:]

Well, there is different sources of guarantees from the government primarily they realize they are all in the latest part of the year in the quarter are short-term facilities and are related to – one of them is related to the oil line participation of the oil line operators which has a priority over other expense, is really an expense, they cannot operate without oil so that’s a – it’s a priority. We also have some other facilities that are guaranteed by property taxes which is also priority. We feel very comfortable with the exposure that we have with the government and those facilities.

[Matthew Clark:]

Okay. That’s it from me. Thank you.

[Operator:]

Our next question comes from Todd Hagerman with Sterne Agee. Please go ahead.

[Todd Hagerman:]

Good morning everybody. Just a couple of questions, Aurelio as you talked about the credit quality trend, I am just curious again you have nice improvement in the quarter. I am just wondering as you look at the pipeline and talk to your bankers and so forth can you give us a sense of, if I look at fourth quarter Q1 is that something that we’re looking at kind of the steady pace down, steady measured pace or is this something that as you look forward there are things that may be in the pipeline that could cause a greater extent of improvement in terms of magnitude. I am trying to get a sense of just kind of the trend in the pace of the trend in terms of the improvement?

[Aurelio Aleman:]

Yeah, Todd. To be honest I’d say it’s a very difficult question it kind of what we are looking but let me give you what are the moving parts here. Obviously we are working in parallel to try to move some of the loan sales that we talk about in the give notes that are held for sales or OREO so some of them last long. So it depends on how successful we are in moving those out. That’s one of the moving parts and obviously we have a dedicated team to add and we are aiming to achieve progress on that front. In this quarter we only sold a small portion of it in the third quarter. So but that there is a lot of effort on that initiative. The other moving part which Orlando mentioned we have some classified loans that are lumpy and we monitor them very closely. It’s quarter-by-quarter activity and they continue to perform but I cannot anticipate if they would perform every quarter on their own. Some of them are improving and getting out of the classification. So but it really all depends also on economic conditions of each of them on their businesses. So it’s something that we have to monitor very closely and hopefully our plan is between the ins and the out that we show improvement every quarter and that’s what we are aiming. But there are moving parts to it as they have been for over for the last three years and it’s something that we have a lot of the resources behind it and it’s our key priority as I always mention.

[Todd Hagerman:]

Okay. And then just as it relates to the card portfolio and the conversion now can you give us kind of an idea of how should we think about the credit quality of that portfolio, the targeted customer base within the company and kind of your expectations in terms of that rollout and kind of what we think are the different economics related to that portfolio, just trying to get a sense of now that we are there with the conversion how do we think about the strategy going forward, both from a customer segment standpoint as well as a credit quality standpoint and how that’s going affect both the P&L as well as balance sheet?

[Orlando Berges:]

Yeah obviously there is some – the portfolio has been on the book for more than a year. So you can see some trend on losses and the portfolio trend, the portfolio has been trading quite before we purchase it for the last three years the portfolio has been peaked at some in time close to $500 million and is now at $320 million, $330 million. So and the fact is there has been very little activity on promoting the portfolio, on cross selling the portfolio and activation and usage. So first of all we have a very large number of accounts that are excellent clients, prime clients and the first growth that we expect is really from activation of the same customer base and increased utilization that’s really starting number one. There is a significant number of accounts that are usage is low. When you look at the credit quality of the portfolio, it’s a prime portfolio. It went through a large cleanup for some years so it’s a prime portfolio. The second initiative it’s related to new products and new marketing of targeting bank clients cross selling or other products with another very large base of clients that not credit card clients today. And I would like to invite to become credit card clients. So there is a well-structured strategy that you are going go see going out to the market actually already started. And we can go in more detail.

[Aurelio Aleman:]

And you need to mention that the losses that we’ve been tracking on that portfolio have in fact been significantly lower than what we had included in our original projections on the acquisition. So it’s been a very good quality portfolio in that sense.

[Todd Hagerman:]

Great. That’s very helpful. Thank you.

[Operator:]

Our next question comes from Taylor Brodarick of Guggenheim. Please go ahead.

[Taylor Brodarick:]

Thank you. A question about Florida obviously with originations did hiring ramp up in that market or has the growth there encouraged you to hire more, expand your teams going forward?

[Aurelio Aleman:]

Well we actually I think we’re done with the hiring right now. We in the regions that we have decided, we did as I mentioned before we built a commercial team that focused on the middle market and commercial clients and we built also a corporate team early in 2013 which has produced excellent result to the year. So we continue to hire on the transaction banking side related to services and expanding our deposit strategy, brought on – I will say on the loan side probably there is a couple of positions. But not an extended group of people. So we are almost done there.

[Taylor Brodarick:]

Okay, great. Everything else has been answered. Thank you.

[Operator:]

(Operator Instructions). Our next question comes from Alex Twerdahl with Sandler O’Neill. Please go ahead.

[Alex Twerdahl:]

Hey good morning guys. Thank you. I wanted to ask you a little more about potential loan growth in the future. You put up originations this quarter of 830 some odd million dollars. I know there is a lot of churn in the loan portfolio and we have plenty of capital. How easy would it be to convert, to go from originating $830 million to actually showing some loan growth? What kind of has to happen, is it all about just giving more loan set that might turn off your book or do you have to actually originate more volume in that or may be just talk about some of the moving parts there?

[Aurelio Aleman:]

Well we have to take it by business, number one. Obviously we should continue to see the held for sale going down. So when you look at loans even though we grew the loan portfolios excluding held for sale when you add held for sale obviously we reduce that so net growth wasn’t there. So that is a key strategy, continue removing the held for sale and growing the three components we achieved growth in the commercial we achieved growth in the consumer and we achieve growth in the mortgage. I think I made a comment that we would target, that we would like the loan portfolio to reach $10 million. We are not there and it’s going to depend on the market. It’s going to depend on the economy, it’s going to depend on the competitive environment. We have increased sales focus, we have increased sales resources and marketing. And because we don’t want to give it up on the credit parameter we want to make sure that we have increased volume of originations to have the optimality of selecting the risk credit. So it’s very difficult to tell but the primary bible is really the market. There is a good pipeline, there are deals on the table, the more challenging one as I say is the mortgage business. Rates are coming down again so we saw reduction in rates in the last week. That could be an opportunity but it’s very driven by rate as we all know. In Florida we’re targeting to grow Florida we and do have some opportunities in that market that we will continue to execute. But think about we are aiming to get the loan portfolio back to $10 million, I cannot tell you it’s not going to happen in the short-term, it’s not going to happen in 2013 but it’s one of our goals for next year.

[Alex Twerdahl:]

Okay, great. And then as you look at the complexion of your NPLs today versus a year ago, you talked about the top priority as continuing to be asset quality and with the success that you’ve had in some of the book loan sales through this year they are successful but expensive, talk about your appetite for potential further book loan sales, is that’s something that completely off the table now or is it still some chance that we see more of those?

[Aurelio Aleman:]

At this stage the focus is organic. I will not say that we will never do a held for sale again because you don’t know how things move but our goal, our objective at this stage to move while we have on held for sale, move while we have in OREO and try to resolve some of the complex cases into OREO so we can move them out too. And that’s really the driver. We’re not planning any large sales at this stage.

[Alex Twerdahl:]

Okay, great. And then just lastly Orlando may be you can give us a little bit of guidance on what tax rate we should use for 2014?

[Orlando Berges:]

Well, the difficult part in there it’s obviously Alex is the DTA component. At this point as we had mentioned before we – the DTA requires some proven track of earnings before we can start talking about reversing it which said we continue a good track we might have the possibility late 2014 or early ‘15 assuming we don’t achieve the reversal of the DTA then you are talking about basically no tax other than taxable some of the small stop that we have that are making money. Otherwise there is a component which is like tax exempt on our portfolio. I would have to say that our normalized tax rate should be somewhere between 25% and 32%, somewhere in that range depending on the mix of tax exempt instruments we have which could be through the investment vehicles that we have or through some of the lending that have tax exempt status. So that’s the one that could change it.

[Alex Twerdahl:]

Okay, great. Thank you very much guys.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back to Aurelio Aleman for any closing remarks.

[Aurelio Aleman:]

Well we thank you all for joining us. And as I always say we are available to continue answering questions or talking we are going to be participating on several conferences in November, Sandler, Deutsche Bank. So we’d like to reach investor community to continue communicating and answering concerns about Puerto Rico and our markets. Thank you all again for joining.

[Operator:]

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.