Banco Popular Espanol SA (NASDAQ:BPOP) Q2 2016 Earnings Conference Call July 26, 2016 11:00 AM ET
Brett Scheiner - IR
Richard Carrion - CEO
Carlos Vazquez - CFO
Lidio Soriano - CRO
Alex Twerdahl - Sandler O’Neill
Ken Zerbe - Morgan Stanley
Brett Rabatin - Piper Jaffray
Gerard Cassidy - RBC
Jesus Bueno - Compass Point
Brian Klock - Keefe, Bruyette & Woods
Brian Horey - Aurelian Management
Good morning, and welcome to the Popular Inc. Quarter Two 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded.
I would now like to turn the conference over to the Investor Relations Officer, Brett Scheiner. Please go ahead.
Good morning, and thank you for joining us on today’s call. Today I am joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our second 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 Carrion.
Good morning and thank you for joining the call. I'd like to first address the highlights and key events of the second quarter. Then I'll present an update on our business and our thoughts regarding the fiscal and economic situation in Puerto Rico. Carlos will comment on the quarter's financial results; and Lidio will provide an update of credit trends and metrics.
With that please turn to Slide #2. In the second quarter Popular reported adjusted net income of $91 million, up $6 million from last quarter's results. We continue to generate strong revenues with capital levels well above peer averages. Tangible book value was $44.62, up from $43.55 last quarter. Our net interest income was up $6 million over the prior quarter. Our net interest margin of 4.31% was down from last quarter's 4.43% as a result of higher cash and short term investment balances due to an increase in public sector deposits. Our spreads remain strong relative to peers with our Puerto Rico net interest margin of 4.67%.
We’re also encouraged by the trends in our U.S. business, particularly the continued strong commercial loan production. Total NPAs this quarter of $836 million including covered loans were down $12 million from last quarter’s $848 million, mostly due to lower NPLs, somewhat offset by an increase in OREO balances.
Non-covered NPLs were $578 million or 2.6% of non-covered loans, down $0.2 million from last quarter. NPL inflows decreased $9 million when compared to the previous quarter, driven mostly by last quarter's inflow of a single commercial borrower in the U.S. Our net charge-offs were $35 million or 63 basis points, down $7 million from last quarter’s $42 million or 76 basis points, excluding a $5 million recovery on the bulk sale we completed this quarter, which Lidia will address later. At quarter end, available holding company liquidity stood at approximately $420 million. This liquidity position provides in excess of two years’ debt service coverage with no maturities until 2019.
The market value of our stake in Evertec is approximately $191 million and significantly exceeds our position's current book value of $35 million. As investors, we will continue to participate in a proportionate share of the Company’s income, while our investment also represents an additional source of capital flexibility and potential holding company liquidity. During last year’s third quarter, we reinstituted a common stock dividend and intend to return additional capital to our shareholders over time.
Please turn to Slide Number 3. Before I turn it over to Carlos, let me comment on our Puerto Rico Government exposures and the Puerto Rico fiscal situation. Our direct outstanding exposure is $582 million, up $17 million from the previous quarter and down $91 million from the same quarter last year. The majority of our direct Puerto Rico Government exposure is in loans to municipalities, not publicly traded securities of the Central Government or its public corporations.
We derive comfort from our underwriting process, the structure, and the size of this exposure relative to our capital base. We will continue to monitor developments in this portfolio closely and make future adjustments as needed while selectively participating in funding the Puerto Rico Government capital needs where we feel the risk reward is appropriate.
Regarding the Puerto Rico government's fiscal challenges, we have stated that any successful solution requires three things: a legal framework for our debt restructuring; an effective fiscal control Board; and meaningful economic stimulus plan. These elements are all necessary and no one or two are sufficient to ensure a strong recovery. Last month the U.S. Congress passed legislation that creates a fiscal control board for the island and establishes a legal framework and a path toward an orderly debt restructuring. It also created a bipartisan Congressional task force to promote economic growth.
This legislation reduces uncertainty, which has had a meaningful impact on investor, business and consumer confidence in recent years. In the near term, the law provides a stay on litigation, allowing for more orderly debt restructuring process, particularly given recent defaults on several classes of Puerto Rico's debt. Over time, we believe the Board and restructuring framework will impose fiscal discipline and transition towards a manageable debt load. However, given current imbalances, this will likely include a reduction of government spending in the short-term, which could negatively affect economic activity on the other.
Ultimately though, this will lay the foundation for sustainable economic growth. While the law does not include economic stimulus measures, it created a bipartisan Congressional task force, the members of which were named earlier this month to discuss and offer recommendations to the U.S. congress by the end of the year on ways to spur economic growth in Puerto Rico.
We believe the critical items for this task force to consider include analyzing Puerto Rico’s equitable access to total healthcare programs, the impact of federal trade restrictions, including the jump back, and additional proposals focused on job creation and attracting investment. We see some near term opportunities to offset potential government cost stemming from improved business and consumer confidence, energy infrastructure development and hopefully a pay down of balances owed to suppliers by the Puerto Rico government.
The permit [ph] law, while not perfect, and reliant on the corporation of groups that will frequently have conflicting interest, put’s CRN [ph] in an improved position and is certainly better than no congressional action. In sum, we believe this legislation and the actions that will follow are step in the right direction to restore the fiscal health of the Puerto Rico government and ultimately the Puerto Rico economy. Though we do not expect, nor do we plan for meaningful economic growth on the island in the near term, we are hopeful over time for the prospect of a manageable debt load, balanced government budget and renewed economic growth.
As the largest financial institution on the island, we will continue to seek to be a source of information, support and advice, particularly from the economic growth front. This is the most critical element in the long run. We will remain attentive to the current situation and the potential impact on our customers. However, our strong market position, significant liquidity, excess capital levels, internal capital generation and risk management practices remain key to our performance.
We have operated in a weak economy for the past 10 years. Despite that, the strong revenues generated by our Puerto Rico Bank have produced positive earnings in each of those years. In the last few years, we have shifted the risk profile of our credit portfolio, enhanced our operations in the U.S., increased profitability and grown our capital. The strength of the capital position and the future earnings power of the bank give us the confidence to resume our common stock dividend, an important milestone for us.
So please turn to Slide # 4, as our CFO, Carlos Vazquez, discusses our financial results in further detail.
Thank you, Richard and good morning. Slide 4 presents our financial summary of the second quarter. This quarter's results are reconciled to GAAP figures in the appendix to the slide deck. Today's earnings press release details variances from the first quarter, headlined by higher net interest income, and a higher FDIC loss share expense.
Net interest income for the first quarter was $358 million, up $6 million from the first quarter, on a higher volume of earning assets and a larger contribution from Western Bank notes. Our adjusted margin was 4.31%, down from 4.43% last quarter, mainly due to an increase in cash and lower yielding short-term investments resulting from an increase in the process mainly from the public sector. We continue to benefit from relatively stable loan yields, enhanced this quarter by an increase in the Western Bank portfolio yield. The average yields for our $2 billion Western Bank loan portfolio increased to 9.53% from 8.76% last quarter. A portion of the increase was due to the positive resolution on various loan relationships in the quarter. Changes in the expected cash flows of individual relationships will continue to make the yield on this portfolio somewhat broader path [ph]. We expect the yields to decline over time as the result of repayments and the quarterly pretax process.
The cost of our interest bearing deposits were up down 2 basis points to 55 basis points on a lower cost of time deposits mostly in Puerto Rico. We continue to deliver organic commercial loan growth in our U.S. operation with quarterly growth of 10%, up from 5% last quarter. Despite this U.S. based growth, our outlook for stable overall loan balances for 2016 remains unchanged. We anticipate that U.S. loan growth will compensate for the Western Bank run up in Puerto Rico. On the Island, we have offset limited organic growth with selective loan portfolio purchases over the last few years. We will continue to pursue this acquisition strategy if attractive transactions become available.
Non-interest income excluding, FDIC loss share activity increased by $10 million compared to last quarter, on higher income from insurance and mortgage related activity. FDIC loss share expenses were higher by $10 million, primarily driven by the quarterly fair value assessment or FDIC loss share true up obligation. This was mainly due to an improvement in Popular's credit spread. We also saw an increase in recoveries, a portion of which are shared with the FDIC and expensed in this line.
Popular's Puerto Rico mortgage business originated $254 million in loans in the second quarter, up from $228 million last quarter. Total operating expenses for the quarter at $302 million were flat with seasonally lower personal cost, offset by higher legal, business promotion and operational losses. We continue to expect quarterly operating expenses to average $305 million to $310 million for the second half of 2016. Our effective tax rate for the second quarter was 26%. For the rest of 2016, we expect our quarterly tax rate to average between 25% and 27%.
Our reported $214 million receivable from the FDIC includes $72 million related to the single family mortgage loss share agreement, which expires in four years. The remaining $142 million represents reimbursable losses that remain in dispute. While we currently expect to collect the disputed balance, any amount remaining in the loss share assets ultimately not collected from the FDIC will be charged off.
Please turn to the next slide. 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 was 16.3%, up from 15.8% in the prior quarter. All of Popular's capital ratios remain robust and well above regulatory requirements. As Richard mentioned, in September of 2015, we resumed payment of a quarterly common stock dividend of $0.15 per share. We will pursue opportunities to actively manage our capital while being responsive to the challenging environment in our local market.
Our future capital actions will take into account development in the Puerto Rico fiscal and economic situation, included those discussed in the call today. We will submit Popular's stress test to our regulators at the end of this week. These results and development in the Puerto Rico market will be permanent in our regulatory discussions regarding additional capital returned over the next few months. We expect to update you on this progress next quarter.
It continues to be our goal to maintain strong capital levels that are appropriate for Popular's risk profile as we work towards our target of a double-digit return on tangible equity.
With that, I'll turn the call over to Lidio.
Thank you, Carlos and good morning. Despite challenging conditions in our main market Puerto Rico, we continue to experience stable credit trends. In Puerto Rico, credit quality metrics reflect lower net charge offs, lower NPLs, lower NPAs and stable NPA inflows as compared to the previous quarter. In the U.S., the payoff of an 11 million non-performing commercial relationship impacted favorably the results for the quarter. The credit metrics reflect the net recovery in credit losses, lower NPLs, lower NPAs and lower NPL inflows.
The events during the quarter also included the bulk sale of Western Bank classified loans and OREOs with a current value of approximately $100 million and $9 million respectively. While this bulk sale improved our credit profile, it did not materially impact credit quality ratios, given the accounting treatment of the majority of these loans.
As Richard covered on Slide Number 3, our current outstanding direct exposure to the Puerto Rico Government, municipalities and other instrumentalities is $582 million, increasing by $17 million from last quarter, mainly due to additional borrowing on existing lines of credit from two municipalities. Our total outstanding exposure to Central Government on public operation is manageable, representing only 1.5% of total Tier 1 capital. As we have discussed in the past, most of Puerto Rico's Popular’s direct Puerto Rico government exposure is in the form of municipal loans and not securities. Our municipality exposure consists of senior priority loans to a select group of municipalities whose revenues are independent of the Central Government.
This exposure is carefully underwritten book of business with senior interest in the municipalities indefinable revenues and cash flows. Our top four exposures are to Carolina where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico where now the municipality with the highest per capita income and by amount, the second most Popular’s municipality. These four municipalities comprise approximately 72% of our total municipality exposure and combined have operating surplus of $58 million and debt service capacity in excess of 2.2 times. In addition, these municipalities have meaningful sources of liquidity outside of deposits held at GDV.
As discussed in previous earnings calls, we also have indirect lending facilities in which the government acts as a guarantor. The largest social exposure is in the form of essential mortgage loans to individual borrowers in which the government providers a guarantee, similar to energy [ph] programs in the U.S.
Please turn to our next slide to discuss the credit metrics for the quarter. Non-performing assets including corporate loans decreased by $12 million to $336 million driven by a decrease of $25 million in NPL including NPLs output sale; offset in part by an increase in other real estate loan of $13 million. The OREO increase was mainly driven by the Puerto Rico mortgage portfolio.
Non-performing loans healthy portfolio decreased $22 million from the previous quarter due to improvement of $11 million in both Puerto Rico and the U.S. The Puerto Rico decrease was mainly driven by the commercial portfolio as all other portfolio remains stable on a quarter-to-quarter basis. The decrease in the U.S. was driven by the $11 million NPL commercial relationship that was paid off during the quarter. At the end of the second quarter 2016, the ratio of NPLs to total loans held in portfolio improved slightly to 2.6% from 2.7% in the previous quarter.
Please turn to Slide #7 to discuss NPL inflows. NPL inflows excluding consumer loans decreased by $9 million when compared to the previous quarter, principally driven by lower inflows in the U.S. offset in part by slight increase in Puerto Rico. The decrease in the U.S. was driven by the previously mentioned $11 million commercial relationship that was classified on NPS during the first quarter of 2016. In Puerto Rico NPL inflows increased by $5 million mainly due to a commercial portfolio.
Please turn to a next slide. Net charge offs excluding write downs amounted to $35 million or our annualized 63 basis points of average loans held in portfolio compared to $42 million or 76 basis points in the first quarter. Net charge off during the quarter excluded the previously mentioned classified bulk sale that resulted in a $5 million recovery.
The provision to net charge-off ratio was up to 127 basis, 110% to 113% in the prior quarter. The corporation allowance for loan losses decreased by $10 million from the previous quarter to $518 million mainly during by the allowance of issuing in Puerto Rico of $8 million coupled with the slight increase of $2 million in the U.S. due to loan portfolio growth. The ratio of allowance for loan losses to loans held in portfolio remained flat at 2.3% this quarter. The ratio of allowance for loan losses to NPLs held in portfolio increased from 85% to 90%.
The continued stable performance of our credit results despite challenging economic conditions in Puerto Rico has stemmed from our efforts to the risk loan portfolio by reducing its exposure to asset classes with historically highest loss content in both Puerto Rico and the U.S. Also we are encouraged by these results. We remain attentive to micro economy and loan portfolio trends.
With that, I would like to turn the call over to Richard for his concluding remarks. Thank you.
Thank you, Lidio. And please turn to Slide #9. Before we open the lines to question, let me conclude today's remarks by reviewing the actions we've been taking to drive shareholder value. Our healthy revenue generation and our leading market position in Puerto Rico allow us to earn above average margins. We're encouraged by the progress in our U.S. operation and by the strength of our Puerto Rico franchise. Popular's credit risk profile is meaningfully different from that of a few years ago. In spite of a difficult macro environment, we continue to see stability in our main credit quality indicators, while remaining attentive to fiscal and economic trends. This improved credit profile, together with our strong capital levels are the anchors of our strategy. We also benefit from our Evertec ownership and our stake in Banco BHD León, the second largest bank in the Dominican Republic. Given the fiscal and economic challenges we face on the island, we are focused on the current situation, while acting to minimize its risk.
We've managed the Bank within this environment for the last 10 years, completing several troubled loan sales, refocusing our loan books on lower loss content business lines, raising approximately $2 billion of common equity and completing two in market FDIC assisted acquisitions, all while earning positive profits in our Puerto Rico business during the island's prolonged recession.
More recently, in the past 24 months we have repaid close to $1 billion in cash; had two credits MOUs listed, restructured our U.S. balance sheet and back office, purchased $2 billion of assets in the Doral transaction and reinstated our common stock dividend after six years. We will continue to seek additional opportunities in the current environment.
The implementation of the [indiscernible] law in the coming months will be a defining period for Puerto Rico's future. We remain confident that Puerto Rico will emerge from the current challenges with a more vibrant and diversified economy and we will do everything in our power to ensure this outcome.
Throughout its 122-year history, Popular has persevered through a myriad of different challenges on the island. Although our company is intrinsically linked to Puerto Rico, Popular’s is also a story of a solid organization that has navigated through a complex environment and has emerged as a stronger, better capitalized and a more diversified institution. We look forward to reporting on our progress in the next few months.
And with that, I'd like to open the call for questions.
We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Alex Twerdahl from Sandler O’Neill. Go ahead.
A couple of questions. First off, in the past you have given us some good numbers on what you have seen in terms of trends for card swipes in consumer spending. can you just give us an update as we finish up the quarter and sort of leading up to the follow up in the Senate, what you have seen from some of that consumer activity?
No major change. If you look at retail sales, as we measured on our debit and credit card volume, which is not inconsiderable is flat to slightly down, I guess but no meaningful change from previous month.
Okay thanks. And then…
The other factor there I guess would be the price of oil and that has remained fairly low. So that’s positive as well.
Okay and then Carlos, as I look at the P&L, one thing that kind of jumps out at me a little bit is just a level of professional fees. It just seems kind of elevated relative to some of the larger peers that you have in the United States. Can you just give us a breakdown of what's include in the professional fees, and whether or not those can go down as credit continues to improve?
Remember, in our case a lot of our IT spend goes professional fees, because we are part of Evertec contract. So that is a little big change when we compare it to our previous state. The second big change is most of our peers in the state that operating in this market that’s growing -- but royalty bodies are going up and credit issues are nonexistent. While we are hoping to get there, we’re not quite there yet at least in the Puerto Rico market. And the last piece that contributes on that line is legal expenses. It’s public knowledge that we are in an arbitration process with FDIC. And those things send to not be cheap
Okay thanks. And then just final question from me. You guys recently launch the national online deposit gathering platform in the United States. Can you just give us a sense for how big you’ll let that get to be? And what your plans are for that in the future?
We have Manuel [indiscernible], who heads our U.S. operations. So we will let him tackle that one.
Unidentified Company Representative
Yes. We’re using that channel. We currently already have another online channel which is e-loan. So when we launch Popular directors and other channel for us to increase liquidity for the operation in U.S. And again I think that in terms of how big that is going to be, we’re going to use that opportunistically and as far as we need it to fund our loan growth.
I guess the answer is the loan growth has been higher than deposit growth in our U.S. operations. So we will supplement that while the profit side catches up.
Our next question is from Ken Zerbe from Morgan Stanley. Go ahead.
Maybe just sticking with the U.S. theme, given what's happening in Puerto Rico and the challenges that the island faces more broadly, can you just talk about your desire to get more meaningfully larger in the U.S.? Would you consider any deals? Has that changed? I heard what you just said about the deposit platform but I’m thinking more -- something a little bit more substantial?
The short answer is Yes; we would consider a deal if it made sense. Our thought when we refocused our U.S. operation is to stick to the New York metro area and top floor of Miami specifically. As you saw we did do the Dural [ph] piece and that has proven to be very good for us. And it has increased our business there in New York substantially and we’re very happy with that. So if those kinds of situations come up where they make a lot of sense, we’re going to do it, but we are not -- we are focused on those two markets, and that’s about it.
And then could you just remind us, how -- the deposit inflows that you had this quarter, how much specifically related to government demand deposits and how transitory are those?
We will give you -- Carlos will give you the exact figures. Just bear in mind that with the GDV essentially winding down, a lot of the government agencies that had deposits in the GDV, most of those were moved over here, but with a chunk of that. But we also grew in our non-public number. So I'll let Carlos give you the specific.
All -- our average balances grew in all deposit lines in the public and private. So it was a very positive quarter on the deposit front. Our public deposits grew in excess of billion dollars for the quarter. And do keep in mind that the public deposits are collateralized. So they already have a material effect on our liquidity overall. But the growth in public was slightly over $1 billion, but all lines in deposits average -- average deposits grew for all lines.
And that is likely to remain on the balance sheet for sort of an extended period?
Well, we are trying to make those judgments and have a better view of exactly how the deposit will move. We will -- as we go, we will make a better judgment. As one of the recent, our cash and short-term investment balances grew this quarter. As we make those judgments, we will redeploy the cash. But again keep in mind, this increase in deposits doesn’t have a material impact liquidity since they are collateralized.
They are mostly -- almost all of them are operating accounts and in particular the main government, what called the TFA [ph] account, that’s the treasury, the local treasury department have. So it’s a little more volatile and we just need to get a better feel for that before we start extending maturities.
Our next question comes from Brett Rabatin from Piper Jaffray. Go ahead.
Seems like you guys are making some good progress on the credit side. Can you talk maybe about your thoughts on credit costs from here. And if you feel like you are going to reach an incremental point where provisioning and charge offs might decline, hopefully as inflows ebb over the next year so?
I think that is going to be on the environment. I think a lot of -- I mean we are certainly very encouraged by the trends in our chromatics, both in Puerto Rico and of course the U.S. But given the operating environment, the community cautious in terms of provisions. So I think as our lot of the uncertainty is taken from our operating environment I think you potentially see provision being the level charge offs on a going forward basis.
Okay. And then I realize DFAST isn’t out, but just thinking about capital and the potential for a substantial buyback, would you guys care to give any color on sort of how you view excess capital and the plans for that as you get through the back half of the year?
We will file the DFAST at the end of the week and we will also file I guess our version of over capital plan a couple of weeks thereafter, and start our discussion. So we do hope to report on that towards the later end of the quarter. But I don’t have anything specific right now, except we would like to return to more capital. Exactly how and how much will depend on the next few weeks.
Okay, and then just lastly with the increase on liquidity and the deposit flows, if you’d mentioned it, I missed it, but just what you did in the securities portfolio during 3Q and sort of how you think about the margin with the excess liquidity and the higher securities book?
A reasonably large part of our drop in margins for the second quarter was our excess cash position or go to cash position. Again, we are trying to get our hands on the volatility of the environmental process that came in before we start to make judgements on our investment portfolio. So as we get more comfortable and we understand how the flows will be, then we’ll move quite certainly in cash through our normal investment strategies, which tend to be longer-term.
Our next question is from Gerard Cassidy from RBC. Go ahead.
Can you guys share with us – obviously, Richard, you talked about the legislation that Congress passed and now hopefully ball will move forward. If the government spending does slow down as you alluded to, should we expect maybe an inflow of non-accrual loans due to that over the next 12 or 18 months?
That's always a possibility. We’re just speculating that to balance the budget it's going to require some cost. How quickly those get done, it's really very difficult. We don’t even have the names of the people on the fiscal control board the legislation provides that they must have a five-year plan that must be developed by the current administration and the yearly budgets must conform to that plan. So it's really early. I guess our thought is that it will require some cost, it will depend on what is done to the countervailing measure to that, and in that sense we were encouraged by the naming of this by bipartisan task force. We were encouraged by the fact that was named, the fact that it is bipartisan and the names on that task force are generally very familiar with Puerto Rico and the situation. So it will really depend on how appropriate these stimulus measures will counteract what we think inevitably will be a reduction in government spending.
Do you have any sense from your conversations with folks in Puerto Rico when this will all get up and running? Is it six months away, 12 months away. Do you have an idea?
I think it's somewhere between six and 12 months away. Bear in mind that it we will probably report in place for the budget that starts on July 1, 2017. So that will be the first time that that process goes through. So I assume if we get the names and the Board gets constituted, I think they have the deadline of September 15. So assuming the Board gets constituted or more importantly the staff and all that machinery is put into motion. It will probably be by the first half of 2017 that this process starts in earnest.
Great. And then are there any other risks -- we don’t know if there will be in economic slowdown due to maybe government spending being lower as part of the balancing act they have to do. But aside from that potential risk, are there any other risks that could come out a less yield for you guys due to whatever they decide to do to get things back in order?
They come out [indiscernible] it’s tough to identify them beforehand. But the thing we spend our time on is really this whole process of the fiscal control board and all these other metrics. That’s what really takes up our times. It's trying to figure out who they are going to put on the Board, how quickly will they get up to speed, what kinds of things this bipartisan congressional task force and -- these are the kinds of things we are spending our time, aside from making sure that the trains run on time.
Very good, and then just shifting over to the U.S. as you guys talked about, doing some online deposit gathering, if I would recall last quarter, I think you guys mentioned you had the small purchase of Lending Club loans. Can you share with us any color on how they’ve progressed since what's going on there?
I’ll let Lidio handle that one.
Yes, I think we mentioned last time that we had initiated the purchase of Lending Club loans. We did a rough test case and we have significant experience with personal loans both in Puerto Rico and the U.S. We only wrote the loans on own standards, and so far, they have – their performance is as we expect when we purchase the loans.
And when you say as expected, meaning what, in terms of credit defaults, no credit defaults or a small amount?
Credit defaults within our expectations, on delinquency within what we expect when we purchase a loan base on the credit profile of the loans.
Okay and then will you look to purchase, not necessarily from Lending Club, but are you still looking for that channel to help grow the U.S. consumer loans?
We have so far between -- we started to provide in the third quarter of 2015. We have purchased around $237 million of loans. Given that pay downs from customer are -- the number is down to 215; after the announcement of the Lending Clubs situation, we stopped purchasing loans and, we are on the road -- all the loans that we purchased we did not find any issues with them. But we haven’t reached out of the process of purchasing loans. So today there is an ongoing discussion we are having as a management team. But as of today, the program stopped. We purchased 237 down to 215. And we haven’t purchased anything since May of this year.
Great, and on the last question, maybe for you, Richard, any update on your guy’s outlook about Cuba? I know it's not something that eminent, but expansion into Cuba, that possibility?
No, I think there is more sizzle than take there. We have a lot of -- obviously we want to do it. We got approved. We’re one of two banks whose MasterCard is approved for use in Cuba by U.S. citizens. And we will continue to develop the relationships and look forward to it. But this will take a lot of time. I think as we have mentioned before, I think the President has stretched executive power to its limit here, but at some point this requires congressional action and I think you guys have a better feel than -- certainly than I do of presidential politics, and how soon that’s about to happen. So I think -- it will take time. There is no doubt in our mind, which direction it’s going. We want to be there. We have a lot of clients who want to be there. So it's something we invest some time in, but it will be a while still.
Our next question is from Jesus Bueno from Compass Point. Go ahead.
Just quickly on the loan growth, it was certainly positive to see even slight loan growth, considering the loan sales. I can understand you’ve been purchasing LC loans, but it does look like commercial growth has been stronger in North America than expected. Is that part of the reason why you feel you are pulling back from the LC loan purchases, or is it just that your outlook on -- perhaps on Puerto Rico has changed in terms of growth opportunities there?
When we restricted the bank and they did their all transaction, it was our goal to have stronger origination capacity in the state which we are achieving. The growth was nice this quarter. It's always just a matter of pipeline. It takes time for loans to close, and more than sell in, meaning that we’re closing the second quarter than the first, what I think the important message to take is that we have a strong pipeline in the U.S. and the portfolio is growing nicely. We are being very attentive to credit since in both the markets we are in. Our markets are very competitive. So we are not growing the book by loosening our credit box. We’re actually letting a lot of business go by because it doesn’t meet our credit or return criteria. So we feel pretty good that we are achieving a good way of growth in the U.S. while keeping our credit spenders high.
That's, great. Thank you. And just returning to that the mortgage banking line, obviously it was positive to see and improvement quarter-over-quarter there. If you could just comment on -- it looks like prepayments were down overall, which helped out. But overall it does like gain on sales was up. So if you could just give us some color on what you’re seeing in terms of volumes in Puerto Rico and also in terms of margins thus far in the quarter.
Well, our originations that we are commenting a lot on the call are lower this year than last year. So we are clearly seeing a softer prudential mortgage book in the Puerto Rico when compared to last year. At this point in time it's really hard to tell unless that affects the lower rate that we have and hope to have -- the next two months are going to have. And on the mortgage market it has not had the clearly noticeable effect than I think some of our peers in the U.S. that reported yet. Also December tends to be very slow period in Puerto Rico for home purchases. So we’ll have to see. But overall the volumes are lower this year than last year and that's our criteria on numbers.
Our next question is from Brian Klock from Keefe, Bruyette & Woods. Go ahead.
So I got in a little late. So I just -- I’m not sure if you actually covered this already. Carlos, I did hear you talk about reiterating the guidance on the expense line of the 305 to 310 quarterly guidance. Because I'm not sure you've talked about those -- there was about 5.5 million of sundry losses that you disclosed in the release that were in that line. And maybe you can talk about what kind of losses those were, and if they are not expected to recur, it seems like the operating expense line for this quarter was something that was below even 300 million. So, I guess maybe you can remind us as a second part what's the sort of expense inflation to expect in the next quarter or two that would take it back up to your guidance range?
I mean the fund releases was a combination of a bunch of things from credit cards to servicing business -- a combination -- a number of things Brain. As you know, a number of our expense lines are currently volatile, and you might be right that that line might be lower or another line maybe higher in this quarter. That's why we try to keep our guidance in the overall summation level as opposed to on product line level because it's really hard to get them all right. So we still -- as we look forward, given what we comment on it is what we expect to happen. We’re not making bets. Our best guess of what is going to happen in the last two quarters of the year continues to be 305 to 310. We will obviously strive to improve on that if we can, but that’s still our best business [ph] of math.
Our next question is from Brian Horey from Aurelian Management. Go ahead.
I’m late. So if you covered this, I apologize. I was just wondering if you could comment on the performance of your taxi portfolio this quarter?
We have -- as we have [indiscernible] in this call, we have restructured a number of our taxi medallion relationship that we purchased from when we acquired our bank. As you know we have in our books at about $0.61 on the dollar. And so far, they are performing under the restructuring terms that we have particular with our most of our relationships.
Okay, can you give us a sense as to what fraction of the book has been restructured at this point?
I don’t have that exact number, but I will say the vast majority. So it will 70%-75%, around that number.
Okay. And can you give us a sense as to what portion those are not accrual at this point?
At this point we are accounted under – as far as know SOP, 03.03, which is the [indiscernible], which is accounting for when you acquire loans with credit impairments. And from that regards, given our estimate of the cash flow, none of it is in a non-performing that is good.
None of it is non-performing. Okay. Would you say that credit performance generally has improved or deteriorated over the course of quarter in that book?
I would say it’s staying. It hasn’t improved or deteriorated.
[Operator Instruction] If there are no further question at this time, the conference has now concluded. Thank you for attending today's presentation. Everyone may now disconnect.
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