Popular Inc (BPOP) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Popular, Inc., earnings conference call. My name is Jasmine and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, to Mr. Enrique Martell, Manager of Corporate Communications. Please proceed.

Good morning and thank you for joining us on today's call. Our Chairman and CEO, Richard Carrion, 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 other members of our management team.

Before we start, I would like to remind you that in today's call we may make forward-looking statements that are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release, and supplements. You may find today's press release and our SEC filings on our Web page, which you may visit by going to www.popular.com.

I will now turn the call over to Mr. Richard Carrion.

Good morning and thank you for joining the call. Please turn to the second slide.

For the third quarter, we reported net income of $27.5 million in our third consecutive profitable quarter, compared with net income of $110.7 million in the second quarter. About one-third of the linked-quarter profit decline was due to the provision expense, with most of the remainder due to a one-time $60 million tax benefit in the previous quarter.

Our revenue-generating capacity has remained strong throughout this credit cycle, and the net interest margin has been above 4% for the last four quarters. Gross revenues for the quarter amounted to $492 million, including $369.3 million in net interest income and $122.4 million in non-interest income.

Revenues were partially offset in the third quarter by a higher provision expense that was driven by a rise in Puerto Rico commercial nonperformers, which led us to provision roughly 111% of our non-covered chargeoffs. As we have previously reiterated, credit costs in Puerto Rico have continued higher than we expected at this point, and we have provisioned accordingly.

Let me address the credit issue before Jorge discusses the quarterly figures in more detail. The credit risk in our non-covered Puerto Rico commercial portfolio is greatly diversified across business sectors, with no significant borrower concentration, and has a low average loan size.

No one business sector represents more than 10% of loan portfolio balance. The commercial book on the island is comprised mainly of loans to small and middle-size businesses, with an average loan size of $476,000.

As we disclosed last month, we completed a sale of $358 million of unpaid principal balance in construction and CRE loans at a price of 45% of the UPB as of March 31, which was in line with previous indications. We ended up recognizing a net benefit of $5 million on the sale.

We believe that the remaining $259 million in book balance of our held-for-sale portfolio is properly marked and continue to pursue opportunities to sell. Smaller deals may be the most efficient way to move forward. In addition to the third-quarter loan sale, we have also been able to close several individual deals, and negotiated payoffs with borrowers in transactions priced between 50% to 70% net of the unpaid principal balance.

Now, in addition to credit management, we need to do more to help recover the earnings power of our franchise. That is why we have launched an action plan to reduce expenses, which mainly consists of an employee retirement window and further efficiencies in our Puerto Rico retail network.

On the earnings front, we continue to find opportunities to add good assets. This quarter we added $130 million in credit card receivables that we purchased from Citibank in a deal that closed in August. This follows a purchase of $518 million in high-quality mortgages executed in two transactions during the first two quarters.

All these transactions are immediately accretive, and the credit-card transaction adds a high-performing portfolio of good clients to our Puerto Rico credit-card business, which in this quarter generated $51 million in gross revenues.

Loan demand is soft; but some sectors are showing signs of strength, particularly the corporate sector. This quarter we closed two large loans that, in addition to the credit card receivables, helped maintain the volume in the Puerto Rico loan book. We are confident that we have the building blocks to generate profitability growth as the economy improves.

Please turn to the next slide and we'll talk about the Puerto Rico economy. Here, the key point is that, while recent signals have been mixed, the economy appears to leveling off.

Retail sales are slowly recovering behind a push in auto sales, which are up 10% during the first eight months of the year versus last year. As you see on the slide, job creation remains a challenge. As of August, nonfarm jobs were down less than 1% on a monthly average basis, versus declines of 4% and 5% in 2010 and 2009, respectively.

The tax reform implemented early this year has further stabilized the economy by boosting after-tax incomes to individuals. Increased corporate tax receipts have allowed the government to maintain current spending levels. During the quarter the government went to market with a $1 billion bond issue, which included $756 million in qualified school-construction bonds to modernize or build some 100 public schools around the island.

The administration is also seeking to attract additional investment through its public-private partnerships. Six finalists were selected in August for a long-term concession to run the San Juan International Airport. The deal is expected to close in early 2012.

The broad package of incentives that has been driving home sales was recently extended to December of 2012 with some minor modifications. The incentives have been very effective in helping reduce the inventory since the law was signed in September of last year. Sales of new housing units in construction projects that were financed by Popular are on pace to exceed last year's total by 20%.

Excluding refis, Banco Popular originated $218 million in mortgages during the quarter. Year to date, purchased money mortgages originated by Popular have amounted to $699 million, up 52% when compared with the same period of last year.

Tourism has been a recent bright spot, reflected in a significant pickup of visitors. The monthly average of 185,000 in hotel registrations in the first half of the year is currently at a 10-year high.

While the higher number of visitors has yet to produce significant job gains in that sector, it has paved the way for more investments in the high-end sector of the market. The Dorado Beach Ritz Reserve, scheduled to open in late 2012, and the St. Regis Hotel, which opened last November, are two good examples.

These data points suggest that the local economy is gradually getting somewhat better, and lower oil prices would certainly be helpful in ensuring that a convincing recovery takes place. With that, let me turn it over to Jorge.

Thank you, Richard. Good morning. Please, let's move to slide 4 for an overview of our consolidated financial results for the third quarter.

Our net income of $28 million in the third quarter was $83 million below the previous one. But both quarters include a series of special items which make it more difficult to identify the important trends in our business. So in order to present more clearly how our results changed, I will now move to the following slide, which compares our pretax adjusted quarter three results with those of the previous quarter.

On the left side, we start by removing the special items from our quarter three results. These include -- a $5 million net benefit from the loan sale completed in September, from approximately $17 million gain on sale, less $13 million provision related to the reclassification to loans held-for-sale; an $8 million gain from the sale of $234 million in US government securities; and $5 million charge related to the retirement window at EVERTEC, of which we own 49%.

Excluding these items, our pretax quarter three earnings amounted to $25 million, which is $48 million below pretax earnings of $73 million in quarter two. Now, we will review the main variations between the two.

Starting with the provision expense, there was a net increase of $32 million. The portion related to Puerto Rico business rose by $47 million, excluding the one-time $13 million provision related to our loan sales. On the other hand, we had a reduction of $23 million in the provision expense related to Westernbank covered assets and $5 million reduction related to the US business.

Moving on to non-interest income, there was a negative variation in FDIC loss share income of $44 million. Approximately $29 million was due to a reduction in the rate of accretion of the FDIC indemnity asset, reflecting lower expected losses from the recasting of future cash flows. Given that the alluded recasting was in June, its effect impacted only one month of the second quarter versus the entire third quarter.

The other main item that reduced FDIC loss share income was $18 million representing 80% offset to the loan loss provision of Westernbank covered assets, reflecting a lower covered loan provision in the third quarter when compared with the previous quarter. Finally, the reduction in interest income from the revolving facilities benefited the FDIC loss share income by $4.4 million, which represents the 80% offset.

On our net interest income, declined by $5 million in the quarter, although our margin was robust at 5.45%.Interest revenue went down $15 million, which was offset by $10 million in lower interest expense.

Covered loan interest income declined $10 million due to a decline of 68 basis points in yield, together with a decline of $129 million in average balances. As we have mentioned before, revenues from covered loans should decline gradually in future periods. Of the remaining $5[million] decrease in interest revenue, $5 million was primarily due to lower non-covered loan balances and $2 million due to a decline in the yield of the investment portfolio.

On the funding side, our cost of deposits went down by $5 million or 9 basis points to 1.16%, reflecting the continuing progress we are making in repricing our deposit base in both banking subsidiaries. Borrowings expense also declined by $5 million, due primarily to a decrease of $811 million in average balances, as we continued to repay the FDIC note.

In non-interest income, there was a rise of $15 million during the quarter, excluding the $18 million gain on the loans sale. In quarter two, we recognized a loss on sale of loans of $13 million due to the fair value adjustment that we took on the funding of loan commitments and other valuation adjustments. In addition, other service fees increased $4 million, led by credit card and investment management fees, while trading profits rose $2 million.

Please turn to slide 6 for a review of our Puerto Rico business. Higher credit costs in Puerto Rico impacted net income during the quarter, but gross revenues stayed strong at $439 million. Net income fell to $54 million mainly due to $60 million increase in provision expense for non-covered loans.

Total provision expense of $157 million for the quarter includes $26 million related to covered loans, which is offset 80% by the loan loss -- loss share agreement, and also includes $13 million related to the loan sale, which had a net benefit of $5 million. Including the $13 million provision related to the sale of the abovementioned loans, non-performing commercial loans drove the provision for non-covered loans to $118 million versus $71 million in the previous quarter.

Net interest income remained practically unchanged at $321 million, with margin at 5.15%, versus 5.19% the previous quarter. Our cost of deposits fell by 9 basis points on a linked-quarter basis.

Total deposits increased by $159 million to $21.7 billion. We believe there is more opportunity to reduce funding costs during the next 12 months when $5.5 billion time deposits reprice. Higher loan volumes are mainly a result of mortgage originations and the previously mentioned credit-card transaction.

Please turn to slide 7 for a review of our US bank. The US bank is farther ahead than what we expected by this point, even when you take into account the loan runoff of discontinued businesses.

Our US operations have been able to maintain a stable top line through the cycle. The bank produced $91 million in gross revenues, compared to $94 million in the second quarter and $90 million in the year-ago quarter. Cost of funds fell by an additional 8 basis points in linked-quarter basis, facilitated by lower rate environment and the shrinking of our balance sheet.

The $20 million provision expense for the quarter decreased by 20% on a linked-quarter basis and is really half of where it was at this point last year. This is a result of improved credit metrics that have allowed for lower provisioning and some level of release of the allowance. We expect the rate of reduction in provision to moderate as credit stabilizes and the reserve releases slow down.

Expenses were down slightly by $4 million. Seeking a more diversified customer base, the rebranding of our retail operations was rolled out to California and Florida in August and was well received.

The US bank is moving forward with half of the NPLs it had at the peak of the cycle. Our biggest challenge now is achieving healthy loan growth in the markets that we serve at an adequate risk-adjusted return.

Please turn to slide 8 for a review of our loan portfolio. The table at the top shows a loan book diversified across business sectors.

Residential mortgage loans, which have the highest concentration at 21.8%, are comprised of mostly Puerto Rico mortgages. Despite the gradual increase in Puerto Rico mortgage NPLs, chargeoffs continue to stay below 1%. As of September, Puerto Rico mortgage chargeoffs were 68 basis points.

Of September, our non-covered or held-to-maturity construction portfolio has declined to $358 million, compared to a peak of $2 billion at December 2007. Early-stage delinquencies have declined since peaking in December 2009, as you see on the chart at the bottom right corner.

Please turn to the next slide for additional detail on credit. Commercial loans in Puerto Rico were the prime driver in the linked-quarter rise of NPLs; but the loan sale brought down total non-performing assets, which had a net reduction of $19 million. During the last 12 months, non-performing loans have fallen 26% or by $612 million because of improved economic conditions in the US and actions taken both in the US and Puerto Rico, such as exiting high-risk businesses, executing bulk loan sales, and reclassifying the construction portfolio in Puerto Rico.

Chargeoffs increased the second quarter by less than $2 million, with a chargeoff ratio at 2.64% of non-covered loans versus 2.59% in the previous quarter and 4.52% last year. Commercial charge-offs in Puerto Rico amounted to $59 million in the third quarter, compared with $50 million in the previous quarter and $57 million in the year-ago quarter.

On the bottom right, the chart shows an increase in commercial inflows in Puerto Rico. As you know, banks have been proactive in classifying C&I loans, given the impact of the current cycle on payment capacity. In our case, we have classified loans where we understand that the repayment capacity according to the original terms have been affected, even though the client is still current in its payments. Approximately 50% of commercial inflows in the third quarter were current in their payments.

The soft economy and a more challenging regulatory environment demands intensifying our credit risk management. We are addressing this through portfolio reviews and early-stage monitoring, and by enhancing our risk-management systems and derisking the balance sheet. It is one area where we have increased resources.

The allowance to non-covered loans ratio was maintained at 3.35%. We increased the allowance for non-covered loans slightly by $3 million after four consecutive quarters of drawing it down.

Now, let us move on to the next slide to review capital. As you are well aware, capital adequacy is once again becoming a hot topic, particularly due to the events occurring in Europe. Popular enjoys strong level of capital.

We already exceed the Basel III capital requirements. And even though the US regulators have not yet issued final capital rules, we are confident that we are well positioned to meet future guidelines. Ample capital gives us the ability to confront difficult times and take advantage of opportunities.

We are continuously reviewing our capital structure with the objective of ensuring we maintain adequate capital for potential stressful environments while maximizing its return. We do not have any plans for repaying TARP at the current time; but when that time comes, a repayment would have to make strategic and financial sense and will be executed in a shareholder-friendly manner as possible.

Now, I would like to turn it over to Richard, for some comments on our common stock.

Thank you. Please turn to slide 11. I want to take a minute to discuss the price of our stock, which has declined 47% as of September 30th.

Even though most financials were also beaten up, we were hit harder than most. The decline is more than 2.5 times that of the NASDAQ Bank Index, which dropped 19%.

While I don't know any CEO who doesn't think his company is undervalued, we think that at current valuation levels the market is underestimating the value of our business. So let me briefly review what we believe a current or potential investor in Popular is getting in return for his investment.

The dominant financial services franchise in Puerto Rico, with a track record of 118 years and a Corporation that has generated over $770 million in pre-provision net revenue during the past 12 months. A US community banking business which this year returned to profitability and has a fully-reserved DTA of $1.3 billion. A 49% ownership interest in EVERTEC, which is a leading transaction processing, merchant acquisition, and IT consulting company in the Caribbean.

It generated operating EBIDTA of $68 million in the two quarters ending on June 30, which was an increase of 14% over 2010. It is carried on our books at $188 million, which when compared with EVERTEC's year-to-date performance, represents a multiple of 1.3 times revenue and 2.8 times operating EBITDA.

Although our margin is strong, there is potential for additional margin upside when interest rates normalize. 74% of our balance sheet is funded with deposits, and we are confident that when rates rise we should benefit materially.

We are aware that the one factor that is preventing us from reaching potential profitability is credit costs. Although the economy has not improved as quickly as we would have liked, to the extent we do see improvements going forward, our profitability should quickly ramp up.

I would like to comment on the two graphs on the page that compare the multiple that the market was assigning to Popular as of September 30, with a peer group of nine similar-sized banks and the top 50 banks in the country, excluding those over $100 billion in size. The first compares the market valuation of tangible book value, where we remove from Popular's book value the remaining unamortized discount from the TruPS that we issued to the US Treasury in August '09 in exchange for the previous preferred stock. As of quarter-end, we traded at 61% of tangible book value, which is a discount of 18% versus our peer group and 44% against the top 50 banks.

Our credit problems have been identified and are being addressed. We do not have exposures to sovereign bonds. There are no material legal risks related to the US mortgage crisis; and the loan sale we announced recently suggests that our held-for-sale portfolio is marked at reasonable levels.

Viewing our stock price against revenues at quarter-end, we were trading at 2 times pre-provision net revenues, which is a discount of 64% versus the top 50 banks, which were trading at 5.5 times revenue. We believe that the level and stability of revenues merits a better multiple.

Turning to the last slide, let's summarize some key points on why we think there is more value to the Company than what the market is suggesting. We remain optimistic about our prospects.

We have a solid level of capital, which gives us the flexibility to take advantage of opportunities. Our strong revenue-generating capacity and our unique deposit franchise in Puerto Rico positions us well for the future.

The key takeaway from all this is that with a strong capital base, a high level of stable revenues, and manageable expected losses from our loan portfolio, we expect to continue to improve our performance in 2012. As I mentioned at the beginning of the webcast, we have started the implementation of a plan to reduce expenses and increase the efficiency of our distribution system to enhance our profitability.

With that we thank you for your attention, and I would like to open the call now for questions. We have with us a few people.

We have Carlos Vazquez, who heads our US operation; we have Ignacio Alvarez, who is our Chief Legal Counsel; Lidio Soriano, who is our Chief Risk Officer; our Treasurer, Richard Barrios; and our Comptroller, Ileana Gonzalez. So, with that, I am happy to open the floor for questions.

(Operator Instructions) Ken Zerbe, Morgan Stanley.

All right, great. Thanks. Maybe we can just go back to slide 9 for a second if you don't mind. I think as you have probably seen your stock is down about 13-plus-% right now; and my suspicion is a lot of it relates to the deterioration in commercial.

So is it --? Could you give us a little more information, a little more --? Just help us understand how much of the increase in the Puerto Rico commercial portfolio was due specifically to this, I will call it a policy change or a change in methodology. Because what we are trying to figure out, obviously, is -- are you on an accelerating upward trend of NPLs? Or if this is sort of a peak and then it stabilizes. Or how should we just be thinking about that going forward, given the change in philosophy?

Sure, Ken. Let me tackle the easy part and then I will turn it over to Lidio for a more difficult part. But I think if you look at the increase, which was almost twice what we saw in the second quarter; and you put that together with the fact that of those inflows about half were clients that are currently paying but we have now doubts as to their documented ability to continue paying -- I think a good part of it is response to a closer scrutiny of these cases and does not reflect any deterioration that we have seen in the third quarter. But let me let Lidio, who has been a few months in the job, give you his perspective on it.

I will add to that, as you consider the cycle of financial reporting by companies, most of them report at the end of the second quarter or during the second quarter. And Popular as a company will tend to analyze it between the second and third quarter.

So as we received a bunch of statements from companies towards the end of 2010 and we analyzed them, we made the decision in certain cases for certain borrowers that the documented ability to pay was deficient and therefore it merits the nonperforming status, even though today they continue to pay.

Okay. So if I think about the 50% that are current, would I be wrong if I assumed that this was essentially an acceleration, a pull forward of a borrower who probably would have gone NPL next quarter or a quarter later? But you have pulled everyone up to this quarter, such that going forward we might not see as much increase, if it all, in NPLs. Or is that the right way to think about it?

I think it is difficult to make that prediction. I would just say that we have -- I think in Mr. Junquera's presentation he mentioned that we have gone through a thorough portfolio review, and as part of that process we think we have uncovered most of our issues. But certainly as things change we will make adjustments.

Okay.

Let me just add here that, given this change -- somewhat of a change in the way that we manage these nonperformers, in the past there was much more reliance on payment history. And nowadays there is much more reliance on future cash flows and its ability to meet agreed terms.

In the past, there were -- probably many of the loans that are now being moved into nonperforming would have never made that mark. And at the there probably -- there was no loss at the end. It was just that the future cash flows of this customer, given the credit cycle difficulties, changed and it got more difficult. But that doesn't need mean that at the end these borrowers were going to totally fail in making payments.

But it is that the scrutiny has intensified, and now there is a forward view of cash flows. And then that now determines whether you have to move a lone to nonperforming or not.

But not necessarily we are advancing customers that would have gone in the future, or that it's going -- they will end up losing money, or that we will end up losing money on their loans. So as Lidio said it is difficult to tell, but we will manage it as we go along here.

Okay. That helps. The other question I had was on the margin. How much of the margin, which is actually fairly stable this quarter, related to any kind of one-time or FDIC adjustments versus items that might be more sustainable? When we think about the margin going forward, is it -- should we be building in compression? Or is it actually fairly reasonable to say it is going to be around these levels, if not coming down a little bit?

Okay, we will probably -- it is probably relatively stable, but with a downward bias because we have -- as we have mentioned the covered assets is a reducing asset and that is an asset that has a very wide spread. So as our covered assets, the proportion of covered assets go down it will then have a reducing effect on the margin.

But offsetting that is our efforts to continue to lower the cost of deposits. Particularly in Puerto Rico is where we continue to see further opportunities.

In the US, we think that we have reached a margin, which is as high as we have experienced it. And it will be difficult to continue to increase it going forward. But in Puerto Rico we see stability.

No, understood. I just wanted to make sure that there wasn't any large one-time items that would lead to a cliff drop in your margin in the next quarter. But I think that makes sense.

Not at all.

Okay, perfect. Thank you.

(Operator Instructions) Joe Gladue, B. Riley.

Yes, hi. I guess first I will start off saying, yes, I like all the detail in the press release.

Thank you.

But, I guess let me touch on the net interest margin a little bit, just I guess I'll ask a couple of detail questions there.

It looks like the cost of borrowings I guess increased even as you are paying down the FDIC receivable. Just wondering if there is -- I guess, what is driving that increase in the cost of average borrowings?

Okay. Yes, Richard is going to address that, Joe.

Yes, the reason behind that, Joe, is that the liability -- the borrowing that we have been paying off the most aggressively, which is the FDIC note, has a cost of 2.50%, whereas the remaining borrowers have a higher rate. So as we continue paying down the FDIC note, the resulting cost of the remaining borrowings will be -- will tend to creep upward.

Okay.

Overall cost is coming down.

I guess on the asset yield side, the pretty sharp decline in the yield on the mortgage loans. Was there some, I guess, interest reversals on loans migrating to non-accrual that was part of driving that? Or just wondering what is behind that.

It is really increasing in TDRs and obviously we are not taking into income anything that is not actually related in those mortgages. So yes, there was a kind of not taking into income everything that is related to those loans that became nonperforming and were presented as TDRs.

Okay. I will ask a question on one of the slide, I guess on page 8 with a 30- to 89-day delinquencies, just want to be sure. The numbers there are just the delinquencies that are still accruing; that doesn't include anything that has been -- any of the loans that were moved to nonaccruing even though they were still performing?

That's correct, Joe.

Okay. I guess lastly, just ask a question on the North American operations. They have been profitable for several quarters in a row now. I think that, I guess, performance is sustainable.

Well, you know, Carlos keeps telling me that not to multiply by 4 every time, but he does it every quarter. But I will let him do the same to you that he does to me.

We are hoping we can sustain it. The challenge is going to be the same challenge that most banks our size have in the US market; and that is asset growth. Remember, we do have a big chunk of discontinued businesses that continue to roll off our balance sheet. So the magic will be whether we can keep a good ratio of growth while the discontinued businesses continue to roll off.

All right. Well thank you, that's all I had.

Brett Scheiner, FBR.

Hi, guys. The increase in commercial NPAs didn't have a large associated chargeoff; it looks like chargeoffs were relatively flat. But there also wasn't a reserve bleed in the quarter, I assume just because of the greater NPA levels.

Can you talk -- so it looks like $135 million in charge-offs; $151 million in core provision. So net a $16 million reserve build. Can you talk about reserve bleed versus reserve build going forward?

Well, I think most of the reserve build -- we don't really give you the detail per portfolio. I think most of the reserve build was in the commercial portfolio here in Puerto Rico. We have been seeing a much better performance in our consumer portfolios in Puerto Rico and across all portfolios in the US.

So overall in the US we have been drawing down reserves and have had to reserve less for the consumer portfolio. So I think most of this was in the Puerto Rico commercial. And correct -- charge-offs did not inch up significantly.

Just to add to that, exactly. We have -- when you look at our balance sheet and our business, we have two different -- in terms of provision to expenses -- performance by geography. In Puerto Rico we are providing more than we -- than the net chargeoff; while in the US we are drawing down the reserve base on the improved performance and credit metrics of our business.

As we continue to move forward, we expect the improvements in the US to moderate. And as the economy in Puerto Rico improves, we should also expect the increases in Puerto Rico to moderate on a going-forward basis.

Okay, thank you.

Derek Hewett, Keefe, Bruyette & Woods.

Good morning. My first question is just in terms of profitability going forward. You had kind of hedged on the US mainland franchise, just because you need -- the need for asset growth. But what about for the Company overall? Do you still expect it to remain profitable going forward?

Yes, we do.

Okay. Does that include any issue with any potential goodwill writedowns? Is that even on your radar right now? Is that a possibility?

No, I think we typically review it every third -- in the third quarter of the year, before the Q. So we are not looking at that, although most people are looking at tangible book right now. But no; we don't see any goodwill write-down.

Okay, great. Thank you. Then what percentage of your NPL inflows last quarter were paying as agreed?

I don't know.

Really we don't have that number. I can get it for you, and share it, Derek.

Okay. Okay, and then just in terms of deposit pricing, I think you said deposit prices or deposit funding cost in Puerto Rico went down I think 9 basis points.

9 basis points on deposit costs, that's correct.

How much further do you think you guys can go?

Well, we gauge it based on overall cost vis-a-vis alternate funding sources such as broker CD rates and LIBOR. We think we still have a ways to go.

As Jorge mentioned during his part, there is about $5.5 billion maturing in time deposits over the next 12 months. So we think there is still opportunities to continue lowering that. And I think that will counterbalance the fact that on the asset side we will see the Westernbank portfolio taper off gradually.

Okay. Then of that $5.5 billion -- I might have missed this. Did you go over what was the average cost of that $5.5 billion? And what are current market rates?

Well, we don't have that number right now. But definitely they are priced at a rate which is higher than what they will be rolled over, provided that rates remained unchanged, which is expected. Yes.

Okay, great. Thank you very much.

(Operator Instructions) A.J. Guido, GoldenTree Asset Management.

Hey, guys. Thanks for taking my question. You had mentioned that you are going through expense reductions or gearing up for 2012 and how to reduce expenses. It would be very helpful if you could try and quantify that.

Sure. We are looking at -- mostly in Puerto Rico, we are looking at streamlining a few things. Primarily consolidation of additional branches, which we think there is plenty of room to do that. Also, we are targeting a headcount reduction in the 200 to 250 FTE range over the next couple of months.

Is there any way you can put it -- is this like a $10 million opportunity, $20 million?

No, I think there is about a $25 million opportunity there.

Per year?

Yes.

Okay. And how long do you think -- that should be done in the next few months, you say?

I think most of the headcount reductions should be achieved by the end of the first quarter, and the branch consolidations probably will take us somewhere into the second quarter of the year.

Okay. Just -- Ken asked a question on credit, and I am just trying to understand. Obviously the main question that everybody wants to know is when your credit in the commercial portfolio bottoms. I understand you changed methodology.

But I mean, can you just give us a little more idea of what you are seeing? Is it just going to remain volatile? Or just how can we become confident that credit might be stabilizing here?

Well, we have not changed methodology. I think we are -- we gave the portfolio a little closer scrutiny for a few reasons, not the least of which we have a new Risk Officer. But I don't think there is any major change.

I can't tell you that there is a major change between the third quarter and the second quarter in what we are seeing around town. We have seen just tougher conditions as have looked at the statements as they have come in, and some of these businesses have been operating in a recessionary environment for four or five years. So it is taking a toll.

But I can't tell you that we have observed any marked deterioration in quality overall. I think in general, banks have been a little more proactive given the regulatory environment in classifying these loans as nonperforming in this cycle. On the more positive side, I think our consumer portfolios have been evidencing a steady improvement over the last couple of years, and those are extremely manageable and getting to pre-crisis levels.

Okay, thank you.

(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session for today. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.