First BanCorp (FBP) 2015 Q4 法說會逐字稿

Good morning and welcome to the First BanCorp fourth-quarter and fiscal year 2015 conference call. (Operator Instructions). Please note today's event is being recorded.

I would now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the Company's financial results for the fourth quarter and fiscal year 2015. Joining me today are Aurelio Aleman, President and Chief Executive Officer, and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from the forward-looking statements made due to important factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the webcast presentation or press release issued by First BanCorp, you can access them under the IR section of our website at www.FirstBanc.pr.com.

At this time, I'd like to turn the call over to our CEO Aurelio Aleman. Aurelio?

Thank you, John. Good morning everyone and welcome to the new year and thank you for joining us again to discuss our year results and fourth quarter. On the call with me today is Orlando Berges, our CFO, who will provide significant details on the quarter and the year.

Please let's move to Slide 5. I would like to first of all do a summary of the year. It is a busy slide. It was a very busy year for First BanCorp.

And first of all, I would like to thank my dedicated officers, employees and board members for all their hard work during the year. I also want to thank our shareholders for their continued support during 2015.

Honestly, 2015 seemed like two years in one before the June announcement and after the June government announcement, and I would like to spend some time on this significant milestone that we achieved.

The first half was full of achievements starting with -- in line with the submission of the 10-K, the recognition of the BPA, approximately $300 million. The Consent Order which had been in place for a long time was lifted.

We participated in an important transaction with the acquisition of the Doral branches and long-term deposits. We successfully completed a divesting transaction. And we closed the first half of the year also releasing our different results which showed our capital strength under a severely adverse economic environment.

Despite those headwinds that became elevated during the second half of 2015, there was significant progress in franchise metrics. When we look at the franchise by itself, NPAs declined by $107 million. NPAs by itself declined $107 million. Inflows declined by $133 million.

Deposits, it was a great year for our deposit franchise. Overall, we increased $472 million of which Puerto Rico [grew] to $685 million. We actually achieved some strategy to reduce costs in deposits and they contracted in (inaudible) but it was an intentional strategy.

Brokered deposits decreased by $790 million during the year, which is a significantly large number. And most importantly, we achieved important market share gains in deposits, branches, mortgage, POS, ATMs, and transaction service that will definitely support revenue growth in the coming years.

Very importantly, we solidified our presence in Florida by growing the loan portfolios and branches and we solidified our presence in the Caribbean region.

Net income was $21 million, obviously compared to a very large number in 2014, which included the $302 million on the DPA. But adjusted net income, non-GAAP pre-tax income, which Orlando will cover later, it increased to $101 million versus $98 million.

Again, due to the macro events, financial results were adversely impacted by OTTI and increased provisioning on the government.

From a high level, we have to say that the core business, steady improvement and the government risk deteriorated as part of the macro news. Definitely, we are very disappointed with the macro impact on our stock price, but we are pleased with the significant progress and market share gains that we achieved in 2015.

Now let's look at more closely to the quarter. Slide 6. During the quarter, we generated $15 million of net income and, as we said, negatively impacted by a $19 million increase in provisioning for the government. Orlando will expand later in this area in more detail.

PP&R continued stable at $50.6 million. And obviously we also have significant, several significant items in expense and revenue that Orlando will cover in his presentation. And during the quarter, NPAs declined slightly and inflows also declined.

We continue to see stability on the consumer out there. We continue to see sufficient economic activity to sustain the portfolios.

And again, you know, our capital ratios are very solid, which obviously support the current challenges that we are facing in Puerto Rico.

Now let's move to the deposit loan portfolio slide to cover it in more detail. Slide 7. On the left column, we have the portfolio strength. On the right, we have the originations. On the bottom, we have the quarter trends and then the year highlights.

A slight decrease of $27 million in loans in the quarter, $34 million in consumers, primarily auto. We also transferred loans to REO and we had some decline in prepayments and construction loans in Florida. That said, the C&I book increased $24 million and we saw a $60 million increase in residential also.

I think the recent quarter, importantly to highlight, showed sufficient activity to sustain the loan portfolios in Puerto Rico.

In Puerto Rico, the most impacted sector I'll have to say is the mortgage business. But in our case, we are compensating with a larger share of the pie as the new channels, after the Doral acquisition, are producing a larger share to us.

Regarding auto, we continue to be a tough competitor, but we continue also with our proven policies. And it's very clear that portfolio quality is also improving.

For the year, we grew our performing portfolio at the corporation level by 1%. Puerto Rico saw a contraction of 3% due to in large part the bulk sale that we received in the second quarter. And Florida grew by 15% the loan portfolio, and the Virgin Islands year-over-year grew by 13%.

So, obviously, the geographical diversification, the line of business diversification, is an important asset of our franchise which helped us compensate the different environments that we operate.

Again, our balance continues stable and we will continue to work hard to sustain the loan portfolios in Puerto Rico and achieve growth in Florida and (inaudible) Caribbean again.

I have to say, you know, the quarter also, when you look at the portfolios on the asset quality, a little delinquencies remained stable within the quarter, which is something that we are monitoring very closely based on Puerto Rico conditions.

Let's move now to Slide 8 on the deposit front. There was definitely noise in the deposit front during the quarter. It was an expected noise. We announced previously in the third quarter that we received almost $180 million in temporary deposits from the government agency. And this deposit we expected to deliver before year end and it happened.

I think, most importantly, the year-over-year growth on non-core on non-brokered and our core franchise was really a great achievement under the current economic environment, $685 million in Puerto Rico and $472 million overall.

Importantly also, you know, the non-interest bearing piece continued to improve. We moved the needle from 10% of total deposits to 14% at year end. The reliance and the reliance year-over-year continues to improve.

Again, a solid year for the franchise and the channels that we have to continue originating accounts, deposits and fees and also the market share gains and the monetization to support our mortgage business growth.

Now let's cover an important part of the equation, our government exposure, which I'm sure everybody wants to talk about. Again, uncertainty still dominating the macro and there's not a definitive timeline for resolution of fiscal matters. I think everybody's clear on that. That said, there continues to be progress in PREPA and there is progress in Congress' effort to support Puerto Rico, which are taking more attention and are moving at a faster pace in the recent weeks.

Also, in today's newspaper, there is news about meetings beginning to happen to take place between government officials and bondholders to discuss potential restructuring alternatives. So I'm sure you saw in the press the PREPA events. The negotiation was hot there for a moment but it got renewed, and you know, we feel this is a critical component as a path to fiscal resolution for the island. And we are hopeful the legislation gets approved and we can bring that into closure the sooner the better.

In our case, our government exposure remained at similar levels within the quarter. We took an additional OTTI charge on our Puerto Rico securities. And more importantly, we increased our reserve based on qualitative adjustments by approximately [$19] million. Orlando will cover that detail.

We continue to feel comfortable with our exposure to municipalities. These municipalities are very well-managed entities. They have a strong sort of repayment assigned to great facilities. You know, 80% of our municipality exposure is really focused on four municipalities that are the largest municipalities of Puerto Rico with the best cash flow. So, we feel very comfortable about this exposure.

Again, we continue to be vigilant regarding potential short-term government liquidity events that definitely could impact the exposure. We are vigilant to government suppliers that depends on payments. There is -- we see all of those getting accumulated and the government has mentioned some of the amounts. And some of those relationships have already been classified or moved to an adverse classification because of liquidity.

Again, in the meantime, we need to focus in this additional business plan and market share opportunities while also continuing our effort to grow Florida and the Virgin Islands and keep working with the government in supporting the path to recovery. I think the activities are gaining momentum and we are hopeful that 2015 will bring resolution to -- 2016, I'm sorry, will bring resolution to the fiscal matter.

The franchise capital position is strong. It's diversified, and our team has plenty experience executing and achieving progress in this challenging economic environment.

With that said, I'm going to hand the call over to Orlando to discuss the quarter in more detail.

Good morning everyone. Aurelio mentioned the quarter, net income for the quarter was $15 million or $0.07 a share compared with $14.8 million last quarter. But the results do include several significant items that I would like to touch upon now first of all.

The first one was a $7 million pretax gain that resulted from a long-term strategic alliance we entered into with EVERTEC where we sold our merchant contracts portfolio and our POS terminals. On the transaction, we received an additional amount of $3 million that was deferred and will be recognized as income over the 10-year term of the agreement. The agreement does include a revenue share component based on volumes where EVERTEC and FirstBank will share on revenues on both existing contracts and new contracts that we enter into throughout the term.

During the quarter, we also had a $2.2 million expense for a voluntary early retirement program that we expect will result in approximately $2.5 million in expense savings going forward. It was completed by the end of this year 2015.

In addition, there were two items were government related. Obviously, you all have seen that there have been a number of events related to the government this quarter that have increased the level of uncertainty in the market and have affected the value of the bonds. To name a few, the activation of the governor of the throw-back provisions had an effect on the prepaid defaults. Still an ability to produce financial information among other factors that happened in the quarter. As a result, we ended up taking an additional $3 million other than temporary impairment charge on some of the Puerto Rico government securities, mostly DDB, based on our assessment of the default probabilities and the loss severities that are implied from the current market valuations of the bonds.

So far for 2015, we took -- we have taken $15.9 million in OTTI charges on those securities. And as we mentioned before, it's basically DDB and Puerto Rico building, most of it being DDB.

Also in the quarter, we increased our general allowance for loan losses on government exposure by $19.2 million, as Aurelio mentioned. To explain, our general allowance methodology includes several qualitative factors that adjust the historical loss experience based on economic conditions. Some of the factors include for example the Puerto Rico, changes in the Puerto Rico economic indicators, changes in property values, the trends in property values, changes in early delinquency in the Bank, loan concentrations, et cetera, among others we have.

The recent events, given the level of risk associated with DMAS associated with the uncertainty surrounding the next steps that will be required to address the financial situation of the government, we decided to stress the qualitative factors that affect the historical loss rates and government exposure and to assure that in fact all of this risk has been properly captured. The result of this resulted in the pre-provision that you saw.

It's important to mention that this adjustment do not include anything on municipalities. It was driven on general allowance adjustments on general direct and indirect exposures, excluding municipalities.

Overall provision, however, the increase, this increase, was partially offset by we had lower migration to work categories and we have reduced charge-off for the quarter. And also we had a release of an $8 million general reserve on construction loans, given the stabilization trends that landlords have had over the last couple of years.

On the net interest income side, net interest income reached $125.2 million, an increase of $300,000 when compared to the third quarter. The net interest margin, as reported, the GAAP net interest margin was 4.07% million, which is 12 basis points lower than last quarter. This margin comparison was driven by a $405 million increase in the average balance of cash and money market investments basically in anticipation of interest -- rising interest rates and expected government deposit withdrawals.

The $405 million include -- we had a large step off it from a municipal agent at the end of the third quarter related to property tax collection that was going to be temporary. You probably saw a lot of that on the news. The average balance includes $150 million on average is related to those deposits.

The deposits were mostly withdrawn at the end of the fourth quarter but because of the short-term nature, the reinvestment component was small and the impact of this deposit on the margin was approximately 5 basis points.

The second component that affected margin during the quarter, we took $130 million in Federal Home Loan Bank advances. It was for interest rate, which management purposes since we didn't need the liquidity. But in reality, it's a four-year money at a very reasonable funding rate of 1.64% that, at this point, we decided not to reinvest based on where market interest rates are, thus affecting the margin again. This one component also affected the margin by approximately 6 basis points.

If we look at the other components, we see that loan yields for the quarter remained at the same level as last quarter. Any impact was volume related. And we had some improvements in investment interest income since the prepayment levels of investments were lower, affecting the amortization of premiums.

On the funding side, we saw a 1 basis point increase in the cost of core deposits, mostly in time deposit input, and obviously the funding cost increases related to the Fair Home Loan Bank advances that I mentioned.

Also, broker CD costs went up on the interest cost side even though the volumes are lower. The balances are down $171 million from the end of the third quarter but the average cost of the broker CDs increased by 8 basis points based on the market cost of new issuance, cost of the broker CD market itself, but also increasing turns we have done on recent renewals.

Our strategic focus we have mentioned before remain growing non-broker deposits and improving the overall funding mix. And as Aurelio mentioned, non-interest-bearing deposits have grown to 14% of our total deposit base.

Looking at noninterest income, I think that the key components of noninterest income I mentioned, but our noninterest income was $23.2 million, compares with $18.8 million in the third quarter, but that includes the $7 million gain on the sale of the merchant contracts and the $3 million in other than temporary impairment on the government securities. Excluding those, noninterest income we increased about $400,000, showing some improvements in service charges on deposits and mortgage banking revenues.

On the expense side, expenses for the fourth quarter amounted to $96 million, which is $2.7 million higher than last quarter, which was $93.3 million. This amount, however, includes the nonrecurring $2.2 million in expenses related to the voluntary early retirement program. Excluding these items, expenses for the quarter were $93.8 million, an increase of only $500,000. The increase was basically driven by the new 4% sales and use tax applicable to business-to-business transactions that was effective on October 1 and an increase in the IBIC insurance costs related to the component, the earnings component, ratio that considers four quarters of earnings.

Asset quality, Aurelio made some reference to it. It was a stable quarter. The nonperforming continued to show stability, decreasing $7 million to $610 million. Nonperforming loans decreased by $29 million, or 6%, from the third quarter. These decreasing nonperforming includes commercial mortgage loans of $20 million that was transferred to REO as well as $9 million in residential mortgage loans that were transferred.

Important to mention that nonperforming inflows for the quarter were $42 million, a decrease of $8.8 million compared to the $50.8 million we had in the third quarter, showing reductions in residential and commercial. Residential inflows, which have been the largest component of the inflows over the last few quarters, were $20.2 million in the fourth quarter, which is $7 million lower than in the third quarter. And also, as Aurelio mentioned, the inflows to the nonperforming for the year are down $133 million as compared to the year 2014.

OREO balance increased by $22 million. That's a function of $32 million in migrations transferred to OREO, mostly the $20 million commercial facility I mentioned, offset by the sales that were achieved over the quarter.

Also showing improvement is the level of adversely classified commercial and construction loans, which decreased by $48 million to $522 million at the end of December. And part of this was the transfer to REO and part was booth classification on two facilities, which added to $27 million.

Regarding charge-offs, charge-offs for the fourth quarter were $21.9 million, or 95 basis points of average loans, as compared to $23.7 million or annualized 102% for the third quarter. The decrease was mostly for $2 million -- due to a $2 million reduction in consumer loan net charge-off improvement, mostly improvements in the auto portfolio loss experience.

The allowance for loan losses increased to $240 million at the end of the quarter, and the ratio of the allowance went up to 2.6% as compared to 2.46% at the end of September. The allowance ratio to nonperforming also went up to 54.4% as compared to 48.4% last quarter, partly driven by rational provisioning taken on the government exposure. Nonperforming, net carrying amount of nonperforming commercial loans, it's at 57.9%, which is similar to what we had last quarter.

Now we can talk a bit about the year. Aurelio mentioned a couple of things, but I'd like to touch upon some significant components. The net income for the year was $21.3 million. That compares to $392 million in 2014. However, the net income for 2014 includes the $302.9 million impact of the partial reversal of the deferred tax asset valuation allowance, thus affecting comparability.

Pretax income was $27.7 million in 2015 and $91.6 million in 2014. But these numbers are affected by a number of other items in both 2015 and 2014 that do not arise either from normal operations or that we consider are unusual in nature and thus affect the comparability.

For example, the one-time impact of the acquisition of Doral branches, the bulk sale of loans, the sale of the merchant business, voluntary early retirement and so on. So in order to facilitate comparing results, we have are including this chart, which is a non-GAAP free tax calculation showing the impact of all of these unusual items on the different components of net income.

As you can see on the chart, there were $66.1 million in provision charges that are related to the bulk sale of loans and the adjustment to the qualitative factors that have stressed the historical loss experience on government exposure. If we were to exclude these items, the provision for 2015 would have been $3.6 million lower than in 2014.

Same thing in expenses. There are $11.7 million in expenses in 2014 and $2.2 million in 2014 that are not considered for normal operations, as we tell on this slide. That includes conversion costs from the Doral acquisition, interim service and bulk sale expenses, et cetera. If we were to exclude those $9.5 million net effect from the adjustment on both years, expenses for 2015 would be down around $4 million from last year.

On the noninterest income side, the growth would have been $8.8 million when we exclude the unusual items that are also detailed there rather than the $20 million increase that is reflected on the financials because of the large impact of things like the bargain purchase gain on Doral and the merchant contract sales.

Considering all of these adjustments, pretax non-GAAP income would have shown a $3 million improvement from 2014 to 2015 from $98.6 million to $101 million, which for us is an indication of the stability of the franchise day-to-day business. So we wanted to share this with you.

Many of you have asked at times on what we expect on the expense side. Clearly, the largest, more difficult component to estimate has been REO and some of the nonperforming related expenses. But based on recent trends, we believe that, if we exclude REO expenses, our expenses should be around $90 million a quarter. So, we should -- normalizing REO expenses should continue trends similar to the ones we have seen in the last few quarters.

Also, in terms of taxes, we see 2016 broadly tax rates, effective tax rates, are going to be somewhere between 24% and 26%, in that range, depending on components. But it's a good indication for any kind of guidance.

On the capital front, capital ratios continue to show improvement with Q1 increasing to 16.92% and total capital to 20%. Obviously, with the income for the quarter, our ratios improved except for the leverage ratio, which was affected by the fact that our average assets went up resulting from the increased average cash that I mentioned before. Still, the leverage ratio is a strong 12.2% for the quarter.

So, with that, we would open the call for questions.

(Operator Instructions). Alex Twerdahl, Sandler O'Neill.

I just want to go back to the reserve that you took this quarter related to the government exposure. And you kind of went through it, but is that $19.2 million, is that totally related to the four loans that are direct to the government exposure or is it quantitative for all commercial loans to any sort of exposures that might exist out there?

No, this one component was totally associated the direct and indirect loan exposures to the government, excluding municipalities. So, it's not related to the other.

The main thing here is that we feel economic components are considered on the other portfolios but the government specific uncertainty had additional risks that we felt needed to be considered on any kind of qualitative adjustment factors.

I think the indirect, just to clarify, the indirect portion that Orlando commented is what we include in Slide 9, the TDF exposure of $129 million. So it's the four loans that you see on the right side plus the $139 million of TDF.

And the TDF loans, those have special reserves that were associated with them in the third quarter. Is that correct?

And they also have [residential] collateral as some of the other lines of the government have real estate collateral.

Yes, in the third quarter, we put in some reserves which are also general reserves based on loan classifications of the TDF facility. This quarter, we just stress the factors, original amounts considering the risks, the uncertainty risk.

Okay. So the total reserve -- I mean is there a way that we could back into it or can you tell us what the total reserve against your direct and indirect government exposure is? I mean if you just divided that $19 million by the $111.5 million, you'd get like 17%. But is that kind of where the entire reserve for total government direct and indirect exposure is, or is it lower than that?

I think, if we exclude municipalities, it's approaching 20%.

Okay.

The municipalities which have a different methodology because of their cash flows are fine directly.

Okay. But the TDF loans are the only ones that are currently included in adversely classified? Correct?

That's correct.

Plus we have PREPA.

Plus PREPA.

Oh, and PREPA too, okay. And can you just help us think through. It seems like based on some of the headlines that I'm reading and you've kind of alluded to that Congress is working on some sort of a solution for Puerto Rico, whether it's full access to Chapter 9 or if it is some variation of restructuring. Can you just help us think through sort of how you're thinking about your exposures to various indirect, various commercial customers and consumer customers that rely on the government and whose cash flows could potentially be reduced in some sort of a restructuring?

To be honest, some sort of restructuring will mostly impact the investment portfolios on the bonds, okay, more than the other exposure of the loan side because the restructuring is aligned to the bond -- to the $72 million in bonds debt. So, any restructuring, we can put actually a framework, and I think any restructuring is also linked to how, you know, before we do a restructuring, how we make sure that the economy is going to get back on track. So, you know, if we are going to frame -- we have to frame the two together.

My answer is, Alex, restructuring is not bad for the banks because -- in the headlines because, you know, we can frame the potential of earn and losses. The other, it's a small portion of the portfolios compared to the overall balance sheet. But when you look at the economic uncertainty, it's what basically everybody is more concerned that -- and obviously a restructuring will bring better outcome to the economic uncertainty. It would put a more positive future into the economic development of Puerto Rico. So, we have to look at them together.

Yes, restructuring is going to take a hit. There's going to be losses associated. But it's going to bring together the tools for the economic development of Puerto Rico. It's not going to happen by itself.

And then a final question just to that point, if there is some future outlook for Puerto Rico suggesting that the economy should improve dramatically and the pricing for some of these troubled loans that you have on your balance sheet and a possible bulk sale starts to improve. Is that something that you'd considered at this point or is it still totally dependent upon controlling inflows?

Right now, we have increased reserves and we feel we are on the safe side of the equation based on the conditions that we have today. You know, if we see better news on the restructuring. There's really three main points that are common ground for everyone -- health benefits equalization, economic incentives and restructuring. We did restructure and there are different flavors of groups that favors Chapter 9. Other groups favor some other alternative.

But you know, the three main objectives of the efforts with Washington and local politicians is the health industry, the economic incentives, and restructuring. So at the end of the day, if bonds are restructured, then the loans that we have and government pays suppliers that is pending and government pays tax reforms that are pending, then we're going to see a better outcome, a better projection, on the potential losses on the loan portfolios.

Yes, okay. I appreciate the color guys. Thank you.

Brian Klock, Keefe, Bruyette & Woods.

I think, just before I get into questions, just thinking about back in the year all of the hard work you guys did. Obviously, the macro environment is something that was pretty challenging. But thinking about the 170 basis point plus pre-ROA and continued declines in your NPAs and capital ratios that continue to build. So pretty darn good quarter and good year for you guys. So I guess good work for the year.

Thank you Brian. Thank you.

So I guess two questions. A follow-up on the government exposure questions. Can you just remind us, on the TDF, the commercial real estate that is the primary source of payment and the cash flows you're getting there. So, I guess maybe two things. Is there a way to tell us what the loan-to-value you have on those commercial real estate loans? And then was there -- what's the payments that you've received in 2015 from the TDFs?

We can give you the data. I think we put some data in the Q; we put some data in the last Q, and we're going to put some data in the K. I don't know if we have it right away here, but there's partial payments made by the entity and then there is the differences paid by the TDF fund.

We don't have the loan-to-values. And we don't publish the loan-to-values, but these are key properties like at least the convention center hotel is the largest one, right near the convention center. There's also a property in Dorado and properties in the Caribbean Hilton. So these are quality real estate behind them.

And obviously, when we say we are taking a conservative approach, it's also linked to the normal liquidity concerns. And that's why -- but we continue to see the [gruesome] industry on the other hand as the priority, one of the priorities that the governments will continue to support and we'll continue to support because, remember, it's very important to understand that these hotels contribute more to the government coffers in terms of room tax and casino revenues, casino tax, than the portion of the payment that the government supplies back to the TDF. So it's still an excellent business to the government to continue protecting.

Brian, I don't have the number through the end of the year. We'll get that. Obviously, it's going to be included on the K. But through September, we had about $4 million of payments received from TDFs to cover financing on these facilities. And the number on 2014 was about $4.5 million. So, there is -- the $4 million we have received obviously within the last quarter.

Okay, great, great. Thanks for that. And that's a great point really on those hotels. I mean you've got good cash flows on the primary source of payment on those and like you said, the government is getting more revenues than what the TDF payments are being made out on that guarantee. So it's still --

Correct.

Alex Twerdahl

Exactly.

So, I guess, thinking about staying with credits as a follow-up on that, with this, what I think is a prudent reserve build you did in the fourth quarter, you had really good migration trends in the underlying credit, especially on the commercial and even the consumer. So I guess with everything that's going on and the issues related to the macro, maybe you can just kind of highlight again just what you're seeing with the underlying trends and the formation trends in the more higher severity stuff, the commercial and construction. It seems like that migration trend is going in the right direction.

Yes, I think obviously we've been cleaning up. After a 10-year recession cycle, there's been a lot of cleanup in our bank balance sheet. And the very large chunky credits are less now than where we were years ago.

I think the consumer side has been supported by the reduction in oil costs. Early delinquencies looking good. And obviously we've been reuniting with conservative policies for some time now. So I think those components are important to be laid out.

I think the risk of extended uncertainty and liquidity is more -- we monitor it very closely and we have classified some relationships that are dependent, cash flow dependent, on payments from government. We don't call them indirect. We call them cash flow dependent. So when we mention indirect, we don't include those. So, we have those as individual loans analyzed based on their own merits and their individual cash flow and how their receivables are moving or not. So some of them have been already classified.

The government mentioned that they owe $1.8 billion to suppliers, so some of those are probably the ones that we have that we have, that we have already, you know, move the needle in classifications. So we're monitoring that very closely and that is a risk definitely that we look at every month, how those cash flows are improving or not.

One of the areas, for example, was the health industry. You know, the health payments that were due last year have been reduced dramatically. So they have been making payments to suppliers. So that area shows an improvement.

On the other hand, if you look at contractors, mechanical contractors or construction, we see all of those are piling up as they -- regarding the government. So that is a risk.

Obviously, the ability of the government to restructure their objective of the restructuring behind any restructuring is to pay those, to pay that. That is what is going to support the economy getting on track and continuing to move forward.

So that is -- we see -- we don't see -- we see enough activity for continue maintaining the portfolios because we are significantly less number of players as banking institutions, but we don't see today still volume to grow Puerto Rico loan. Obviously our focus on growth is Florida and the Virgin Islands, and we see the opportunities there too. We see Puerto Rico volumes as good enough to sustain our portfolios.

Mortgage was impacted by -- it's been impacted as a business both by regulation and by the loan-to-values in Puerto Rico. So when you look at the overall market contracted to 2015, on the other hand, we are approaching 24% origination market share with the acquisition and the restructuring that we did on the mortgage business.

So for us, we are compensating. If you look at the trend in volumes in the loan origination graph, you'll see that we have sustained in the [2%, 2.30%] per quarter range our mortgage origination business per quarter. So we feel that we can continue with that.

If the industry gets better and the overall macro gets better, then definitely that -- Puerto Rico we estimated being about $2 billion, $2.2 billion last year versus $3.4 billion the year before versus $4.6 billion the year before. So it's been coming down, the overall volume of mortgage. That probably is the most impacted sector on it.

And on the other hand, we're seeing a lot of deals. Investors coming into the island, buying property, buying real estate that they are putting big money into. We participated in some of those last year. And we have a pipeline, active pipeline, in Puerto Rico that we will continue to see and work with those investors in getting properties and getting investment moving.

That's great. Thank you. That's some really good color, Aurelio. I think one of the things you mentioned in there with a lot of those good nuggets was everyone is worried about oil and gas prices. And if there's one area in the US that benefits significantly, it is Puerto Rico economy. So it definitely is a big help for you guys at this point.

Yes, but remember that we don't have public confrontation. So everybody owns a car, one car or two. So they depend a lot on the price of the gas at the pump. It is a subsidy right now.

Yes, perfect. And just my other question is really just on the expenses. Like I said, I think you guys have done a good job on expense control. Even in the quarter with the FDIC insurance premium that went up in the business-to-business tax, you still had a pretty steady control on expenses.

Maybe you could just give us a little color on the early retirement program. I guess maybe talk about how many people actually did take advantage of it? Now, is that all in? Was it something that happens in the fourth quarter at the end so the benefits will be fully reflected into the first quarter and then should we think about the run rate of the $2.5 million cost saves starting in the first quarter of 2016?

We decided to defer the opportunity offer to people with some definitions of years of service and years of age, the opportunity to take an early retirement. We don't have a form of -- we don't have a pension plan. We have a 401(k), but it was general.

The $2.2 million is the impact in the quarter of the amount that we offered those employees in both salaries or benefits, and/or benefits for -- as part of the program. It was not a large chunk of employees. It was about 53 employees. But obviously, because of the tenure, some were higher salary employees.

Non-officers, we did not extend it to executive officers or to any senior vice president of the institution. The $2.5 million I mentioned is based in our estimate about the positions that will be -- we will fill some of those positions, but it's only a small percentage of that. And it should start, most of it should start on the second month of the year.

There are some people that are still in the bank within the first month, and it's going to be spread out. It is going to have its estimated annual savings, so we'll see about 11 months of that. But starting -- yes, definitely starting February.

Great. Thanks for that, Orlando, and thanks for your time guys.

Taylor Brodarick, Guggenheim Securities.

Thank you. Just two for me. I think the first question would be assuming that a more normalized Puerto Rico environment -- I mean your CT-1 ratio obviously about 1,000 basis points above well-capitalized levels. What level do you think you -- could you give sort of more detail around your thinking of what level you'd be more comfortable running the Bank at?

A tough question, Taylor.

Let me answer it. I think there is a framework, Taylor. We have -- obviously DFAST is part of that answer. There is a framework to get to that -- to get quantitatively based on the qualitative factors. And definitely we're going to run it again.

I think if we look at the disclosure of DFAST, there is a cushion that has to be placed and there is -- we do have plenty of capital for that number to be lower than what we have on hand today. But to give you a definitive answer, I would like to look at numbers first.

I mean, keep in mind that we need to -- any bank needs to run their institution most likely at a level that is well-capitalized and have to build in the buffers associated with DFAST that are required, the 2.5% buffers. So those levels.

But what I'm hesitant, Taylor, is to the all of the uncertainty and all of the things going on, obviously the DFAST numbers include that uncertainty.

It wouldn't be responsible to give you numbers at this stage without making a humongous number of assumptions on what's happening in the future, how those macroeconomic variables are going to leave us for unemployment, inflation and so on are going to be affected. But clearly the number is lower than the one we have today.

Right, right. And speaking of DFAST, it looks like the Fed is going to require the CCAR banks to stress their severely adverse scenarios even more this year. I know you can't really telegraph any details of your conversations, but do you feel like your numbers, which are pretty draconian for your DFAST results last year, will materially change given just asset quality remaining fairly stable?

I mean based on current numbers, there is no changes, dramatic changes, on assumptions. It should remain.

Remember those scenarios included very high unemployment numbers that have not materialized and included very high the duration with property values that have not changed significantly from last year. So, I think just considering the parameters that we modeled and the assumptions, employment has remained stable, the employment ratios.

The health price index and CRE index have also remained fairly stable, which are some of the components. And even GDP, retail sales, the intrinsic metrics have remained really stable to last year on that trend. So, we are not approaching any scenarios in terms of near what the DFAST economic scenarios that were modeled.

Okay, great. Thank you for the comments.

(Operator Instructions). Showing no further questions, I'd like to turn the conference back over to Mr. Pelling for any closing remarks.

Thank you, Rocco. Coming up in February, we have the KBW conference in Boca Raton, Florida on Thursday, February 11. And there's also a Sandler O'Neill field trip for Puerto Rico scheduled for February 23 and 24. We look forward to seeing you at these events. We thank you for your interest and your continued support in First BanCorp. At this time, we'll end the call. Thank you.

Thank you all.

And thank you everybody. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.