First BanCorp's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: First BanCorp (FBP)

First BanCorp (NYSE:FBP)

Q4 2013 Earnings Call

February 4, 2014 11:00 AM ET

Executives

John Pelling – IR

Aurelio Aleman – President and CEO

Orlando Berges – EVP and CFO

Analysts

Mike Lardis – Bank of America

Alex Twerdahl – Sandler O’Neill

Todd Hagerman – Sterne, Agee

Michael Rosado – Credit Suisse

Taylor Brodarick – Guggenheim Securities

Brian Klock – Keefe Bruyette & Woods

Operator

Good day and welcome to the February 4, 2014, First BanCorp Conference Call and Webcast to report Fourth Quarter Results. 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. Please go ahead.

John Pelling

Thank you, Gary. Good morning everyone and thank you for joining First BanCorp’s conference call and webcast to discuss the company’s financial results for the fourth quarter and fiscal year 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 SEC 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 webcast presentation or press release issued by First BanCorp you can access it at the company’s website at 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. Thank you everyone for joining. We are going to cover in detail throughout [ph] fourth quarter and the fiscal quarter and also some detail I will need to explain to the market.

On the call with me today is Orlando Berges. He will cover the details and the financial results. I will start with a summary of the year and then a summary of the quarter.

Year 2013 was another very important year for First BanCorp and definitely we saw a slight improvement in our franchise in a number of key areas. As we said before, we continue in parallel executing strategies to improve our risk profile and also strengthen our core franchise and definitely the year. We are pleased to say that we achieve both.

We [indiscernible] in the area of asset quality was our key priority and continue to be. We executed, I have to say timely in early 2013 on two large bulk sales which reduced NPAs by 41% or $513 million also improved in the classified asset ratio.

Excellent progress was mainly in the revenue generation side anchored by an impressive 47 basis point improvement in the NIM to 4.11% and also increasing high quality loan originations in the segments of the portfolio that we know well. We believe we also on the right way, order consumer C&I and important to mention including a strong growth in the Florida market.

Clearly profitability was impacted by these transactions and also was impacted by still debated credit related cost. We posted a net loss of $164 million for 2013. If we exclude the bulk sales we made about $45 million for the year versus $29.8 million the year before.

Pre-provision pretax revenue reach $184 million which we consider strong above $5.3 million versus prior year and definitely we continue through the year to deal effectively with the headwinds coming from the Puerto Rico public sector loss.

On the deposit side, we also made progress, we continue to replace our broker CDs with core deposit which increased by $248 million. This was heavily supported by new product introductions, enhancement to our operation platforms and definitely key hires in our commercial and corporate banks.

Our loan origination lendings in the commercial and consumer mortgage continue to produce positive result with an increase of $600 million to $3.7 billion. And as we said before, we continue to focus on rebuilding our commercial book growing the consumer portfolio including the credit card business and achieving growth in our Florida franchise where the economy is definitely providing good opportunities.

On the year, we use capital wisely to accelerate improving asset quality and we continue to maintain very strong capital ratios definitely [indiscernible] of the availability to continue addressing the legacy credit ratios.

Moving to the next page into the quarter. In the quarter, we posted net income of $14.8 million as we reported this morning. Definitely there is still some noise in the expense line which Orlando is going to color in details, some of it related to additional litigation expense on Lehman. One important one related to optimizing our branch network and also some additional OREO adjustments.

I want to comment on the branch. I think regarding that one-time restructuring cost. It’s important to mention that during the quarter we completed branch rationalization process for Florida and BI on the Virgin Islands. We announced the closure of two – our two Orlando branches and we also announced the closure of two branches in the Virgin Islands.

If you remember in Florida, we began last year realigning the network and the other branches in the Miami-Dade area, which is the area that we like to focus. We had there last year Hialeah and Pinecrest. We also expanded and moved our Coral Gables facility and to our branches we’re moving them to larger facilities as we continue to grow deposit and commercial businesses in the Miami-Dade Broward market. In the BI, we adjusted the network to settle the market and we continue to own the largest ATM branch network in the USVI territory.

We can also adjust this net income adjusted for the two items, net income was $18.5 million. Furthermore, our results were impacted by an additional $13 million related to the measure and increasing in write-downs to OREO properties which Orlando is going to cover in detail.

Again, in the quarter we continued to make progress on the core franchise, the NIM increased to 5.25%, 4.25% I’m sorry by 5 basis points. Deposits including government grew $17 million while brokered CD declined $38 million, government was down $53 million, we can cover that in detail at the end. As part of the development we plan to improve the liquidity of the GBBs [ph] other banks deposits have been moved to the central bank loan – a central government bank.

For the quarter, originations were strong at $972 million. Asset quality was stable for the quarter, NPAs still a 5.7% is the lowest level since 2010 [ph], but definitely we’ll continue to have work to do in that area. It’s important to mention that we did not complete any large sale or a significant sale of OREO or held for sale loans this past quarter and important our DTA valuation allowance stands at $523 million.

Moving a little bit more detail to our loan portfolio, again I – you see the originations by area that includes the $972 million includes approximately most of the quarter. And again, we really focused on the three point strategy the consumer, commercial and mortgage. It’s harder to sustaining the pipeline and we have experienced having the second half of 2013 but we continue to achieve our initial target.

For 2014, definitely we continue to see weakening residential mortgage business in terms of volumes we believe it’s a combination of market rates and we’re going to see this quarter the impact of the Dodd-Frank QMR which was implemented in the beginning of January. But we on the other hand we continue to place additional focus on our Florida franchise where we see an additional opportunity for loan growth. That said, we achieved $57 million in growth in our Florida commercial book driven by new transactions in the territory.

Moving to the next slide on the deposit. Deposit declined 38% but that was driven by as I mentioned by the government. Excluding this we continued to grow the core and we achieved this by reducing the cost by approximately 2 basis points. We actively planning our liquidity plans to – and we’re expecting some additional reductions in government not large but those will be covered by either increasing the core or excess liquidity that we currently carry. Again, this is a journey and we continue to focus our efforts in cross-selling implementing better products which basically helped us achieve the core deposit growing markets. Again, we continued to target for the reduced dependency on broker CDs, which now make 32% of our total deposits.

I’m going now to hand the call over to Orland, so he can discuss some other details of the results of the quarter.

Orlando Berges

Okay. Good morning everyone. As Aurelio mentioned the net income for the quarter was $14.8 million that’s $0.07 a share which compares to $15.9 million last quarter or $0.08 a share. He also mentioned two large items, two large non-recurring items in the quarter. The first one that affected the expense line that was $2.5 million accrual for legal fees that were awarded by the court to a counterparty on the Lehman case. Based on the court judgment we received in December same as the case we are in the process of appealing this court decision but the amounts have been posted on a bond and we accrue the expense.

The second large component was this [indiscernible] of $1.4 million we took on the closing on our consolidation of two Orlando branches and two Virgin Island branches. If we look at this component that it’s made up of two sides, first of all, two of these branches we own, so we move the asset as a held for sale asset. And under our accounting process we booked all gains or losses on assets held for sale that’s part of the other income category. But we took an adjustment to estimate a fair value of those properties by $500,000 and that went through the other income category that we’ll see in the next few slides.

And then there were $900,000 that went through expense that includes lease cancellation fees, write-down of remaining unamortized, improvements and things like that. Those two items, if we adjust the results for the quarter for those two items, they would have been a $18.5 million or $0.09 a share which compares when adjusted net income for the last quarter of $19.3 million to remind that – in that quarter we had also two large non-recurring items which is expense associated with the secondary common stock offering and a convergent of a credit card portfolio that we converted the processing platform.

Results, the results for the quarter also show an improvement of $1.8 million in net interest income, $2.4 million increase in non-interest income that we will then touch up on in detail.

And the other large item Aurelio mentioned and I’m also going to touch up on in detail the $7 million increase in OREO related expenses mostly valuation adjustments. Provision for the quarter increased over $800,000 and we also had a $5.9 million loss on the equity of the unconsolidated entity which is basically a same amount we had in the third quarter. And as you know, we account for this under hypothetical liquidation book liquidation model which is basically assumes that the NPTs liquidated at the end of each quarter.

Looking at net interest income, net interest income for the quarter was $132.7 million which compared to $130.9 million in the prior quarter which is an increase of $1.8 million I’d mentioned. Net interest margin expanded to 4.25% for the quarter compared to 4.20% in the third quarter. This is 34 basis points higher than same quarter in 2012 fourth quarter of 2012. On a taxable equivalent basis, you probably saw on the press release it was 4.40% for the quarter. The improvement, it’s a combination of decrease of $1.3 million or 5 basis points in interest expense. And an increase of $1.4 million in the interest income on investment securities mostly a large part of it with a reduction in pre-payment fees. And this was offset by $1.1 million decrease in loans.

If we look at this decrease in loans, it’s a combination of decrease in residential and consumer of 2.7, while commercial loans – interest income increased by 2 million in the quarter. Residential was basically average balance outstanding and some of them we mentioned as non-performing.

On the funding side, the cost of funds went down 5 basis points. Two main components there, $700,000 reduction in interest expense on Federal Home Loan Bank advances that matured during the quarter and we will not redo it. We didn’t meet the liquidity at this point, so its avail our liquidity for the future. And also $600,000 reduction in interest expense and broker CDs at the average of – cost of the broker CDs went down 6 basis points during the quarter.

We have been sharing this with you over the last few quarters, this quarter we repaid $446 million of matured broker CDs with an all-in cost of 1% and new issuances were $407 million with an all-in cost of 90 basis points taking significant reductions over the last year on this category clearly we don’t have as much space as we still used to have in terms of future reductions. But here a little bit here and there could still happen.

Again, our focus remains to grow non-broker deposits we have been doing over the last few years. And improving the overall funding mix, the average non-broker deposits for the quarter grew $143 million was less at the year-end but the average was 133. And the cost of this non-broker deposits went down by 2 basis points in the quarter as compared to last quarter.

Looking at non-interest income categories. We had improvements $400,000 in mortgage banking revenues and we had improvements of $500,000 in credit card and other loan fees in the quarter. This was partially affected by the $500,000 I mentioned on the per-value adjustment on the assets we are selling as part of the restructuring of the branches. And also there was a recovery of $2.1 million of book and I mentioned is that as you know we have been over the year moving assets held for sale either for disposition or completion of foreclosure processes.

Some specific assets we moved in the first half of the year, we took a write-down in one of them, we completed a foreclosure of some of those assets in the third quarter and the last one was completed this quarter. The fair value adjustment on that asset that just came in on the new appraisal was higher than the carrying amount so we reversed part of the fair value adjustment we had – we keep those assets at the lower cost of market. So we reserved that $2.1 million improvement that you saw on the result.

This one is related to some other charges that we took on the OREO that I’m going to discuss further in the next slide. It’s all part of bunch of properties we took over or have been taking over the last few quarters.

On the expenses Aurelio already mentioned that it was a noisy quarter, expense include $7.5 million which included the two unusual items, the $2.5 million on the attorney fees, last contingent fee accrued and $900,000 expenses on the branch consolidation. But again, last quarter we also had someone timers which had $3.4 million. So if we look at the large components of the increasing expenses, we had $7 billion in rank downs on OREOs, again related part of its related to that same property that took gain on the other side.

Basically this were the 7 million were in Florida commercial properties. We had updated appraisals in all these properties and in several events that affected the values in one case, one of the properties had a large tenant, which takes more than half of the space announced during the quarter that they were going to leave the space. So the appraisal considered that and obviously that reduced the projected cash flows based on the expected absorption times for the property. And the two of the other properties were mostly net operating income reductions.

Again, this have been properties we have been in the process of taking over, we took over the last second half of the year, so we are going to start working some of the revenue components of the property for the future but as of now obviously the values are affected by those reductions in net operating income.

The other large component you saw on the expense side was $2.2 billion increase in credit card processing expenses. In there we still have much higher levels of volumes related to both commercial matter such as for example call center activation efforts to get all this people into the new system, those numbers were fairly high during – still fairly high during the quarter.

And also, we did have credit based on the agreement, the temporary servicing agreement we had before with the seller of the portfolio, people we bought the portfolio from in which we receive a credit based on some parameters and that credit was $900,000 a quarter over the last few quarters. And we expect this expense normalize to be more like the $4 million – $3.8 million to $4 million range that’s where we – on the [indiscernible] expense is going to be.

The other component on the expense side which was large in the quarter was basically business promotion was higher by $1.8 million. In their significant part of it was related to a large marketing effort we undertook once we completed the conversion of the credit card portfolio that – if we launch the card which we mentioned in prior calls we were limited or basically prohibited from doing any changes or issuing any kind of new products. So we lately have been pursuing the relaunching of the credit card portfolio.

Moving to asset quality, the asset quality metrics remain fairly stable. Aurelio mentioned we didn’t have any large numbers – held for sale or OREO sales in the quarter, non-performing assets in total were fairly flat at $725 million, we launched about $600,000 from last quarter. In there but if you look at the composition, we have reduction in non-performing loans including the loans held for sale of $28.3 million from last quarter and an increase in OREOs of $26.9 million. Basically there were several loans that we had on the held for sale category, we completed foreclosure process that were moved into the OREO category, so that’s why you see the shift but, in overall, the balance is too much. So they are all related.

We did see some increase in inflows on the non-performing of $10 million in the quarter compared to last quarter was part of it residential and couple of larger commercial real estate properties that were moved into a non-performing. Obviously these commercial properties were all classified substandard, so it’s a shift from substandard to non-performing.

TDRs were $630 million at the end of December down about $6 million from September. And approximately $425 million of those TDRs are in accrual status, the other are kept in non-performing component. If you look at the carrying amount of the non-performing commercial portfolio, it had a $0.54 on the dollar as you can see on the chart.

Charge-offs for the quarter were $26 million, 1.1% of loans, it’s down from $33 million in the last quarter which was 1.41% of loans, decrease was mostly related to commercial mortgage loans mainly in Florida where we had a recovery on our loan paid-off of $4.5 million recovery on the loan paid off. And we had some increases in C&I and consumer portfolios.

The allowance at the end of the quarter was $286 million allowance for loan losses are representing 2.97% of loans compared to 304 as of the end of September. And the ratio of non-performing, the allowance to non-performing was 57.7% at the end of the quarter slightly down from 58% at the end of third quarter. We did see a reduction in required charge-offs for the quarter.

Our capital position remained strong with improvements in Tier 1 total capital ratio of Tier 1 common can be seen in this chart. Tangible book value per share was $5.30 went down a couple of cents compared to September mostly to adjustments on the other comprehensive income related to some declines in value to the U.S. agency MBS securities we have in investment portfolio. We had a reduction on the MBS was slightly pick up on the Puerto Rico securities. But again, as Aurelio mentioned despite the efforts and the charges taking on the option of non-performing capital remains very strong.

I want to give the call back to Aurelio.

Aurelio Aleman

Thank you, Orlando.

Moving to Slide 18, we share last time the Puerto Rico government exposure and we have said before I want to emphasize that we feel very positive about the steps taken by the government to address the fiscal matters. We see more positive note on that [indiscernible] at this stage obviously the headlines that most of them can reach [indiscernible]. On the other hand we’ve been working closer with the government to make sure that the economic activity matters also are moving ahead at a greater speed.

We have put this slide on exposure to basically there are some of the questions where we see some investors regarding how exposed we are to the government and if you can see we have about $470 million in loans through different areas of the government. There is an increase of 75 from the prior quarter, this represent a short-term tax anticipation now that actually it’s a seasonal one. We’ve been doing this one for many years now.

We feel very comfortable with our government exposure. The majority of the facilities have a specific source of repaying the tax to tax cash flows. So we feel really comfortable with this. Obviously, we have also $71 million on the investment portfolio which cash flows are there and continue to perform on that matter.

In addition, we have 205 of indirect exposure to the tourism development fund is not the borrower but the government [indiscernible]. We probably have the lease exposure to the lower – among the local peers and we will continue to manage this position prudently there is activity of repayment, the line of credit that go down and up through the quarters.

On the deposit side, we have $550 million and basically its well diversified among different NPTs and also about 50% of is related to transactional accounts definitely are stickier as I mentioned before some of it will move out to the balance sheet but we’re not concerned about that part.

Before we move into the Q&A, I want to share some comments that I think are important when we looking into 2014. Obviously, we are prepared to, for this economic recovery to continue to extend, we continue to see enough activity to continue securing our strategy in Puerto Rico but we also have a strategy for the Florida market that has provided some activity and so we are really prepared to manage the cycle on the current conditions.

I think it’s important with low asset quality it’s important to mention that this is a much, we’re starting 2014 with a much different profile on the NPA side than a year ago. Our legacy asset have been reduced to more money or laterals and we have taken significant write downs. So we are starting much better in that front. And definitely Florida continues to provide opportunity for growth and we will take them now we have all the things to execute and we have better bank facilities to execute.

We continue to closely look at our cost structure and we continue to have optimization exercises that will be with the branch networks in Florida and the VI. We always are going to have every quarter some activity looking into our cost. For 2014 definitely asset quality will remain our top priority until we do the NPAs to more asset level and we continue to take the credit cost down.

Well, now let’s open the call for questions. John?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Erika Najarian of Bank of America. Please go ahead.

Mike Lardis – Bank of America

Hey good morning guys. This is actually Mike Lardis on for Erika. Just, I guess firstly, just wanted to talk about, the higher net losses on the OREO operations around 13 this quarter from the 7 last quarter, related to the commercial properties in Puerto Rico and the Virgin Islands. I guess I just I knew it’s their unique situations with these types of properties. So I guess, I just want to get a sense of how you’re thinking about these costs going forward in terms of lumpy you continue this to kind of a lumpy line item in your expense base or do you, you think it will continue to kind of slowly decline. I’m just trying to get a sense of thinking about that going forward thanks.

Orlando Berges

Well, this quarter was definitely much higher than we expected to be honest. There were four large properties in this case where five large properties involved in the current analysis, four of those properties were properties that we enter into OREO on the last quarter. And as I mentioned they had some specific events like one of them had a significant impact on the numbers because of losing the main tenant which had over 60% of the space. So when the appraisal was updated because of that effect that the chart was extremely high. These properties make up almost half it’s over 45% of the commercial portfolio that went for that we just start. So it’s a large chunk of those.

Overall, if you look at carrying amounts you have to divide it the OREO portfolio it’s up 70% commercial and in terms of dollars and 30% residential. We have mentioned in the past about residential we keep at around $0.62 on the dollar which is the experience we’ve had an ultimate disposition of the OREO from UPB I’m talking.

On the commercial side, the number is like 41% or $0.41 on the dollar the carrying amount and so far it’s been pretty close this bunch of properties were all together and we need to work on the revenue component on those as we take over all the managing component of the property. So we don’t, if you look at the past we didn’t have that same level of charges in other quarters that this one was a much higher quarter definitely.

Mike Lardis – Bank of America

Okay, sure. That’s helpful. I appreciate that color. I know you, just kind of a bigger picture in terms of the total expense run rate kind of for 2014, I mean I’m just trying to think of kind of maybe back, is the $95 million to kind of $100 million kind of a run rate the good way to think about it kind of borrowing higher OREO cost. I’m just trying to think of it a general range and just kind of what your thoughts are?

Orlando Berges

Yes. We feel the normalized level that $95 million to $100 million should be a normal running rate. Clearly you bet some of these components if you take the quarter we have the $7 million head additional OREOs and we had the $3 million. So there were $10 million out of the $106 million. So, that $95 million to $100 million assuming a normalized level should definitely be a running rate for a plus.

Mike Lardis – Bank of America

Okay. Okay. Great. That’s helpful. And then lastly here just kind of switching up to the loan growth side. Obviously, loan growth was pretty healthy it would just strength in C&I and it looked obviously a lot that growth looks like it actually came from Florida and the strategies you’ve discussed before. I guess just may be where you’re seeing strength, is there any particular segments or industries in Florida you’re actually seeing the strength and kind of how you think about that going forward in terms of loan growth drivers in Florida?

Aurelio Aleman

Well, we have a fairly well-diversified portfolio. We’re really going after local names. The local names that are being established in the market for long time of period that have an experience in the market would position as a mid-sized bank over there some of those clients are targeted by the very large banks some of targeted by the very small banks. So we feel that we have a niche. We have hired teams as I mentioned before in both the commercial – the commercial middle market segment as well as the corporate segment these teams have experience in the market, they’ve been there for sometime in the different cycles. I will say the only assets that were not on the writing at this stage is construction.

Mike Lardis – Bank of America

Okay.

Aurelio Aleman

We are really focusing on C&I, CRE activity and operating business which we can also sell the cash management part of the business and become core clients and core relationship.

Mike Lardis – Bank of America

Okay. Great. Thanks for the color guys. I appreciate it.

Operator

The next question comes from Alex Twerdahl of Sandler of O’Neill. Please go ahead.

Alex Twerdahl – Sandler O’Neill

Hey, good morning guys.

Aurelio Aleman

Good morning, Alex.

Alex Twerdahl – Sandler O’Neill

Just wanted to dig a little bit into your exposure to the Puerto Rican government and just wondering hypothetically should there be a down grade of Puerto Rican debt by one of the major rating agencies? What would be your direct exposure, or what would be the direct impact to your balance sheet?

Aurelio Aleman

Yes. We don’t believe that there is direct immediate impact or usually we, down grade those I mean default, the downgrading obviously mean the future outlook and we continue to monitor the facilities very closely. If you look at the distribution of the portfolio as I say most of the cash flows, most of the facilities have direct cash flows or operating priorities. So we have some of the facilities to have priority over bonds actually.

So when you look at – obviously, the investment portfolio we need to make the assessment. But not necessarily a downgrade, I mean impediment to investment portfolio because obviously it will depend on the cash flow analysis at that point in time. So answer is immediate impact we don’t really expect any obviously we are very closely monitoring liquidity continuity plans and obviously what the government is doing to make sure that they sustain the liquidity and they will have access to the markets which obviously could be not having access to the market in the future then will be another target.

Alex Twerdahl – Sandler O’Neill

Right. And then I think you said it earlier but the increase in line to the central government over the third quarter the $70 million increase that was entirely a tax anticipation note?

Aurelio Aleman

Correct that’s what we call a trend, Orlando do you want to explain on that?

Orlando Berges

Yes, that was, it’s the facility that government has been taking for years that its share among the banks typically taken beginning of fourth quarter or late third quarter this time was beginning of fourth quarter and its paid up between April and June which is the time of collection that’s property tax facility. So we should, we expect that to be for the normal process.

Alex Twerdahl – Sandler O’Neill

Okay, great.

Orlando Berges

We have been participating on the Alex basically every year for – number of years I’ve been around.

Alex Twerdahl – Sandler O’Neill

Okay, great. And then finally just with two quarters of profitability consecutively in the books, is there any update your outlook on when you might be recapture that DTA valuation allowance?

Orlando Berges

No. At this point, I don’t think it’s anything different from what we discussed before. We still need to choose from profitability quarters, improvement trends and then the analysis going to be based out of that. So we don’t feel there is still anything different to change the outlook. We continue towards several quarters of profitability and cumulative loss and some of the other components like we discussed before like the unusual nature of some of the components like these bond sales and things like that. But I don’t think this changes our outlook.

Alex Twerdahl – Sandler O’Neill

Great. Thank you very much guys.

Aurelio Aleman

Thank you, Alex.

Operator

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

Todd Hagerman – Sterne, Agee

Good morning everybody.

Aurelio Aleman

Good morning, Todd.

Orlando Berges

Hey Todd.

Todd Hagerman – Sterne, Agee

Couple of questions just first on the credit side. Really I was wondering if you could just give kind of your thoughts in terms of what you’re seeing in terms of mortgage, we’ve seen some deterioration just in the overall mortgage portfolio. I’m just curious kind of at this point of the cycle the higher tax rates and so forth what if you’re seeing anything different just in terms of the underlying mortgage pool itself. And then how you’re seeing the just the general effect on the economy and I always going to mention the auto portfolio as well just in terms of trends there?

Aurelio Aleman

Okay. Yes, I think on the mortgage we made a comment on the last quarter regarding the volumes – the reduced volumes in the third quarter. We believe from a consumer standpoint is really the product that has been most impacted by consumer confidence in terms of the consumer making a long-term decision on getting mortgage or buying a property. Definitely there has been an impact in the second half of the year as a reaction of all the negative headlines. You’d coupled that with definitely the market rate we change. So that’s what we saw in the second half of the year if you compare the second half as a market itself, we all banks experience a similar reduction.

Regarding the – in our case regarding the increasing in net NPA in the mortgage, we have to remember that we sold a pool in the second quarter. And in prior quarters some of the key were that would net off the NPAs were coming from that pool that we sold. So obviously, now we have pool that is different. We also – there were some rules in terms of loss litigation and trial periods that they had an impact also when the trial periods were increased from three months to six months before the loan can get back to performance. So it’s a combination of things. Obviously, we know the portfolio very well and we feel it’s not a trend we’re just dealing it specifically, we know the timing of things in the portfolios.

Regarding originations, I think obviously, we also believe when you look at the size of the market, where the market was and you look at the demographic even with the reduced demographic it should be higher volumes. So obviously, it’s going to take some time on the consumer confidence to basically continue to see the higher volume. We expect the first half of 2014 to remain in similar level in that business similar to the second half of 2014 – of 2013. And obviously, we’re looking to compensate some of the mortgage volumes to grow up slowly the business.

Orlando Berges

One thing, Todd. Looking at the numbers that we obviously – when we had the increase in non-performing we monitor that closely. The one thing that the 30 to 89 days delinquency in the mortgage side you didn’t get a replacement of those loans that one is non-performing, in fact that they – it went down from last quarter by $26 million. So we need to continue to monitor that as part of our efforts.

Todd Hagerman – Sterne, Agee

Okay. That’s helpful. And then just secondarily, just in terms of the government deposits held at the bank. I think Aurelio you mentioned there are expectations that those numbers will trend lower. I’m assuming that’s on the time deposit side. But could you just talk just in terms of with those deposits coming down time specifically, how that could potentially impact your funding cost going forward to deposits?

Aurelio Aleman

Well, to be honest we probably get a – we could probably get cheaper deposit in Florida now what we pay the government on time deposits. So that is not a concern.

Todd Hagerman – Sterne, Agee

Okay.

Orlando Berges

From the funding cost, it’s not an issue that the time deposit component had. We look it more from the liquidity component and we see as Aurelio mentioned we would expect some repayments of all the facilities that like the trends that I mentioned before doing this first half of the year. And we have that built into our liquidity plan. So funding cost wouldn’t be an issue, we just monitoring from a liquidity perspective.

Todd Hagerman – Sterne, Agee

Okay. Great. Thanks very much.

Aurelio Aleman

Thank you, Todd.

Operator

The next question comes from Michael Rosado with Credit Suisse. Please go ahead.

Michael Rosado – Credit Suisse

Hi, guys. Michael Rosado, here calling in for Matthew Clark.

Aurelio Aleman

Hi, Mike.

Orlando Berges

Hi, Mike.

Michael Rosado – Credit Suisse

Hi. Can you just talk about the growth opportunity in the credit card portfolio? And if you could provide any detail on line utilization and maybe a general percentage of how many existing FBP customers don’t have an FBP credit card? Just trying to get a sense for the opportunity here. Thanks.

Aurelio Aleman

Well, I think I’m going to talk in general, I don’t want to give you numbers that I don’t have in my hand. But, in general if we gave out the cycle of the portfolio, we acquired this portfolio and this portfolio has been operating for the last four years. We acquired it 18 months ago. And now we that we completed a conversion, we have full control of the portfolio on the marketing activities, prior to that we didn’t have any control of the portfolio. We’re limited in terms of line activation, promotions, utilization, line increases.

So it’s a full menu of things that we believe the portfolio supporting time reached $600 million is down to around $310 million. So obviously, we do expect some increase based on just doing basic marketing activities and cross-sell into our clients and being a more active market here appear on the [indiscernible]. Obviously, we don’t expect to reach the $600 million that it was as in point in time. But, we expect to achieve some growth in the year because of what the cycle of the portfolio was and the activities that we are not – that we were not allowed to do before having the conversion completed.

Michael Rosado – Credit Suisse

Okay, great. Then can you just talk about maybe the outlook for the margin of 2014 and then if there any remaining levers on the liability side in terms of repricing of CDs and wholesale borrowings?

Orlando Berges

Obviously, the opportunities are still there but not as much we had before. We have taken a bunch of them on the broker CD side. The average remaining broker CDs are now close to 1%. And based on the market they – you can issue somewhere between 85 to 90 basis points on average depending on the mix and when I mention average it fell obviously the mix that we are taking out of maturity. You go short as much lower but we go long it’s higher.

So there could be a few basis points in there on a few basis points in the – on the regular time deposits as there are other term are expiring and maturing over the next 12 to 14 months. The benefit – the improvement in our case, we continue to see as we have mentioned before in the funding may change, we still have some more percentage of demand deposit accounts as a percentage of total deposits, and we should and it’s been one of the strategies, launch a new product.

So that funding mix, it’s going to reach the margin. So we do expect some pick-up coming from the funding side I mentioned, the funding mix but not to the extent that we saw in terms of pick-up during 12 to 13 [indiscernible] that we had a large pick-up.

The other thing is that, it’s related to successful or not, how successful we can be on and how quickly we can be on the execution of the reduction of the non-performing because obviously we still have $700 million of asset sitting there. But I’m dealing a much at this point. So you can shift a portion of those into performing clearly it’s going to improve your margins.

Michael Rosado – Credit Suisse

Okay, great. Thanks. The rest of my questions –

Orlando Berges

But we haven’t provided any specific guidance on margins, so I don’t want to mislead you in that sense.

Michael Rosado – Credit Suisse

Okay. Thank you. The rest of my questions have been answered already. Thanks.

Operator

The next question comes from Taylor Brodarick with Guggenheim Securities. Please go ahead.

Taylor Brodarick – Guggenheim Securities

Great. Thanks very much. I think we had most of them, but I guess one question would be on asset quality. If you sort of targeted one to two year out projection for rate like to get NPAs towards and what sort of cost savings on the operating expense side, do you think you can realize if you got asset quality to a more normalized level?

Aurelio Aleman

Well, I think the composition now in bulk NPAs and the rest it’s really assets that are being adjusted significantly $175 million in OREOs and $55 million on held for sale. So obviously as Orlando mentioned gave you some indications as to where the OREOs are, how much lower they need to go, as they continue to move in and out.

Obviously, it’s a factor. But, we like to see NPAs are 5.7, when we combine both. We like to see half of that number. Obviously, sooner the better but I think the driver is going to be the speed of liquidity as you know as we continue there are already 250 of those already disposition state that we can sell any moment. Obviously, the speed of liquidity in the market will continue to meet with investors, we continue to see increased interest in Puerto Rico but that’s really the driver, this take long to close and some of them they didn’t close but that’s really the driver.

Obviously, as we have continued to clean up the legacy book, we have spread migration to improve also and those are the two components. But, we would like to see that happen sooner the better, Orlando provided some costs in the prior call and we can’t make reference to that. Orlando?

Orlando Berges

We had indicated Taylor still the numbers are similar to the one we discussed before. We had $42 million in OREO expenses, all include in evaluation adjustments in 2013. Last call, we had indicated probably on a normalized level, we should be at least $20 million lower than current levels. And that still holds that’s probably I mean with the large hit this quarter, it’s probably a little bit more but that $20 million number should happen with a normalized level of non-performing.

Taylor Brodarick – Guggenheim Securities

Great. Thank you both. Appreciate it.

Operator

(Operator Instructions) The next question comes from Brian Klock with Keefe Bruyette & Woods. Please go ahead.

Brian Klock – Keefe Bruyette & Woods

Hey, good morning gentlemen.

Orlando Berges

Good morning, Brian.

Brian Klock – Keefe Bruyette & Woods

I think, the other guy asked a lot of things I was focused on. I guess just, thinking about where you guys stand with capital levels continue to build and just there is a little choppiness on the credit side but impaired levels are definitely down year-over-year classified levels seem like they are going to be coming down quite a bit too.

And the thing about the regulatory orders you guys have outstanding, it seems like the earnings power is improving, the asset quality levels are coming down or least stabilizing and continuing to drop from higher levels. So I guess, what should we be thinking about is as far as vision to maybe you can comment on specifically but would guys would be able to set returning capital before getting the regulatory orders, left it or is it something you have to wait till after that happens?

Aurelio Aleman

I think the macro plays a big role in all this Brian. When I say the macro is the way, the regulated environment not only for First Banc but for the remaining banks in the island. And I think capital plans would be adjusted accordingly with all the data including the exercise that some of us are going through regarding [indiscernible] compliance which obviously applies to banks over $10 billion are going to be exercised through May 31st.

So I think – I mentioned before Brazil was the determining factor now the stress testing. So I think probably by the second quarter, we have better information to share in that regard. But now, it really – it’s still not clear to us. That’s the reality.

Brian Klock – Keefe Bruyette & Woods

Sure. I think you are right. And going into your I guess the [indiscernible] but it does seem like from my view that if you got a lot of capital that to get through that and think about maybe when you will do your next one, you have got a lot of capital to return it put to work. So I guess we will wait for more information when you can learn more in the second quarter.

Aurelio Aleman

Yes. We hopefully we have some more information by then. Yes.

Brian Klock – Keefe Bruyette & Woods

All right. Thank you.

Aurelio Aleman

Thanks.

Operator

As there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over John Pelling for any closing remarks.

John Pelling

Thanks Gary. We want to thank everyone for their interest in First BanCorp. As always [indiscernible] by phone, in person if you want to escape the blizzard conditions up north. In addition, we will be participating at the Credit Suisse and Sterne, Agee conferences in Boca on February 12th and 13th. We will also be at the KBW Conference in Boston on the 26th and 27th of February.

Thanks again for your time. Appreciate your interest. This will conclude the call.

Aurelio Aleman

Thank you all.

Orlando Berges

Thank you.

Operator

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

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