Enrique Martell - Corporate Communications
Richard Carrión - Chairman and Chief Executive Officer
Jorge Junquera - Chief Financial Officer
Lidio Soriano - Chief Risk Officer
Joe Gladue - B. Riley
Ken Zerbe - Morgan Stanley
Todd Hagerman - Sterne Agee
Derek Hewett - KBW
Popular, Inc. (BPOP) Q3 2012 Earnings Call October 19, 2012 10:30 AM ET
Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Popular Inc. Earnings Conference Call. My name is Derik and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.
I would now like to turn the conference over to Mr. Enrique Martell, Manager of Corporate Communications. Please proceed.
Good morning. Thank you for joining us on today’s call. Our Chairman and CEO, Richard Carrión, CFO, Jorge Junquera, and our CRO, Lidio Soriano 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 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, which you may visit by going to popular.com.
We also want to announce that we will hold our Investor Day on Friday, December 14 in San Juan. We will furnish the press release next week with details. I will now turn the call over to Mr. Richard Carrión.
Good morning and thank you all for joining the call. I would like to address three topics in my remarks this morning. First, I will provide a high level overview of third quarter results and Jorge will provide more details in his remarks. Second, I would like to take a step back from this quarter’s results and provide some perspective on where we are today and how we are managing Popular to create shareholder value. And third, I want to focus on the fundamental strength of our company and the reasons we believe there is a substantial value in the franchise that is not being reflected in our current share price.
So please turn to the second slide. We have $47.2 million in net income in the net income which was marked by another strong performance from our core businesses despite slow commercial loan demand in Puerto Rico and the U.S. Gross revenues amounted $459 million and our net interest margin increased to 4.37% which stands well above our peers. We remain on track to meet our 2012 net income target range of $210 million to $225 million. Stable revenues, a lower provision for the covered portfolio and lower funding cost were the primary drivers of the improved performance in a quarter that was relatively clean. Notably absent from this quarter were three large recorded in the second quarter. A tax benefit, a write-down of our held for sale portfolio and the prepayment expense of high cost repos.
Excluding the write-down and the prepayment expense, pre-tax income increased by $23 million compared with Q2. We continued to reduced NPLs. NPLs held for sales declined by $70 million, while NPLs held in portfolio declined by $12 million as a result of our lost mitigation and resolution strategies. Year-over-year NPLs held for sales and non-performing assets are down $151 million and $256 million respectively. Charge-offs declined for the fourth consecutive quarter to the lowest level in more than four years. We have strong capital ratios today and our total capital the well capitalized threshold by $1.8 billion.
Our common equity tier one ratio at September 30 stood at 12.72%. We are well positioned to exceed the current and proposed Basel III requirements. Our tangible book value per share at quarter-end was $32.15. Jorge will also provide some additional color on capital.
Please turn to the third slide. While we can't control the pace of economic recovery, we will not use economic headwinds as an excuse. We are sharply focused on the factors that are under our control, and that we know are key areas of focus for you. Our number one priority is reducing non-performing loans. And while the pace of improvement is slower than all of us would like, we are continuing to make progress on this front in basically three ways. Aggressive loss mitigation efforts, one-off transactions and bulk sales.
We executed three individual loan transactions during the quarter that reduce our NPL held for sale portfolio to less than half of where it stood at the beginning of the year. Year-to-date NPLs held in portfolio are down by $187 million. We continue to actively pursue NPL sales on terms that make business sense. Or approach here is driven by economic and what creates the most value for our shareholders. Our progress on this front will have significant implications across our business. As we continue to reduce our NPL balance, we increase our flexibility in terms of the timing and form of a TARP exit.
And I know you would like more clarity on TARP so let me provide some perspective. First, there is no contractual repayment date or dates for TARP. Our primary objective is to repay TARP in a manner that protects shareholder value. Of course the timing and form of repayment will be subject to the approval of our principal regulator, the Federal Reserve, with whom we are in constant dialog. While the TARP program was never meant to be permanent, these trust preferred securities do not have a maturity date and there is no treasury call either in a contractual or on a official sense. So we are not facing any near-term pressure to repay.
A coupon is scheduled to reset in December 2013 from 5% to 9%. If these securities are still outstanding at that time, this will not have material impact on our earnings. It will have only a modest but manageable effect on cash flow. That is because we converted the original TARP preferred to the trust preferred securities and are now required to account for the cost of these securities at an effective rate that works out to approximately 9% of par before and after the reset. So the potential reset is not a significant factor in how we view TARP repayment. Again, our primary objective is to repay TARP in a manner that is the least dilutive to our shareholder.
Our exit could be in the form of partial repayments or lump-sum payments. It could also be in the form of treasury selling the securities in the open market as it has done in other situations. In terms of the source of repayment, a number of banks have repayed TARP in recent quarters with equity components that are relatively low compared with previous TARP repayments. So we are focused on continuing to reduce our NPLs and building capital so that we have as much flexibility as possible in structuring our TARP exit at the appropriate time.
Before I turn the call over to Jorge, I would like to close by reviewing the fundamental underlying strength of the Popular franchise. Strength that I believe are not appropriately reflected in our current market valuation but that will become clearer and will be reflected in our earnings and valuations as we work through our current NPL balance, repay TARP and return to a more normalized economic environment. So please turn to slide four.
First, we have the premier banking franchise in Puerto Rico which has generated $1.2 billion in gross revenues so far this year, with a net interest margin that exceeded 5% in the third quarter. Our mortgage business has produced an average of $366 million in originations per quarter this year and is on track to surpass more than $1.4 billion in originations by year-end. Our revenue generating capacity reflects our number one market positions in deposits and loans, our valuable brand and high customer loyalty. This has enormous long-term value.
Second, we have a strong capital base relative to peer banks, relative to current regulatory requirements and relative to proposed Basel III requirements. Third, we have significant assets with market values that are potentially well above the values at which they are carried on our books. The two best examples are our 49% stake in EVERTEC, and a 20% stake in Banco BHD in the Dominican Republic. The EVERTEC stake is carried on our books at a value of $62 million. For the first six months of 2012, EVERTEC had an adjusted EBITDA of $79 million or $159 million NOI. A 49% share of that EBITDA is around $78 million. Same thing goes for BHD. We have a 20% stake in BHD carried on our books at $73 million. In both 2010 and 2011, BHD reported annual net income of approximately $100 million U.S. dollars.
We believe our covered loan portfolio also has value in excess of the amount of which it is carried on our books. The covered assets are accounted for as a run-off portfolio. In reality, the portfolio contains a great number of relationships that will remain with us even after the FDIC guarantee expires. More than 100,000 new customer relationships came with that transaction. Keep in mind also that as the covered loan portfolio runs down, the earnings volatility associated with the quarterly mark will abate, improving visibility to our core earnings power.
Net revenues to date from the covered portfolio are $127.7 million, net of provision expense. It is clear to us that there is real long-term value in this franchise and our focus is on taking the actions that will maximize this value. So with that let me turn the call over to Jorge to provide more details on the quarter.
Thank you, Richard. Good morning. Let's turn to slide five to review the financial highlights. Third quarter was relatively free of noise and I am sure that you appreciate that. I certainly do. Absent the noise, our performance became clear, stable revenues, lower provision, and lower funding cost through our third quarter results. Before I go into the details I want to point out that we have added some new disclosures to our earnings releases this quarter in an effort to add some clarity on key issues. In particular, we have added a table on the second page of the release that highlights the main financial statement impacts related to the accounting for the covered portfolio.
As we discussed last quarter, the accounting of this portfolio is complex, so I wanted to give you a way to see quarterly variances in one slide. In the third quarter, we earned greater income from our non-covered portfolio and thoroughly reduced our cost of funds, thanks to our continued push to lower the cost of deposits. And to the benefit of having prepaid high cost repos in previous quarters.
The cost of deposits fell by 9 basis points or $6 million and the cost of borrowings fell by 56 basis points or $3 million. Net interest expense on deposits during this quarter was 35% lower than the same quarter last year. Higher volumes in our mortgage and consumer portfolios helped offset higher prepayments in our investments portfolio and a decline in interest income from our covered portfolio. We remind that in the second quarter a number of loan resolutions increased income from our covered portfolio.
Non-interest income went up primarily because of favorable variance of $24 million in the valuation of our held for sale portfolio. The negative valuation adjustment amounted to $3 million versus $27 million in the second quarter as a result of recent appraisals and market indicators. As Richard alluded to earlier, we reached a number of resolutions that reduced our NPL held-for-sale portfolio by $70 million to $109 million.
Fee income remained fairly stable in the quarter. The trading account benefited from an improvement in the mortgage securities market. We recorded higher realized and unrealized gains on MBSs which were partially offset by slightly higher hedging costs. The other variance in non-interest income was due to the drop of the 80% offset to lost share income during the third quarter caused by lower loan loss provision for covered loans and lower expenses reimbursable by the FDIC when compared to the previous quarter.
Operating expenses amounted to $290 million. This was down slightly from the previous quarter after excluding the prepayment expense of high cost repos and the relatively high level of expenses related to the management of the Westernbank assets in the second quarter. We are aware that this level of expenses is higher than we had previously indicated. I would emphasize that the difference is principally driven by cost management of our NPLs which have declined slower than expected.
Further reductions in non-performers will decrease our operating expenses over time, because as you know, managing non-performers requires additional collection staff, legal fees, appraisals and OREO expenses. We have identified about $18 million in quarterly non-personnel costs that are related to collections and OREO expenses. In a normalized environment we should be able to cut about half of that. So we’re closing monitoring this cost to make sure that we obtain the full benefit of further reductions in our NPLs.
We run out the financial summary with the tax items. As you recall in the second quarter, we reached an agreement with the Puerto Rico Treasury department that clarified the classification of covered assets. That led to a $78 million benefit in the second quarter compared with a tax expense of $15 million in the third quarter.
Please turn to slide six. With a common equity tier 1 of 12.72%, we once again ended the quarter as one of the highest capitalized regional banks in the U.S. We have $1.8 billion of excess common equity tier 1 capital over the well capitalized requirement of 5%. We have done a detailed analysis to estimate the projected impact of Basel III rules on our capital. The key takeaway from our analysis is that our level of excess capital will not decline as Basel III is phased in.
Even though the future growth of excess capital will be reduced under the new rules, our excess capital will continue to rise. In our analysis, we projected a regulatory capital under the proposed Basel III rules up to the fourth quarter of 2015 under the following conservative assumptions. Net income is $200 million annually between 2013 and 2015. Our assets and non-performing loans remained unchanged. The composition of our loan portfolio also remains unchanged and all dividends are paid. Keep in mind that the implementation of the proposed regulation would occur between 2013 and 2019 with most of the impact in our case occurring in 2015 when the new asset risk weights enter into effect and the revised well-capitalized levels are fully phased in.
Although there are many moving parts in the new rules, let me summarize their main impact on our excess common equity tier 1 capital as of the fourth quarter of 2015. Pro forma excess common equity tier 1 at that time would amount to $2.1 billion under Basel III. While under Basel I, the excess would reach $2.6 billion or $500 million higher. The biggest impact comes from the increase in the well-capitalized requirements which rises from 5% today to 6.5%. This reduces pro forma excess capital by approximately $360 million, below where it would have been under Basel I. The second most significant impact is from the rise in the risk weights applied to assets and off balance sheet exposures. This reduces pro forma excess capital by approximately $160 million.
The final impact is a small increase in capital, $15 million due to the lower DTA deduction required in our case. Again, the key message is that even though the future growth of excess common equity tier 1 capital would be reduced under the new rules, our excess capital will continue to rise. We anticipate having excess capital during the next several years as Basel I rules are implemented. We believe the potential productive uses of capital include NPL sales that make economic sense, TARP repayment and returning capital to shareholders when we are in a position to do so.
With that, I’ll turn the call over to Lidio.
Thank you, Jorge. Before I go through the slides, let me first start by highlighting three key credit trends. First, third quarter results reflect improvements in overall credit quality and the successful execution of our loss mitigation strategy. As of the end of the third quarter, non-performing assets and non-performing loans are at the lowest level since 2010 and 2009 respectively, and net charge-offs have decreased for four consecutive quarters. Second, we continue to benefit in the U.S. by the improving economy and our derisking strategies. NPL declined from the second quarter by $20 million to $226 million and are down $530 million or 67% from the peak amount. Net charge-offs in the U.S. declined to the lowest level since 2009 at $25 million.
Third, the quality of our Puerto Rico loan portfolio continues to improve driven by a combination of measures put in place to strengthen our risk management capabilities and the stabilization to improvement of economic indicators in Puerto Rico such as stable employment, increasing retail sales and increasing tourism figures. During the quarter, the largest NPL was resolved at its book of $50 million. This transaction and the resolution of two other large relationships reduced NPL held for sale by 39% or $70 million to $109 million.
Please turn to slide seven. Total loans held in portfolio grew slightly to $20.8 million due to a higher mortgage origination in Puerto Rico and purchases of high quality portfolios. NPLs held in portfolio declined from the previous quarter by $12 million to their lowest levels since the first quarter of 2009. NPLs are down 34% from their peak in the third quarter of 2010. The decrease in the third quarter was led by a $17 million reduction in U.S. commercial loans and an $18 million reduction in Puerto Rico construction loans. These decreases were partially offset by an increase of $21 million in Puerto Rico commercial loans due to four significant relationships entering NPL status.
NPAs for the quarter decreased by $57 million driven by the resolution of book value of several large loans in Puerto Rico. In speaking, the third quarter of 2010, NPAs have decreased $600 million or 24%. In the charts on the right, you see the overall declining trends in our OREO and NPL held for sale for the last two years. On a combined basis, OREO and NPL held for sale have declined from $172 million or 57% since the fourth quarter of 2010. The decrease is mainly driven by bulk sales completed during the fourth quarter of 2010 and the third quarter of 2011, and resolution of large non-performing loans in 2011 and 2012.
As we continue to make progress in resolving our NPLs, some of the loans relationships now totally fall into OREO. In certain instances we are taking over the administration of commercial properties to protect our collateral and expedite this position. The increase in OREO is mainly due to property foreclosed from the Puerto Rico mortgage and commercial portfolio. We will continue to aggressively resolve our non-performing loans in all of our properties.
Please turn to slide eight. The quarterly increase in commercial construction and NPL inflows was driven by four large commercial relationships in Puerto Rico. We are nearly done with our annual review of Puerto Rico commercial portfolio. So far the results have met our expectations. When compared with the year-ago quarter, commercial and construction inflows are down by a $166 million. NPL mortgage inflows declined by $19 million year-over-year, driven by lower repurchase activity from the mortgage recourse portfolio.
We continued to pursue loan modification as a key loss mitigation strategy. The chart on the bottom left shows the decline in trends of NCO levels and the NCO to loan ratio over the last five quarter. A decrease in net charge-offs for the third quarter was driven by lower losses in the U.S. loan portfolio, partially offset by increase in the Puerto Rico commercial portfolio. Charge-offs reached their lowest levels since the first quarter of 2008 and the net charge-off ratio is below 2% for the second consecutive quarter. The net charge-off ratio has improved 87 basis points or 32% since the first quarter of 2011.
Please turn to slide nine. Provision for loan losses increased by $1.8 million from the second quarter of 2012, due to higher net charge-offs in the Puerto Rico commercial loan portfolio, offset in part by lower losses in the U.S. loan portfolio. For the quarter, the lower releasing of the U.S. reserve resulted in an increase in the ratio of provision to net charge-off to 87%. In Puerto Rico, we continue to provision at levels higher than the U.S.
The bottom half of this slide shows the allowance to loans and coverage ratios. Both remained flat compared with the previous quarter. In terms of our coverage ratio, it is important to highlight that approximately 50% of our NPLs are subject to individual analysis and those have been written down to their estimated net realizable value. The coverage ratio is also influenced by our mortgage portfolio but we continue to experience low levels of losses.
With that, I would like to turn the call over to Richard for his concluding remarks. Thank you.
Thanks, Lidio. Please turn to slide ten. I want to leave you with three thoughts before moving to the Q&A.
First, the fundamental strength of our franchise are becoming clear yet are not reflected in our current market valuation. Our franchise in Puerto Rico is like no other. Its revenue generating capacity demonstrated quarter-after-quarter will only improve as the economy recovers further. We again ended the quarter as one of the highest capitalized regional banks in the U.S. with $1.8 billion of excess common equity tier 1 capital over well-capitalized required requirement. This excess capital will continue to rise under Basel III. We believe that the potential value of a number of significant assets, our holdings in EVERTEC, Banco BHD, and our covered portfolio among these exceed the values at which they are carried in our books.
Second, we are sharply focused on the factors that are under our control. Reducing non-performing loans in Puerto Rico and in the U.S. is our top priority. Blocking, tackling, grinding, call it what you will, we are doing it and we will execute sales when these make economic sense either on an individual basis as we did in the third quarter, or through bulk sales. Our continued progress on this front will have significant positive implications across our business.
We are closely monitoring credit-related costs to make sure we obtain the full benefit of credit reductions in our NPLs. I want to make clear that there is no trigger within a certain time period to repay TARP. While paying TARP is a priority, we will not rush into it. It will be done in a manner that protects shareholder value.
Third, we are viewing all of our strategic and financial decisions through one lens, driving shareholder value by increasing our return on equity. If we can grow assets prudently and generate returns in excess of our cost of capital, we will do so. If we don't see opportunities to grow assets while maintaining credit quality and generating returns above our threshold, we won't pursue growth for growth sake. If that means a flat or even smaller assets base but higher returns, we are prepared to make that trade-off.
We would free up capital and we would seek to deploy that capital in the way that creates the most value for shareholders, including returning capital to shareholders when we are in a position to do so. We are focused on taking the actions that will cause the real long-term value to be reflected in Popular’s share price over time.
I look forward to seeing you at the Investor Day. With that, I'd like to open the call for questions.
(Operator Instructions) And our first question is from the line of Joe Gladue from B. Riley.
Joe Gladue - B. Riley
I want to start off with a few asset quality questions. First off, just wondering if you could give us a little more color on the resolution of some of the construction loans during the quarter. Was that sales or payoffs or just ….?
The ones that Lidio referred to in his remarks were actual sales, Joe. Yeah,
Joe Gladue - B. Riley
Okay. And I guess....
And (inaudible) we’ve negotiated with borrowers. So it’s a combination of sales and discounted payoff negotiated with the borrowers.
The bigger one, the biggest one, the $50 million one was the sale. Was an outright sale.
Joe Gladue - B. Riley
And also I have noticed there was some increase in the balance of construction loans. Just I guess wondering where you -- was that increases in draw-downs on existing loans or is that new loans?
We have very selectively started some construction lending. In Puerto Rico that is mostly related to commercial property or a judicial building that is being built for the federal government. So that’s driven by that.
Joe Gladue - B. Riley
Okay. Just could you tell us what the level of accruing TDRs was at the end of the quarter?
He was ready for this one, Joe.
Yeah, I think every quarter I miss this one, so this time I do have it. We have about accruing TDRs, as of the end of the September are about $629 million.
Joe Gladue - B. Riley
Okay. And I guess, lastly, I will just ask, just about the outlook for loan demand. I guess there is a little bit of growth in the non-covered portfolio this quarter but I guess not enough to offset the decline in covered loans. Just wondered if you could give us sort of a breakdown of where you see loan demand in segments, in geography, and when that might overtake the decline in the covered loans?
All right. Let me take a stab on that. In Puerto Rico obviously we have the decline in covered loans and that will be gradual over time. We are seeing, in the commercial side we are seeing some demand in the upper-end in what we would call corporate but certainly not corporate by mainland U.S. standards. But we are seeing some demand, some investments there. Much less so and very slow loan growth and demand in the small and middle business sector.
Consumer is pretty much stable with the exception of automobiles. Automobiles, we've seen sales go up quite a bit and that part is growing as is the mortgage portfolio. In the U.S., I would tell you that on the commercial side, that we are seeing a fairly flat demand and there we have some legacy portfolios that are coming down. So, the demand we're seeing is not enough to make up for that fall. So, finding assets is a key question for us.
Your next question is from the line of Ken Zerbe from Morgan Stanley.
Ken Zerbe - Morgan Stanley
I appreciate all the color that you gave on Basel III, and I apologize if I missed this, but did you or could you provide what the pro forma impact to your Tier 1 common would be if you applied Basel III as of this quarter?
Yeah, I think it's roughly 200 basis points. But I don't think anybody is applying Basel III tomorrow. But if that were the case, I mean, we thought it would be more meaningful to actually go through the more dynamic analysis of how it actually would get implemented although even those dates are under review. But if we were to do it right away, I think the impact is roughly 200 basis points on the common equity Tier 1. So it takes us from 12.72% to 10.70%.
Ken Zerbe - Morgan Stanley
Understood. Okay. It just helps putting everyone on the same basis. The other question I had, maybe just help us think about the reduction in NPAs. I know it's one of your top priorities. You've certainly been very vocal about reducing NPAs, I think, we've all kind of been frustrated maybe of how slow the reduction has actually happened. When you think about going forward with the NPA reduction, what is your timing. I just want to make sure that we are all on the same page that when you think about by the end of the year, by the end 2013, these are kind of the milestones which you are trying to hit, that way we can think about it in the right way.
Sure. We'll probably, I mean we're not going to put a number out there. We certainly have a target but as you know these deals come -- Puerto Rico is a lot less liquid market than in the U.S. We've had a lot more success dealing with some of these things in the U.S. where there is a much more liquid market for these assets. That's not the case in Puerto Rico. Nonetheless, there are deals and we've seen some of these deals. If we see a significant deal of size that makes sense, we're going to go ahead and do it. We think it's a high priority for us. We are working on it. We hope to continue reducing it substantially over the next few quarters but we don’t have a specific number that we want to put out there.
Your next question will come from the line of Todd Hagerman, Sterne Agee.
Todd Hagerman - Sterne Agee
Just wanted to talk a little bit more about the commercial and construction portfolios and how it relates to the held for sales and held for investment. Obviously you have made pretty dramatic improvement year-over-year in both of those portfolios and held for sale came down pretty meaningfully. Could you just talk a little bit more about how we should think about that pace? Obviously you had some sales this quarter that occurred, but kind of following on the previous question with the pace of improvement. It’s been pretty meaningful over the last year, are you starting to see more opportunities to further reduce that in a more accelerated fashion? How should we think about that given kind of the trends?
Again, these opportunities don't necessarily follow a continuous line. They are a bit more sarcastic in nature. But yes, we are seeing, as the economy gets a little better, we are seeing more interest, more people are coming down, taking a look, picking their tires and it’s just a matter of coming to agreement. We have seen the balance come down quite significantly particularly in that held for sale portfolio and we are seeing a number of resolutions in our held for investment portfolio. So, again, we do think it will continue at this pace.
Todd Hagerman - Sterne Agee
Okay. Great. And then just secondly, in the States one of the significant impacts this quarter is new OCC guidance related to modifications in consumers filing for bankruptcy. I know you're not an OCC bank per se with the Fed and the Commonwealth. But has that been an issue that's been raised by the Fed or is it an issue that you're currently looking at with your existing portfolio kind of given the changes that we're seeing in the U.S.?
Let me have Lidio take a stab at that.
Yes. Thank you, Richard. The majority of our residential portfolio is in Puerto Rico. In Puerto Rico, the majority of the bankruptcies are reorganization rather than liquidation. The OCC direction was related to Chapter 7 liquidation in which the borrower does not reaffirm his or her mortgage debt. That is not a material -- that will not have a material impact in our organization because of our business in Puerto Rico.
Todd Hagerman - Sterne Agee
Okay. So, is that something now that, I'm assuming nothing happened this quarter, but is that something that potentially may have, not to say a material, not to say -- as you put it, not much of an impact but is that something that you're evaluating for the fourth quarter?
Not a material impact. I mean, as I said, in Puerto Rico more than 90% of the bankruptcies are reorganization rather than liquidations.
(Operator Instructions) Our next question is coming from the line of Gerard Cassidy, RBC Capital Markets. Our next question is coming from the line of Derek Hewett, KBW.
Derek Hewett - KBW
A quick question on the margin. It's kind of flat to maybe slightly up relative to the beginning of the year. How much longer do you guys think you can defend the margin at these levels before we start to see it?
Well, we have two opposing forces. On the one hand, on the assets side, I think we have the impact of the Westernbank portfolio beginning to wane. On the cost side, however, we have been lowering the cost of deposits significantly and that has outweighed the former. So, we are comfortable with where our margins are. Obviously, we defend it tooth and nail and we are continuing to try to maintain it at this level which we think is way higher and it is a competitive advantage for us.
(Operator Instructions) And at this time I'm showing no further questions in queue. Ladies and gentlemen that concludes today's conference. Popular Inc. would like to thank you for your participation and you may now disconnect. Everyone have a great day.
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