Popular Inc (BPOP) 2014 Q1 法說會逐字稿

Good morning and welcome to the Popular, Inc. first-quarter 2014 conference call. (Operator Instructions). Please note this event is being recorded. Now I will turn the call over to the Investor Relations Officer at 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 first-quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, I would like to remind you that on today's call we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. 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. Thank you.

Good morning and thank you all for joining the call. I'd like to first address the highlights and key events of the first quarter, discuss the details of our US reorganization plan announced this morning and provide some updates regarding the economic situation in Puerto Rico. Carlos will then go into greater detail on the quarter's financial results and Lidio will provide an update of credit trends and metrics.

So please turn to the second slide. In the first quarter, Popular earned net income of $86 million, well ahead of adjusted results for last quarter and last year's first quarter. We continued to generate strong revenues with capital levels above peer averages. Our net income drove tangible book value per share to $38.71, up from $37.56 last quarter. Our margin of 4.70% declined slightly from last quarter's 4.74% as continued improvements in funding costs partially offset last quarter's additional income from resolutions in the covered loan portfolio. Our spreads remain strong relative to peers with our Puerto Rico net interest margin close to 5.5%.

Total NPAs this quarter of $956 million, including covered loans, were up slightly from $932 million last quarter. Noncovered NPLs were at $635 million, or 2.9% of noncovered loans, up from $598 million, or 2.8% last quarter. While aggressive loss mitigation efforts, resolutions, restructurings and NPL sales continue, one credit relationship of approximately $52 million was put on nonaccrual status in the quarter impacting our credit metrics.

Excluding this one relationship, NPAs and NPLs were stable. NPL inflows increased $64 million when compared to the previous quarter, mainly the result of the aforementioned Puerto Rico commercial credit relationship. Puerto Rico mortgage inflows of $89 million were down $5 million from last quarter's $94 million. Our net charge-offs were $43 million, or 80 basis points up from last quarter's $35 million, or 66 basis points from stable gross charge-offs, but slightly lower recoveries.

On the capital management front, BPNA has received approval to pay a $250 million dividend to the holding company. Concurrently, we will also contribute $100 million of this balance to BPPR. After giving effect to this capital rebalancing, the holding company's cash will be approximately $680 million.

Please turn to slide 3. Over the last three years, we have been talking about increasing optionality in our US franchise. Today, we have announced a number of strategic initiatives in the US. Since we opened our first branch in 1961 in the Bronx, we have pursued strategic opportunities with an eye toward adding diversification and profitable growth to our strong Puerto Rico franchise.

With that in mind, we have decided to focus strategically on our New York Metro and South Florida regions and have signed definitive agreements for the sale of our operations in California, Illinois and Central Florida in three distinct transactions. These strategies are intended to simplify our operations, provide capital release and improve the return on capital of our US operation.

In addition to the sales, we have also announced plans to consolidate our Rosemont, Illinois and Orlando, Florida operations center, transferring most of these support functions to Puerto Rico and New York. This will rightsize our back office to that of the resulting bank's asset base providing greater operating efficiency. We anticipate an estimated $50 million restructuring charge and an estimated $160 million goodwill write-down associated with these efforts in the coming quarters. We also expect a decrease in expenses from the branch sales and the other efficiency initiatives to offset a comparable reduction in revenues that result from the asset sales. Our operations in the US will be headquartered in the New York Metro area with a presence in South Florida.

We will continue to look at all components of BPNA's balance sheet to manage credit quality and required capital. As such, we expect the mix of improved relative profitability and capital relief to yield much improved returns on capital for our US business. Additional details about these transactions are available on slide 3 and in a separate press release issued this morning.

Please turn to the next slide. Regarding our TARP application, we continue in active dialogue with our regulators, but our application has not yet been approved. As we have said previously, we cannot speculate on the timing or the conditionality, if any, of an approval. However, we believe that actions such as the rebalancing of capital within our banking subsidiaries and increased liquidity at the holding company are positive steps, which move us closer to the repayment of TARP and we hope to have more information regarding our TARP application in the near future.

Slide 4 includes pro forma capital ratios for the first quarter excluding all $935 million of TARP funds. These ratios include the impact of the reversal of the approximately $404 million of unamortized discount related to TARP funds. Our tier 1 capital and tier 1 common ratios are 19.4% and 15.1%, up 20 basis points and 30 basis points respectively over last quarter with our tier 1 common equity ratio exceeding the CCAR 5% target by $2.4 billion.

In addition, the market value of our remaining stake in EVERTEC is approximately $280 million and significantly exceeds our position's current book value of $20 million. As investors, we will continue to participate in a proportionate share of the company's income. EVERTEC remains an important business partner and a valuable asset that also represents an additional source of capital flexibility.

Before I turn it over to Carlos, let me comment on the Puerto Rico economy. Over the last few quarters, we have mentioned that despite the volatile environment, we were more confident in the island's fiscal outlook than we were earlier in 2013. This improved outlook is due to recent government actions, including pension reform, as well as revenue and expense results for the island's fiscal year that are ahead of budget. We are encouraged by recent government measures and pleased to see the island's liquidity position improve considerably by the $3.5 billion debt issue completed in March.

The recent judiciary ruling on the teachers pension plan is a small setback that is offset by achievements such as the Lufthansa aircraft maintenance facility in Aguadilla expected to create 400 new jobs on-site, as well as a multiple of that figure in indirect jobs. In the short term, however, measures taken to improve the government's fiscal health may decelerate the pace of Puerto Rico's economic improvement, but we continue to believe they are positive reforms for the long term strength of the economy.

While we have operated in a weak economy for most of the past seven years, the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years. We continue to be particularly attentive to our portfolios and see no indications or signs that would lead us to anticipate a material change in the stability of our credit metrics in the coming quarters. While sustained economic weakness is not an ideal business condition, it would not represent an environment that is particularly foreign to us. We are confident that our significant liquidity, excess capital levels and strong internal capital generation will continue to be key to our future performance.

Lidio will expand on our Puerto Rico government exposure later in the call. I would note though that as we stated last quarter, this exposure does not represent a random sampling of Puerto Rico municipalities or government entities, but a deliberate and carefully underwritten book of business, particularly with our senior interest in the borrowing entity's cash flows, identifiable revenues as sources of payment and specific collateral.

Finally, I'd like to mention that after 22 years of dedicated service at Popular, Corporate Treasurer, Richard Barrios, has decided to retire. We deeply appreciate Richard's commitment and contribution to Popular as he helped shepherd the bank through both prosperous and difficult times. We are joined today by [Juan Pablo Perez] who has already begun to transition into the Treasury function. Although Richard leaves behind big shoes to fill, we are confident in Juan Pablo's ability to continue what has so far been a seamless transition and we wish Richard all the best going forward. So please turn to slide 5 as CFO, Carlos Vazquez, discusses our financial results in further detail.

Thank you, Richard and good morning. On slide 5, we present our financial summary for the first quarter. Please note that the fourth-quarter data is reconciled to GAAP figures in the appendix to the slide deck with supporting information in today's earnings press release. As has been the case in recent quarters, our underlying performance continues to be driven by, one, stability in interest income and two, stability in credit trends. Variances to our fourth-quarter results stem mainly from the FDIC loss share expense, covered loan provision and the operating expense lines. Details of these variations can be found in our press release.

Net interest income for the first quarter was $373 million, down $3 million from last quarter, mostly as a result of two less days in the first quarter where lower funding costs were offset by lower covered loan yields. Our loan portfolio was down slightly from the prior quarter as flat noncovered balances were offset by covered loan runoff. Economic weakness and covered asset runoff are headwinds, but we remain hopeful that we can maintain flat noncovered loan balances till the end of 2014, excluding the effect of the recent sales at BPNA.

Our recent strategy in Puerto Rico has been to offset limited organic growth with selective loan portfolio purchases. This quarter, we acquired a portfolio of personal consumer loans of $90 million yielding over 10%. The average yield in our $2.9 billion covered loan portfolio declined 25 basis points to 11.18% for the quarter, reflecting the absence of benefits previously disclosed and recorded in the fourth quarter. Our funding costs continued to improve in Q1. Total deposit costs in the period fell 3 basis points to 57 basis points.

During the quarter, Banco BHD, Popular's investment in the Dominican Republic, completed an all-stock acquisition of a local competitor, Banco Leon. This transaction grows BHD's $3 billion balance sheet by an additional $1 billion and solidifies the bank's position as the second-largest bank in the Dominican Republic. The purchase closed on February 1 of this year. Our ownership stake in the resulting new larger BHD declined to 15.8% from the previous 20%. Popular's other operating income this quarter includes a $6.5 million pretax gain as a result of this transaction.

Noninterest income decreased by $5 million compared to last quarter's normalized results as income from mortgage banking activities decreased by nearly $11 million, which includes a $5 million negative impact on the fair value of MSRs. In addition, the [seasonal] insurance commission recognized in the fourth quarter were not present in Q1. These are partially offset by the previously mentioned gain from BHD.

Our Puerto Rico mortgage business originated $319 million in Q1, up from $287 million last quarter, but down from last year's $357 million. We continue to expect an average quarterly pace of originations similar to this quarter through 2014. But there are many moving parts in the mortgage line items. This quarter's decline in mortgage banking income was largely due to the previously mentioned negative MSR valuation adjustment in addition to lower gains from sale of mortgages. Table F in the press release includes further information around our mortgage banking business.

Trading account activities were $3.5 million higher than prior quarter due to positive marks in our mortgage-backed securities portfolio. Our trading portfolio of Puerto Rico bonds and closed-end funds held by our broker-dealer subsidiary, Popular Securities, remains at $12 million, flat to last quarter. This quarter's decrease in FDIC loss share expense stems mainly from additional income due to this quarter's higher covered provision level offset by the effects of better experience and forecasted cash flows from the Westernbank portfolio.

Managing the expense side of our operations is a top priority and we are committed to capturing every opportunity to do so. This quarter's improved operating expense level reflects these efforts, although we benefited from some seasonally low expense items. Total operating expenses for the quarter were down $26 million to $297 million as expense reductions occurred in nearly every line item. The largest being professional fees, business promotion and the FDIC deposit insurance expense. While subject to a degree of variability and seasonality, as previously mentioned, we expect quarterly operating expenses to average at the lower end of the previously disclosed $305 million to $310 million range for the remaining of the year, excluding the impact of the BPNA reorganization. Our tax rate for the quarter was approximately 21% due to higher income from our US subsidiaries. Our tax mitigation efforts are ongoing and we reiterate our estimate of an annual effective tax rate of 31% for 2014.

Please turn to slide 6. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to well-capitalized regulatory requirements. Our tier 1 common equity ratio stands at 15.1% and represents in excess of $2.4 billion over the 5% CCAR target. Adjusting for the potential repayment of TARP, we expect our capital levels to continue to exceed well-capitalized requirements under the Basel III guidelines.

The rebalancing of our capital between our banking subsidiaries and the strategic moves announced today in our US business reflect our commitment to increase our strategic and financial flexibility while maintaining strong capital levels. Please note that any potential capital release stemming from the strategic actions in the US is incremental to the dividend from BPNA to the holding company previously described by Richard.

We seek to maintain strong capital levels appropriate for Popular's risk profile and eventually pursue with the approval of our regulators other capital management and distribution strategies, including the repayment of TARP. Improvements in operating efficiency and these potential capital actions will help us move towards our target of a double-digit return on tangible equity. With that, I turn the call over to Lidio.

Thank you, Carlos and good morning. Before we begin looking at some of the specifics of the Corporation's credit indicators for the first quarter of the year, let me make a few general comments related to trends in our loans portfolios. In the US, we continue to benefit from an improving economy and the results of our derisking strategies. In the first quarter, the pace of improvement accelerated as we were able to resolve a number of nonperforming commercial relationships. US NPLs and NPAs decreased by 32% and 28% respectively, mainly driven by loan resolution and loan sales. Two important milestones were reached during the quarter. The NPL ratio decreased below 2% to 1.8% and the sole remaining nonperforming construction relationship was resolved during the quarter. US net charge-offs were a net recovery of $2.7 million in the current quarter compared to a net loss of $111,000 during the fourth quarter.

In Puerto Rico, the classification to nonperforming of one borrowing relationship of $52 million affected the credit metrics for the quarter. Excluding this relationship, credit metrics this quarter were stable. I will note that this new nonperforming relationship is current and paying and despite its classification, we expect continued performance. Puerto Rico nonperforming loans increased by $85 million for the fourth quarter of 2013 largely driven by increases in commercial and mortgage NPLs. The increase in commercial NPLs is mainly driven by the previously mentioned single credit relationship. The Puerto Rico net charge-off ratio increased to 1.16% from 90 basis points in the previous quarter, which benefited from the sales of previously written off consumer loans. Excluding these recoveries, net charge-offs remained stable during the first quarter of 2014.

Puerto Rico early delinquencies increased during the quarter driven by the maturity of credit facilities of certain commercial clients. These relationships are current in their interest payments, are in the process of renewals, which we expect to complete during the second quarter. Excluding this relationship, early delinquencies were stable during the quarter.

Turn to slide number 7 to go into the details. Nonperforming assets increased by $24 million on a linked-quarter basis primarily driven by increases in NPLs in Puerto Rico, offset in part by a decrease in other real estate owned of $8 million mainly due to a disposition of foreclosed properties from the covered loan portfolio. Nonperforming loans increased by $37 million from the previous quarter, largely driven by increases in Puerto Rico, offset in part by declines in the US region.

In Puerto Rico, NPLs increased by $85 million due to increases in commercial and mortgage NPLs of $60 million and $23 million respectively. As discussed in my introduction, the increase in commercial NPLs is driven by a single borrowing relationship of $52 million. For mortgages, while inflows are down, the increase of mortgage NPL is mostly driven by a reduced level of outflows resulting from the bulk second (inaudible) during the second quarter of 2013.

In the US, NPLs decreased by $48 million or 32% mainly due to the continued improvement in credit performance and loan resolutions. The improvements in the US NPL balance were broad-based with every loan category improving. Commercial and construction, including (inaudible), improved by $41 million, or 36%. Mortgage improved by $4 million or 15% and consumer improved by $3 million, or 23%.

Please turn to slide number 8 for a summary of the trends in NPL inflows. NPL inflows, excluding consumer loans, increased by $64 million from the previous quarter principally driven by an increase in Puerto Rico commercial loans, coupled with a slight increase in US commercial loans. In the US, inflows of nonperforming loans increased by $7 million from the fourth quarter of 2013 principally driven by a $10 million commercial relationship, which was subsequently sold during the quarter. Excluding this relationship, NPL inflows decreased by $3 million from the $16 million reported in the fourth quarter of last year. In Puerto Rico, the increase in commercial NPL inflows is driven principally by the $52 million borrowing relationship discussed previously. Excluding this relationship, NPL inflows increased slightly driven by an increase of $8 million in construction loans offset in part by a $6 million improvement in mortgage NPL inflows.

Please turn to the next slide to discuss net charge-off provision and allowance for loan losses. Net charge-offs for the first quarter amounted to $43 million, or 80 basis points, compared to $35 million or 66 basis points in the previous quarter. The increase of $8 million is mainly driven by the gains recognized in the fourth quarter resulting from the sale of previously charged-off Puerto Rico consumer loans. Excluding this sale, the net charge-off ratio was stable. In Puerto Rico, the net charge-offs were $46 million, an increase of $11 million from the fourth quarter, primarily due to the effect of the just-mentioned sale of previously charged-off consumer loan. The net charge-off ratio remained stable during the quarter (inaudible) the effect of the sale at 1.16%.

In the US, net charge-offs were a net recovery of $2.7 million compared to a net charge-off of $111,000 last quarter driven by the resolution of a number of commercial relationships above book value. The provision to net charge-offs decreased to 110% from 135% in the previous quarter. Excluding the effect of the recoveries from the loan sales in the prior quarter, the provision to net charge-offs remained stable quarter over quarter. The provision to net charge-off ratio is driven by current economic conditions in our main market, Puerto Rico. At [111 17%] the ratio in Puerto Rico reflects continued weakness in some of Puerto Rico's economic indicators. In the US, continued improvement in economic conditions and credit metrics led to a reserve release of $7 million for the quarter. The overall ratio of allowance for loan losses to nonperforming loans decreased to 85% from 90% in the previous quarter.

To summarize, the pace of credit improvements accelerated in the US driven by the resolution of a number of commercial relationships. In Puerto Rico, the classification to nonperforming of a borrowing relationship of $52 million somewhat distorted the credit metrics for the quarter. Excluding this single borrowing relationship, credit metrics were stable.

Before turning the presentation over to Richard for his concluding remarks, let me briefly summarize our Puerto Rico government exposure. Please turn to the next slide. Our current direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $1.1 billion of which approximately $944 million is outstanding, a decrease of $6 million compared to the previous quarter. Of the amount outstanding, $781 million consists of loans and $163 million are securities. Our direct exposures can be divided into two main categories, loans to the central government and public corporations and loans to municipalities. Our largest exposures to the central governments are collateralized by property taxes at $145 million plus another $100 million in tax and revenue anticipation notes. Both are short-term facilities to fund working capital needs.

Our largest exposures to public corporations are to the electric power authority and the (inaudible) authority for $74 million and $75 million respectively. Both are also short-term facilities to fund working capital needs. Our municipality exposure is mostly a diversified portfolio of senior priority loans to a select group of municipalities whose revenues are independent of the central government.

In addition to this direct exposure to the government, we also have indirect lending facilities in which the government acts as a guarantor. In the case of these loans, our primary credit exposure is to nongovernment borrowers and secondarily to underlying collateral. 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. With that, I would like to turn the call over to Richard for his concluding remarks. Thank you.

Thank you, Lidio. Please turn to slide 11. Before we open the lines to questions, let me conclude today's remarks by reviewing the Puerto Rico government financial situation and the actions we are taking to drive shareholder value. Recently implemented fiscal measures continue to be significant with government revenues and expenses remaining on target. We are working closely with other business leaders to offer cooperation and guidance to the government wherever appropriate. In addition to the continued investment of local entrepreneurs in new and existing opportunities, stateside investors have purchased more than $2 billion in Puerto Rico commercial and real estate assets alongside the $3.5 billion raised in the government's last financing. In fact, tomorrow we are a major sponsor of an investment summit in Puerto Rico, which will focus on the benefits of the island's tax incentives and we are expecting close to 200 investors.

We remain optimistic about the prospects of Puerto Rico emerging from the current situation with a stronger and more vibrant economy. As I mentioned in our Annual Report, this optimism does not stem from blind faith. It comes from experience. The 120-year history of Popular has allowed us to witness events such as the change of sovereignty, two world wars, the Great Depression and devastating hurricanes. Throughout this history, we have seen Puerto Rico transform itself time and time again, a testament to our resilience and resourcefulness.

Our healthy revenue generation uniquely positions us to benefit from an eventual economic recovery and yields reasonable returns while the leading market position of our unique Puerto Rico franchise continues to allow us to sustain above average margins. We remain cautious, but are encouraged by the ongoing stability in our credit quality indicators in Puerto Rico as our covered portfolio continues to produce better-than-expected results and we have not seen significant signs of stress in our loan portfolios.

Popular's credit risk profile is meaningfully different from the one with which we entered this credit cycle, which together with our strong capital position improves our outlook. We have reached a milestone in our strategic thinking in the US and are refocusing our business to improve returns, as well as operational and capital efficiency in the region. In summary, we are driving value for our shareholders as we remain focused on creating revenue opportunities while effectively managing credit, our capital and our overhead costs. We have robust capital under existing Basel I capital requirements, which we expect to continue under the Basel III rules. We continue to see additional value in our EVERTEC ownership and our stake in BHD, which is the second-largest bank in the Dominican Republic and the improved performance of our US operations. We look forward to reporting to you on our continuing progress. And with that, I'd like to open the call for questions.

(Operator Instructions). Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen. So interesting, I think the last comments you made, Richard, were kind of pretty significant when you look at capital levels, the risk profile of the Company changing, concentrating the mainland operations into New York and to Central Florida. Capital ratios there are significantly higher than just about any mainland peer you can kind of come up with. So it feels like you guys are in a really good position to get out of TARP. I know you won't comment on the TARP, but maybe you can just remind us, with $680 million of cash at the holding company, what are the sort of debt service requirements again at the holding company?

Yes, this is Richard Barrios. Brian, we currently have about $680 million in cash, which is enough to cover roughly five years of debt service right now before a TARP repayment. Obviously in the context of a repayment of TARP, in all probability, our debt service requirements would come down significantly.

Right, right. So there is a lot of that cash that could be available to be used to repay TARP.

Absolutely. Most of it, in fact.

And I guess maybe a second question related to that is once you get out of TARP, I guess, maybe talk about the thought process of having all that significant capital and I guess your plans to utilize it in the mainland and/or the potential to return capital to shareholders in the future.

Well, we are anxiously looking forward to that moment frankly. But, right now, I guess our focus is on getting there. We are being a lot more deliberate in managing capital and preparing for that as we mentioned in the call. We expect the actions we are taking in the states will create even more significant capital or potential capital releases from the US bank, which would be available for either growth or to send back up to the holding company. So right now, our primary focus is on the TARP event.

Sure, sure. Totally. And maybe just one last question and I'll get back in the queue, for Carlos. I guess you talked about the expense guidance coming in at -- going forward more at the lower end of that range, around $305 million. Good quarter this quarter with expenses coming in much lower than that range, but it does feel like the pension and postretirement expense will be lower going forward. So I guess I am just thinking what other sort of expenses are kind of coming back because I would have thought that you'd probably even be below that $305 million guidance range based on how good the first quarter was.

Well, you are correct and then the pension should -- some of that will remain, but the same way in last quarter, we were pretty clear that that should not be multiplied by four in making assumptions. This quarter, it should not be multiplied by four either. We mentioned we have some benefits of seasonality in our expenses that you can see in the first quarter. Other expenses that will change along the year for example is our advertising and promotional expense, which tends to come in later in the year. There are some other expenses that are less predictable, some other expenses may move up or down if we do a rather large repossession of a property. So these are -- that line may be on the lower end, but other lines will probably move up. So we feel pretty confident that that $305 million number is the right level. But we will guarantee that it is not going to be exactly $305 million in any of the next three quarters.

That's a fair point. I appreciate you guys taking my questions. Thank you.

There will be also some noise from the US, so we will have to back that out.

Correct. We will try to make that fairly explicit.

Okay. I will get back in the queue. I am sure that the next question is probably going to ask you for details on the branch sales. So thanks, guys.

Ken Zerbe, Morgan Stanley.

Hey, thanks. I think I will actually ask more detail on the branch sales. My question, just I guess a two-part on this one. Just to be super clear, you mentioned that expenses are going to offset revenues. I just want to make sure that what you truly mean is that the net income impact is going to be zero going forward of selling these branches and then if that is the case, why?

Well, yes, that is what we mean. In fact, it should be slightly positive, not meaningfully so. So we expect to generate the same amount of income with a much lower asset base. Why? Because we expect to reduce expenses by the same amount of the income that is going to be reduced.

So you are keeping -- I guess I am just trying to think of like -- because if the US is profitable today, obviously you are able to maintain the same level of profitability without the branches, without the infrastructure. Is that solely because you are just becoming more efficient in the US?

The nominal income number would look similar at the end of the day, Ken, but it is a much smaller operation with a much lower -- we hope -- an adjusted -- a quarterly-adjusted level of capital. So the return on the capital will be much higher.

Got it. Okay. All right. Second question I had, just it looks like you had some interest recoveries in the US business that boosted NIM a fair bit. Could you quantify that benefit?

This quarter, I think it was six -- yes, it was about (multiple speakers). What is the delta from last quarter? It is not that big. We did have a lot of recoveries, which proved -- the impact on the reserve release was much bigger than NIM, I think the NIM was $6 million, but that is a gross number, so I don't know what the delta is from the last quarter.

$6 million NII change?

No, not change, $6 million gross NII. So I will have to get you the change number, Ken.

Got it. Okay. All right, yes, because I think I saw the US NIM going up, I think it was like 16 basis points give or take sequentially. Okay.

The third question I have, the final question, just in terms of the tax rate, I know you are guiding for 31%. Obviously it came in materially lower than that. I think you had mentioned because of the US profitability, but I am just looking at page or slide 15 in your slide deck, it looks like the US business actually made a little less money than it did last quarter, so 41 versus 43. Help me understand that. I guess what was your expectation for the US? Why would the tax rate be so much lower given the income in the US really didn't change at all?

Well, the proportion of income from the US to the total is much greater and that basically has a tax rate of zero. So that is what brought it down significantly.

And the fourth-quarter effective tax rate was also in the low 20% range as well, so it is consistent with the fourth quarter.

Got you. But then what does your -- sorry -- just what does your 31% guidance then assume? Because it sounds like the US business is going to remain as profitable as it was.

I think this quarter's results, as did in the fourth quarter, you have some releases and provision in the US. We certainly are not assuming that we are going to continue to have releases in the US every quarter. But that will impact the nominal profitability.

Which was also the case in the fourth quarter of last year.

Got it. Understood. Okay, so without the further reserve release, US makes a lot less money and then your tax rate is higher on a lower pretax earnings basis?

That is basically it. Correct.

Okay, perfect. All right, thank you very much.

Gerard Cassidy, RBC.

Thank you. Good morning, guys. In the remaining portion of the franchise that is left in Florida and New York, I think you guys mentioned there would be about 49 branches. How does that break out between New York, New Jersey versus South Florida?

South Florida is 9 or 10 (multiple speakers)

38 or 39 in New York.

Sorry. I should have that number.

Is the 9 or 10 in South Florida enough of economies of scale or do you need to grow that or what is the view in southern Florida?

Well, I think part of the idea is precisely to focus on a smaller number of markets and yes, we probably want to add more branches there over time.

And just one last question on the branch divestiture. I think you mentioned in the press release you are expecting to close it by the end of the year. There seems to be just a long drawn out period for these types of transactions. Are you real confident it can happen by year-end or it's hard to say?

We are, but again all these -- these are three separate deals. It was nonfrivolous, we used to say, to land them all on the same date. They need to go through regulatory approvals and there is significant outbound conversions and we hope we can get it done by the third quarter, but there are really factors beyond our control.

Sure, understandable. Shifting gears, coming back to the credit quality, obviously, you guys have had tremendous success over the last two or three years of improving it and you had the uptick this quarter. Can you give us some color on this commercial credit -- the large commercial credit that came in from Puerto Rico? Was it a commercial real estate credit or was it a regular C&I loan and what prompted you to have to put it on non-accrual?

It is a C&I credit, it is an operating company that has a very good business and a very good position in Puerto Rico. However, they have had, as most or other individuals, also they had a real estate venture that has gone south. They have put a lot of capital into that and taking a lot of capital from the operating company and that has deteriorated somewhat the financial condition of the operating company.

We can't give you too much more color, Gerard, without mentioning the name of the company.

No, that's fine. That's certainly sufficient. I think I may have heard hopefully correctly. Did you say in the delinquencies the 30 to 89 there was another one or two commercial credits that have shown up and if so, are they commercial real estate or commercial and what was the size of those credits?

No, what I said in the introduction was that, during the quarter, and when you see the RQs, you will see an uptick in commercial early delinquency. Those are lines of credit that have expired and we are in the process of renewing of the commercial. They are current in their payments and therefore, when you look at the numbers in the second quarter, they should come down.

Very good. And then finally on your BHD stake, was there -- did we hear you right that you had a $6.5 million gain this quarter because of the acquisition they did down in the Dominican?

That is correct.

Okay, thank you. I appreciate it. Thank you.

(Operator Instructions). Taylor Brodarick, Guggenheim Securities.

Thank you. I think everybody else has hit most of them, but one question on I guess the FDIC loss share expense. As we get closer to the five-year anniversary of Westernbank, any additional detail or color on how you are thinking that line item might trend over the next four quarters, five quarters?

That line will continue to depend on our recast of the Westernbank portfolio that we do on a quarterly basis and the changes in the credit profile of all the pools within that portfolio. So it's very hard to give you more color on it.

Yes, it's pretty volatile. I don't know.

And another thing to take note of is that as we get closer to that end, any changes in the estimated cash flows that would reduce the losses will be proportionately accelerated in the recognition of that impact.

Exactly. Okay. And then also, Carlos, from the $305 million to $310 million kind of range you were talking about, did you roll OREO expense into that as well?

Yes.

Okay, great. Okay, thanks very much.

(Operator Instructions). There are no further questions at this time. Would you like to make any closing remarks?

Thank you all for joining the call. We look forward to talking again. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.