Popular Inc (BPOP) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Popular, Inc.'s 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 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, and 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 the second 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.

With that, please turn to slide number 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 [equity] deposits.

Our spreads remains strong relative to peers with our Puerto Rico net interest margin of 4.67%. We're also encouraged by the trends in our US business, particularly the continued strong commercial loan production. Total MPAs 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 allowances.

Noncovered NPLs were $578 million, or 2.6% of noncovered 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 US. 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 Lidio will address later.

At quarter-end, available holding company liquidity stood at approximately $420 million. This liquidity position provides an excess of two years debt service coverage with no maturity 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 instituted 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 fellow Corporation.

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's 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 a debt restructuring, an effective Fiscal Control Board, and a 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 a 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 Island. 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 the federal healthcare programs; the impact of Federal Trade restrictions, including the Jones Act; and additional proposals focused on job creation and attracting investment.

We see some near-term opportunities to offset potential government cuts stemming from improved business and consumer confidence, energy infrastructure development, and hopefully a paydown of balances sold to suppliers by the Puerto Rican government.

The Permitala, while not perfect and reliant on the cooperation of groups that will frequently have conflicting interests, puts the Island 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 a step in the right direction to restore the fiscal health of the Puerto Rican 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 prospects 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 on 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 US, increased profitability, and grown our capital. The strength of the capital position on the future earnings power of the Bank gave us the confidence to resume a common stock dividend, an important milestone for us.

So please turn to slide number 4, as our CFO, Carlos Vazquez, discusses our financial results in greater detail.

Thank you, Richard, and good morning. Slide 4 presents our financial summary for the second quarter. This quarter's results are reconciled to GAAP figures in the Appendix to the slide deck. Today's earnings press release detailed variances in the first quarter, headlined by higher net interest income and a higher FDIC lost share expense.

Net interest income for the second quarter was $358 million, up $6 million from the first quarter on a higher volume of earning assets and a larger contribution from Westernbank loans. 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 deposits mainly from the public sector.

We continue to benefit from relatively stable loan yields, enhanced this quarter by an increase in the Westernbank portfolio yield. The average yields of our $2 billion Westernbank loan portfolio increased to 9.53% from 8.76% last quarter. A portion of the increase was due to the positive resolution of various loan relationships in the quarter.

Changes in the expected cash flows of the individual relationships will continue to make the yield on this portfolio somewhat volatile. We expect the yield to decline over time as a result of repayments and the quarterly free cash process.

The cost of our interest bearing deposits were down 2 basis points to 55 basis points on a lower cost of time deposits, mostly in Puerto Rico. We continued to deliver organic commercial loan growth in our US operation, with quarterly growth of 10%, up from 5% last quarter. Despite this US-based growth, our outlook for stable overall loan balances for 2016 remains unchanged. We anticipate that US loan growth will compensate for the Westernbank run-off 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. Noninterest income, excluding FDIC lost share activity, increased by $10 million compared to last quarter on higher income from insurance and mortgage-related activities.

FDIC lost share expenses were higher by $10 million, primarily driven by the quarterly fair value assessment for FDIC lost share true-up obligations. This was mainly due to an improvement in Popular's credit scripts. We also saw an increase in recoveries, a portion of which are shared with the FDIC and expensed in this light.

Popular's Puerto Rico mortgage business originated $254 million of loans in the second quarter, up from $228 million last quarter. Total operating expenses for the quarter at $302 million were flat, with seasonably lower personal costs, 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 [refuel] from the FDIC includes [$72 million] related to the single-family mortgage loss share agreements, 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 is a 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. 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 2015, we resumed payment of a quarterly common stock dividend of $0.15 a share. We will pursue opportunities to actively manage our capital while being responsive to the challenging environment in our local markets. Our future capital actions will take into account developments in the Puerto Rico fiscal economic situation, including those discussed in the call today.

We will submit Popular's stress tests to our regulators at the end of this week. These results and developments in the Puerto Rico market will be prominent in our regulatory discussions regarding additional capital returns 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 turn the call over to Lidio.

Thank you, Carlos, and good morning. Despite challenging conditions in our main market, Rico 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 NPL inflows as compared to the previous quarter.

In the US, the payoff of an $11 million nonperforming commercial relationship impacted favorably the results for the quarter. The credit metrics reflect a net recovery in core losses, lower NPLs, lower NPAs, and lower NPL inflows.

Key events during the quarter also included the bulk sale of Westernbank classified loans and OREOs with a carrying 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 incrementalities, 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 the central government and political operations is manageable, representing only 1.5% of total Tier 1 capital. As we have discussed in the past, most of Puerto Rico 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 a carefully underwritten book of business with senior interest in municipalities, identifiable revenues and cash flows.

Our top form of exposures are to Catalina where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico; Juana Diaz, the municipality with the highest per capita income; San Bayamon, the second most populous municipality.

These four municipalities comprise approximately [73%] of our total municipality exposure and combined of our operating circles 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 GDB.

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 (inaudible) 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 $12 million to $836 million, driven by a decrease of $25 million in NPLs, including NPLs held for 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.

Nonperforming loans held in portfolio decreased $22 million from the previous quarter, due to improvements of $11 million in both Puerto Rico and the US. The Puerto Rico decrease was mainly driven by the commercial portfolio, as all other portfolios remained stable on a quarter-over-quarter basis. The decrease in the US was driven by the $11 million NPL commercial relationship that was paid off during the quarter. At the end of the second quarter of 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 number 7 to discuss NPL influence. MPL influence, excluding consumer loans, decreased by $9 million when compared to the previous quarter, principally driven by lower influence in the US, offset in part by site increase in Puerto Rico. The decrease in the US was driven by the previously mentioned 11 million commercial relationships that were classified as NPL during the first quarter of 2016. In Puerto Rico, NPL inflows increased by $5 million, mainly due to a commercial portfolio.

Please turn to the next slide. Net charge-offs excluding write-downs amounted to $35 million or an annualized 63 basis points of average loans held in portfolio compared to $42 million or [36] basis points in the first quarter. Net charge-offs in the quarter excluded the previously mentioned classified bulk sale that resulted in a $5 million recovery.

The provision to net charge-off ratio was slightly -- was up slightly [to 127% from 113%] in the prior quarter. The corporation allowance for loan losses decreased by $10 million from the previous quarter to $518 million, mainly driven by allowance addition in Puerto Rico up $8 million, coupled with the slight increase of $2 million in the US due to loan portfolio growth.

The ratio of allowance for loan losses to loans held in portfolio remains flat at 2.3% this quarter. The ratio of allowance for loan losses to NPLs held in portfolio increased from increased from 85% to 90%.

The continued stable performance of our credit results despite challenging economic conditions in Puerto Rico stems from our efforts to derisk our loan portfolio by reducing its exposure to asset classes with historically high loss content in both Puerto Rico and the US. Although we are encouraged by these results, we remain attentive to macroeconomic 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 number 9. Before we open the lines to questions, 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 allowed us to earn above average margins. We're encouraged by the progress in our US operations 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 the 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 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 book for 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 TARP, had two credit MOUs listed, restructured our US 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 Permisila 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 is also a story of solid organization that has navigated through a complex environment and has emerged as a stronger, better capitalized, and 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) Alex Twerdahl, Sandler O'Neill.

A couple of questions. First off, in the past, you've given us some good numbers on what you've seen in terms of trends for card swipes and consumer spending. Could you just give us an update as we finish off the second quarter as we're leading up to default in the (inaudible) and what you've seen from some of that consumer activity?

No major change, if you look at retail sales as we measure on our debit and credit card volume, which is not inconsiderable, it is flat to slightly down, I guess, but no meaningful change from previous months.

Okay. Thanks. And then, I know that --

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 the level of professionals 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 included in the professionals fees and whether or not those can go down as credit continues to improve?

So remember, Alex, that in our case, a lot of our IT spend goes to professionals fees because they are part of our EVERTEC contract. So that is the first big change when we compare to our peers in the states. This second big change is that most of our peers in the states are operating in a market that's growing. Real estate values are going up and credit issues are non-existent.

We're hoping to get there but we are not quite there yet 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 the FDIC and those things tend to not be cheap.

Okay. Thanks. And then just final question for me -- you guys recently launched a national online deposit gathering platform in the United States. Can you just give us a sense for how big you will let that get to be, and what your plans are for that in the future?

We have Manuel Chinea here who has our US operations, so we'll let him tackle that one.

Yes. We are using that channel. We currently already have another online channel which is E-LOAN, so we launched Popular Direct, that's another channel for us to increase liquidity for the operation in the US. 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 that the loan growth has been higher than deposit growth in our US operations, so we will supplement that while the deposit side catches up.

Okay. Thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Maybe just sticking with the US then, 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 US? I mean, would you consider any deals? Has that changed? I heard what you said about the deposit platform but I'm thinking more -- something a little more substantial. Thanks.

Well, you know, I guess the short answer is yes, we would consider a deal if it made sense. Our thoughts when we refocus our US operation is to stick to the New York Metro area and South Florida, Miami specifically. As you saw we did to the Doral 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 or they make a lot of sense, we're going to do it, but we are focused on those two markets and that's about it.

Got it. Okay. And can you just remind us the deposit inflows they have that you have this quarter how much specifically related to government demand deposits and how transitory are those?

We'll give you -- Carlos will give you the exact figures but they are in mind that with the GDB essentially winding down amount of the government agencies that had deposits in the GDB, most of those were moved over here -- that was a chunk of that but we also grew in our nonpublic numbers -- I'll let Carlos give you the specifics.

Our average balances grew in all deposit lines in the public and private, so it was a positive quarter on the deposit front. Our deposits grew in excess of $1 billion for the quarter. Do keep in mind that the deposits are collateralized so they don't really have a material effect on our liquidity overall but the growth in public was slightly over $1 billion. But all lines in average deposits grew for all lines.

Are those likely to remain on the balance sheet for sort of an extended period?

Well, we are -- we tried to make those judgments and have a better view of exactly how the deposit will move. So as we go, we'll make a better judgment. That's one of the reasons our cash and short-term investments balances grew this quarter. As we made those judgments, we will redeploy the cash. But again, keep in mind this increase in deposits has no material impact on liquidity as they are collateralized.

They are mostly -- almost all of them are operating accounts, and in particular, the main government -- what's called CFA accounts that the local Treasury Department has. So it's a little bit more volatile, and we just need to get a better feel for that before we start extending maturities.

Okay. Great. Thank you.

Brett Rabatin, Piper Jaffray.

It seems like you guys are making some good progress on the credit side. Can you talk a bit 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 are up over the next year or so?

I think that is going to depend on the environment. I think a lot of -- we are certainly encouraged by the trends -- credit metrics both in Puerto Rico and, of course, the US. But given the operating environment, we continue to be cautious in terms of provisions, so I think as -- a lot of uncertainty is taken from our operating environment, I think you potentially see provision being below charge-offs on a going forward basis.

Okay. And I realize DFAST isn't out, but just thinking about capital and the potential for substantial buybacks, would you guys care to give any color on how you view excess capital and the plans for that as you get through the back-half of the year?

We'll file the DFAST at the end of the week, and we will also file, I guess, our version of a 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'd like to return more capital; exactly how and how much will depend on the next few weeks.

Okay. And then just lastly, with the increase in liquidity and the deposit flows -- if you 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 close to cash position. Again, we are trying to get a better handle on the volatility of the government deposits that came in before we started making judgments in our investment portfolio. And so, as we get more comfortable, we understand what the flows will be, then we'll move what is presently attached to our normal investment strategies, which tend to be longer-term.

Okay. Thanks for the color.

Gerard Cassidy, RBC.

Good morning, Richard. Good morning, Carlos. Can you guys share with us -- obviously, Richard, you talked about the legislation that the Congress passed and now hopefully the whole will move forward. If the government spending does slow down as you alluded to, should we expect maybe an inflow of nonaccrual loans due to that over the next 12 or 18 months?

That's always a possibility. I mean we're just speculating that to balance the budget is going to require how quickly those get done. It's really very difficult -- we don't even have the names of the people on the Fiscal Control Boards. 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 cuts -- it will depend on what is done as countervailing measures of that and that since we were encouraged by the naming of the Bipartisan Task Force. We were encouraged by the fact that it 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 much 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 months and 12 months away. Bear in mind that it will probably be put in place for the budget that starts July 1st of 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 the constituted. I think you have a deadline of September 15. So assuming the Board gets constituted and, more importantly, the staff of that machinery gets put into motion, it will probably be acquired by the first half of 2017 that this process starts in earnest.

Great. And then are there any other risks? And we don't know if there will be an economic slowdown due to maybe government spending slower 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 of left field for you guys, due to whatever they decide to do to get things back in order?

They come out of left field. It's tough to identify them beforehand, but the thing we spend our time on is really this whole process of the typical Control Board and all these other measures. That's what really takes up our time -- 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 does this Bipartisan Congressional Task Force need to listen to? These are the kinds of things we're spending our time on, aside from making sure that the trains run on time.

Very good. And then just shifting over to the US, as you guys talked about doing some online deposit gathering -- as I recall, last quarter, I think you guys mentioned the small purchase of lending club loans. Can you share with us any color on how they've progressed since what's gone on?

Absolutely. I'll let Lidio handle that one.

Yes, I think we mentioned last time we had initiated a -- the purchase of lending club loans -- we did it as a test case. We have significant experience with personal loans both in Puerto Rico and the US. We underwrote the loans based on our own standard, and so far, the performance is as we expected when we purchased the loans.

And when you say as expected, meaning what, in terms of credit defaults? No credit defaults for a small amount?

Credit defaults within our expectation -- some delinquency what we expect when we purchased the loan base on the credit profile of the loan.

Okay. And will you look to purchase not necessarily from lending club but are you still looking for that channel to help grow the US consumer loans?

We have -- so far, we started the program in the third quarter of 2015 and we have purchased around $237 million of loans. Given the paydowns from customers, that number is down to $215 million. After the announcement in May of the lending club situation, we stopped purchasing loans and we underwrote all B loans that we purchased. We did not find any issues with them, but we haven't restarted the process of purchasing loans.

So today, there's an ongoing discussion of what we're having as a management team. But as of today, the program has stopped. We purchased $237 million -- it's down to $215 million, and we haven't purchased anything since May of this year.

Great. And one last question maybe for you, Richard. Any update on you guys' outlook about Cuba? I know it's not something that's imminent, but expansion into Cuba -- is that a possibility?

No, I think there's more sizzle than steak 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 US 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've mentioned before, I think the President has stretched executive power to its limits here, but at some point, this requires Congressional action. And I think you guys have a better feel than certainly I do of Presidential politics and how soon that's about to happen. So I think it will take time.

There's 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.

Great. Thank you for the color.

Jesus Bueno, Compass Point.

Thanks for taking my questions. Just quickly on the loan growth, it was certainly positive to see even slight loan growth, considering that the loan sales -- and I understand you've been purchasing LC loans, but it does look like it. 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 perhaps on Puerto Rico has changed in terms of growth opportunities there?

When we restructured the bank and digital transactions, our goal to have stronger origination capacity in the space, which we are achieving. The growth was nice this quarter. Some of it is just a matter of pipeline. It takes time for loans to close and more of them fell in -- meaning they were closed in the second quarter than the first.

But I think the important message to take is that we have a strong pipeline in the US and the per-quarter is growing nicely. We are being very attentive to credit, since most of the markets we are in -- our markets are very competitive, so we are not growing the book by loosening our credit box. We are 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 rate of growth in the US while keeping our credit standards high.

Great. Thank you. And just quickly turning to the mortgage banking line -- obviously, it was positive to see an improvement quarter-over-quarter there. If you could just comment on -- it looks like prepayments were down overall, which help out, but overall, it does look like gain on sales is 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 margin thus far in the quarter?

Well, our originations that we are calling out on the call are lower this year than last year, so we are clearly seeing a softer residential mortgage market in Puerto Rico compared to last year. At this point in time, it's really hard to tell what effect the lower rate we have, and hope to have, in the next few months is going to have.

And on the mortgage market, it has not had a very clearly noticeable effect. And I think some of our peers in the US have reported yet. Also the summer tends to be a very slow period in Puerto Rico for home purchases, so we'll have to say that, overall, the volumes are lower this year than last year, and that's what's affecting our numbers.

That's great. Thank you very much and thank you for taking my questions.

Brian Klock, Keefe, Bruyette & Woods.

So I got in a little late, so I'm not sure if you actually kind of covered this already. Carlos, I did hear you talk about reiterating the guidance on the expense line of the $305 million to $310 million quarterly guidance, so I'm not sure if you talk about those.

There was $5.5 million of sundry losses that you disclosed in the release that were in that lineup. 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?

The (inaudible) was a combination of a bunch of things from credit cards to mortgage -- servicing business. A combination of a number of things, Brian. As you know, a number of our expense lines are fairly volatile. and you might be right, that that line might be lower, but another line may be higher next quarter.

That's why we try to keep our guidance in the overall summation level as opposed to on a per-line level, because it's really hard to get them all right. But as we look forward, what we comment on is what we expect to happen -- we're not making bets. Our best guess as to what's going to happen in the last two quarters of the year continues to be $305 million to $310 million. We will obviously strive to improve on that if we can, but that's still our best guess as of now.

All right. Appreciate it. All my other questions were answered, so I appreciate your time. Thank you.

Thank you, Brian.

Brian Horey, Aurelian Management.

Thanks for taking my question. I got in 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 detailed in previous calls, we have -- we structure a number of our taxi in relationship that we purchased from when we acquired the Rah Bank. As you know, we have them in our books at about $0.61 on the dollar. And so far, I mean, they are performing as under the restructuring terms that we have instituted within 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 would be 70% -- 75%, around that number.

Okay. And can you give us a sense as to what portion of those are nonaccrual at this point?

At this point, they are accounted under what's previously known as SOP 303-03, which is ASC Subtopic 310-30, which is accounting for when you acquire loans with credit impairment. And from that regards, even our estimate of the cash flow -- none of it is a nonperforming status today.

None of it is nonperforming? Okay. And would you say that the credit performance generally is improved or deteriorating over the course of the quarter in that book?

I would say it's staying stable, as in approval deteriorated.

Okay. Thank you.

Thank you.

(Operator Instructions) If there are no further questions at this time, the conference is now concluded. Thank you for attending today's presentation. Everyone may now disconnect.

Thank you.