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OFG Bancorp (NYSE:OFG)

Q3 2013 Results Earnings Call

October 29, 2013 10:00 AM ET

Executives

José Rafael Fernández - President, CEO and Vice Chairman

Ganesh Kumar - Executive Vice President and CFO

Norberto González - Executive Vice President and Chief Risk Officer

Analysts

Brian Klock - Keefe, Bruyette & Woods

Emlen Harmon - Jefferies

Todd Hagerman - Sterne Agee

John Stein - FSI Group

Operator

Good morning. My name is Laurie, and I will be your conference operator today. Thank you for joining us for this conference call for the OFG Bancorp. Our speakers are José Rafael Fernández, President, Chief Executive Officer and Vice Chairman; and Ganesh Kumar, Executive Vice President and Chief Financial Officer. There is a presentation that accompanies today's remarks. It can be found on the Investor Relations website under the webcast presentations and under file page.

Please note this call may feature certain forward-looking statements about management's goals, plans, and expectations, which are subject to various risks and uncertainties, outlined in the Risk Factor sections of OFG Securities and Exchange Commission filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments, which occur afterwards.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. During the question-and-answer session, we ask questioners to not use cell phones as they might call loud static on the line.

I would now like to turn the call over to Mr. Fernández.

José Rafael Fernández

Thank you and good morning to all. I will cover the general overview and Ganesh will discuss key aspects of our financial results. Please turn to slide four. OFG had another strong core performance in the third quarter. We earned $0.34 a share diluted versus $0.68 in the second quarter.

Please note that $0.68 included $0.43 for the other items. The first was a net of increase in our DTA and the second one was an increase in provision related to moving NPLs to held for sale.

There were a number of significant accomplishments during this quarter. First, we saw continued high levels of loan income production of wealth management and banking fees and of deposits. Second, our net interest margin continues among the best in the industry. Third, we further enhanced our already strong credit quality by selling virtually all residential mortgage NPLs booked prior to 2010.

And shortly after the quarter ended we successfully completed the Oriental-BBVA Puerto Rico technology conversion on schedule and on budget. Not only will this enable us to operate more efficiently, it would also enable us to launch new technology enhanced products and services to our target customer base. A good example is our recently introduced Cuenta Libre, our freedom account for online and mobile customers.

On a strategic level, our client base both commercial and retail continues to expand. We are gaining increased recognition for our highly service-oriented approach and now that we have completed the operational and technological integration of Oriental and the former BBVA Puerto Rico operations, we are building a franchise and culture base on a set of core values.

Before I turn the call over to Ganesh, I wanted to speak for a moment about Puerto Rico. As you know, economic and fiscal conditions here are challenging. While it might be a surprise for some outside of Puerto Rico, we have been living and working in this economic climate for seven years now.

Recognizing this increase interest in Puerto Rico’s financial position we are sharing with you more detail about our government-related loans and securities and our outlook for both Puerto Rico and OFG.

As to how the balance of 2013 looks for OFG, given our earnings trajectory so far this year on our pipeline of business we are very confident operating results in the first quarter -- in the fourth quarter should be very similar to the third quarter. As a result, we believe we will be able to exceed our 2013 guidance of $1.55 GAAP EPS.

With that, I’d like to turn the call over to Ganesh.

Ganesh Kumar

Thank you, José. Thank you all for your time. Let me start walking you through operating results that echo José’s sentiments he expressed now. The quarter’s highlight to recap are strong core performance completed technology conversion, vastly improved asset quality, all performance ratios are comparable to state size good performing institutions. In all, we can say we are delivering on our promises we made prior to our acquisition.

On page -- on slide five, you can see that we are building our non-covered loan balances very nicely. We had anticipated some run-off prior to be our -- prior to BBVA-PR acquisition on our modeling. But actual results are much more encouraging.

Balances are up 4.2% from second quarter and slightly ahead of year 2012 combined. These high balances have resulted in a greater level of interest income year-to-date and it has also benefited our NIM trends.

To give you some color on our portfolio, commercial institutional loans showed strong growth. This includes new commercial loans and as well as expanded government loan book that we will be discussing in few slides.

Residential mortgages decreased this quarter. We expect the balances continue to taper down gradually as we do not had more non-conforming loans as part of our overall production.

Other loans were flat, we are primarily maintaining our market share and as well as the portfolio as the production balances, repayments and charge-offs, consumer loans continuing to do well include -- increasing our portfolio.

On page six, we present you the trends in our loan generation. Prior to acquisition we expressed that one of our key strategy is to build our loan generation capabilities. We demonstrated this in second quarter which we are pleased to repeat again in the third quarter.

Production increased 68% from preceding quarter to a record $550 million. This $550 million included a commercial institutional production that was up 250%, approximately $220 of this increase was from the government-related activities which also included $100 million in tax anticipatory credit. Later in the presentation we have a summary of total exposure and show why we are comfortable with our positions that we are holding today.

The balance of the increase in production and the segment was primarily commercial and industrial loans, which we continue to have a good pipeline. Residential mortgage production was down 40% to $61 million and as you have seen in overall in the market we have also seen considerable shrinkage in the local market as well.

As a result, we believe the mortgage production going forward will probably remain at these lower levels. It could also be potentially be lower when CFPB restrictions come into effect shortly.

Auto production is stable. Year-to-date, auto loans have been flat or slightly up. However, we are seeing higher levels of price-based competition in the local market. Consumer production is up and it is getting stronger due to our expanded branch network and integration of our platforms.

On page seven, you can see that we continue to expand our deposit base while reducing our cost of deposits. Since the beginning of the year we have reduced $125 million of expensive time deposits and replaced them with lower cost savings accounts.

Looking at this quarter, you can see the retail balances remained flat after a 7% increase last quarter. Similarly commercial and institutional balances have declined 6% after increasing 9% last quarter.

However, we are able to retain our good quality clientele and as well as the account base, especially considering that we have consolidated the nine branches and as well as completed our technology integration during the quarter.

The deposit interest expenses continue to decline. Our efforts have reduced the cost of deposits from 125 basis points in the second quarter of last year to 94 basis points in the third quarter of this year. At the same time, we have increased our core deposit base considerably.

Looking ahead, we believe account such as Cuenta Libre and other new services in the works will enable us to continue to grow our retail deposit base and as well as further reduce cost of funds.

On slide eight, we are -- you can see we are continuing to achieve high levels of interest income and as well as net interest margin. Loan income is comparable to second quarter removing one-time items. Second quarter yields were higher, however, on a GAAP basis primarily as a benefit of early repayments of acquired loans, cost recoveries of covered loans and as well as other purchase accounting impacts.

Removing this, NIM was almost as same as next -- last quarter. However, on a different or lower on -- U.S. GAAP basis. It is slowly reaching to a more normalized level as the affect of purchase accounting go away.

Over the next few quarters we expect it to reach approximately to 5% level and continue to hold there. That’s a little higher than what we had originally anticipated for 2013 mainly due to higher loan balances that we have been able to do in terms -- and what we have been able to do in terms of deposit cost reductions.

Please turn to page nine. Core non-interest income continues to be strong as we capitalize on our large platform and client base. We are continuing to target $90 million to $95 million in 2013, banking service revenues, however, were slightly down, mainly due to large one-time fees we had in second quarter associated with certain repayments of acquired loans.

Mortgage banking revenues reflect lower level of production as we had discussed previously. Wealth management was down slightly, despite all the turmoil in the local market that kept the transaction volumes down, we have been able to continue to deliver strong results in this area. Broker dealer assets gathered $2.5 billion were down from $2.8 billion in second quarter primarily because of market fluctuations.

Trust -- trust asset managed of $2.7 billion were up from $2.6 billion in the second quarter. Both groups of these assets reflected combination of market changes, or changes in market values as I previously mentioned.

Now, I would like to take a moment to explain our approach to wealth management. As our broker dealer, we have always emphasized risk of our diversified investment approach. Only 3.6% of our total broker dealer assets under management are leveraged by our clients. And around 25% of our assets are invested in PR bonds and closed-end bond funds that come under margin pressure at this point in time.

We are happy to say that we already have a favorable position going forward and we believe in the current crisis. The investment approach in the local market needs to change to reflect the risk involved.

On Page 10, as you can see on the slide from the magnitude of difference, this quarter is close to a normalized quarter. What I would consider as a normalize quarter but for the following items which I’m going to walk through.

First, the provision. The provision reflect the assumption that current despite the loss factors, what we have seen combined in our legacy and as well as our tight portfolio, we’ll continue to -- we'll continue in future. Higher loan balances due to origination result -- also result in requiring new provisions. The covered loan provisions of $3 million reflect the annual cash flow re-forecasting we do periodically to refresh all the cash flows of all the pools in the covered loans.

Second, regarding the FDIC loss share expense. It is down $4 million from second quarter, primarily because of lower levels of cost recoveries as I mentioned earlier. On the third -- third point is the non-interest income. In the non-interest income, we have $1.4 million of a charge associated with selling additional non-performing loans, as we had originally anticipated. This also requires -- this $1.4 million also include $700 million retention by the buyer for -- towards the property tax receipts that we have to pay from the escrow account.

Taxes -- finally the taxes. This quarter, the applicable tax rate remain to be 35%. However, we had two beneficial items that really -- that brought the effective rate down to 25%. The first was the DDA increase due to re-measurement that’s what Rafael mentioned earlier in is -- in his section.

The second is also a closing of the tax, BBVA PR tax positions and certain re-measurement -- certain re-measurement but our purchase accounting adjustment that we did, which has effectively benefited us to bring the tax rate down to 25%. However, going forward, we assumed the effective tax rate to be at 35%.

Let’s turn it over to Slide 11, which is a new slide that we have included to describe our Puerto Rico exposure. In all that you can see, we have $983 million in loans and securities. As you know, we did not have much exposure as of end of last year. The current book of loan is part of the acquired business and the one that we feel comfortable to continue.

Out of the $983 million total exposure, $837 million are in loans and -- remaining $146 million is in the investment securities. In analyzing the exposure that we present, please consider the following three points. First, all of these loans have a very different source of payment. This makes us very confident in calculating the debt service ratios and the ability of various government entities to meet its obligations.

Second, let’s look at the maturities. Two-thirds of our loans because of the nature are -- do have maturity within the next 12 months or so. This is because most of these credits or tax revenue anticipatory notes are other types of short term funding -- short term lending to fund government operating -- government’s operating needs.

Third, the loan and security amounts we are showing do not include an additional 2.61% valuation allowance we had already taken. And this provides us coverage in terms of our provisioning that makes us feel comfortable about the exposures that we have in this sector.

Finally, to give you some more color on the investment securities, our Puerto Rico related Investment Securities fall into two groups. One is $121 million comprised of obligations to be our government-ended subdivisions. Of that. $99 million is a short-term credit facility to the Puerto Rico government, structured like a bond, but is mark to market currently close to par.

The balance of the PR related -- PR related investment security is $20 million of CRA eligible investment that we are required to hold. You can also see that we have around $491 million of deposits from municipality, central government, and other government entities.

On Page 12, you can see our already strong credit quality was further enhanced by our sale of residential mortgages, mortgage NPLs in third quarter. The sale involved a total of $122 million of non-performing loans at 49.2% of UPB. All these loans were originated prior to 2010. As such, they carry higher underlying collateral risk due to their vintage. $62 million of these NPLs were originated by Oriental and they were shown as part of the non-acquired loan credit statistics we present.

This sale enhances our current credit quality. I would like to bring your attention to the reported metrics on table 6 in our financial supplement. Over the last five quarter, we have brought down the NPLs from 10% to 3.4%, a cumulative $37 million charge-off over the same period. Not only our asset quality is better than the local peers but it also compares well with U.S. peers.

More than 50% of our loan portfolio is under purchase accounting with approximately $800 million in non-accretable yield and some with remaining loss share coverage. We believe that these aspects should be considered when our risk profile is compared to other institutions.

We are also very proud that we were able to transform our balance sheet, manage residual credit risk and acquire and integrate a large bank while increasing our combined capital strength at the same time.

As you can see on Slide 13, our shareholder’s equity grew as retained earnings, more than offset the small decline in OCI, due to reduction in unrealized gains on our investment securities. Net income increased shareholders equity by about $20 million this quarter.

Similarly, our tangible book value also increased $0.20 to $13.47. We are very confident in OFG’s ability to grow as all our businesses continue to increase market penetration and profitability.

Capital ratios have continued to improve across the board. As you can find -- you can find all these numbers in our financial supplement and as well as in the presentation. We anticipate our capital position to strengthen further in the subsequent quarters.

That concludes my part of the presentation. Let me turn it over to José.

José Rafael Fernández

Thank you, Ganesh. Please turn to Slide 16. While we are still formulating the details of our plan for next year, we want to give you a broad overview of our thinking regarding the 2014 and 2015.

In general, given the local economic condition, we assume we’ll experience a decline in our interest-earning assets. However, we believe, we would be able to more than offset these cost savings most of which are already built in and thus enable us to continue to progress.

There are three key areas of savings we are focused on. We expect to continue to review the cost of deposits, as the local market gets closer in line with that of the mainline. Two, starting in the fourth quarter of 2013, we expect to begin to benefit from the first way of BBVA Puerto Rico related cost savings with another way starting in the fourth quarter of 2014.

And third, in the second quarter of 2015, we’ll be able to eliminate the large amount of FDIC indemnification asset amortization that we have been expensing so far. We also believe these are -- there are significant core non-interest revenue opportunities in wealth management, insurance and corporate trust. As we continue to take advantage of our new and larger customer base and the recent disruption in the local market.

With no legacy issues, we have a high degree of capital flexibility we can deploy. If interest-earning assets are not where we want them to be, we can return more capital to investors via increase dividends or share buybacks. And if conditions present themselves, we can continue our strategy of market consolidation, to the acquisition of complementary businesses or other strategic opportunities.

Please turn to Slide 16. I’d like to conclude today's call with our outlook for Puerto Rico and OFG itself. With regards to Puerto Rico, we believe that the central government has demonstrated its commitment to meet it debt obligations and to get the economy moving again.

The government has started to enact series of reforms, fiscal pension and relating to public corporations while instituting new tax measures for fiscal 2014, all tailored to reduce structural budget GAAP’s. Tax revenue so far for the first quarter of 2014 fiscal year are coming in slightly ahead of expectations. We applaud all concern for their efforts and have and will do what is safely within OFG's ability to help and lead.

As per OFG itself, the challenges that Puerto Rico faces are not new to us. We have been leaving closely with them since at least the mid 2000. And we’re carefully watching for any negative economic impact the new taxes could have.

With that in mind, our strategy will be to continue what has worked for us so well in the past, that is operating conservatively and being ever mindful of the current economic and fiscal situation and its impact on credit underwriting. Given our financial strengths and focusing on customer service as opposed to price as a differentiating factor, we will continue to concentrate on acquiring a quality clientele.

This is so we can deliver quality results to all our stakeholders, which include our depositors, our retail and business customers, our investors, our people and ultimately the communities we serve.

With this, I'll end our formal presentations. We’re also here with Norberto González, our Executive Vice President and Chief Risk Officer. All three of us will be available for the question-and-answer session. Operator, please open the call for questions

Question-and-Answer Session.

Operator

(Operator Instruction) Your first question comes from line of Brian Klock of Keefe, Bruyette & Woods.

Brian Klock - Keefe, Bruyette & Woods

Good morning, gentlemen.

José Rafael Fernández

Good morning, Brian.

Brian Klock - Keefe, Bruyette & Woods

I guess, just a real quick question, I guess, on clarification then, José Rafael on your earlier comment since beginning of the call, you talked about sort of core run rate of earnings, similar to what the third quarter was. So should we take the $0.34 add back to $0.03 of merger cost, the losses and security and then at the loss and the sale of an NPL so are you talking about a core run rate that’s more like $0.40, so that’s what you mean?

José Rafael Fernández

Brian, I'm referring to really the end of the 2013 year when I -- so I just want to first of all frame it there and I’m just giving a comfort to everyone that we feel very comfortable that the results in the fourth quarter are very much in line with this quarter and your comments are quite accurate.

Brian Klock - Keefe, Bruyette & Woods

Okay. Okay. And then…

Ganesh Kumar

Brian, I would like to add because the $0.35 -- the ETR will go back to be 35% as supposed to be 25% this quarter as of right now.

Brian Klock - Keefe, Bruyette & Woods

Right. Yeah. And I guess thinking about -- can I show, with the net interest income and the margin guidance that you gave and I know you said that obviously there is a lot of the accretable yield in the purchase accounting nose that goes through there and eventually you would expect to see that margin kind of compressed down to the 5% range. It seems like though that you did have some more transfers from the non-accretable discount into the accretable yield. So it almost seems like there’s going to be some more accretable yield coming through the NII line in the next few quarters, does that make sense?

José Rafael Fernández

Correct. We -- not next few quarters lower -- the lower the average, weighted average life of the loan I should say. If you see the 10-Q, accretable yield and then what we are showing in this table preliminary results it’s about $60 million increase in accretable yield quarter-to-quarter between the end of the second quarter and beginning of the third quarter. That’s because of the remeasurement that we are continuing to do.

Basically what are the way we work was throughout the year, we have until December 18 to do the remeasurement, complete the remeasurement. We take pull-by-pull, our loans in terms of significance, in terms of balances and continue to work down. So that’s part of the changes.

And I think if you ask me, are there more remeasurement that is yet to come, we are almost very closed to performing it and are showing it and therefore, there will be very little changes in the next quarter and that’s why I think I’d said that this quarter is very closed to being a normalized quarter. And to me I think the noise primarily comes from some provisions, higher provisions because we did a higher covered provisions as part of the annual recasting and the FDIC is always the issue and then the tax.

Brian Klock - Keefe, Bruyette & Woods

Got it. Okay. Thank you. I’m going to jump back in the queue. Thanks for taking my question, guys.

Operator

Your next question comes from line of Emlen Harmon of Jefferies.

Emlen Harmon - Jefferies

Hey. Good morning, guys.

Ganesh Kumar

Good morning, Em.

Emlen Harmon - Jefferies

I was actually hoping to continue on the provision for a little bit as well, did see -- you guys increase the reserve on parent consumer and auto books? Could you give us a little bit a color behind the decision there and do you feel like the provision on a non-covered portfolio is kind of at a run rate we should expect going forward?

Ganesh Kumar

If you see (inaudible) what we did Emlen is obviously our LNS methodology replaces what charges we have done, so because that is our historical loss factor. And we assume as I mentioned that going forward the historical loss factor is the actual experience that we are going to have. It’s not going to any more lower than that. That is our assumption working assumption.

And if you consider our production levels, if you have to maintain the same 2% sort of allowance to the total loan portfolio, if you take the new production and see the basically the 2% is what we have provided as for the new loans.

Emlen Harmon - Jefferies

Got you. Okay. But, I mean, the balances there were on a net basis, I guess, relatively flat in those two books. So, I guess, based on what you’re telling me, I mean, if we see kind of limited growth in the auto or the consumer books, we essentially expect to you guys be replacing charge-offs from this point going forward?

José Rafael Fernández

Emlen, remember that, what you’re saying at the overall book…

Ganesh Kumar

Exactly.

José Rafael Fernández

… is correct, but we have the new book is growing quite rapidly on the consumer side.

Ganesh Kumar

And thus was the auto. The way it happens, Emlen, is the -- what our production, the net of the charge-offs and all those kind of outflows, it comes out of the SOP book and it goes into the new book, which needs provisions.

Emlen Harmon - Jefferies

Got you. So there is going to be a churn essentially over the next year or too.

Ganesh Kumar

Exactly.

José Rafael Fernández

Correct.

Emlen Harmon - Jefferies

Yeah. Got you. Okay. And then still -- couple of questions on the expenses, the decline in interest earning assets you noted they were some expense saves that come along with that? Is that separate in distinct from the kind of three areas that you laid out near the tail end in your prepared remarks?

Ganesh Kumar

Decline in interest, say that, could you repeat the question again?

Emlen Harmon - Jefferies

So, yeah. Sure. So you know, you’re expecting a decline in interest earning assets, as we head out in to next year?

José Rafael Fernández

Correct.

Emlen Harmon - Jefferies

And in conjunction with that you would also say there were some cost savings, I guess, that you were expecting to kind of help offset that, was that something separate in distinct from the three areas that you laid out for us at the very end of the call here or is that -- those expense kind of included in those three areas?

José Rafael Fernández

They’re all included. They’re all included. And as I mentioned part of those sales from deposit cost saves that we anticipate. And including in that we can also say that we have already taken some BBVA costs saves in 2013, which we will add into 2014 additional portion and together the full impact you will see it in 2015. And that’s kind of how we have laid out the cost saves into the acquisition.

Emlen Harmon - Jefferies

Got it. Okay. And one final one if I could, kind of say thanks is there going to be a little bit of color on how you’re thinking about capital longer term? How should we think about return to shareholders versus keeping something in store for kind of strategic activities that may come up? Should we think about you guys are kind of at a level in 2015 where you can -- you feel like you have some capital in store for doing acquisitions or other strategic actions and we should expect the majority of earnings to be return or how do we think about kind of where you are in 15 and what you want to hold in store for anything that comes up?

Ganesh Kumar

The way we look at it, Emlen is we kind of look at tangible common equity levels and we think we should operate slightly above the 8% TCE. So right now we are around 7.43% and we think that we can target 8% on the TCE we will be comfortable kind of having, I don’t want to use a word excess but I guess, I’m, so comfortable with levels of capital. We are comfortable today but we will be then getting into some more, let say capital management strategies. Having said that and as I mentioned on my prepared remarks, we feel that there is an opportunity for us to start looking at the dividend and start evaluating that possibility.

Emlen Harmon - Jefferies

Okay. Thanks. Appreciate the responses.

José Rafael Fernández

Welcome.

Operator

Your next question comes from the line of Todd Hagerman of Sterne Agee.

Todd Hagerman - Sterne Agee

Good morning, everybody.

José Rafael Fernández

Hi, Todd. How are you?

Todd Hagerman - Sterne Agee

Good. Thank you. Couple of questions. First, Ganesh, one of the leverage points is the cost to funds as it relates to deposits specifically, and I was wondering if you could just talk a little bit more, as I look at the average yields in Table 5 I noticed that, I noticed you the both brokered and the borrowings did come down which is positive yet. The brokered deposits really not change in yield and we had a pick up on the borrowing side. I’m just wondering if you could just give a little more detail in terms of those leverage points particularly with some of those higher cost funding sources.

Ganesh Kumar

Sure. As I mentioned, Todd, that we do have time deposit and as well as some institutional CDs that are maturing and we are going to reprice them and I think that’s in the plan. And we have not taken wholesale efforts in order to reprice the consumer deposits primarily because we were focusing on integrating the organization and the branch network and all those kind of things.

So there, as we have always said there are some opportunities in deposit cost reductions and I think the first order of business after this quarter for us is to take a look at the institutional time deposits and continue to wind down the broker CDs as we run access of loans, so as they become mature and I think that is our first starter of business. And then in 2014, we can always take a look at lower cost deposits on the consumer side.

José Rafael Fernández

I also point -- like to point out also, Todd, that during the quarter we also took advantage of restructuring or the maturity of a couple of repos that we had. And that’s why you see a little bit of a higher cost on the repos this quarter and that is basically us maintaining our asset and our liability strategies in place, as we had some short-term repos that we wanted to extend for one and half to two years going forward.

Todd Hagerman - Sterne Agee

Okay. That’s helpful. And just a follow-up, Ganesh, in terms of the institutional time deposits, could you just give us a sense of what the kind of average rate there is and what the order of magnitude kind of where that could possibly reprice?

Ganesh Kumar

It’s the institutional deposits. When we referred to institutional deposits, are primarily deposits from local cooperatives and there is absolutely no need for excess liquidity at this point in time, and therefore these deposits which are price at 120 basis points, as and when they come to maturity we maybe able to offer them lower rates. And in case if they don’t renew into continue the relationship, we do have liquidity, enough liquidity and loan to deposit coverage to let them go. So, I think the primarily, as I said this quarter, we need to take a look at those relationship and start repricing them as we can.

Todd Hagerman - Sterne Agee

Okay. Great. And then just finally, José you mentioned about the positive pipeline I believe on the commercial side. I’m just curious in terms of this quarter, if you could just give a little bit more detail in terms of the impact that the government borrowing did have on the growth this quarter and kind of related to the pipeline going forward, does the government play that segment, play any kind of meaningful role in terms of your pipeline going forward?

José Rafael Fernández

Yeah, let me say a couple of things. One, Ganesh mentioned in his remarks, the exposure that we have to the government of Puerto Rico was pretty much acquired from the BBVA acquisition back in December. And I think we are pretty much covering our exposure in terms of how much more we want to be exposed in terms of the government of Puerto Rico. Having said that though, we are here to continue to work with the government and try to help and lead in terms of what needs to be done to help get things restarted in terms of the economy.

From that angle, I can say that the production here this quarter was basically a tranche that matured in the second quarter that we had a $125 million of tranche that matures and we basically originated a new tranche for $100 million on the same type of tax anticipation note which will come due April, May and June of next year.

The rest is a couple of municipal, a very strong municipal loans that we gave and these are municipalities that have a very longstanding relationship with us in terms of other banking products and services and we feel very confident and comfortable with their operations. I would say, we also did couple of significant new loans on the commercial side that add to our good relationships, commercial relationships and we can now continue to grow those and expand those client services as we have more capabilities now.

Todd Hagerman - Sterne Agee

That’s very helpful. I appreciate the comments.

José Rafael Fernández

Welcome.

Operator

(Operator Instruction) Your next question comes from the line of John Stein of FSI Group.

John Stein - FSI Group

Hey, guys. Just a couple more questions on the Puerto Rico loan exposure and thank you for putting this Slide 11 in here. But the 2.61% valuation allowance is that just on the investment securities portfolio or is that on the overall portfolio?

José Rafael Fernández

That is actually not in the investment portfolio, it’s on the loan portfolio and it’s part of our acquisition mark.

John Stein - FSI Group

So that’s the acquisition mark, okay.

José Rafael Fernández

That’s the general valuation allowance and the securities’ mark to mark.

John Stein - FSI Group

But the new loans that you’re making, you are specifically provisioning on?

José Rafael Fernández

The new government loans?

John Stein - FSI Group

Yes.

Ganesh Kumar

According to our provision methodologies?

José Rafael Fernández

The general valuation allowance and according to provision methodology, it’s covered under the provision.

John Stein - FSI Group

And what is the yield profile of the new government loans that you are putting on?

José Rafael Fernández

The new government loans are coming in around 350 to 400 basis points above LIBOR and remind you -- let you know that these are tax exempt, so there is a effective tax, a yield…

Ganesh Kumar

Full time equal of -- fully taxable, equal in this fair.

John Stein - FSI Group

Okay. And here you emphasize relatively short duration, do you expect to keep the portfolio size stable as these loans mature or shrink it down?

José Rafael Fernández

It just really depends. We do have a constant communication with the government and I think we need to work with them and make sure that we help on all fronts. So my expectation would be to keep it at this level and if there are some opportunities to reduce that exposure we will take advantage of them, but we also want to be able to provide some help locally.

John Stein - FSI Group

Okay. Thank you.

José Rafael Fernández

Welcome.

Operator

At this time, there are no further questions. I will now turn the call back over to management for closing remarks.

José Rafael Fernández

Thank you. And we look forward to talking to you next quarter when we hold our fourth quarter call next year actually. Thank you all for your time and have a great day.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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