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Popular Inc. (NASDAQ:BPOP)

Q3 2011 Earnings Call

October 19, 2011 08:00 a.m. ET


Jorge Junquera – CFO Enrique Martel – Manager, IR

Richard Carrion – President, Chairman and CEO

Lidio Soriano – CPA Executive Vice President - Corporate Risk Management Group


Joe Gladue – B Riley

Ken Zerbe – Morgan Stanley

Brett Scheiner – FBR Capital Markets

Derek Hewett – Keefe Bruyette & Woods Inc.


Good day, ladies and gentlemen. Welcome to the Third Quarter 2011, Popular Inc. Earnings Conference Call. My name is Jasmine and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s conference to Mr. Enrique Martel, Manager of Corporate Communications. Please proceed.

Enrique Martel

Good morning and thank you for joining us on today’s call. Our Chairman and CEO, Richard Carrion; and our CFO, Jorge Junquera will review our third 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 in today’s call, we may make forward-looking statements that 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, which you may visit by going to

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

Richard Carrion

Good morning, and thank you for joining the call. Please turn to the second slide. For the third quarter, we reported net income of $27.5 million in our third consecutive profitable quarter compared with net income of $110.7 million in the second quarter. About one-third of the link quarter profit decline was due to the provision expense with most of the remainder due to a onetime $60 million tax benefit in the previous quarter.

Our revenue generating capacity has remained strong throughout this credit cycle and the net interest margin has been above 4% for the last four quarters. Gross revenues for the quarter amounted to $492 million including $369.3 million in net interest income and $122.4 million in non-interest income.

Revenues were partially offset in the third quarter by a higher provision expense that was driven by a rise in Puerto Rico commercial non-performers, which led us to provision roughly 111% of our non-covered charge-offs.

As we have previously reiterated credit cards in Puerto Rico have continued higher than we expected at this point and we have provision accordingly.

So let me address the credit issue before Jorge discusses the quarterly figures in more detail. The credit risk in our non-covered Puerto Rico commercial portfolio is greatly diversified across business sectors with no significant borrower concentration and has the low average loan size. No one business sector represents more than 10% of the loan portfolio balance.

The commercial book on the island is comprised mainly of loans to small and middle sized businesses with an average loan size of 476,000. As we disclosed last month we completed the sale of $358 million of unpaid principal balance in construction and CRE loans at a price of 45% of the UPBS of March 31st which was in line with previous indications.

We ended up recognizing a net benefit of $5 million on the sale. We believe that the remaining $259 million in book balance of our held-for-sale portfolio is properly marked and continue to pursue opportunities to sell. Smaller deals maybe the most efficient way to move forward. In addition to the third quarter loan sale we have also been able to close several individual deals and negotiated payrolls with borrowers in transactions price between 50% to 70% net of the unpaid principal balance.

Now, in addition to credit management we need to do more to help recover the earnings power of our franchise. That is why we have launched an action plan to reduce expenses which mainly consist of an employee retirement window and further efficiencies in our Puerto Rico retail network.

On the earnings front, we continue to find opportunities to add good assets. This quarter we added $130 million in credit card receivables that we purchased from Citibank in a deal that closed in August. This follows the purchase of $518 million in high quality mortgages executed in two transactions during the first two quarters.

All these transactions are immediately accretive and a credit card transaction adds a high performing portfolio of good clients to our Puerto Rico credit card business which in this quarter generated $51 million in gross revenues.

Loan demand is soft but some sectors are showing signs of strength particularly the corporate sector. This quarter we closed two large loans that in addition to the credit card receivables helped maintain the volume in the Puerto Rico log book. We’re confident that we have the buildings blocks to generate profitability growth as the economy improves.

Please turn to the next slide. We’ll talk about the Puerto Rico economy. Here the key point is that while recent signals have been mixed the economy appears to be leveling off. Retail sales are slowly recovering behind the push in auto sales which are up 10% during the first eight months of the year versus last year.

As you see on the slide, job creation remains a challenge. As of August non-farm jobs were down less than 1% on a monthly average basis versus declines of 4% and 5% in 2010 and 2009 respectively.

The tax reform implemented early this year has further stabilized the economy by boosting after tax income to individuals. Increased corporate tax receipts have allowed the government to maintain current spending levels. During the quarter the government went to market with a $1 billion bond issue which included $756 million in qualified school construction bonds to modernize or build some 100 public schools around the island.

The administration is also seeking to attract additional investment to its public-private partnerships. Six finalists were selected in August for a long term concession to run the San Juan International Airport. The deal is expected to close in early 2012.

The broad package of incentives that has been driving home sales was recently extended to December of 2012 with some minor modifications. The incentives have been very effective in helping reduce the inventory since the lowest sign in September of last year. Sales of new housing units in construction projects that were financed by Popular are on pace to exceed last year’s total by 20%. Excluding refi’s Banco Popular originated $218 million in mortgages during the quarter. Year-to-date purchase money mortgages originated by Popular have amounted to $699 million, up 52% when compared with the same period of last year.

Tourism has been a recent bright spot reflected in a significant pick up of visitors. The monthly average of 185,000 in hotel registrations in the first half of the year is currently at a ten year high. While the high number of visitors has yet to produce significant jobs in that sector it has paved the way for more investments in the high-end sector of the market. The Dorado Beach Ritz Reserve scheduled to open in late 2012 and the St. Regis Hotel which opened last November are two good examples.

The data point suggest that the local economy is gradually getting somewhat better and lower oil prices would certainly be helpful in ensuring that a convincing recovery takes place. With that let me turn it over to Jorge.

Jorge Junquera

Thank you Richard and good morning. Please, let’s move to slide four for an overview of our consolidated financial report for the third quarter. Our net income of $28 million in the third quarter was $83 million below the previous one. Both quarters include a series of special items which make it more difficult to identify the important trends in our business. So in order to present more clearly how our results change I will now move to the following slide which compares our pre-tax adjusted quarter three results with those of the previous quarter.

On the left side we start by removing the special items from our quarter three results. These include a $5 million net benefit from the loan sales completed in September from approximately $17 million gain on sell less $13 million provision related to the reclassification to loans held-for-sale. An $8 million gain from the sale of $234 million in U.S. government securities and $5 million charge related to the retirement window at EVERTEC of which we own 49%.

Excluding these items our pretax quarter three earnings amounted to $25 million which is $48 million below pre-tax earnings of $73 million in quarter two. Now we will reduce the main variations between the two.

Starting with the provision expense, there was net increase of $32 million. The portion related to Puerto Rico business rose by $47 million excluding the one-time $13 million provision related to the loan sales. On the other hand we had a reduction of $23 million in the provision expense related to Westernbank over assets and $5 million reduction related to the U.S. business.

Moving on to non-interest income there was a negative variation in FDIC loss share income of $44 million. Approximately $29 million was due to a reduction in the rate of accretion of the FDIC indemnity asset reflecting lower expected losses from the recasting of usual cash flows.

Given that the alluded recasting was in June this effect impacted only one month in the second quarter versus the entire third quarter. The other main item that reduce FDIC loss share income was $80 million representing 80% offset to the loan loss provision of Westernbank covered assets reflecting a lower loan provision in the third quarter when compared with the previous quarter. Finally, the reduction in interest income from the revolving facilities benefited the FDIC loss share income by $4.4 million which represents the 80% offset.

Our net interest income declined by $5 million in the quarter although our margin was robust at 5.45. Interest revenue went down $15 million which was offset by $10 million in lower interest expense. Covered loan interest income declined $10 million due to the decline of 68 basis points in yield together with a decline of a $129 million in average assets. As we mentioned before revenue from covered loans should decline gradually in future periods.

Of the remaining $5 million decrease in interest revenue $5 million was primarily due to lower non-covered loan balances and $2 million due to a decline in the yield of the investments portfolio.

On the funding side, our cost of deposits went down $5 million or nine basis points to 1.16% reflecting the continuing progress we are making in re-pricing our deposit base in both banking subsidiaries. Borrowings expense also declined by $5 million due primarily to a decrease of $811 million in average balances as we continue to repay the FDIC note.

In non-interest income, there was a rise of $15 million during the quarter excluding the $18 million gain on the loan sale. In quarter two, we recognized a loss on sale of loans of $13 million due to the fair value adjustment that we took on the funding of loan commitments and other valuation adjustments.

In addition, other service fees increased $4 million led by credit card and investment management fees while trading profits rose $2 million.

Please turn to slide six for a review of our Puerto Rico business. Higher credit cost in Puerto Rico impacted net income during the quarter, but gross revenues stayed strong at $439 million. Net income fell to $54 million mainly due to $60 million increase in provision expense for non-cover loans.

Total provision expense of $157 million for the quarter includes $26 million related to cover loans which is offset 80% by the loan loss share agreement and also include $30 million related to the loan sale which had a net benefit of $5 million.

Including the $30 million provision related to the sale of the above mentioned loans, non-performing commercial loans drove the provision for non-covered loans to $180 million versus $71 million in the previous quarter. Net interest income remained practically unchanged at $321 million with a margin of 5.15 versus 5.19 in the previous quarter. Our cost of deposit fell by nine basis points on a linked-quarter basis.

Total deposits increased by $159 million to $21.7 billion. We believe there is more opportunity to reduce funding cost during the next 12 months when $5.5 billion time deposits re-price. Higher loan volumes are mainly a result of mortgage originations and as previously mentioned credit card transaction.

Please turn to slide seven, for a review of our US Bank. The US Bank is further ahead than we had expected by this point even when you take into account the long run off of discontinued businesses. Our U.S. operations have been able to maintain a stable top-line through this cycle. The bank produced $91 million in gross revenues compared to $94 million in the second quarter and $90 million in a year ago quarter.

Cost of funds fell by an additional eight basis points in linked-quarter basis, facilitated by lower rate environment and the shrinking of our balance sheet. The $20 million provision expense for the quarter decreased by 20% on a linked-quarter basis and it’s really half of where it was at this point last year. This is a result of improved credit metrics that have allowed for lower provisioning and some level of release of the allowance.

We expect the rate of reduction in provision to moderate as credit stabilizes and the reserve leases slow down. Expenses were down slightly by $4 million.

Seeking a more diversified customer base, the rebranding of our retail operations was rolled out to California and Florida in August and was well received. The U.S. Bank is moving forward with half of the NPLs it had at the peak of the cycle. Our biggest challenge now is achieving healthy loan growth in the markets that we serve at an adequate risk adjusted return.

Please turn to slide eight for a review of our loan portfolio. The table at the top shows our loan book diversified across business sectors. Residential mortgage loans, which have the highest concentration at 21.8%, are comprised of mostly Puerto Rico mortgages. Despite the gradual increase in Puerto Rico mortgage NPLs, charge offs continue to stay below 1%. Of September, Puerto Rico mortgage charge offs were 68 basis points.

Of September, our non-covered or held maturity construction portfolio has declined to $358 million compared to a peak of $2 billion at December 2007. Early stage delinquencies have declined since beginning December 2009 as you can see on the chart at the bottom right corner.

Please turn to the next side for additional detail on credit. Commercial loans in Puerto Rico were the prime driver in the linked quarter rise of NPLs, but the loan sale dropdown total non-performing assets, which had a net reduction of $19 million. During the last 12 months, non-performing loans are falling 26% or by 612 million because of improved economic conditions in the U.S. and actions taken both in the U.S. and Puerto Rico. So just exiting high risk businesses, executing both loan sales and reclassifying the construction portfolio in Puerto Rico. Charges increase the second quarter by less than $2 million with the charge of ratio at 2.64% of non -covered loans versus 2.59% in the previous quarter and 4.52% last year.

Commercial charge offs in Puerto Rico amounted to 59 million in the third quarter compared with 50 million in the previous quarter and 57 million in a year ago quarter. On the bottom right the chart shows an increase in commercial inflows in Puerto Rico. As you know banks have been proactive in classifying C&I loans given the impact of the current cycle on payment capacity.

In our case we are classified loans where we understand that the retaining capacity according to the original terms have been affected even though the client is still current in its payment.

Approximately 50% of commercial inflows in the third quarter were current in their banks. The soft economy and a more challenging regulatory environment demands intensifying our credit risk management.

We are addressing this through portfolio reviews and early stage monitoring and by enhancing our risk management systems and the risk in the balance sheet. It is one area where we have increased resources. The allowance to non cover loans ratio was maintained at 3.35%. We increased the allowance for non cover loans slightly by 3 million after four consecutive quarters of slowing it down.

Now, let’s move to the next slide to review capital. As you are well aware capital adequacy is once again becoming a hot topic particularly due to the events occurring in Europe.

Popular enjoys strong level of capital, we already exceed BASAL-III capital requirements and even though the US regulators have not yet issued final capital rules, we are confident that we are well positioned to meet crucial guidelines.

Ample capital gives us the ability to confront difficult times and take advantage of opportunities. We are continuously reviewing our capital structure with the objective of ensuring to maintain adequate capital for potential stressful environments while maximizing its return.

We do not have any plans for repaying Tarp at the current time but when that time comes, a repayment would have to make strategic and financial sense that will be executed in a shareholder friendly as matter of possible. Now, I would like to turn over to Richard for some comments on our common stock.

Richard Carrion

Thank you. Please turn to slide 11 and I want to take a minute to discuss the price of our stock which has declined 47% as of September 30th. Even though most financials were also beaten up we were hit harder than most. The decline is more than two and a half times that of the NASDAQ bank index which drop 19%. Well, I don’t know any CEO who doesn’t think his company is undervalued. We think that at current valuation levels the market is underestimating the value of our business. So let me briefly review what we believe a current or potential investor in Popular is getting in return for his investment.

The dominant financial services franchise in Puerto Rico with a track record of 118 years and a corporation that has generated over $770 million in pre-provision net revenue during the past 12 months. A U.S. community banking business which this year return to profitability and has the fully reserved DTA of $1.3 billion dollars.

A 49% ownership interest in EVERTEC, which is the leading transaction processing merchant acquisition and IT consulting company in the Caribbean, it generated operating EBITDA of $68 million in the two quarters ending on June 30th which was an increase of 14% over 2010. It is carried on our books at $188 million which when compared with EVERTEC year-to-date performance represents the multiple of 1.3 times revenue and 2.8 times operating EBITDA.

Although our margin is strong there is potential for additional margin when interest rate is normalized. 74% of our balance sheet is funded with deposits and we are confident that when rates rise we should benefit materially. We are aware that the one factor that is preventing us from reaching potential profitability is credit cards. Although the economy has not improved as quickly as we would have liked to the extent we do see improvements going forward our profitability should quickly ramp up. I would like to comment on the two graphs on the page that compare the multiple that the market was assigning to Popular as of September 30th.

With the peer group of nine similar sized banks and the top 50 banks in the country excluding those over $100 billion in size. The first compares the market valuation of tangible book value. What we remove from Popular’s book value the remaining unamortized discount from the troughs that we issued to the U.S. Treasury in August 2009 in exchange for the previous preferred stock.

As the quarter end we traded at 61% of tangible book value which is a discount of 18% versus our peer group and 44% against the top 50 banks. Our credit problems have been identified and are being addressed. We do not have exposures to Sovereign bonds. There are no material legal risk related to the U.S. mortgage crisis and the loan sale we announced recently suggest that our held for sale portfolio is marked at reasonable level.

Given our stock price against revenues at quarter end, we were creating a two times pre-provision net revenues, which is a discount of 64% versus the top 50 banks which were trading at 5.5 times revenue. We believe that the level of stability of revenues merits a better multiple.

Turning to the last slide, let’s summarize some key points on why we think there is more value to the company than what the market is suggesting. We remain optimistic about our prospects. We have a solid level of capital, which gives us the flexibility to take advantage of opportunities. Our strong revenue generating capacity and our unique deposit franchise in Puerto Rico positions us well for the future.

Key takeaway from all this is that with a strong capital base, a high level of stable revenues, and manageable expected losses from our loan portfolio, we expect to continue to improve our performance in 2012. As I mentioned at the beginning of the webcast, we started the implementation of our plan to reduce expenses and increase the efficiency of our distribution system to enhance our profitability.

With that, we thank you for your attention and I'd like to open the call now for questions. We have with us a few people. We have Carlos Vazquez, who heads our U.S. operation; we have Ignacio Alvarez, who is Chief Legal Counsel; Lidio Soriano, who is our Chief Risk Officer; our Treasurer, Richard Barrios, and our Controller, Ileana Gonzalez.

So with that I’m happy to open the floor for questions.

Question-and-Answer Session

Operator: [Operator Instructions]. And your first question comes from the line of Mr. Ken Zerbe with Morgan Stanley. Please proceed.

Ken Zerbe – Morgan Stanley

Hi, thanks. Maybe we can just go back to slide nine for a second if you don’t mind. I think as you’ve probably seen your stock is down about 13 plus percent right now, and my suspicion is a lot of it relates to the deterioration in commercial. So, could you give us a little more information, a little more – just help us understand how much of the increase in the Puerto Rico commercial portfolio was due specifically to this, I’ll call it policy change or change in methodology. Because what we’re trying to figure out obviously is, are you on accelerating upward trend of NPLs, or if this is sort of a peak and then it stabilizes or how should we just be thinking about that going forward given the change in philosophy?

Richard Carrion

Sure Ken. Let me tackle easy part then I’ll turn over to Lidio for more difficult part. But I think if you look at the increase, which was almost twice what we saw in the second quarter, and you put that together with the fact that of those inflows about half were clients that are currently paying, but that we have no doubt as to their documented ability to continue paying. I think a good part of it is response to a closer scrutiny of these cases and does not reflect any deterioration that we’ve seen in the third quarter. But let me let Lidio who has been a few months in the job give you his perspective on it.

Lidio Soriano

I will add to that. When you consider the cycle of financial reporting by companies, most of them report at the end of the second quarter or during the second quarter and Popular as a company will tend to analyze it between the second and third quarter. So as we receive financial statements from companies at the end of 2010 and we analyze them we made the decision in certain cases for certain borrowers that the documents that are ready to pay was deficient and therefore we merit a non-performing status even though today they continue to pay.

Ken Zerbe – Morgan Stanley

Okay. So, if I think about the 50% that are current, I mean would I be wrong if I assume that this was essentially an acceleration or pull forward of borrower who probably would’ve gone NPL next quarter or a quarter later, but you’ve pulled every one up to this quarter such that going forward we might not see as much increase if at all in NPLs or is that the way to think about it.

Lidio Soriano

I think it’s difficult to make that prediction. We just say that, I mean we have – I think in Mr. Junquera’s presentation he mentioned that we have gone through a thorough portfolio review and as part of that process we think we have uncovered most of our issues. Well, certainly if things change we will make adjustments.

Ken Zerbe – Morgan Stanley


Jorge Junquera

Let me just add here that given this somewhat of a change in the way that we manage these non-performers, in the past there was much more reliance on payment history. Nowadays, there is much more reliance on future cash flows and its ability to meet agreed terms. In the past there were probably many of the loans that are now being moved into non-performing would have never made that mark. At the end they’re probably – there was no loss at the end. It was just that the future cash flows of this customer given the credit cycle difficulties changed and it got more difficult. But that doesn’t mean that at the end the borrowers were going to totally fail in making payments, but the scrutiny has intensified and now there is a forward view of cash flows and then that now determines whether you have to move alone to non-performing or not. But not necessarily we are advancing customers that would have gone into future or that they will end up losing money or with that we will end up losing in their loans. So as Lidio said it’s difficult to tell, but it’s – we’ll manage it on – as we go along here.

Ken Zerbe – Morgan Stanley

Okay and that helps. The other question I had was on the margin. How much of the margin, which was actually fairly stable this quarter, related to any kind of one-time or FDIC adjustments versus items that might be more sustainable. When we think about the margin going forward is that – should we be building in compression or is it actually fairly reasonable to say it’s going to be around these levels if not coming down a little bit.

Jorge Junquera

Okay, it’s probably relatively stable but with a downward bias, because as we have mentioned the covered assets it’s a reducing asset and that is an asset that has a very wide spread. So if covered assets – the proportion of covered assets go down, it will then have a reducing effect on the margin. But offsetting that, yes, our efforts to continue to lower the cost of deposits, particularly in Puerto Rico is where we continue to see further opportunities. In the U.S. we think that we have reached a margin which is as high as we have experienced it and it will be difficult to continue to increase it going forward. But in Puerto Rico we see stability.

Ken Zerbe – Morgan Stanley

No, I understood. I just wanted to make sure that there wasn’t any large one-time items that would lead to a cliff drop in your margin in the next quarter, but it makes sense.

Jorge Junquera

Not at all.

Ken Zerbe – Morgan Stanley

Okay, perfect. Thank you.

Operator: [Operator Instructions]. Your next question comes from the line of Mr. Joe Gladue with B. Riley. You may proceed.

Joe Gladue – B. Riley

Hi, I guess first off start off saying I like all the detail in the press release.

Jorge Junquera

Thank you.

Joe Gladue – B. Riley

But I guess let me touch on the net interest margin a little bit just to I guess ask a couple of detailed questions there. It looks like you have the cost of borrowings I guess increased even as you are paying down the FDIC receivable, just I guess what’s driving that increase in the cost of average borrowings?

Jorge Junquera

Okay, yeah. Richard is going to address that Joe.

Richard Carrion

Yes, the reason behind that Joe is that the liability that – or the borrowing that we had been paying off most aggressively, which is the FDIC note, has a cost of 250 whereas the remaining borrowers have higher rate. So as we continue paying down the FDIC note, the resulting cost, the remaining borrowings will tend to creep upward, overall cost.

Joe Gladue – B. Riley

Okay. And on the, I guess, on the asset yield side, pretty sharp decline in the yield on the mortgage loan. So was there some, I guess, interest reversals on loans migrating to non-accrual that was part of driving that or just wondering what's behind that.

Ileana Gonzalez

It’s really increasing in CDRs and obviously we are not taking into income anything that is accumulated in those mortgages. So, yes, there was kind of not taking into income everything that is related to those loans that we cannot afford and where we send as CDRs.

Joe Gladue – B. Riley

Okay. And I’ll ask a question on one of the slide, I guess, on page eight with the 30 to 89-day delinquencies. Just wanted to be sure, the numbers there are just the delinquencies that are still accruing that doesn’t include anything that’s been any other loans that were moved to non-accruing even though they were still performing?

Unidentified Company Representative

That's correct.

Joe Gladue – B. Riley

Okay. And I guess lastly just to ask a question on the North American operations. It had been profitable for several quarters in a row now. I think that, I guess, performance is sustainable?

Unidentified Company Representative

Well, Carlos keeps telling me that it – not to multiply by four every time, but he does it every quarter, but I’ll let him do the same to you what he does to me.

Unidentified Company Representative

We are hoping we can sustain it. The challenge is going to the same challenge that most banks our size have in the U.S. market and that is asset growth. Remember, we do have a big chunk of discontinued businesses that continued to roll off our balance sheet. So the magic will be whether we can keep a good ratio of growth while the discontinued businesses continue to roll off.

Joe Gladue – B. Riley

All right. Well, thank you. That’s all I had.

Richard Carrion

Thanks, Joe.

Operator: Next question comes from the line of Brett Scheiner with FBR. You may proceed.

Brett Scheiner – FBR Capital Market

Hi, guys. The increase in commercial NPAs didn’t have a large associated charge off. It looks like charge offs were relatively flat. But, there also wasn’t a reserve during the quarter I assume just because of the greater NPA level. Can you talk – so it looks like $135 million in charge offs, $151 million in corporate vision, so net of $60 million reserve build, can you talk about reserve bleed versus reserve build going forward?

Jorge Junquera

Well, I think most of the reserve builds – we don’t really give you the detail per portfolio. I think most of the reserve build was in the commercial portfolio here in Puerto Rico. We have been seeing much better performance in our consumer portfolios in Puerto Rico and across all portfolios in the U.S. So, overall in the U.S., we’ve been drawing down reserves and have had to reserve less for the consumer portfolio. So I think most of this was in the Puerto Rico commercial. And correct, charge offs did not inch up significantly.

Unidentified Company Representative

Just to add to that. Exactly, I mean we have – when you look at our balance sheet and our business, we have two different – in terms of provision to expenses performance by geography. In Puerto Rico, we are providing more than the charge off. While in the U.S we are drawing down the reserve base and improve our performance and credit metrics of our business. As we continue to move forward, we expect the improvements in the U.S. to moderate and as the economy in Puerto Rico improve we should also expect the increases in Puerto Rico also to moderate on a going forward basis.

Brett Scheiner – FBR Capital Market

Okay. Thank you.

Operator: Your next question comes from the line of Derek Hewett with Keefe, Bruyette and Woods. Please proceed.

Derek Hewett – Keefe Bruyette & Woods Inc.

Good morning.

Richard Carrion

Good morning.

Derek Hewett – Keefe Bruyette & Woods Inc.

My first question is just in terms of profitability going forward yet kind hedged on the U.S. mainly on franchise just because you need – the need for asset growth, but what about for the company overall? Do you still expect it to remain profitable going forward?

Richard Carrion

Yes, we do.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay. And does that include any sort of issue with any potential goodwill write down? Is that even on your radar right now? Is that a possibility?

Richard Carrion

No, I think we typically review it every third – in the third quarter of the year before the Q. So we’re not looking at that. Although most people are looking at tangible book right now, but no we don’t see any good will right now.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay, great, thank you and then what percentage of your NPL inflows last quarter were paying as agreed?

Richard Carrion

Well, really we don’t have that number. I can get it for you and share it Derek.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay. And then just in terms of deposit pricing I think you said deposit prices or deposit funding cost in Puerto Rico went down I think nine basis points.

Richard Carrion

Nine basis points on deposit cost, that is right.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay, how much further do you think you guys can go?

Richard Carrion

Well, we gauge it based on overall cost vis-à-vis alternate funding sources such as broker CD rates and LIBOR and we think we still have a ways to go. As Jorge mentioned during his part there is about $5.5 billion maturing in time deposits over the next 12 months. So we think there is still opportunities to continue lowering that and I think that will counter balance the fact that on the asset side we will see the Westernbank portfolio taper off gradually.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay, and then at that $5.5 billion I might have missed this. Did you go over what was the average cost of that $5.5 billion and what are current market rates?

Richard Carrion

Well, it’s a – we don’t have that number right now, but definitely they are priced at a rate which is higher than what they will be rolled over provided that rates remain unchanged which is expected, yeah.

Derek Hewett – Keefe Bruyette & Woods Inc.

Okay, great, thank you very much.

Operator: [Operator Instructions] Your next question comes from line of A.J. Gydle with Goodentry Asset Management. Please proceed.

Unidentified Analyst

Hey guys, thanks for taking my question. You had mentioned that you are going through expense reductions or gearing up for 2012 and had reduced expenses it will be very helpful if you could try and quantify that?

Unidentified Company Representative

Sure. We are looking at – mostly in Puerto Rico we are looking at streamlining a few things, primarily consolidation of additional branches which we think there is plenty of room to do that. Also we are targeting a head count reduction in the 200 to 250 FTE range over the next couple of months.

Unidentified Analyst

Is there any way you can put it just like a $10 million opportunity, $20 million –

Unidentified Company Representative

I think there is about a $25 million opportunity there.

Unidentified Analyst

Per year?

Unidentified Company Representative


Unidentified Analyst

Okay, and how long do you think that it should be done in the next few months you say?

Unidentified Company Representative

I think most of the head count reduction should be achieved by the end of the first quarter and the branch consolidations probably will take us somewhere into the second quarter of the year.

Unidentified Analyst

Okay and just – can I ask a question on credit. And I am just trying to understand. I mean obviously the main question that everybody wants to know is kind of when your credit in the commercial portfolio bottoms. I understand you changed methodology. But I mean can you just give us a little more idea of what you are seeing? Is it just going to remain volatile or just can we become authentic credit and we might be stabilizing here.

Unidentified Company Representative

Well, we have not changed methodology I think we gave the portfolio a little closer scrutiny for a few reasons not the least of which we have a new risk officer, but I don’t think there is any major change. I can tell you that there is major change between the third quarter and the second quarter in what we are seeing around town.

We have seen just tougher conditions as we looked at the statements as they have come in and some of these business have been operating in a recessionary environment for four or five years. So it is taking a toll, but I can tell you that we have observed any marked deterioration in quality overall. I think in general banks have been a little more proactive given the regulatory environment in classifying these loans as non-performing in this cycle. On the more positive side I think our consumer portfolios have been evidencing a steady improvement over the last couple of years and those are extremely manageable and I am getting pre-crisis levels.

Unidentified Analyst

Okay, thank you.

Operator: [Operator Instructions] Ladies and gentleman this concludes a question and answer session for today. Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day!

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