Popular Inc (BPOP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the conference call of the third-quarter 2010 financial results of Popular, Inc. My name is Chancelai, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Enrique Martel, Manager of Investor Relations. Please proceed, sir.

Good morning, and thank you for joining us on today's call. Our Chairman and CEO, Richard Carreon, and our CFO, Jorge Junquera, will review our third-quarter results and then answer your questions.

They will be joined in the Q&A session by our Chief Risk Officer, Amilcar Jordan, our Controller, Ileana Gonzalez, and our Treasurer, [Richard Valance].

Before we start, I would like to remind you that in today's call we may make forward-looking statements which 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 earning press release and are detailed in our SEC filings and financial quarterly release and supplements, which are included as exhibits.

You may find today's press release and our SEC filings on our Web page, which you can visit by going to www.popular.com. I would now like to turn the call over Mr. Richard Carrion.

Good morning. Thank you for joining the call. Please turn to the second slide. For the third quarter we reported net income of $494.5 million compared with a net loss of $55.8 million in the second quarter, and a net loss of $125 million for the third quarter of 2009. These results, of course, include a net gain of $530.9 million related to the sale of 51% of our processing facility subsidiary, EVERTEC.

As Jorge will discuss in more detail, the provision expense totaled $215 million, which is $12.8 million higher than the previous quarter. While the provision at BPNA was lower than the second quarter, the Puerto Rico Bank's provision increased, mainly in the commercial and construction portfolios due to a reduction in the value of real estate collateral.

Operating expenses were also higher for the second quarter, but it is mostly due to expenses related to the EVERTEC transaction and the extinguishment of high-cost debt.

Topline revenues at Banco Popular de Puerto Rico totaled $256 million, reflecting our ability to maintain a solid topline. We believe Banco Popular is well-positioned to benefit from a turn of the credit cycle.

During this year we have focused our efforts on four key areas. To pave the way for our participation in the FDIC-assisted transactions in Puerto Rico, we raised over $1.6 billion in two successful transactions, the offering held in April and the sale of 51% of our technology subsidiary, EVERTEC, which closed on September 30.

As we announced, the transaction resulted in a net gain after tax of approximately $531 million, adding about $0.52 per share to our tangible book value. We also received net cash proceeds of approximately $529 million.

Second, we have dedicated significant resources through the acquisition and integration of Westernbank, a transaction that has been accretive from day one.

On the weekend of August 27, only four months after the bid announcement, the conversion of systems and branches was successfully completed. This was a very major operation that involved more than 200,000 clients, 280,000 deposit accounts, 60,000 credit accounts, representing about $8.4 billion.

The conversion was quick. It went without a major hitch, which is a testament to the operational capacity of Banco Popular de Puerto Rico.

The swift conversion provides two principal benefits. First, it opened Popular's entire platform of products and services to our new clients, approximately 140,000 of which did not have a relationship with Popular at the time of the acquisition.

Secondly, it provides a clear look at the Westernbank client base. Our credit teams can better manage these relationships now that they're in our system. And our marketing group can use all the tools at their disposal to cross sell products to this new customer base, a large portion of which had only one relationship with Westernbank.

Our third focus area is credit management. The commercial and construction portfolios in Puerto Rico are the two portfolios that demand the greatest amount of effort and resources, because of the continued high level of charge-offs. We intend to leverage off the momentum created by Puerto Rico's new housing incentives, which I will describe in the next slide, with initiatives of our own to address this area.

The segregation of our credit management groups into early-stage and late-stage delinquency has enhanced the restructuring and resolution process. We continue to provide resources as needed to the workout, construction and collection divisions.

Last, but not least, is BPNA. We have suffered considerable losses in our US operations, largely arising from legacy assets tied to the mortgage sector. Since hitting bottom in 2009, the credit metrics of the US Bank have improved progressively. While Jorge will provide more financial details, I want to point out that we feel we have seen the worst of the credit cycle at the US Bank.

Charge-offs fell below $100 million for the first time since the third quarter of 2008, and marked the third consecutive quarter where loan losses have declined.

Having said that, the charge-off ratio of 5% is unsustainable. Deleveraging and cost-cutting have their limits. With the restructuring of the operations largely behind us, we launched a number of initiatives this quarter to enhance our core banking business in the States.

The US Bank is strategically important to us. It provides a diverse source of revenues outside of the island, and we are focused on returning it to profitability and recapturing the value of our deferred tax assets.

In September we appointed Carlos Vazquez as President of BPNA. Carlos has vast banking experience. He headed our Consumer Lending Group in Puerto Rico and developed a good relationship with the US regions, while he simultaneously helped lead the restructuring of the operations on the mainland.

He will be based in Illinois, and Carlos will spearhead plans to grow our retail and commercial business in our regions. The US Bank is leaner and more efficient, and has increasingly integrated the support of Puerto Rico, mainly in the back office and business development areas.

As you can see in the third slide, the economy on the island has remained sluggish this year and job creation continues to be a challenge. The administration has taken a pragmatic approach towards the turnaround, reducing the budget deficit by close to 60% through painful, but necessary, cost-cutting initiatives. So the government expects to continue to reduce its expenses. More disruptive cutbacks like last year's layoffs are not expected.

In September the government signed into law an aggressive housing incentive package, providing a much-needed jolt to the residential housing market. The whole package is very generous, and targets primarily new homes, but also benefits existing ones, and has a 10 month sunset provision, which should create a sense of urgency.

The program reduces cash outlays at closing and grants significant tax exemptions, such as no capital gains tax in the future sale of an acquired new home, no tax on rental income for 10 years, and no property taxes for five years on new homes.

Following the enactment of this new law, we have seen an increase in interest among potential buyers, evidenced by a significant increase in the signing of new option agreements, which are indicative of future sales activity.

With that, I would like to now turn it over to Jorge.

Thank you, Richard. Good morning. Let me start with an overview of the consolidated financial results, which are presented on slide number four.

The sale of our 51% interest in our information technology business, EVERTEC, resulted in a gain of $531 million in the third quarter. Excluding the EVERTEC transaction results in a loss of $36 million, or approximately $0.04 per share. Primarily driven by continued high credit cost and an increase in operating expenses in Puerto Rico, mostly related to the EVERTEC transaction and the extinguishment of high-cost debt.

Our net interest income was $386.9 million, which came in $107.9 million above the previous quarter. The improvement in net interest income was driven primarily by three factors.

First, in the first quarter it included three months' contribution by Western assets rather than two months' contribution in the second quarter, due to the April 30 acquisition date.

Second, you have the accretion of a portion of the discount of the performing revolving loans acquired from Westernbank pursuant to FASB 91 amounting to $79 million.

Third, we accelerated the amortization of the premium attributable to $2 billion prepayment of the FDIC note made in the third quarter.

Our net interest margin was up substantially at 4.49% as compared to 3.21% in the second quarter. In addition to the factors mentioned above which improved net interest income, the continued reduction in the cost of deposits further enhanced our margin.

Non-interest income amounted to $796.5 million compared to $215.9 million in the second quarter. The increase was mostly due to the gain in the sale of majority interest in EVERTEC, and also included a $10.6 million reduction in the estimate of fair value of the equity appreciation instrument issued to the FDIC. This partially offset -- was partially offset by an increase in the FDIC indemnification asset of $71.6 million.

As some of you know, the FDIC indemnification asset in substance -- is in substance the present value of the guaranteed portion of expected loan losses. As we discussed in the previous webcast, the return of the acquired loan portfolio flows in perspective periods through net interest income, but changes in the value of the FDIC indemnification asset are reflected in other income.

A $71.6 million decrease in the FDIC indemnification asset recorded during the third quarter resulted principally from the Corporation's application of reciprocal accounting of the covered loans accounted for under FASB 91, and represents approximately 80% of the discount accretion of the covered loans, which are no longer expected to be reimbursed under the FDIC lost share agreement.

Operating expenses in the third quarter amounted to $371.5 million compared with $328.4 million in the second quarter. The main variations where $25 million in expenses from the EVERTEC sale and $25.5 million in penalties on the early extinguishment of debt.

In Puerto Rico, as we see on page 5, the Bank earned $13 million this quarter versus $22 million in the previous quarter. The decrease in profit was mainly driven by a $60 million increase in loan loss provision.

Commercial and construction loans made up most of the increase in charge-offs, largely due to a reduction in the value of the underlying collateral of these loans. In this environment we have continued to strengthen our coverage ratio in Puerto Rico, which now stands at 4.91% of loans.

Construction, of course, has been the most significant -- the most challenging sector. We currently have a reserve coverage of over 25% on what now stands as an $884 million construction loan book, excluding loans acquired from the Westernbank, and which are covered by the loss share agreements by the FDIC.

On the funding side, we continue to work on reducing the cost of our deposits, leveraging on the strength of our franchise. On the other hand, on the loan side it is a matter of demand more than anything else. A negative economic environment has led to reluctance to expand or invest, resulting in a weak loan demand.

Turning to our US Bank on slide six, the US operations have followed general credit trends on the mainland, and have seen substantial improvements in our credit performance.

To put this in perspective, the provision expense in the third quarter last year was more than five times larger than what it was this quarter. Our topline has remained relatively stable, despite the economic headwinds and the substantial restructuring in the US operations.

We are working on increasing our customer base within our footprint, as we move from being mainly a Hispanic bank to a more broad-based community bank.

To that end we launched in July a rebranding pilot program in Illinois that changed the name of the bank from Banco Popular to Popular Community Bank in order to appeal to a more broader demographic group.

Carlos, our new head of the US Bank, and his team are watching this initiative closely, along with other strategies to determine the best alternatives to make the US profitable again.

Moving on to slide seven, we can track the trend of several credit metrics of the Corporation. During 2010 we have seen improvements in most of our portfolios, except for the Puerto Rico commercial and construction portfolios.

At this point last year charge-offs and nonperforming loans had doubled in the first nine months. Year to date in 2010 charge-offs have fallen 7% when compared to the same nine-month period last year. Nonperforming loans have increased only 3% in the same period, compared with 76% increase in the same nine-month period in 2009.

Mortgages are a different story. Nonperforming loans in this sector continues to rise. But charge-offs in Puerto Rico, where most of the increase in nonperforming loans takes place, continues below 1%. There are a number of reasons for this substantial difference between mortgage nonperformance and charge-offs in Puerto Rico, as some of you well know, most notably, the underwriting.

These loans are full doc, primarily 30-year fixed-rate mortgages with moderate loan to value. Loans referred to foreclosure have a high reinstatement rate, which hovers around 75% in Puerto Rico.

In general, although we remain cautious with our economic outlook for 2011, we believe that we may be near the bottom of the cycle and should be approaching stability in the economy.

As you can see in slide eight, the EVERTEC transaction boosted our capital ratios by more than 2 percentage points and concludes a series of measures that we had undertaken to strengthen our capital base.

Our capital levels are well above both current well-capitalized requirements and those mandated by the new Basel III proposal, which includes enhanced common equity requirements, plus a capital conservation buffer of 2.5%.

[As of the end of the quarter, total capital was 16.17%; Tier 1 14.88% and Tier 1 common -- excuse me, total capital was 16.17%; Tier 1 was 14.88%, and Tier 1 common was 11.41%.] (all numbers corrected by company after the call)

And with that, I would like to turn it now to Richard for a recap and final comments.

Thank you, Jorge. Before we recap the key points, I want to speak briefly about the foreclosure process issue that has generated so much discussion in the past couple of weeks.

Popular's situation is a bit different from many of the major US financial institutions with large residential portfolios for several reasons. In Puerto Rico, our largest market, all sales require judicial actions. In fact, we do not use an expedited or summary foreclosure process, like in many US jurisdictions, but instead file regular civil actions that can take 12 to 18 months to complete.

During this period we are in contact with the borrower in order to try to resolve the issue, and we are very effective in these efforts. In fact, as Jorge just mentioned, our reinstallment or cure rate for residential foreclosure actions commenced in our servicing portfolio is approximately 75%.

In the US, as well, we do not foresee any problems. Except for our own nonconventional mortgage portfolio, we exited the mortgage servicing business in late 2008. As of September 30, our total residential mortgage portfolio in the US consisted of approximately 29,000 loans, with a principal amount of $2.08 billion.

As of this date we had less than $100 million of our portfolio in various stages of foreclosure, the vast majority of which the foreclosure process has continued without interruption.

So if you please turn to slide nine, I will wrap it up by reviewing the key takeaways from this quarter. The EVERTEC transaction has given Popular a strong capital position and enables us to compete favorably in a new economic and regulatory environment. We are now shaping the new relationship between EVERTEC and Popular, which is changed from being the parent company to being a 49% owner and its largest client.

We are also starting what is the second full quarter after acquiring Westernbank in a FDIC assisted transaction. With the conversion behind us, we are continuing to work on achieving an estimated 70% in cost synergies by next year, and on securing long-term relationships with our new clients. There is a lot of work to be done with this portfolio, but there is value to be found now that the dust has settled.

To give you an idea of our efforts to realize the value of this acquisition, while trying to control expenses, our personnel based in Puerto Rico stood at 6,150 as of April 30, 2010, and represented an annualized basic payroll expense of $202.4 million.

Our most recent forecast for December 2010 includes approximately 6,850 employees and a $226.4 million annualized payroll expense. This represents an increase of 11% in employees, 12% in payroll, which compares to a 38% increase in assets, a 16% increase in deposits, and an 8% increase in clients.

In terms of the credit environment, metrics has contributed to improved -- have continued to improve in the US, and has stabilized in Puerto Rico, with the exception of our commercial and construction portfolios. The non-homogeneous nature of these portfolios and the need to analyze many of these loans on a loan by loan basis results in greater volatility in the provision.

In the US there are a number of initiatives that we have taken to broaden our business in the regions we serve. We have an established relationship in the communities we are serving, and a solid franchise in Puerto Rico that we can leverage. And, of course, there is the potential to recover the value of our deferred tax asset.

We continue to strengthen our position and will remain thoroughly focused in the areas that we have just discussed.

We thank you for your attention, and I would like with that to open it up for questions.

(Operator Instructions). Ken Zerbe, Morgan Stanley.

The first question I had, maybe you can just walk through or identify specifically each of these FDIC-related items. I guess, specifically I am wondering about in particular the $78.5 million discount accretion that you have. But then there was another item, it was in the $50 million. Are both of those expected to be sustainable? What exactly was the offset?

I think you may have mentioned the 7 -- actually it was like $71 million -- maybe I will let you go walk through that, if you don't mind.

We will let Jorge take you through that.

This is very complicated accounting, as you already know. But there are a few parts to this. First, you have the yield that is earned on the bulk of the loans that are acquired. This accretive yield, it is earned at around 6% on the loans that are booked under the SOP rule. So the market value of those loans is roughly around $3.7 billion at a 6%. So there you have your calculation for that part of the number.

Then we had a large number that came in from loans that are -- because of their nature, their revolving nature -- are booked under the rule FASB 91. These were around $700 million loans, in which -- are booked at, again, fair value discount of around 50%. And you have then to accrete the discount which they are booked on the performing loans throughout the life of loan.

Given the nature of the revolving nature of the loans, these are very short-term, so the amount that is accreted is very large. Roughly you're talking of around a $200 million discount that has been amortized or accreted in 12 months. So that would be then the other part.

Those are the two large components. The problem is that one affects interest income, which is the loans -- the accretive yield under the SOP rule, and the discount from the FASB 91 loans. But the counterbalance is then the reduction in the FDIC indemnity asset.

Again, the rules do not allow this to be offset through net interest income, but actually this -- being this and other asset then the benefit from that -- the return from that asset is then accrued through other income.

And it is under the reciprocal rule it assumes that since you are amortizing the FASB 91 loans, your revolving loans, it is -- it means that you will not be then collecting any reimbursement from the FDIC from these loans. And then a counter account of 80% of what you are a accreting is booked under the -- for other income as you reduce the indemnity asset.

I don't think I have -- I probably have confused 99.9% of the guys. Probably my Controller is the only one that has understood this. So I would like is Ileana, if you can jump in and try to explain it in another way, unless --.

I think your explanation was excellent. I don't know if it was understood, but it is correct.

You're going to get a raise, Ileana.

We have around $8 billion in covered assets. And as Jorge indicated, $700 million of those were accounted for under FASB 91. You also have the indemnity assets which amounted to 80% of the losses at present value, which was 3.3 billion at the beginning of the acquisition.

So what is happening during this quarter is that you are amortizing the FASB 91 to net interest income, which is the $80 million that Jorge mentioned. But then you have to amortize or write-down the indemnity asset by 80% of those amounts recognized to net interest income, under the assumption that you are increasing the value of your asset, but then you need to decrease the value of whatever you're going to collect from the FDIC.

All right. That is -- go ahead.

Most of the other loans are under SOP. That is the $7 [billion] that Jorge mentioned. Accordingly, those loans, you only are accreting into income the 6% which is the amount that we accounted for as the yield that would be recognized during -- on those loans.

Obviously, we would need to reassess that accretion once we have better understanding of the charge -- of the losses on these loans, but in the meantime we are using that exactly that same 6%.

Okay. I may follow-up off line to get some of the nuances related to all that.

The other question I just had very briefly was, in the release you mentioned the incremental EVERTEC expenses associated with the sale, at least that resulted, are largely contributed to a $43 million increase in expenses this quarter versus second quarter. Is that -- at what point did those incremental expenses go away? All things --.

Those are nonrecurring. Those are one-time. It has to do with the sale, so those are nonrecurring.

Okay, so the one-time items in the expense line would be the debt of $25 million and the $43 million of these expenses. So those are --.

About $25 million and $25 million is the number.

$25 million and $25.5 million. (multiple speakers) million of extraordinary or one-timers in the third quarter.

Oh, because the increment of EVERTEC was $25 million also?

Right, yes.

Understood, perfect. All right. Thank you very much.

Brett Scheiner, FBR Capital.

Hey guys. Good to see your progress on credit. Two quick questions. One is, with the US -- the BPNA net income line getting closer to break even, do you think there's a possibility of a DTA allowance reserve release at some point -- reversal, I mean?

Well, we are working towards that, but until we start seeing some positive numbers, we are not even bringing that one up. But, yes, that is the ultimate goal without a doubt.

When there was taxable income in that sub, at that point you would reverse the entire allowance?

That would -- we would reverse whatever is a reasonable -- yes, we can reasonably recapture.

Okay.

But the goal certainly is that bogey is out there and we are working towards it.

It is unlikely, of course, that we would be reversing a substantial amount in the near future, because it must show that you would reasonably have future earnings to use it up. And it is unlikely in the next year or so.

Have you gotten some clarity around what future earnings means? Is that 36 months, 24 months?

It is a combination of the platforms behind the generation of that income and the amount.

I think we have to satisfy ourselves and satisfy our external auditors that there is a reasonable chance that we can earn consistently over the future. At some point it is a judgment call, but it requires a track record of earnings.

Okay, and then just one other question. If you take the $372 million OpEx number and back out the $25 million from the dead extinguishment and the $25 million nonrecurring on EVERTEC, you get to a $322 million number, a $321 million OpEx number. Is that the recurring OpEx we should be using?

I think that it shows the improvement in terms of what we have achieved with the EVERTEC synergies. We think we still have some synergies to go, so I wouldn't lock it in just yet.

Okay, great. All right, thanks again. Good quarter, guys.

Joe Gladue, B. Riley.

I would like to ask a few more questions regarding the US operations. One, I guess in the slideshow you mention that delinquency trends are improving in BPNA. I'm just wondering if you could give us a little more detail on that.

Well, definitely the largest improvement has come from both the restructuring effort that has reduced the size and the platform of the business there. And reduction in the staff has come down to about two-thirds of what it was before. And the number of branches are now below 100. So it is -- there has been some substantial changes.

But then the other part is the continued improvement in the credit quality. In 2009 BPNA lost over $700 million. This year, if you analyze the numbers now, you see that it would be around over $200 million, $250 million. Next year it should be continued improvements as portfolios -- troubled portfolios are lower, the economy continues to support, and we continue to work on the restructuring effort. So it is moving in the right direction.

It is a function of once we get to a relatively normalized environment how profitable is the business. And it is -- it seems like we're going to have to do some things different. And that is where we stand right now. We are looking at other alternatives that will enhance or will accelerate that moment when we can return profitability to the US.

If you just look from the queue, the last six, seven quarters, you will see that even though the size of the operation has decreased by over 21%, 22% in terms of loans and assets, FTEs have gone down by 33%, yet we have achieved margin improvements that have kept the topline study. And as Jorge says, both the expense base and the provision has been continuously going down.

So as we move forward, what we have to do to separate what is the legacy asset charge on that piece from the ongoing business and start growing that core business back up.

I guess you mentioned that the rebranding effort and that it was -- I believe you said it was starting in Chicago. Is that something you plan to just see how it works out in the Illinois area first before rolling it out throughout the system or --?

That is something we started -- I don't know -- six, seven weeks ago. So it is still a little early to tell. We are watching it very carefully. The anecdotal evidence is positive so far. We want to look at the numbers, but the plan would be to roll it out in the other regions in 2011. That is part of the strategy. Hopefully, in the next webcast we can have Carlos talk a little bit more about that.

Okay, I guess move over a little bit to Puerto Rico. I am just wondering, can you give us any color on the impact of the new housing incentives, how much inventory is moving or any details at all?

Well, as you can imagine, in anticipation of the law being passed, the market dried up for that month of August. So it is really after the law passed in September that we have seen a big increase in activity and visits to projects, in options being laid down and whatnot. So we think by the next couple of months we will get a feel of how much of that is turning into reality.

There is roughly between available inventory and what is coming on stream the estimate is there is about 20,000 of housing -- residential housing inventory. The goal for this law is to increase the sales to 6,000. So while it is not going to soak it all up, it will certainly increase the absorption rate and certainly that is the hope.

I guess the last question I will ask is about deposit rates and competition in the market in Puerto Rico now that the consolidation is complete. Are things getting more rational as deposit rate is coming down?

Well, we are obviously focused on cutting down and reducing the cost of deposits. I think once the Q comes out you will be able to see the cost of deposits has been coming down. There is still some pressure in Puerto Rico as some of the other banks shift their focus from brokered deposits to trying to generate local deposits, but we do see the possibility for margin expansion coming, and it is coming also from the deposit side.

Okay, thank you.

Adam Barkstrom, Sterne.

I am going to ask the accretable yield question in maybe a little bit different way. I guess the way that maybe I am understanding it, or misunderstanding it, the $78.5 million piece, is that recurring or not? I am thinking not. And the $56.5 million piece, is that recurring or not? And I am thinking it is.

Okay, both are recurring. But it will depend entirely on the actual balances of those assets and the expectation of collectability from those assets. To the extent that we are able to maintain the assets acquired for a longer time than what we originally expected, as we continue to work very hard with customers in trying to restructure loans, and work together with the FDIC to manage this, then the amount will remain and may improve. To the extent that loans are finally charged off, then that will disappear.

Let me be bold enough and add something here. On the FAS 91 piece you have five months this quarter, because we did the whole initial five months here. You have five months this quarter, whereas the SOPPs (technical difficulty) three months. Clearly the revolving loans, the FASB 91 piece will accrue over a shorter period.

Bear in mind also that the mirror side of that, which is the FDIC indemnification asset, comes in as other income or a charge to other income. And so that margin will probably be a little inflated, in that sense you have to take into account that other piece. But that said, we are confident that we will have good yield on these assets.

Okay, great. Thank you. Then on the deposit costs issue, I want to take -- you had a slight reduction in deposit cost issue, but -- or deposit cost this quarter. But as I recall in kind of talking to you guys recently that one of the things that perhaps did not happen as quick as we all wanted it to, or expected it to, was the reduction in deposit cost, because there is still a couple of irrational deposit pricers out there.

I am curious if that is still the case. And do we think -- I am curious to get your thought on do you guys think consolidation is complete on the island at this point?

Well, in terms of deposit cost, they have come down. Clearly following the three closings and that -- the fact that you have three banks that have been absorbed, there has been an effort by the other banks to try to capitalize on that and try to take clients away. So everybody is waiting for that dust to settle.

I do expect deposit costs to continue to decrease, given the level of interest rates we are seeing. So I do expect deposit cost to continue.

Regarding further consolidation, I don't know. I think eventually the market will consolidate to a smaller number of institutions, but I don't think that is imminent.

One last question, if I could. Could you remind us -- I know it will be reported in your Q, but just in rough numbers, the balance sheet size of BPPR and BPNA?

BPNA will be roughly around $9 billion.

$8 billion and change.

And, you remember, you know it is coming down, because we have discontinued some lines and those loans are being paid off.

Puerto Rico is about $31 million and change. You have it on slide five and six.

I am sorry. Great. Thank you, gentlemen.

Bain Slack, KBW.

I know it is still early in the housing stimulus process, but with the new option agreements that you guys are seeing signed, is there any indication from these agreements of what that could mean for real estate prices?

I guess, I am trying to read in what that may mean for the remaining losses, specifically in the construction development book.

I think it is speculative at this point, but certainly the net options that we have seen, we haven't seen levels like this since 2007. So we will wait until that flows through the process and see how many originations that turns into. I think we'll have a better bead in the next month or two as to where that is heading. But all the signs, albeit anecdotal, all the signs are positive there.

I guess in addition to obviously the deposit costs come down, you guys still had some other high-cost funds. Is there any update on the remaining FDIC line? And I think you guys had about $100 million of some high-cost debt, costing you about 13%, where does that say today?

Jorge has been working on that a lot. I will let him take it.

Yes, we continue to talk to the owners of that debt, and trying to negotiate a deal that works well for both. I would say that we are probably 50-50 there.

On the FDIC note, there is still outstanding over $3 billion. To the extent that we continue to build liquidity -- excess liquidity at the Bank, we will continue to consider accelerating the repayment of the FDIC debt, yes.

Okay. I guess the last question on -- kind of going into the BPNA. Feeling more optimistic about the credit and the changing in the name. At one point probably, if we go back to last year, I think there was discussion about if the market came back looking to potentially sell locations, particularly maybe some of the non-core locations. I think California had been kicked around, and maybe Illinois.

Is there now a shift in the thinking that with the credit potentially getting better and the opportunity to recognize the [ET] over time that that we may keep those locations, and maybe actually BPNA then turns from a potential seller to a potential buyer in the markets?

Look, we are in that process. I want to let Carlos settle in and we are looking at the operation. We have done most of the restructuring. We have done the branch consolidations that we wanted to do. We are now focusing, as I said, on a base strategic plan, and trying to separate the cost of legacy assets from the inherent profitability of the ongoing core business. And then we will see what options are available.

But I think the goal is profitability. It is getting back to an adequate level of profitability. We know we have some good assets there in the deferred tax asset, but that is the bogey we are looking at.

Great, I appreciate that. Thanks.

(Operator Instructions). At this time there are no further questions in the queue. I would like to turn the call back over to management for closing.

Okay, well thank you all for joining us. I think, as I said in the press release quote, I think in general we feel good about this. We are not happy about the provision going up slightly, but we think we have our arms around the problem, and we are focused on those two portfolios and bringing that down.

Everything else is moving along. We have been knocking down the things we said we were going to do, so we are feeling -- the team is feeling good about the future.

So thank you all again for being with us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.