Popular's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: Popular, Inc. (BPOP)

Popular, Inc. (NASDAQ:BPOP)

Q1 2014 Earnings Conference Call

April 23, 2014 11:00 AM ET

Executives

Brett Scheiner – Investor Relations Officer

Richard L. Carrión – President, Chairman, and Chief Executive Officer

Carlos J. Vázquez – Executive Vice President, Chief Financial Officer and President-Popular Community Bank

Analysts

Brian Klock – Keefe, Bruyette & Woods, Inc.

Kenneth Zerbe – Morgan Stanley & Co. LLC

Gerard S. Cassidy – RBC Capital Markets LLC

Taylor Warren Brodarick – Guggenheim Securities LLC

Operator

Good morning and welcome to the Popular, Inc. First Quarter 2014 Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. And now, I will turn the call over to the Investor Relations Officer at Popular, Inc., Brett Scheiner.

Brett Scheiner

Good morning and thank you for joining us on today’s call. Today, I’m joined by our Chairman and CEO, Richard Carrión; our CFO, Carlos Vázquez and our CRO, Lidio Soriano who will review our first quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, I would like to remind you that on today’s call, we may make forward-looking statements that are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. You may find today’s press release and our SEC filings on our webpage at popular.com.

I will now turn the call over to Mr. Richard Carrión.

Richard L. Carrión

Thank you. Good morning and thank you all for joining the call. I’d like to first address the highlights and key events of the first quarter, discuss the details of our U.S. reorganization plan announced this morning and provide some updates regarding the economic situation in Puerto Rico. Carlos will then go into greater detail on the quarter’s financial results and Lidio will provide an update of credit trends and metrics.

So please turn to the second slide. In the first quarter, Popular earned net income of $86 million, well ahead of adjusted results for last quarter and last year’s first quarter. We continue to generate strong revenues with capital levels above peer averages. Our net income drove tangible book value per share to $38.71, up from $37.56 last quarter.

Our margin of 4.70% declined slightly from last quarter’s 4.74% as continued improvements in funding costs; partially offset last quarter’s additional income from resolutions in the covered loan portfolio. Our spreads remain strong relative to peers with our Puerto Rico net interest margin close to 5.5%.

Total NPAs this quarter of $956 million including covered loans were up slightly from $932 million last quarter. Non-covered NPLs were $635 million or 2.9% of non-covered loans, up from $598 million or 2.8% last quarter. While aggressive loss mitigation efforts, resolutions, restructurings and NPL sales continue, one credit relationship of approximately $52 million was put on non-accrual status in the quarter, impacting our credit metrics.

Excluding this one relationship, NPAs and NPLs were stable. NPL inflows increased $64 million when compared to the previous quarter, mainly due to the result of the aforementioned Puerto Rico commercial credit relationship. Puerto Rico mortgage inflows of $89 million were down $5 million from last quarter’s $94 million. Our net charge-offs were $43 million or 80 basis points, up from last quarter’s $35 million or 66 basis points from stable growth charge-offs, but slightly lower recoveries.

On the capital management front, BPNA has received approval to pay a $250 million dividend to the holding company. Concurrently, we will also contribute $100 million of this balance to BPPR. after giving effect to this capital rebalancing, the holding company’s cash will be approximately $680 million.

Please turn to Slide 3. over the last three years, we’ve been talking about increasing optionality in our U.S. franchise. today, we have announced a number of strategic initiatives in the U.S. since we opened our first branch in 1961 in the Bronx, we’ve pursued strategic opportunities with an eye toward adding diversification and profitable growth to our strong Puerto Rico franchise.

With that in mind, we have decided to focus strategically on our New York metro and South Florida regions and have signed definitive agreements for the sale of our operations in California, Illinois and Central Florida in three distinct transactions. These strategies are intended to simplify our operations, provide capital release and improve the return on capital of our U.S. operation.

In addition to the sales, we have also announced plans to consolidate our Rosemont, Illinois and Orlando, Florida operations center, transferring most of these support functions to Puerto Rico and New York. This will right size our back office to that of the resulting bank’s asset base, providing greater operating efficiency.

We anticipate an estimated $50 million restructuring charge and an estimated $160 million goodwill write-down associated with these efforts in the coming quarters. We also expect the decrease in expenses from the branch sales and the other efficiency initiatives to offset a comparable reduction in revenues that result from the asset sales.

Our operations in the U.S. will be headquartered in the New York metro area with the presence in South Florida. We will continue to look at all components of BBNA’s balance sheet to manage credit quality and required capital.

As such, we expect the mix of improved relative profitability and capital relief to yield much improved returns on capital for our U.S. business. Additional details about these transactions are available on Slide 3 and in a separate press release issued this morning.

Please turn to the next slide. Regarding our TARP application, we continue an active dialog with our regulators, but our application has not yet been improved. And as we have said previously, we cannot speculate on the timing or the conditionality, if any, of an approval. However, we believe that actions such as the rebalancing of capital within our banking subsidiaries and increase liquidity at the holding company are positive steps, which move us closer to the repayment of TARP and we hope to have more information regarding our TARP application in the near future.

Slide 4 includes pro forma capital ratios for the first quarter, excluding all $935 million of TARP funds. These ratios include the impact of the reversal of the approximately $404 million of unamortized discount related to TARP funds. Our Tier 1 capital and Tier 1 common ratios are 19.4% and 15.1%, up 20 basis points and 30 basis points respectively over last quarter.

With our Tier 1 common equity ratio, exceeding the CCAR 5% target by $2.4 billion. In addition the market value of our remaining stake in EVERTEC is approximately $280 million, and significantly exceeds our positions current book value of $20 million. As investors, we will continue to participate in a proportionate share of the company’s income. EVERTEC remains an important business partner and a valuable asset that also represents an additional source of capital flexibility.

Before I turn it over to Carlos, let me comment on the Puerto Rico economy. Over the last few quarters, we have mentioned that despite the volatile environment, we were more confident in the island’s fiscal outlook than we were earlier in 2013.

This improved outlook is due to recent government actions including pension reform, as well as revenue and expense results for the island’s fiscal year that are ahead of budget. We’re encouraged by recent government measures and pleased to see the island’s liquidity position improve considerably by the $3.5 billion debt issue completed in March.

The recent judiciary ruling on the teachers pension plan is a small setback that is offset by achievements such as a Lufthansa aircraft maintenance facility in Aguadilla, expected to create 400 new jobs on site, as well as a multiple of that figure in indirect jobs.

In the short-term however, measures taken to improve the government’s fiscal health may decelerate the pace of Puerto Rico’s economic improvement, but we continue to believe they are positive reforms for the long-term strength of the economy.

While we have operated in a weak economy for most of the past seven years, the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years. We continue to be particularly attentive to our portfolios and see no indications or signs that would lead us to anticipate a material change in the stability of our credit metrics in the coming quarters. While sustained economic weakness is not an ideal business condition, it would not represent an environment that is particularly foreign to us.

We’re confident that our significant liquidity, excess capital levels and strong internal capital generation will continue to be key to our future performance. Lidio will expand on our Puerto Rico government exposure later in the call. I would note, though, that as we stated last quarter, this exposure does not represent a random sampling of Puerto Rico municipalities or government entities, but a deliberate and carefully underwritten book of business, particularly with our senior interest in the borrowing entity's cash flows, identify our revenue as sources of payment and specific collateral.

Finally, I’d like to mention that after 22 years of dedicative service at Popular, Corporate Treasurer, Richard Barrios has decided to retire. We deeply appreciate Richard’s commitment and contribution to Popular, as he helped shepherd the bank through both prosperous and difficult times. We are joined today by [Juan Pablo Perez] (ph) who has already begun to transition into the Treasury function. Although, Richard leaves behind big shoes to fill, we’re confident Juan Pablo’s ability to continue what has so far been a seamless transition and we wish Richard all the best going forward.

So please turn to Slide 5. Our CFO, Carlos Vázquez discusses our financial results in further detail.

Carlos J. Vázquez

Thank you, Richard, and good morning. On Slide 5, we present our financial summary for the first quarter. Please note that the fourth quarter data is reconciled to GAAP figures in the appendix to the slide deck with supporting information in today’s earnings press release. As has been the case in recent quarters, our underlying performance continues to be driven by one, stability in net interest income; and two, stability in credit trends.

Variances to our fourth quarter results stem mainly from the FDIC loss share expense, covered loan provision and the operating expense lines. Details of these variations can be found in our press release.

Net interest income for the first quarter was $373 million, down $3 million from last quarter mostly as a result of two less days in the first quarter where lower funding costs were offset by lower covered loan yields. Our loan portfolio was down slightly from the prior quarter, as flat non-covered balances were offset by covered loan runoff. Economic weakness and covered asset runoff are headwinds, but we remain hopeful that we can maintain flat non-covered loan balances to the end of 2014, excluding the effect of the recent sales at BPNA.

Our recent strategy in Puerto Rico has been to offset limited organic growth with selective loan portfolio purchases. This quarter, we acquired a portfolio of personal consumer loans of $19 million, yielding over 10%. The average yield in our $2.9 billion covered loan portfolio declined 25 basis points to 11.18% for the quarter, reflecting the absence of benefits previously disclosed and recorded in the fourth quarter. Our funding costs continued to improve in Q1. Total deposit costs in the period fell 3 basis points to 57 basis points.

During the quarter, Banco BHD, Popular’s investment in the Dominican Republic completed an all-stock acquisition of a local competitor, Banco Leon. This transaction grows BHD’s $3 billion balance sheet by an additional $1 billion and solidifies the bank’s position as the second largest bank in the Dominican Republic. The purchase closed on February 1 of this year. Our ownership stake in the resulting new larger BHD declined to 15.8% from the previous 20%. Popular’s other operating income this quarter includes a $6.5 million pretax gain as a result of this transaction.

Non-interest income decreased by $5 million, compared to last quarter’s normalized results, as income from mortgage banking activities decreased by nearly $11 million, which includes a $5 million negative impact the fair value of MSRs. In addition, the seasonal insurance commission recognized in the fourth quarter were not present in Q1. These are partially offset by the previously mentioned gain from BHD.

Our Puerto Rico mortgage business originated $319 million in Q1, up from $287 million in last quarter, but down from last year’s $357 million. We continue to expect an average quarterly pace originations similar to this quarter through 2014. While there are many moving parts in the mortgage line items, this quarter’s decline in mortgage banking income was largely due to the previously mentioned negative MSR valuation adjustment, in addition to lower gains from sale of mortgages. Table F in the press release includes further information around our mortgage banking business.

Trading account activities were $3.5 million higher than prior quarter due to positive marks in our mortgage-backed securities portfolio. Our trading portfolio of Puerto Rico bonds and closed-end funds held by our broker-dealer subsidiary, Popular Securities remains at $12 million flat to last quarter.

This quarter’s increase in FDIC loss share expense stems mainly from additional income due to this quarter’s higher covered provision level, offset by the effects of better experienced and forecasted cash flows from the Westernbank portfolio. Managing the expense side of our operations is a top priority and we are committed to capturing every opportunity to do so. This quarter’s improved operating expense level reflects its efforts, although we benefited from some seasonally low expense items.

Total operating expenses for the quarter were down $26 million to $297 million, as expense reductions occurred in nearly every line item. the largest being profession fees, business promotion and the FDIC deposit insurance expense. While subject to a degree of variability and seasonality, as previously mentioned, we expect quarterly operating expenses to average at the lower end of the previously disclosed $305 million to $310 million range for the remaining of the year, excluding the impact of the BPNA reorganization. Our tax rate for the quarter was approximately 21% due to higher income from our U.S. subsidiaries. Our tax mitigation efforts are ongoing and we reiterate our estimate of an annual effective tax rate of 31% for 2014.

Please turn to Slide 6. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to well capitalized regulatory requirements. Our Tier 1 common equity ratio stands at 15.1% and represents an excess of $2.4 billion over the 5% CCAR target. Adjusting for the potential repayment of TARP, we expect our capital levels to continue to exceed well-capitalized requirements under the Basel III guidelines.

The rebalancing of our capital between our banking subsidiaries and the strategic moves announced today in our U.S. business reflect our commitment to increase our strategic and financial flexibility, while maintaining strong capital levels. Please note that any potential capital release streaming from the strategic actions in the U.S. is incremental to the dividend from BPNA to the holding company previously described by Richard.

We think to maintenance strong capital levels appropriate for Popular’s risk profile and eventually pursue, we do call our regulators, other capital management and distribution strategies including the repayment of TARP.

Improving this in operating efficiency and these potential capital allocations will help us move towards our target of a double-digit return on tangible equity.

With that, I will turn the call over to Lidio.

Lidio V. Soriano

Thank you, Carlos, and good morning. Before we begin, looking at some of the specifics of the Corporation’s credit indicators for the first quarter of the year let me make a few general comments related to trends from our loans portfolios. In the U.S. we continue to benefit from our improving economy and the results of our de-risking strategies.

In first quarter, the pace of improvement accelerated, as we were able to resolve a number of non-performing commercial relationships. U.S. NPLs and NPAs decreased by 32% and 28% respectively, mainly driven by loan resolution and loan sales.

Two important milestones were reached during the quarter. The NPL ratio decreased below 2% to 1.8% and this all remaining non-performing construction relationship was resolved during the quarter. U.S. net charge-offs we a net recovery of $2.7 million in the current quarter, compared to a net loss of $111,000 during the fourth quarter. In Puerto Rico, the classification to non-performing of one borrowing relationship of $52 million affected the credit metrics for the quarter. Excluding this relationship credit metrics this quarter were stable.

I will note that this new non-performing relationship is current and paying and despite it’s classification we expect continued performance. Puerto Rico non-performing loans increased by $85 million for the fourth quarter of 2013 largely driven by increases in commercial and mortgage NPLs.

The increasing commercial NPLs is mainly driven by that previously mentioned single credit relationship. The Puerto Rico net charge-off ratio increase to 1.16% from 90 basis point in the previous quarter which benefited from the sales of previously written off consumer loan. Excluding these recoveries net charge-off remains stable during the first quarter of 2014.

Puerto Rico early delinquencies increased during the quarter, driven by the majority of credit facilities of certain commercial clients, these relationships are current in their interest payments, are in the process of renewals which respect to complete during the second quarter. Excluding this relationship a leader delinquencies were stable during the quarter.

Turn to Slide number seven to go into the details. Non-performing assets increased by $24 million on a link-quarter basis, primarily driven by increases of NPLs in Puerto Rico. Offsetting part by a decrease in other real estate owned of $8 million, mainly due to a disposition of our close properties from the cover loan portfolio.

Non-performing loans increased by $37 million from the previous quarter, largely driven by increases in Puerto Rico offsetting part by declines in the U.S. region. In Puerto Rico, NPLs increased by $85 million due to increases in commercial and mortgage NPLs of $60 million and $23 million respectively. As discussed in my introduction, the increasing commercial NPLs is driven by a single borrowing relationship of $52 million.

For mortgages what inflows are down the increase of mortgage NPL is mostly driven by reduce level of outflows resulting from the bulk second period during the second quarter of 2013.

In the U.S., NPL decreased by $48 million or 32%, mainly due to the continued improvement in credit performance and non-resolutions. The improvements in the U.S. NPL balance were broad based with every loan category improving. Commercial and construction including [legal fee] (ph) improved by $41 million or 36%, mortgage improved by $4 million or 15% and consumer improved by $3 million or 23%.

Please turn to Slide number 8 for a summary of the trends in NPL inflows. NPL inflows excluding consumer loans increased by $64 million from the previous quarter, principally driven by an increase in Puerto Rico commercial loans coupled with a slight increase in U.S. commercial loans. In the U.S., inflows of non-performing loans increased by $7 million from the fourth quarter of 2013 principally driven by a $10 million commercial credit relationship which was subsequently sold during the quarter. Excluding this relationship, NPL inflows decreased by $3 million from the $16 million reported in the fourth quarter of last year.

In Puerto Rico the increasing commercial NPL inflows is driven principally by the $52 million borrowing relationship discussed previously. Excluding this relationship, NPL inflows increased slightly driven by an increase of $8 million in construction loans, offset in part by $6 million improvement in mortgage NPL inflows.

Please turn the next slide to discuss the net charge-off provision allowance for loan losses. Net charge-offs for the first quarter amounted to $43 million or 80 basis point, compared to $35 million or 66 basis point in the previous quarter. The increase of $8 million is mainly driven by the gain recognized in the fourth quarter, resulting from the sale of previously charge-off Puerto Rico consumer loans. Excluding this sale, the net charge-off ratio was stable. In Puerto Rico, the net charge-offs were $46 million, an increase of $11 million from the fourth quarter were mainly due to the effect of the just mentioned sale of previously charge-off consumer loan.

The net charge-off ratio remains stable during the quarter, excluding the effect of the sale at 1.15%. In the U.S., net charge-off were a net recovery of $2.7 million, compared to a net charge-off $111,000 in the last quarter, driven by the resolution of a number of commercial relationship above book value. The provision to net charge-off decreased to 110% from a 135% in the previous quarter, excluding the effect of the recoveries from the loan sales in the prior quarter, the provision to net charge-off remains stable quarter-over-quarter.

The provision to net charge-off ratio is driven by current economic conditions in our main market Puerto Rico. At 117% the ratio of Puerto Rico reflects continue weakness in some of Puerto Rico economic indicators. In the U.S. continued improvement economic conditions and credit metrics led to a reserve release of $7 million for the quarter. The overall ratio of allowance for loan losses to non-performing loans decreased to 85% from 90% in the previous quarter.

To summarize, the pace of credit improvements accelerated in the U.S. driven by the resolution of a number of commercial relationships. In Puerto Rico, the classification to non-performing of a borrowing relationship of $52 million, somewhat restarted the credit metrics for the quarter. Excluding this single borrowing relationship, credit metrics were stable.

Before turning the presentation over to Richard for his concluding remarks, let me briefly summarize our Puerto Rico government exposure. Please turn to the next slide. Our current direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $1.1 billion, of which approximately $944 million is outstanding, a decrease of $6 million compared to the previous quarter. Of the amount outstanding, $781 million consist of loans, $163 million are securities. Our direct exposures can be divided into two main categories, loans to the central government and public corporations and loans to municipalities. Our largest exposure is to the central governments are collateralized by property taxes at $145 million plus some more than $100 million in tax and revenue anticipation notes. Both are short-term facilities to fund working capital needs.

Our largest to exposures to public corporations are to the electric power authority and the [electrical] (ph) control authority for $74 million and $75 million respectively. Both are also short-term facilities to fund working capital needs. Our municipality exposure is mostly a diversified portfolio of senior priority loans to a select group of municipalities whose revenues are independent of the central government. In addition to this direct exposure to the government, we also have indirect lending facilities in which the government acts as a guarantor.

In the case of these loans, our primary credit exposure is to non-government borrowers and secondarily to underlying collateral. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee similar to efficient programs in the U.S.

With that, I will like to turn the call over to Richard for his concluding remarks. Thank you.

Richard L. Carrión

Thank you, Lidio. Please turn to Slide 11. Before we open the lines to questions, let me conclude today’s remarks by reviewing the Puerto Rico government financial situation and the actions we’re taking to drive shareholder value. Recently implemented fiscal measures continue to be significant with government revenues and expenses remaining on target. We are working closely with other business leaders to offer cooperation and guidance to the government wherever appropriate.

In addition to the continue investment of local entrepreneurs in new and existing opportunities, stateside investors have purchased more than $2 billion in Puerto Rico commercial and real estate assets, alongside the $3.5 billion raised in the government’s last financing. In fact, tomorrow we are major sponsor of an investment summon in Puerto Rico, which will focus on the benefits of the island’s taxing incentives and we’re expecting close to 200 investors.

We remain optimistic about the prospects of Puerto Rico emerging from the current situation with a stronger and more vibrant economy. As I mentioned in our annual report this optimism does not stand from blind face, it comes from experience. The 120 year history of Popular has allowed us to witness events such as the change of sovereignty two of the worse, The Great Depression and devastating hurricanes. Throughout this history, we have seen Puerto Rico transform itself time and time again, a testament to our resilience and resourcefulness.

Our healthy revenue generation uniquely positions us to benefit from an eventual economic recovery and yields reasonable returns, while the leading market position of our unique Puerto Rico franchise continues to allow us to sustain above average margins. We remain cautious, but are encouraged by the ongoing stability in our credit quality indicators in Puerto Rico, as our covered portfolio continues to produce better than-expected results and we have not seen significant signs of stress in our loan portfolios.

Popular's credit risk profile is meaningfully different from the one with which we entered this credit cycle, which together with our strong capital position improves our outlook. We have reached a milestone in our strategic thinking in the U.S. and are refocusing our business to improve returns, as well as operational and capital efficiency in the region.

In summary, we are driving value for our shareholders as we remain focused on creating revenue opportunities while effectively managing credit, our capital and our overhead costs. We have robust capital under existing Basel I capital requirements, which we expect to continue under the Basel III rules. We continue to see additional value in our EVERTEC ownership and our stake in BHD, which is the second-largest bank in the Dominican Republic and the improved performance of our U.S. operations.

We look forward to reporting to you on our continuing progress. And with that, I'd like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Klock at Keefe, Bruyette & Woods.

Brian Klock – Keefe, Bruyette & Woods, Inc.

Good morning, gentlemen.

Carlos J. Vázquez

Greetings, good morning.

Brian Klock – Keefe, Bruyette & Woods, Inc.

So interesting, I think the last comments you made, Richard, were kind of pretty significant when you look at capital levels, the risk profile of the Company changing, concentrating the mainland operations into New York and to Central Florida. Capital ratios there are significantly higher than just about any mainland peer you can kind of come up with. So it feels like you guys are in a really good position to get out of TARP. I know you won't comment on the TARP, but maybe you can just remind us, with $680 million of cash at the holding company, what are the sort of debt service requirements again at the holding company?

Carlos J. Vázquez

Well have…

Richard L. Carrión

We had this – I’m Richard Carrión. Brian, we currently have about $680 million in cash, which is enough to cover roughly five years of debt service right now before a TARP repayment. Obviously in the context of a repayment of TARP, in all probability, our debt service requirements would come down significantly.

Brian Klock – Keefe, Bruyette & Woods, Inc.

Right, right. So there is a lot of that cash that could be available to be used to repay TARP.

Richard L. Carrión

Absolutely. Most of it, in fact.

Brian Klock – Keefe, Bruyette & Woods, Inc.

And I guess maybe a second question related to that is once you get out of TARP, I guess, maybe talk about the thought process of having all that significant capital and I guess your plans to utilize it in the mainland and/or the potential to return capital to shareholders in the future.

Richard L. Carrión

Well, we are anxiously looking forward to that moment frankly. But, right now, I guess our focus is on getting there. We are being a lot more deliberate in managing capital and preparing for that as we mentioned in the call. We expect the actions we are taking in the states will create even more significant capital or potential capital releases from the U.S. bank, which would be available for either growth or to send back up to the holding company. So right now, our primary focus is on the TARP event.

Brian Klock – Keefe, Bruyette & Woods, Inc.

Sure, sure. Totally. And maybe just one last question and I'll get back in the queue, for Carlos. I guess you talked about the expense guidance coming in at – going forward more at the lower end of that range, around $305 million. Good quarter this quarter with expenses coming in much lower than that range, but it does feel like the pension and post-retirement expense will be lower going forward. So I guess I am just thinking what other sort of expenses are kind of coming back because I would have thought that you'd probably even be below that $305 million guidance range based on how good the first quarter was.

Carlos J. Vázquez

Well, you are correct and then the pension should – some of that will remain, but the same way in last quarter, we were pretty clear that that should not be multiplied by four in making assumptions at this quarter should not be multiplied by four either. We mentioned we have some benefits of seasonality in our expenses that you can see in the first quarter. Other expenses that will change along the year for example is our advertising and promotional expense, which tends to coming later in the year. There are some other expenses that are less predictable, some OREO expenses may move up or down if we do a rather large repossession of a property. So these are – that line may be on the lower end, but other lines will probably move up. So we feel pretty confident that that 305 number is the right level. But we will guarantee that it is not going to be exactly 305 any of the next two quarters.

Brian Klock – Keefe, Bruyette & Woods, Inc.

That's a fair point. I appreciate you guys taking my questions. Thank you.

Richard L. Carrión

There will be also some noise from the U.S., so we will have to back that out.

Carlos J. Vázquez

Correct. We will try to make that fairly explicit.

Brian Klock – Keefe, Bruyette & Woods, Inc.

Okay. I will get back in the queue. I am sure that the next question is probably going to ask you for details on the branch sales. So thanks, guys.

Operator

The next question comes from Ken Zerbe of Morgan Stanley.

Kenneth Zerbe – Morgan Stanley & Co. LLC

Hey, thanks. I think I will actually ask more detail on the branch sales. My question, just I guess a two-part on this one. Just to be super clear, you mentioned that expenses are going to offset revenues. I just want to make sure that what you truly mean is that the net income impact is going to be zero going forward of selling these branches and then if that is the case, why?

Carlos J. Vázquez

Well, yes, that is what we mean. In fact, it should be slightly positive, not meaningfully so. So we expect to generate the same amount of income with a much lower asset base. Why? Because we expect to reduce expenses by the same amount of that the income is going to be reduced.

Kenneth Zerbe – Morgan Stanley

So you are keeping – I guess I am just trying to think of like – because if the U.S. is profitable today, obviously you are able to maintain the same level of profitability without the branches, without the infrastructure. Is that solely because you are just becoming more efficient in the U.S.?

Richard L. Carrión

The nominal income number would look similar at the end of the day, Ken, but it is a much smaller operation with a much lower – we hope – an adjusted – a quarterly-adjusted level of capital. So the return on the capital will be much higher.

Kenneth Zerbe – Morgan Stanley

Got it. Okay. All right. Second question I had, just it looks like you had some interest recoveries in the U.S. business that boosted NIM a fair bit. Could you quantify that benefit?

Richard L. Carrión

This quarter, I think it was six.

Carlos J. Vázquez

It was about $6 million.

Richard L. Carrión

What is the delta from last quarter? It is not that big. We did have a lot of recoveries, which proved that the impact on reserved release was much greater than another name. I think the name was $6 million, but that’s gross number. So I don’t know what the delta is from the last quarter.

Kenneth Zerbe – Morgan Stanley

$6 million NII change?

Richard L. Carrión

Yes, not change, $6 million gross NII. So I will have to get you the change number, Ken.

Carlos J. Vázquez

Correct.

Kenneth Zerbe – Morgan Stanley

Got it. Okay. All right, yes, because I think I saw the U.S. NIM going up, I think it was like 16 basis points give or take sequentially. Okay. The third question I have, the final question, just in terms of the tax rate, I know you are guiding for 31%. Obviously it came in materially lower than that. I think you had mentioned because of the U.S. profitability, but I am just looking at page or slide 15 in your slide deck, it looks like the U.S. business actually made a little less money than it did last quarter, so 41 versus 43. Help me understand that. I guess what was your expectation for the U.S.? I mean why would the tax rate be so much lower given the income in the U.S. really didn’t change at all?

Richard L. Carrión

Well the proportion of income from the U.S. to the total is much greater and that basically has a tax rate of zero, so that’s what brought it down significantly.

Carlos J. Vázquez

And at the fourth quarter effective tax rate was also in the low 20 range as well, so it’s consistent with the fourth quarter.

Kenneth Zerbe – Morgan Stanley

Got you. But then what is your 31% guidance then assume? Because it sounds like the U.S. business is going to remain as profitable as it was.

Richard L. Carrión

I think this quarter’s results, as did in the fourth quarter we have some releases in provision in the U.S. We certainly are not assuming that we’re going to continue to have releases in the U.S. every quarter. So that will impact the nominal profitability.

Carlos J. Vázquez

Which was also the case in the fourth quarter of last year.

Kenneth Zerbe – Morgan Stanley

Got it, understood. Okay, so without the further reserve release, U.S. makes a lot less money and then your tax rate is higher on a lower pretax earnings basis?

Richard L. Carrión

That’s basically yes.

Carlos J. Vázquez

Correct, yes.

Kenneth Zerbe – Morgan Stanley

Okay, perfect. All right. Thanks very much.

Richard L. Carrión

Thank you.

Carlos J. Vázquez

Thank you.

Operator

The next question comes from Gerard Cassidy at RBC.

Gerard S. Cassidy – RBC Capital Markets LLC

Thank you. Good morning guys.

Richard L. Carrión

Good morning.

Carlos J. Vázquez

Good morning.

Gerard S. Cassidy – RBC Capital Markets LLC

In the remaining portion of the franchise that’s left in Florida and New York, I think you guys mentioned there will be about 49 branches. How does that breakout between New York, New Jersey versus South Florida?

Richard L. Carrión

I think South Florida is nine or 10 million…

Carlos J. Vázquez

(Indiscernible)

Gerard S. Cassidy – RBC Capital Markets LLC

Is the nine or ten in South Florida enough of economies of scale or do you need to grow that or what is the view in southern Florida?

Richard L. Carrión

Well, I think part of the idea is precisely to focus on smaller number of markets and we probably want to add more branches there.

Gerard S. Cassidy – RBC Capital Markets LLC

And just one last question on the branch divestiture. I think you mentioned in the press release you are expecting to close it by the end of the year. There seems to be just a long drawn out period for these types of transactions. Are you real confident it can happen by year-end or it's hard to say?

Richard L. Carrión

We are, but again all of these are three separate deals. It was non-frivolous, we used to say, to land them all on the same date. They need to go through regulatory approvals and there is significant outbound conversions and we hope we can get it done by the third quarter, but there are really factors beyond our control.

Gerard S. Cassidy – RBC Capital Markets LLC

Sure, understandable. Shifting gears, coming back to the credit quality, obviously, you guys have had tremendous success over the last two or three years of improving it and you had the uptick this quarter. Can you give us some color on this commercial credit, the large commercial credit that came in from Puerto Rico? Was it a commercial real estate credit or was it a regular C&I loan and what prompted you to have to put it on non-accrual?

Richard L. Carrión

It is a C&I credit, it is an operating company that has a very good business on a regular position in Puerto Rico. . However, they have had, as most or other individuals also they had a real estate venture that has gone south. They have put a lot of capital into that and taking a lot of capital from the operating company and that has deteriorated somewhat the financial condition of the operating company.

Gerard S. Cassidy – RBC Capital Markets LLC

And thank you.

Richard L. Carrión

Too much more color Gerard without mentioning the name of the company. All right.

Gerard S. Cassidy – RBC Capital Markets LLC

No, that's fine. That's certainly sufficient. I think I may have heard hopefully correctly. Did you say in the delinquencies the 30 to 89 there was another one or two commercial credits that have shown up and if so, are they commercial real estate or commercial and what was the size of those credits?

Richard L. Carrión

What I said in the introduction was that during the quarter and when you see the RQs, you will see an uptick in commercial early delinquency. Those are lines of credit that have expired and we are in the process of renewing of the commercial. They are current in their payments and therefore when you look at the numbers in the second quarter, it will come down.

Gerard S. Cassidy – RBC Capital Markets LLC

Very good. And then finally on your BHD stake, was there, did we hear you right that you had a $6.5 million gain this quarter because of the acquisition they did down in the Dominican?

Richard L. Carrión

That is correct.

Gerard S. Cassidy – RBC Capital Markets LLC

Okay, thank you. I appreciate it. Thank you.

Richard L. Carrión

Okay.

Operator

(Operator Instructions) Our next question comes from Taylor Brodarick at Guggenheim Securities.

Taylor Warren Brodarick – Guggenheim Securities LLC

Thank you. I think everybody else has hit most of them, but one question on I guess the FDIC loss share expense. As we get closer to the five-year anniversary of Westernbank, any additional detail or color on how you are thinking that line item might trend over the next four quarters, five quarters?

Richard L. Carrión

That that line will continue to depend on our recast of the Westernbank portfolio that we do on a quarterly basis and the changes in the credit profile of all the pools within that portfolio. So it is very hard to give you more color on it.

Carlos J. Vázquez

It’s pretty (indiscernible)

Taylor Warren Brodarick – Guggenheim Securities LLC

Okay

Richard L. Carrión

It seem to be take note of is that as we get closer to that end any changes in the estimated cash flows that would reduce the losses will – will be proportionally accelerated in the recognition of that impact.

Taylor Warren Brodarick – Guggenheim Securities LLC

Exactly. Okay. And then also, Carlos, from the $305 million to $310 million kind of range you were talking about, did you roll OREO expense into that as well?

Richard L. Carrión

Yeah.

Taylor Warren Brodarick – Guggenheim Securities LLC

Okay, great. Okay, thanks very much.

Richard L. Carrión

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Would you like to make any closing remarks?

Richard L. Carrión

Well, I say thank you all for joining the call. We look forward to talking again. Thank you.

Operator

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

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