Popular Inc (BPOP) 2015 Q4 法說會逐字稿

Good morning and welcome to the Popular, Inc., fourth-quarter 2015 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to the Investor Relations Officer of Popular, Inc., Brett Scheiner. Please go ahead.

Good morning and thank you for joining us on today's call. Today I'm joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our full-year and fourth-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 supplement. 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 2015 and the fourth quarter, then I will 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.

Please turn to slide number 2. This year we reached a number of key milestones in improving the performance of our Bank. In February, we announced the purchase of $2 billion of assets and the assumption of a similar amount of deposits as part of the Doral Bank transaction, with subsequent acquisitions of their insurance and mortgage servicing portfolios. In addition, during the year, we completed the restructuring of our US operations, and in September we reinstated a quarterly dividend.

These accomplishments come in concert with improved financial results for the Company. For the full-year 2015 we reported net income of $895 million, which includes the effects of the partial recapture of our US deferred tax asset. Adjusted net income from continuing operations was $375 million, improving on the prior year's $305 million.

Our credit quality improved, as total NPAs including covered loans of $843 million were down from $933 million at year-end 2014. Noncovered NPLs decreased $29 million to $602 million; NPLs were 2.7% of noncovered loans compared to 3.3% last year.

Our stable credit metrics were the result of aggressive loss mitigation efforts, resolutions, restructuring, and NPL sales. Our Tier 1 capital and Tier 1 common ratios at year-end were both 16.2%.

Turning to slide 3, as you can see we continued to improve our leading market position in Puerto Rico. Banco Popular's franchise is unique and has consistently grown its retail and commercial clients. We currently serve 1.6 million customers, representing approximately 65% of Puerto Rico's bank population.

Given this privileged competitive position, we continue to focus on strengthening the relationship and satisfaction of our clients, while providing innovative solutions as part of our digital transformation efforts. Approximately 600,000 of our clients are active online, and 67% of these use mobile devices.

In December, close to 30% of our deposit transactions in Puerto Rico were processed through ATMs and mobile devices, a figure that has been increasing consistently. Our business profile positions us well for an eventual economic recovery on the island and continues to provide meaningful earnings power in the interim.

Please turn to slide 4. In the fourth quarter, Popular earned adjusted net income of $98 million, up $5 million from last quarter and up $17 million from last year's adjusted fourth-quarter results. We continued to generate strong revenue, with capital levels well above peer averages. We're also encouraged by the trends in our US business, particularly given the strong commercial loan production.

Tangible book value was $42.18. Our net interest margin of 4.39% was flat from last quarter. Our spreads remain strong relative to peers, with our Puerto Rico net interest margin of 4.80%.

During the quarter, we completed the valuation of the Dural transactions and the related goodwill. We also recorded an additional partial recapture of our US deferred tax asset. Carlos will expand on both these items.

At year-end, available Holding Company liquidity stood at approximately $414 million, driven by a $200 million dividend from our US banking subsidiary. This liquidity position provides ample debt service coverage, with no maturities until 2019.

In addition, the current market value of our stake in EVERTEC is approximately $170 million and significantly exceeds our position's current book value of $34 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.

Last quarter we reinstated a common stock dividend and intend to return additional capital to our shareholders over time.

Please turn to slide 5. Before I turn it over to Carlos, let me comment on our Puerto Rico government exposure and the Puerto Rico economy. The majority of our direct Puerto Rico government exposure is in loans to municipalities and not publicly traded securities of the central government or its public corporations. Our underwriting process, the structure, and the size of our Puerto Rico government exposure relative to our capital base gives us comfort.

Our direct outstanding exposure is $578 million, essentially flat to the previous quarter and down $233 million from last year. We will monitor developments in this portfolio closely and make future adjustments as needed, while selectively participating in funding the Puerto Rico government's capital needs where we feel the risk/reward is appropriate. As such, our total exposure increased by $34 million this quarter, reflecting a new short-term line of credit to the entity responsible for collecting municipal taxes, CRIM.

The government of Puerto Rico faces multiple fiscal and liquidity challenges in the coming weeks and months. The U.S. Treasury's efforts, Speaker Paul Ryan's push for action during this first quarter, and the fact that these issues are now on the agendas of political groups in both the U.S. Congress and in Puerto Rico are promising. Political processes, however, are inherently unpredictable.

That said, we're convinced the central government of Puerto Rico will fall short of the liquidity to meet its obligations in the next few months and immediate action is required. We continue to believe that any successful solution will require three things: one, a legal framework for a debt restructuring; two, an effective fiscal control board; and three, a meaningful economic stimulus plan. This is a three-legged stool, and we are concerned that the discussion and action to date has not put sufficient emphasis on economic growth.

A resolution will need bipartisan support from the Puerto Rico Legislature and the community at large, as well as the active participation of the US government's executive and legislative branches. We hope that the political leadership in San Juan and Washington, DC, will arrive at solutions that will achieve fiscal balance and, more importantly, put the economy back on a growth track. We will do everything and our power to support this result.

While the Puerto Rican economy has been relatively resilient, unfortunately the longer these issues drag on the more negative an impact they will have. In the interim, the current uncertainty harms both commercial investment and consumer confidence.

However, our strong market position, significant liquidity, excess capital levels, and internal capital generation 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 banks 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, increased profitability, and grown our capital. With that progress in mind we are confident that we are prepared to manage through a variety of potential scenarios.

The strength of the capital position and the future earnings power of the Bank give us the confidence to resume a common stock dividend, an important milestone for us. So please turn to slide 6 as our CFO, Carlos Vazquez, discusses our financial results in further detail.

Thank you, Richard, and good morning. On slide 6 we present our adjusted financial summary for the fourth quarter. This quarterly data is reconciled to GAAP figures in the appendix to the slide deck.

Today's earnings press release details variances from the third quarter, the largest being lower loan-loss provision and higher fee income, offset by lower FDIC loss-share income and slightly higher operating expenses. Net interest income for the fourth quarter was $351 million, flat from the third quarter, as lower commercial loan income was compensated by trends like mortgage interest income and slightly higher income from consumer loans.

We continue to achieve healthy organic commercial loan growth in our US operation, with fourth-quarter growth of 6%, down slightly from 7% last quarter. Despite this US-based growth, our outlook for stable overall loan balances for 2016 remains unchanged. We anticipate that our US loan growth will compensate for the Westernbank runoff 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.

The average yield of our $2.1 billion Westernbank loan portfolio increased to 8.82% from 8.59% last quarter. We expect similar yields on this portion of our loan book for the next few quarters, slowly declining thereafter due to ongoing loan resolutions, repayments, and the quarterly recast of the portfolio's expected cash flows.

Our interest-bearing deposit costs were flat to the prior quarter's 54 basis points, as improvements in deposit mix offset an increase in volume and tenor of client time deposits in our US operation. Noninterest income excluding FDIC loss-share activity, increased by $11 million compared to last quarter. This was mostly the result of contingent premiums at our insurance subsidiary that are reported annually in the fourth quarter.

Popular's Puerto Rico mortgage business originated $235 million of loans in Q4, down from $327 million last quarter and down from $275 million in the fourth quarter of last year.

The fourth-quarter production was affected in part by the implementation of the TILA/RESPA Integrated Disclosure rule. Overall origination volume for the year increased $67 million to $1.3 billion.

Total operating expenses for the quarter were up $5 million to $305 million, the low end of our guidance. This increase was mostly driven by higher processing and technology expenses, the impact of the recently enacted B2B sales tax in Puerto Rico, and seasonally high promotional expenses. As previously disclosed, we expect quarterly operating expenses to average $305 million to $310 million through the end of 2016.

Given the partial recapture of the DTA in our US subsidiary in 2015, beginning in the first quarter of 2016 our GAAP results will incorporate an effective tax rate of approximately 44% on our US earnings. Our adjusted effective tax rate for the fourth quarter was 24%. For 2016 we expect our quarterly tax rate for the full year to average between 27% and 29% as a result of the aforementioned effective US tax rate.

Please turn to the next slide. On slide 7 we provide an overview of the losses expected to be realized and collected from the FDIC through the closeout period of the loss-share agreements. The loss-share portion of our commercial LSA expired at the end of the second quarter of 2015.

Our total $310 million receivable from the FDIC at year-end includes three components: first, $76 million related to the single-family mortgage loss-share agreement which expires in four and a half years; second, $85 million billed for second-quarter 2015 losses which were paid by the FDIC this month; and lastly, $149 million of reimbursable losses that remain in dispute. While we currently expect to collect this disputed balance, any amount remaining in the loss-share asset 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. GAAP earnings for the quarter were $137 million, but other factors drove a decline in our tangible book value from $42.71 last quarter to $42.18 at year-end.

The largest of these factors was the final assessment of the valuation of the assets acquired and the liabilities assumed in the Doral Bank transaction, which resulted in an additional $121 million of goodwill. Also impacting tangible book value were the recurring payments of our quarterly common stock dividend, as well as an accumulated other comprehensive loss of $67 million.

Our Tier 1 common equity ratio was flat at 16.2%. All of Popular's capital ratios remain robust and well above regulatory requirements, as confirmed by the strong results of our 2015 Dodd-Frank stress test. Please note that due to regulatory schedule adjustments, we will file our next DFAST in July of 2016.

As Richard mentioned, last quarter we resumed payment of a $0.15 per share quarterly common stock dividend. We will pursue opportunities to actively manage our capital while being responsive to the challenging environment in our local market. Future capital actions will take into account developments in Puerto Rico's fiscal and economic situation.

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 turn the call over to Lidio.

Thank you, Carlos, and good morning. Despite challenging economic and fiscal conditions in our main market, overall asset quality remained stable during the quarter, with three items impacting our reported results.

First, we sold a dairy farm loan portfolio in Puerto Rico with a book value of $34 million, of which approximately $21 million were nonperforming. The incremental provision associated with this sale was $5.9 million, which were adjusted -- adjusting the non-GAAP results.

Second, commercial net chargeoffs in Puerto Rico were impacted by $31 million in chargeoffs related to certain borrowers for which specific reserves were recorded in prior periods.

Finally, we placed a $15 million individual customer relationship into nonperforming status. This loan is secured mainly by Puerto Rico securities.

In the US, we finalized the first-day fair value adjustments related to the assets acquired and liability assumed from the Doral Bank transaction. This process led to a lower fair value of assets acquired, particularly for a portfolio of taxi medallion loans.

Doral's taxi medallion portfolio is mostly a New York-based portfolio with unpaid principal balance of $249 million and a revised fair value of $155 million. The main factors impacting our fair value assessment were borrower concentration, collateral values, and documented payment capacity.

Please turn to slide 9 to begin the discussion. This slide compares Popular's current portfolio mix to that at the end of 2007. The key message is that the Corporation has derisked its loan portfolio by reducing its exposure to asset classes with historically high loss content.

In the US, we no longer have a subprime consumer and mortgage business. Our US Bank is now a community and niche lender with a much lower risk profile. Our construction exposure is mainly in New York with experienced developers and prudent loan-to-values.

In Puerto Rico, our commercial and construction exposures have decreased from 55% of our total loan book to 43%. Construction lending has decreased 92% and now stands at $101 million.

On the bottom of the slide we also segment the commercial portfolio and include net chargeoff distribution by segment since 2008. The important message from the table is that our commercial mix has significantly improved by reducing exposure to asset classes with historically high losses.

In addition to a materially improved risk profile, our 2015 Dodd-Frank stress test provides us with additional comfort. It incorporates a severely adverse scenario for Puerto Rico in which the unemployment rate peaks at 20.4% and economic activity measured by GNP decreases by 6.3% during the first calendar year. Under such a scenario, while we forecast over 10% loan losses in the

nine-quarter period and reflect a [2]30 basis point impact to our Tier 1 common equity ratio, we maintain a meaningful cushion in excess of well-capitalized status at all times.

As Richard covered on slide number 5, our current outstanding direct exposure to the Puerto Rico government, municipalities, and other instrumentalities is $578 million, flat from the previous quarter. Our total outstanding exposure to the central government and public corporation is manageable, representing only 1.9% of total Tier 1 capital.

As we have discussed in the past, most of 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.

Our top four exposures are to Carolina, where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico; Guaynabo, the municipality with the highest per-capita income; and Bayamon, the second-most-populous municipality. These four municipalities comprise approximately 72% of our total municipality exposure and combined have an operating surplus of $58 million and debt service capacity in excess of 2.2 times.

As discussed in previous earnings calls, we also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee similar to FHA programs in the US.

Please turn to the next slide to discuss the credit metrics for the quarter. Nonperforming assets including covered loans decreased by $36 million to $843 million, driven by an NPL decrease of $35 million in Puerto Rico. The decrease in Puerto Rico NPLs was mainly driven by lower commercial NPLs of $58 million, mainly due to the $31 million of chargeoffs from previously reserved relationships. This was coupled with the sale of a commercial portfolio which included $21 million of nonperforming loans.

These were offset by the increase in NPLs from the previously mentioned individual consumer relationship. At the end of the fourth quarter, NPLs represented 2.7% of total loans held in portfolio compared to 2.8% in the previous quarter.

Please turn to slide 11 to discuss inflows to NPL. Compared to the previous quarter, NPL inflows excluding consumer loans decreased by $87 million, mainly driven by lower commercial inflows in Puerto Rico. The third-quarter inflows included a small number of large commercial loans affecting the result for that quarter.

Mortgage NPL inflows in Puerto Rico decreased by $9 million on a linked-quarter basis. NPL inflows in the US decreased to $12 million from $16 million last quarter.

Please turn to the next slide. Net chargeoffs excluding write-downs amounted to $83 million or, annualized, 148 basis points of average loans held in portfolio, compared to $46 million or 83 basis points in the third quarter of 2015.

NCOs, net chargeoffs, were impacted by $31 million in chargeoffs related to relationship reserves in prior quarters. US net chargeoffs were less than $1 million in the last two quarters.

The provision to net chargeoff ratio decreased to 56% from 128% in the previous quarter. Excluding the effect of the portfolio sale and the chargeoff from previously reserved loans, the provision to net chargeoff ratio was 90%.

The Corporation allowance for loan losses decreased by $33 million from the previous quarter, primarily driven by the chargeoff associated with relationships reserved in prior quarters. The ratio of allowance for loan losses to NPLs held in portfolio remains stable at 84%.

To summarize, despite conditions in our main market, the Corporation asset quality remains stable. For the year, NPLs decreased by $29 million to $602 million; the NPL ratio improved from 3.25% to 2.69%. NPAs improved by $90 million to $143 million; the NPA ratio improved by 46 basis points.

The net chargeoff ratio remains stable, from 90 basis points in 2014 to 98 basis points in 2015. Inflows into NPLs decrease by $114 million to $587 million.

While we are encouraged by such stability, we remain cautious in our short-term outlook. With that I would like to turn the call over to Richard for his concluding remarks. Thank you.

Thank you, Lidio. Please turn to slide 13. Before we open the lines to questions, let me conclude today's remarks by reviewing the actions we are taking to drive shareholder value.

Our healthy revenue generation and our leading market position in Puerto Rico allow us to earn above-average margins. Popular's credit risk profile is meaningfully different from that of a few years ago.

In spite of the difficult macro environment, we continue to see stability in our main credit quality indicators while remaining attentive to fiscal and economic trends. This, together with our strong capital levels, improves our outlook.

We also benefit from our EVERTEC ownership and our stake in Banco BHD Leon, 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 have 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 18 months we have repaid close to $1 billion in TARP, had two credit MOUs lifted, restructured our US balance sheet and back office, purchased $2 billion of assets in the Doral transaction, and reinstated our common dividend after six years. We will continue to seek additional opportunities in the current environment.

We're encouraged by the progress we are seeing in our US operation and by the strength of our Puerto Rico franchise. The next few 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.

(Operator Instructions) Gerard Cassidy, RBC.

Good morning. Question for you regarding the return of additional capital to shareholders. Can you give us some further color on what the timeline might be that you can go back to the regulators and ask for that, and what type of percentage of current earnings you might be comfortable asking for?

Well, we're not -- we don't have really to get regulatory approval. What we do is have an active dialogue with regulators.

Clearly we want to see how the next few months turn out before we make a move in that direction. We are conscious of where the stock price is; we're conscious of the mathematics of buying back stock at this price; and we think we could afford to do a higher percentage of our earnings in terms of dividend return. But at this point, we're going to wait to see how the next few months pan out before we make a major move.

So you do not have to wait for the filing of the 2016 DFAST?

No, no.

Okay, okay. That's what I wanted to make sure.

Then secondly maybe Lidio can expand upon that $50 million credit that you identified that moved into nonperforming, to give us a little more color about the securities and what's behind it in terms of collateral.

Just to reiterate and make sure we got the right number, it is $15 million, half of $30 million, the amount.

Oh, okay. Apologies, my error.

An individual consumer relationship that is mostly backed by Puerto Rico securities. But given the gyrations in the price of securities in Puerto Rico, we placed it into nonaccrual during the quarter.

Okay, thank you. Then finally, regarding your average loan balances, obviously it's a struggle to grow the loan book in Puerto Rico. We recognize that.

Is it feasible to expect the average loan balances by the end of 2016 to be higher than where they are at the end of 2015? Or should we continue to expect them to slowly decline?

I think we're -- our view on that is that we expect loan losses to be flat during the year with some continued runoff on the Westernbank portfolio. Our Puerto Rico business continues to be reasonably healthy, given the environment.

Our bankers are very busy; we're making new loans every day. And then as we have nice growth in the US. But a summation on all those pieces would probably be loan balances that look about the same when we end this year.

Okay. Then actually last question, the last quarterly call I think you guys gave us some color on the consumers through their debit card transactions, how they were handling the fiscal situation, and the headlines from it. Is there any trends that you can identify that the consumers are still spending money with an upward trend? Or no, have they really pulled back?

Well, look. We look at both credit and debit card sales, and it's a pretty big sample of the universe, obviously. And we look at that.

We back out the increase in the tax. We make a guess as to lower gasoline -- an informed guess, I should say -- as to lower gasoline prices.

We still find that the last couple of months were positive, an increase in sales vis-a-vis last year. So that is -- in a sense, the consumer has been continuing to spend.

Obviously, the low price of oil, while it seems to rattle the markets, is pretty good if you're a consumer in Puerto Rico and buying gas and paying for electricity. So we think that has probably pumped in a significant amount as a countervailing force to the other things that are going on. So bottom line, sales have been slightly up to flat.

Thank you.

Ken Zerbe, Morgan Stanley.

Great, thank you. I guess first of all, I did hear your comments that loan growth is going to be relatively stable. I guess switching over to deposit growth, I think it was -- I mean, it was a teeny bit weaker than what we were expecting, nothing material.

But just more curious on your outlook for deposit balances given what's happening in the island. Is it fair to assume deposits can actually stay stable as well? Or is that noticeably different from loans?

We were surprised by your comment that the deposit growth was slower, frankly, because we've seen very robust deposit growth, particularly in terms of transactional accounts.

Perhaps I have high expectations. (laughter)

(multiple speakers)

Go lower them, Ken. (laughter).

But the deposits I think have --

Look at the mix of the deposits.

Yes, deposits have been pretty healthy. Probably the more important part of your question, Ken, is what happens going forward.

We don't guide on deposits, but all we can do is comment on our past experience. And in past experience in Puerto Rico, when the situation has gotten a little bit challenging, usually what happens is our deposit balances go up.

Again, past practice does not make a forecast. But so far we've seen good behavior in the deposit growth; and historically when the economy is challenged our deposits have tended to go up.

All right; that helps. Then just the other question I had, in terms of all the non-GAAP perhaps adjustment you've had to -- in terms of the reorganization, the bulk sale, losses, impairments, etc., at what point should we expect those to start trailing off? Because I would imagine we're getting close to that point already, but just wondering what the outlook is into early 2016.

Yes, I feel you, Ken. They keep telling me this is the last quarter, but the accountants come up something every time. It was the DTA this time, and you know.

Ken, it is our goal to be a boring bank. It is our goal to have really clean numbers that don't have any adjustment to them.

Some of these -- you can't help it. Situations come up where transactions occur that are not part of a normal course of business. As you know, we're pretty diligent in our adjustments and careful about them.

So we're just trying to make sure that we present the market the best shot we can come up with of what the running core business looks like that. But yes, we share your goal. We're trying to make that page of adjustments go away. We just haven't succeeded yet.

All right, perfect. Thank you very much.

Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen. Interestingly, it seems that you read the newspapers every day and it seems like Puerto Rico is going to just fall into the ocean. Obviously, there's challenges there.

But looking at your asset quality trends, you guys have done pretty well this year with a tough environment. So maybe thinking about there's already been -- right -- the Puerto Rico government has withheld tax refunds, so there's already been impact on the consumer.

With everything that's going on now, with PREPA now being somewhat delayed and I guess with the GDB and its liquidity situation as the rest of the debt restructuring is being worked on, I guess, how do you think this plays out by the time we get to the end of this fiscal year for the government?

I know you talked a little bit about it, Richard, what you think needs to be done. I guess is there -- it seems like we have to get something done before this fiscal year ends, right? I guess maybe just think -- does that seem logical that there can be some meaningful progress done by the middle of this year?

Absolutely. I think there has to. Something needs to happen before June 30, before the end of the fiscal year. We are convinced of that.

We are somewhat disappointed that some of these deals are taking a little longer to get done. We'd like to see more action coming from the Congress.

As we've said repeatedly and even testified before the Senate, we think the solution will have to have some kind of debt resolution structure or mechanism. We think the solution needs to have some type of fiscal board to ensure adherence to a good, disciplined fiscal regime. And more importantly, we think the solution has to include some kind of stimulus towards private investment, because at the end of the day we just want to see growth again and reverse some of these trends.

So we're not happy about where things are. We think it will require urgent action in the next few weeks and months, and we are convinced something's got to happen before June 30.

Appreciate your thoughts.

It's difficult to handicap the dynamics of this because there's a lot of politics involved, and it's tough to predict particularly in an election year, both locally and in the States.

Right, right. Interesting, thinking about stimulus, with everything else going on it feels like -- if I remember the numbers, if PREPA could get resolved with the ad hoc group plan that's out there and that can get moved forward, the next phase would be, I guess, with the restructuring of PREPA, which is a few billion dollars of capital that would be infused -- right -- THAT would come into the Puerto Rico economy.

So in addition to low prices of oil, and that's another stimulus for the economy, right, if I'm correct?

Exactly, I think the key to getting that restructuring done is that once that's done it opens the way for a lot of capital investment and the replacement of a very outdated and outmoded plant. So it is fundamental to get that one done as quickly as possible.

Exactly. And I hope that --

These are not -- these are complex deals, to say the least --

Sure.

-- with a lot of hurdles. But we're doing everything we can to make sure it gets done.

Right, great. I hope the political leaders have that in mind as well, how big of an impact that could have to move that forward on all counts.

Absolutely.

So the other quick question -- and I'm sure, Lidio -- I'm not sure if you have it available or if we have to wait till the Q; but do you have the classified balances for BPPR at the end of the year versus -- I think it was what, $3.2 billion was in Puerto Rico at the end of the September quarter?

It's not going to be significantly different from September, but you have to wait until the Q.

Okay, okay. Fair enough. Fair enough.

The K, the K, the K.

Oh, right, right, the K. I guess maybe last question too, one of the things that -- you guys have put up some solid numbers here in Puerto Rico with a challenging environment. The US operation seems to be gaining some traction.

So I guess maybe talk about the expectation. Can you put up the same sort of growth that you guys have put up in the last couple of quarters in 2016 in the US BPNA franchise?

Yes, we think so, absolutely.

Great. Thank you for taking my questions. Appreciate it.

Alex Twerdahl, Sandler O'Neill.

Hey, good morning, guys. A couple questions here just quickly. The Doral reassessment, is that a one-time thing or is that something that has to happen every year?

No, that's a one-time thing. You get 12 months from the date of the transaction to get it done. So it's a one-time thing.

Okay. Then you say that the almost $77 million of the change in the loan portfolio is due to medallion loans. But what is roughly the other half of the $147 million of adjustment to loans? What kind of loans are those?

They're mortgage, consumer, 1-to-4-family mortgage loans, construction loans in the US, and some limited CRE and C&I loans in the US. The total mark on the Doral portfolio including the taxi medallions was around 10%.

10% additional this quarter?

The total mark, so the total discount.

Of the total -- of the Doral assets that we acquired.

Okay. Then, Lidio, if you have them handy, can you just rattle through some of the statistics on that medallion piece? Like for example, how many medallion loans the $248 million unpaid principal balance represents.

Then I think you said that it was due to concentrations to some big borrowers. Can you just tell us how big, how many loans, or how big the loan value might be to one borrower?

Sure. I'll give you some of the numbers that I have handy with me. We have approximately 248 loans that compose the outstanding balance that we have from that portfolio.

Our biggest relationship is approximately $55 million of unpaid principal balance. Carrying value then, obviously with the discount you can do the math, more or less.

Okay. But it's 248 loans and the unpaid principal balance is $248.6 million. Is that -- did I hear that correctly?

Correct, yes.

Okay. Then on the bulk loan sale, you say the book value is $34 million-plus. What was the unpaid principal balance on that? And what was the final sale price?

Yes. The unpaid principal balance was $58 million, and the price paid was between 47% and 48%, 47.75%.

Okay. Those are all commercial loans, or commercial real estate loans?

Those were all commercial loans of the dairy farm industry.

Yes, agricultural.

Okay. Then just finally, can you help us think through -- if we do get some restructuring, some form of Chapter 9 or whatever, I think we have a good handle on what your exposures are to the bonds and to the loans to the central government. But assuming that a restructuring would also include some sort of a reduction to maybe some balances owed to various contractors and whatnot who you could have exposure to, can you help us just think through what the impact would be to your balance sheet if in fact we do get some sort of Chapter 9?

And how you've been able to quantify those exposures internally, and whether or not those types of things are incorporated in DFAST, and just maybe a little bit more discussion about that.

Let me just give you -- obviously we spent a lot of time thinking about this, and we've taken a crack at the impact on both our commercial and our consumer and mortgage portfolios, basically, looking at the impact of government employees getting laid off and what that would do to our customer portfolios; looking at our client base in terms of commercial clients and what is their outstanding to the government, in terms of how much they rely on the government for their revenues, what are the criticality of the functions they provide; and then taken a crack at increasing loss given default, and increasing or actually trending up the classification of these loans and seeing that impact.

All of those have turned to be well within the scenarios we have done for our DFAST. I don't know, Lidio, do you want to --?

I think that's perfect.

Good. So you've taught me well, Obi-Wan.

Okay, that's extremely helpful. Thanks for taking my questions, guys.

Brett Rabatin, Piper Jaffray.

Hi, good morning. I think most of the stuff's been addressed; but just wanted to ask from a regulator perspective how -- what they've been thinking here, with all the noise that's been happening in Puerto Rico. How has their mindset changed regarding capital ratios or how they look at your institution? Any thoughts on how they've changed maybe their view on Puerto Rico and what maybe they've done recently in terms of communication with you.

Well, regulators, as you know, tend to be risk-averse, otherwise they wouldn't be regulators. So they get pretty nervous, but I think we keep a very good communication with them. We dialogue with them.

We take them through some of the things we do to try to get ahead of these things. We think they are pretty comfortable with our position and what we've done.

We think they think we are by far the better positioned institution on the island. They like to get some intel from us.

I say "we think" because they never really come out and say that; you're going to interpret body language there. But we think they are fairly comfortable with where we are.

Okay. Then just thinking about -- you mentioned earlier in your comments, liquidity might fall short for some of these things going on in Puerto Rico. Do you guys have any plans to change anything with your securities positions with Puerto Rico debt?

We have very little exposure there, frankly. There's not much. I don't know, Carlos, if you want to --?

No, the securities position, it's in the table on the deck on page 5. It's only about $18 million. So any change on that would not be material to our results.

Okay, great. Thank you.

(Operator Instructions) Leo Harmon, FMA.

Hi, good morning, you all. Wanted to talk a little bit just big picture. Obviously as you all have pointed out on the call, that over the last four years and particularly over the last 10 years or so you've driven a lot of growth in tangible book, you've increased earnings power, you've sold assets, you've rightsized the balance sheet. Your reward for that is trading at 50% of tangible book value. (laughter)

Obviously there is a disconnect somewhere between what the market is perceiving and what you are perceiving. So as you are talking to your Board, can you walk through what you're thinking about strategically? Whether or not you think about going private; whether or not you think about looking at larger partners to be able to capture the difference between perception and reality.

It is frustrating at times to look at everything we think we have accomplished objectively, and then you look at the stock price. We just keep banging away.

Yes, we have had these thoughts at times, whether there is an alternative to being in the public markets. But it hasn't gone too much beyond that thus far.

It is -- believe us, we share in your frustration. There is a lot of environmental in the behavior of our securities, unfortunately; a lot of it response to the environment in Puerto Rico that we have to operate in.

That we can help move in the right direction, but we obviously can't solve it on our own. So we're just trying to run a really good bank in the meantime and eventually the valuation will recognize that, we hope.

Okay. Thank you for entertaining my question.

Michael Cohen, Opportunistic Research.

Hi, thanks for taking my question. Was just following up on the taxi medallion. Could you provide just a bit of additional detail?

The $248 million in taxi medallion loans, are those exclusively in New York City? How many medallions are those against? And what do you have the average medallion value at in average loan-to-value?

Let me see if I can answer some of the questions that you pose. As I mentioned in the call, the majority of our exposure is in New York; about I want to say 91% to 92% is in New York City. We have about another 5%, 6% in Chicago and then the rest a miscellaneous exposure in other jurisdictions. So the majority is in New York City.

In terms of the number of medallions, let me see if I have that information handy. The number of medallions is 437, exactly. (multiple speakers) Yes, 437 medallions is the composition of our portfolio.

And what was the other questions?

I'm sorry, you said there's 137 medallions.

437, I'm sorry.

437 medallions; and roughly 91%?

If you tell me the value I can give you a current value to loan value. So I mean that is certainly it's a difficult thing to answer precisely because of the [paucity] of the values of medallions in New York City.

Understood. How many of those medallions are in New York?

I said 91%. 91% in New York City; about 5%, 6%, Chicago; and then the rest in other jurisdictions, Philly, Miami.

Okay, great. Thanks for taking my question.

(Operator Instructions)

Okay. Well, thank you very much.

This will conclude our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.