Popular Inc (BPOP) 2016 Q3 法說會逐字稿

Good morning and welcome to the Popular Inc. third-quarter 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 note this event is being recorded.

Now I will turn the call over to the Investor Relations Officer of Popular Inc., Brett Scheiner.

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 third-quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start I would like to remind you that 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 in 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 would like to address the highlights and key events of the third 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 two. In the third quarter, Popular reported net income of $47 million which includes the impact of the $55 million adverse award on the recent arbitration with the FDIC. Adjusted net income totaled $95 million, up $4 million from last quarter's adjusted results.

We continued to generate strong revenues with capital levels well above peer averages. Tangible book value was $44.86, up from $44.62 last quarter. Our net interest income was down $7 million from the prior quarter, our net interest margin of 4.12% declined from last quarter's 4.33% as a result of lower yields on the Westernbank portfolio, lower yields on increase liquidity due to higher public sector deposits, and slightly higher funding costs in the US. Our spreads remain strong relative to peers with our Puerto Rico net interest margin of 4.49%.

We are also encouraged by the trends in our US business particularly the continued strong commercial loan production. Total NPAs this quarter of $805 million including covered loans were down $30 million from last quarter's $836 million mostly due to the PREPA sale in the quarter.

Noncovered NPLs were $579 million or 2.6% of noncovered loans, up $2 million from last quarter. NPL inflows decreased by $6 million mainly due to a reduction in Puerto Rico commercial inflows of $14 million offset in part by an increase in Puerto Rico mortgage inflows of $8 million.

Our net charge-offs were $35 million or 63 basis points, flat to last quarter excluding a $5 million recovery in the prior period. At quarter end, available holding company liquidity stood at approximately $409 million. This liquidity position provides in excess of two year debt service coverage with no maturities until 2019. The market value of our stake in EVERTEC is approximately $196 million and significantly exceeds our position's current book value of $37 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 re-instituted a common stock dividend and intend to return additional capital to our shareholders over time. As we discussed last quarter, we filed our Dodd-Frank stress test at the end of July, the strong results of which were made public last week. In addition, we filed our capital plan soon after our stress test and our regulators continue to review our stress test and capital plan and we hope to update you by the end of the year.

Please turn to slide three. Before I turn it over to Carlos, let me comment on our Puerto Rico government exposures and the Puerto Rico fiscal situation. During the quarter, we sold our $75 million PREPA loan for an $8.5 million pretax gain on its $40 million book value. Our direct outstanding exposure to the Puerto Rico government is $524 million, down $58 million from the previous quarter. The sequential decline is mostly due to the previously mentioned loan sale.

Nearly all 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 Rican government's capital needs where we feel the risk reward is appropriate.

Regarding the Puerto Rico government's fiscal challenges, in June, federal legislation created a fiscal oversight board for the island and established a legal framework and path towards an orderly debt restructuring. It also created a bipartisan congressional task force to make recommendations to help promote economic growth. This legislation reduces uncertainty which has had a meaningful impact on investors, 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 result in increased fiscal discipline and facilitate a transition towards a manageable debt level. However, given current imbalances, this will likely include a reduction of government spending which in the short term could negatively impact economic activity on the island.

We see some near-term opportunities to offset potential government cuts 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. Ultimately these actions will lay the foundation for sustainable economic growth.

The members of the PROMESA Oversight Board were named in September and a Chairman was elected. Their most pressing charge is naming an Executive Director to manage the fiscal rebalancing and debt restructuring process. As we move into 2017, the Board's focus will likely shift to the fiscal 2018 Puerto Rico government budget as well as more substantive discussions with bondholders.

In addition, the bipartisan US Congressional Task Force named this past summer is expected to offer recommendations in a report to the U.S. Congress by the end of the year on ways to spur economic growth in Puerto Rico. As we stated last quarter, we believe the critical items for this task force to consider are proposals focused on job creation and attracting investment as well as analyzing Puerto Rico's equitable access to federal health care programs.

The ultimate success of the Oversight Board depends on the cooperation of groups that frequently have conflicting interests. In addition, a new Puerto Rico government and administration will be elected in two weeks. Progress on these fronts will require patience as the Board is not expected to name an Executive Director before the end of the year.

In sum, we believe this legislation and the actions that will follow albeit painful are a 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 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 budgets, 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.

Please turn to slide four. As our CFO, Carlos Vazquez, discusses our financial results in further detail.

Thank you, Richard, and good morning. Slide four presents our GAAP financial results for the third quarter.

Slide five shows our calculation of adjusted net income with additional information available in the appendix. Today's earnings press release details (inaudible) in the second quarter with lower net interest income and higher operating expenses.

FDIC loss share expense increased meaningfully due to the previously announced $55 million charge resulting from the FDIC arbitration. Net interest income for the third quarter was $354 million, down $7 million from the second quarter mostly due to lower balances and yields in our Westernbank portfolio.

Our margin was 4.12%, down from 4.33% last quarter due to lower yields on the Westernbank portfolio and lower yields on cash and securities that resulted from increased liquidity mostly from higher public sector deposits. The average yield of our $1.8 billion Westernbank loan portfolio decreased to 8.65% from 9.94% last quarter reverting to levers similar to those of the first quarter of 2016.

As previously disclosed, a portion of the elevated yield last quarter was due to resolution of various cases. As was the case in Q2, changes in expected cash flows of individual relationships have made the yield in this portfolio volatile. Over time we expect this yield to decline as a result of repayments and loan resolutions.

Excluding the Westernbank loans, we benefit from relatively stable loan yields in the rest of our portfolio. The cost of our interest-bearing deposits was up 2 basis points to 57 basis points on a higher cost of time deposits in the US. We continue to deliver organic commercial loan growth in our US operations with quarterly growth of 4%.

While 2016 loan balances will likely be stable in 2017, we anticipate slight growth in overall loan balances with the US more than compensating for the Westernbank runoff and limited growth in Puerto Rico. On the island we have historically offset limited organic growth with selective loan portfolio purchases. We will continue to pursue this acquisition strategy if attractive transactions become available.

Noninterest income excluding FDIC loss share activity increased by [$15] million compared to last quarter on the gain of the sale of our PREPA loan and higher income from our equity investments. FDIC loss share expenses were higher by $49 million primarily driven by the impact of the previously announced FDIC arbitration decision. Excluding this effect, this expense would have been down $6 million for the period.

Our Puerto Rico mortgage business originated $235 million of loans in the second quarter, down from $254 million last quarter. Total operating expenses for the quarter were $324 million, up $15 million on higher operational and fraud losses, personnel cost and a goodwill impairment of $4 million in our Puerto Rico securities subsidiary. We anticipate that some of these expense line items would revert back to prior trends. In the coming quarters we expect operating expenses approximately $320 million. These additional expenses include the promotion and growth of our digital channels, our US retail network transformation and investment in technology, compliance and back-office infrastructure.

We anticipate this increase in expenses from prior quarters to be offset during 2017 by lower FDIC loss share expense, higher net interest income from our US loan growth and higher service charges in Puerto Rico.

Our effective tax rate for the third quarter was 25% which excluded a $4 million benefit for the release of a tax reserve in Puerto Rico. Through the end of 2017, we expect our quarterly tax rate to average between 25% and 27%.

As disclosed earlier this month, we are disappointed with the unfavorable result in the arbitration of the $55 million receivable previously under dispute with the FDIC. After accounting for this decision, we have a remaining $152 million FDIC receivable; $87 million of that amount represents reimbursable losses that are still in dispute while the remaining balance of $65 million is related to the single-family mortgage loss share agreement which expires in four years.

We currently expect to collect the remaining disputed balance of $87 million. The arbitration hearing relating to $82 million of the receivable in dispute is scheduled for next month and we should have a final word by year-end. As we have stated before, any amount of the loss share assets ultimately not collected from the FDIC will be charged off.

Please turn to slide number six. We continue to enjoy strong capital levels relative to Mainland and Puerto Rico peers as well as with respect to well capitalized regulatory requirements. All of Popular's capital ratios remain robust and well above regulatory requirements as reflected by the result of our Dodd-Frank stress test made public last week. Lidio will expand on this later.

Our Tier 1 common equity ratio was 16.6%, up 30 basis points from 16.3% in the prior quarter. While being responsive to the challenging environment in our local market, we are pursuing additional opportunities to actively manage our capital including additional dividends and share repurchase as well as M&A and asset acquisitions. Last year we resumed a payment of a quarterly common stock dividend of $0.15 a share roughly six months after filing our stress test. While we had hoped that the regulatory consultation process would be faster this year, that has not proven to be the case.

As Richard mentioned, our regulators continue to review our stress test results and capital plan. We look forward to providing an update to the market once our discussions with them are finalized. We now hope this can take place by year-end. It continues to be our goal to maintain strong capital levels that are appropriate for Popular's risk profile as we work toward 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 third quarter. In Puerto Rico, credit quality metrics reflect lower net charge-offs, lower NPLs, lower NPAs and lower NPL inflows as compared to the previous quarter. In the US, credit metrics reflect stable NPLs, stable inflows into NPLs and low net charge-offs.

Key events during the quarter included the sale of written off credit cards and personal loans in Puerto Rico that resulted in a $7 million recovery and the sale of the PREPA loan that resulted in a gain on sale of $8.5 million.

As Richard covered on slide number three, our current outstanding direct exposure to the Puerto Rico government municipalities and other instrumentalities is $524 million decreasing by $58 million from last quarter mainly due to the sale of the PREPA loan coupled with scheduled principal payments received on existing loans.

Our total outstanding exposure to the central government and Puerto Rico corporations is minimal representing only 0.6% 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 single 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, (inaudible) revenues and cash flow. 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 municipalities with the highest per capita income; and Bayamon, the second most populous municipality. These four municipalities comprise approximately 74% of our total municipality exposure and combined of our operating service of approximately $30 million and debt service capacity in excess of 2 times.

In addition, these municipalities have meaningful sources of liquidity outside of deposits held at GDB. 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.

As mentioned by Carlos, this week we disclosed our Dodd-Frank stress test. The test combines the Fed's mandated severely adverse scenario for the US with a severely adverse scenarios for Puerto Rico in which the unemployment rate peaks at 20.6% and economic activity measured by [DMP], decreases by 6.7% during the first calendar year. Under such scenarios, we forecast over 8% loan losses in the nine quarter period and reflect a 3.65% impact to our Tier 1 common equity ratio over that time maintaining a meaningful cushion in excess of well capitalized status at all times.

During to slide number seven to discuss credit metrics for the quarter. Nonperforming assets including covered loans decreased by $30 million to $805 million driven by the sale of the PREPA loan offset in part by an OREO increase of $7 million mainly in the Puerto Rico mortgage portfolio. Nonperforming loans increased slightly by $1.6 million driven by higher mortgage NPLs in Puerto Rico of $8 million offset in part by lower commercial NPLs of $6 million in Puerto Rico. The ratio of NPL to total loans held in portfolio remained flat at 2.6% quarter over quarter.

Please turn to slide number eight for a summary of the trends in NPL inflows.

Compared to the previous quarter, NPL inflows excluding consumer loans decreased by $6 million mainly due to a reduction in Puerto Rico commercial inflows of $40 million offset in part by an increase in Puerto Rico mortgage inflows of $8 million. NPL inflows in the US were flat on a linked quarter basis at $9 million.

Please turn to the next slide to discuss other credit metrics. Net charge off amounting to $35 million or an annualized 63 basis points of average loans held in portfolio were flat from the second quarter of 2016. As previously mentioned, the results for this quarter included a $7 million recovery from the sale of previously charged off consumer loans. Excluding this impact, the increase in net charge off was mainly driven by a variance in the Puerto Rico construction portfolio due to lower recoveries coupled with higher losses of $2 million in the US mortgage portfolio. The provision for loan losses in the third quarter increased by $3 million to $43 million mainly as a result of strong portfolio growth in the US region.

The provision to net charge-off ratio was 121%, down from 127% in the prior quarter excluding last quarter's booked sale recoveries. The corporation allowance for loan losses increased by $8 million from the previous quarter with equal increases in Puerto Rico and the US. The ratio of allowance for loan losses to loans held in portfolio was flat to the previous quarter at 2.3%. The ratio of allowance for loan losses to NPLs held in portfolio was [0.91%] up 1% from last quarter.

To summarize, our continued stable credit performance despite challenging economic conditions in Puerto Rico is the result of the steps we have taken to de-risk our loan portfolio by reducing its exposure to asset classes with historically high loss content. In addition, we have strengthened our credit underwriting criteria. This markedly improved risk profile combined with our strong stress test results, give us comfort that we will continue to be a source of strength as Puerto Rico emerges from the current challenges.

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 10. Before we open the lines to questions, let me conclude today's remarks by reviewing the actions we have 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 are encouraged by the progress in our US operation and by the strength of our Puerto Rico franchise. 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 create a solid foundation for 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 continuing to make long-term investments in new business initiatives.

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 end market FDIC assisted acquisitions all while earning positive profits in our Puerto Rico business during the island's prolonged recession.

In the past two years, 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 stock dividend after six years. We will continue to seek additional growth opportunities in the current environment.

The actions taken by the Oversight Board in the coming months will be a defining moment 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 123-year history, Popular has persevered through a number of 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 more diversified institution. We look forward to reporting on our progress in the next few months.

With that, I would like to open the call for questions.

(Operator Instructions). Brett Rabatin, Piper Jaffray.

Good morning, everyone. Wanted to first ask obviously there has been a delay with the capital plan. Can you maybe share with us if you could, your thoughts on what you were hoping to do in terms of a buyback or any color around the initiative there?

We would rather wait until we finish our discussions with regulators. Obviously we would like to return some capital and it will probably be a combination of the two but we are, we submitted our plan. We will finish our discussions with the regulators which unfortunately the timing is not up to us and we will announce it right away.

Okay. And then if I heard it correctly, $320 million of quarterly expense run rate for 2017, right? Does that start in 4Q and then can you talk about what initiatives are driving that?

As you know, Brett, our expenses tend to be volatile. So different lines change quite a bit every quarter. That is one of the reasons why we give you some guidance on expenses we say at the aggregate level just because all the pieces and they are moving quite a bit. The pieces that move this quarter were operational losses, some personnel costs and the goodwill in Popular securities. But there's other things that we expect to continue to move.

As I mentioned, this does continue to require some investment as part of the -- the reason you saw the expenses going up. Again, we are continuing to invest on our digital channels. We are working on improving the capacity of our US operations to fund itself and find itself more attractive rate and by making their branch network better.

Yes, that includes moving some branches up and some branches, remodeling some branches, making some branches smaller, a number of activities. And then technology compliance and back office continue to require additional investment and that is obviously true of us and every other bank so some of that is going in those lines as well.

And then I want to make sure I heard you correctly. Your body language I think sounds more optimistic than I think I have heard it on the economy. Was just wanting to make sure I kind of got that read right. And then as far as loan purchases go, can you talk about your plans there and what you did in 3Q?

I guess if we sound more confident it is because we continue to see the stable credit metrics and as the pieces of the PROMISA Board start falling into place, we at least see some movement in a direction. That is not to say everything is rosy, there is plenty of concern that once the Board really starts getting down, we will also see some cuts in government expenses and that will impact the economy if it is not offset on the other hand with new investment.

We are also encouraged by what we are seeing in the US in terms of a lot of growth, particularly in C&I loans which runs counter to what we have been seeing from other banks. So we are encouraged there.

With regards to loan purchases, there were no significant loan purchases in the third quarter, Brett. That is something that we are always looking and if good opportunities show up we are ready and capable to move on them but nothing significant in the third quarter.

Okay, thanks for the color.

Brian Klock, KBW.

Good morning, gentlemen. So, Carlos, I just wanted to follow up on the expense side of things. I know you mentioned that you think that even though the expense number may be a little volatile and higher close or near that 320 level that came in at the third quarter. So when I think about the fee income, there is some noise in there was some of the indemnification reserves and you said there would be a lower loss share. And I guess what is the rate efficiency ratio we should be thinking about or what is the right level of fee income that you think we could be at to help partially offset the higher expenses?

At this time the way we look at it, Brian, is it is pretty much what I mentioned in my comments and while you are correct in that we see a higher running rate on expenses, we also see in 2017 higher income to compensate for the higher expenses. We believe most of that will come from lower FDIC loss share expense, some higher net interest income and also some higher service charges in Puerto Rico. Those will be principal contributors to offsetting the additional expenses. As usual there will be others, there will be surprises going both ways. But if anything, the more important message is that while expenses will probably be slightly higher, we are also seeing some income to offset that.

Okay. Maybe just a follow-up. I know you guys have talked about -- obviously with had a couple of the quarters in a row from the asset quality side, charge-offs and provisions that beat my estimates in the last few quarters. I think when you put all of that together I guess what do you think, what kind of an ROA do you think you can generate in next year with that as the kind of expectation or guidance? Is that something that could get you back in the mid-90s and closer to a 1% ROA in 2017?

I think you guys on the Street are always right so I will go with whatever you guys are saying.

I'm not sure about that but I guess is that something that you think is doable. I've got a 91 basis point ROA this quarter, do think it is possible to enhance that towards the 1% next your?

I would never contradict Brian. If that is what you think, we will do our best.

Okay. Thanks for your time.

Ken Zerbe, Morgan Stanley.

Thanks. Good morning. Just going back to the capital plan, maybe this is just more for my benefit because I understood the whole DFAST process which you submit your DFAST plan, you get a non-objection. I guess your capital return is not necessarily a requirement of DFAST. I guess I'm just surprised by the delay in the announcement. Like what am I missing here that it now becomes that the regulators have I guess is that they have not non-objected if that makes sense to you. I'm trying to figure out why there is a delay.

I think you got it right. You are missing the difference between theory and practice and it is them not objecting. We just have to wait it out and it is their timing not ours unfortunately. If it were up to us believe me it would move a lot faster.

You are right, Ken, in. Fortunately or unfortunately depending which side you want to take, there is no formal process in our case. So there is no set timetable, there is nothing like that so it is just ongoing regulatory dialogue and it takes some time. As I mentioned, we had hoped this would move faster than last year but our hope is now proving to be right. We will continue to work on it. Discussions continue and as soon as we know, we will let you know.

And I'm assuming you can't tell us any of the details and that is fine but at least are you able to tell us have they come back to you with sort of detailed or specific issues that at least they are addressing with you or are you literally in the dark in terms of what they are looking for?

As you know, we usually don't comment on regulatory discussions and we are not going to start today. But we describe what is happening as a dialogue and that was not by chance so we are in discussions and when those reach their conclusion then we will let you know.

Before the lawyers. It is a dialogue but it is somewhat asymmetric, okay? Let me get that in before the lawyers slap me down.

Understood, that makes sense. The offset to the expenses because I know you repeated a few times the lower FDIC expenses and that is fine. But then the higher NII and the higher deposit service charges in Puerto Rico, I guess my question is what gives you the confidence that you are going to be able to get those higher deposit service charges in Puerto Rico or the higher NII? Because I know obviously with NIM down and asset growth fairly muted, is it fair to assume that those particular items are a much smaller piece of the offset versus the FDIC?

We haven't broken it down for you. The higher net interest income, we also commented that we expect asset growth, slight growth in loan balances next year. That is including everything, the runoff of Westernbank and everything else. So normal course of business, our loan book goes up, we should see higher net interest income and the services charges to a large extent are related to higher deposit balances. And by the way, the higher deposit balances while we refer to the positives from the public sector frequently, the higher deposit balances are actually across all our client types, our retail clients, our divisional clients, our commercial clients. We have seen deposit growth in all types of deposits not only (inaudible) cash flow deposits.

Okay, great. Thank you very much.

Gerard Cassidy, RBC.

Good morning, gentlemen. How are you? Can you share with us -- and I know it is hard to say in normalized times considering what the island's economy and fiscal situation has been going through as well as yourselves. But when you look at the amount of capital you think you are going to need to run this organization from a CET1 standpoint, obviously your capital is very high today. What would you consider to be a normal level if things were more normal down in Puerto Rico?

That is a tough question, hard to answer as you know. We currently think it is lower than it is now and in all probability it will always be higher than that of our peer banks, slightly higher. Exactly where you draw the line between those two boundaries, there is where the magic comes and that line actually is not static, it might be dynamic given our discussions with regulators.

Okay. Can you also, you guys touched upon the FDIC loss sharing, you lost that claim. On slide 18 you give us what is remaining and there is still another claims in dispute of $87 million. Can you share the difference in these claims versus the ones that you just lost or are these I assume these are not the same ones?

Yes, they are not the same ones. It is a different arbitration panel, a different issue. We have one for 82 that in essence a final argument will take part next week. So we should get some resolution there before the end of the year and we will share that. That is the big one, the other one is a smaller one roughly -- another $6 million and that hasn't even been scheduled for final arguments.

But a different set of facts. As Richard mentioned different arbitration panel so essentially it is a completely different process.

A whole new ballgame.

And the issue of dispute, are the issues as different as the whole process meaning one may have been over claims for losses on loans and another one is on taxes? How about the core dispute, I mean is it different?

Yes. The core dispute is different. Completely different. One was related to an A.B. restructure, another one is related to Section 4.1 wholesale authorization. So those are the issues, two separate issues.

Great. This is probably not an easy question to answer. It is more subjective than objective but clearly it appears that Puerto Rico economically and fiscally has hit bottom and now you are starting the long process of hopefully coming out of these troubles. Is there any evidence yet that the population has started to slow -- the outmigration of population to the states particularly to Florida, has that slowed at all or do you have any sense of where that is going at this time?

We have no evidence that it has slowed. In fact if anything, it is slightly more this year than it was last year. But no real evidence and I think the coming months will determine the course of that. Lidio, you may want to add something.

I would just say that operation migration has -- the affect not the cost so I think it will reverse as we see improvement in our economy.

Great. Thank you, gentlemen.

Alexander Twerdahl, Sandler O'Neill.

A couple of questions. First, just heading back to the capital discussion, you guys said that there is no set timeframe on how these discussions will play out. But based on your conversations last year leading up to the announcement of the dividend and the DFAST, etc. and based on kind of where you know you are today, can you assign a degree of confidence when you say that you hope to have an announcement by the end of the year, can you assign a degree of confidence that we will get some sort of announcement pre-Christmas?

About 73.5% probability. We really can't. I am sorry. I don't mean to be flip. It is frustrating for us as well frankly. But it is their timing. We do think it will be in the next couple of months but we really can't put a number on it.

Okay. Better than 50% though would you say?

I said 73.5%.

Okay. That is going in my note.

Are you going to forecast the result of the elections too in the meantime?

And then is the whole process you are going through right now with the capital return is that a once per your process? I mean could you announce something in December and then revisit it in June or is it really just kind of -- it has to be done only once per year?

There is no set process, Alex. The technical answer to your question is that it could happen any time but being practical, one of the more important inputs into the discussions and the decision is the stress test. So the stress test will tend to be the gating item to the discussions being more productive. But again, since there is no process, technically it could happen at any time, yes.

Okay. And then in the past you guys have given some good trends on just debit card and credit card swipes on the island. I was wondering if you have any updated trends over the last couple of months?

Pretty stable but auto loan -- I mean auto sales have been up but in general retail has been stable, no major change in either direction.

And then you had a huge amount of inflows of deposits this past quarter I think a lot of them were government related deposits. Should we just assume those stay basically money markets for the foreseeable future? Or I mean how do you project or anticipate or plan for inflows and outflows of $1.5 billion of deposits in a quarter?

We are kind of keeping it very short term for the time being until we get a better feel of how things will run over the next year and as the fiscal plan takes place, how that will play out if there is any debt restructuring changes and how the cash flows, needs of the government change. We are sort of keeping it short term until we get a better feel for what we think will be more rock solid.

Bear in mind most of these are operating accounts with the big one being the treasury TSA account. So we will get a better feel for it but for the time being, we are keeping it with a very short maturity on the asset side.

Are you paying interest on those deposits?

Yes, it is a minimal amount that you have to pay interest on all government deposits.

This is one of the reasons that our margin suffered to touch. While this business is net interest income accretive, we make more dollars in interest income, it is actually margin dilutive. But there is other parts of the business, we obviously get service fees for providing services to these lines as well. So it doesn't all come through the margin line.

But as Richard said as we get a better reading on what the right and continued levels of the deposits will be, we will make calls on our investment portfolio. But again, don't lose sight of the fact that it is not all public deposits. About one-third of the increase in deposits this last quarter was non-public deposits, client deposits, corporate and personal deposits.

And then just a final question for me, Lidio, do you have early stage delinquency trends?

Yes, give me one second. On a quarter-over-quarter basis our early delinquency numbers are stable are around 3.1% with a $30 million improvement in Puerto Rico offset by slight deterioration in the US, slight deterioration in the US mainly driven by a (inaudible) delinquency.

Okay, great. Thank you very much for taking my questions.

Matthew Keating, Barclays.

Good morning. Thank you for taking the question. I appreciate the color on the loan growth expectations for next year being slightly positive and also the color on deposit trends being pretty robust. If you had to put a number on where deposit growth could trend, because it seems as though deposit growth has obviously been the principle driver of the Company's average earning asset growth over the past couple of years. Do you think you could still see mid single-digit or better deposit growth next year given sort of the puts and takes you might see on the public deposits, etc.? Thanks.

It is hard to call it now. There are probably two things. First of all, it is always important to make the point that deposits are not a liquidity issue for us since have to be collateralized. [If] deposits do go down, we will get our securities and our collateral back and we can either [repos] of it so it is not a liquidity issue. But it is a big number and again it is very hard to forecast exactly where that number is going to go. So actually that may sway the balance overall.

What gives us more peace of mind is the fact that our non-public deposits are going up and we have been successful in continuing to grow the deposit (inaudible) business together with the balance sheet. So if you look at the big pieces, there is an unknown in deposits in Puerto Rico. You have the US growing in the balance sheet and hopefully growing deposits together with it and some core deposit growth and non-public deposits here, the big delta will be deposit side and it will be very hard for us to predict that right now.

That is helpful. Thank you. Then I guess forgive me if I missed this, but mortgage banking has been sort of a volatile line item over the last couple of years. But it seems to have stabilized recently around $15 million, $16 million range. Do you think that is a decent run rate given what you are seeing within the Puerto Rican economy for mortgage banking results as we look out? Or should we see that continue to decline or actually expand going forward? Thanks.

The main deltas you will see in that business is going to be if we have more origination we will have more gain on sale. The (inaudible) have been pretty steady and a slightly lower level this year so that is in (inaudible) right now. And the other big delta is the value BMSR, and that as you know gets affected by a whole bunch of stuff, the prepayment rate, assumption changes, interest rate changes. That is a bit more volatile and harder to predict line.

So the core business is slightly smaller than it used to be and these two lines are the more volatile lines so the line of gain on sales should be fairly steady unless something happens and the MSR depends on interest rates, repayment rate speeds and a bunch of other stuff. So that one is hard to figure out.

Got you. Thanks for the color.

Joe Gladue, Merion Capital.

My question is I guess wondering if you could give us a little bit of color on the two different market areas in the US, just sort of how they are doing in terms of loan and deposits and expectations between the New York and Florida markets?

They are both doing pretty well. Obviously we have more coverage in New York and a bigger business a book of business in New York. But Florida is doing well where we have a pretty specialized line of business there in terms of association lending, condominium association lending and that business is doing extremely well as well.

So I think it is equally good. Obviously we have a bigger base in New York, more coverage in New York so in terms of dollar terms, it is growing more but relatively they are both doing well.

Thank you.

Jesus Bueno, Compass Point.

Thank you very much for taking my questions. I appreciate the color earlier on loan growth for 2017. Just looking specifically at the results in the Puerto Rico unit, it was encouraging to see the commercial balances up quarter over quarter. Could you just discuss some of the puts and takes there? I'm just trying to understand whether it is origination driven or perhaps if there is something there, maybe slower paydowns that impacted that?

We have the issue that you know well that while the headlines and the financial situation and the government continues to be very challenging in Puerto Rico, the economy is actually not doing horribly. It is essentially flat around zero. When you look at our bankers, our bankers are really busy and they are making a lot of loans and proposals and they are trying to do a lot of business.

So far the business they are succeeding in doing just to a large extent just refill the bucket from normal run off. But it is not because there is not a lot happening. The market is active, the market continues to be competitive. We are very busy. So our are clients are making strategic moves, our competitors are extending their business and we are trying to play a role in all of that.

While the balances have tended to be flat, the composition changes a lot and clients pay us back, new clients borrow and we continue to be very active and hopefully we can add more business more moving forward. But when the economy is around zero, our bank our size will tend to reflect the movements in the economy.

Thanks for the color. Just staying on kind of loan growth, I know you mentioned that part of your US growth will be supplemented by purchases. But I guess as we are thinking about balancing organic growth versus purchases I guess what do you anticipate your mix is going to be? And as it relates to that, the purchases you made earlier in the year, I know you were testing out the vintages to see the loss rates. But how exactly has that -- how have the loss rates played out relative to your initial expectations before you started those purchases?

I think when we initially undertook the tests and we started buying some of those loans, we built a model to try to predict expected losses. I will say so far they are behaving as we expected when we initially embarked in the test.

There have been no surprises is the answer. So proof of concept has been positive and we will probably make a call in the next few weeks whether we want to go back to that. But so far no surprises. It has been positive so far. We haven't had third-party prices in the US for a quarter and half since the second quarter so all of what you see this quarter has been organic growth. And my commentary on loan purchases actually mostly was directed to Puerto Rico more than the states. And we will continue to look but those opportunities come when they come and then we just make a call on whether the risk profile and return profile makes sense for us or not and move if it feels [good].

Understood. Thank you. If I could just slip one more in. Could you remind us -- if we were to see a rate increase in December, what would be the benefit to your NII just based off of a 25 basis point move?

Yes, I mean we are slightly asset sensitive so it would be good for us. As you know, we don't make big bets on interest rates on our balance sheet. So it will be a plus, something probably in the ballpark of $10 million, something in that ballpark. So if it is not going to change the date, it will nice. So you have a vote on rates going up go up, vote (inaudible) up.

That is great. Thank you very much for taking my questions.

(Operator Instructions). There are no further questions at this time. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.