First BanCorp (FBP) 2016 Q3 法說會逐字稿

Good day and welcome to the First BanCorp third-quarter earnings conference call. (Operator Instructions) Please note this event is being recorded.

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

Thank you, Nicole. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the Company's financial results for the third-quarter 2016.

Joining me today from FBP 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 the important factors described in the Company's latest Securities and Exchange Commission filing. 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 the press release and the DFAST results that we published on Monday, you can access them under the IR section of our website.

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

Thank you, John. Good morning, everyone. Thank you for joining us again to discuss our third-quarter results.

On the call with me is Orlando Burgess, our CFO, who will be discussing the details of the financials. So I am going to give you some highlights first. So please move to slide 5 of the deck.

We are pleased that we posted another positive quarter in earnings, $24.1 million, compared to $22 million in the prior quarter. Importantly, our pretax, preprovision income remained over the $50 million level. It is in line with prior quarters and leading our goal for the quarter. Net interest income has been under pressure, actually for the industry as well as for us, but growth in our performing portfolio is -- loan portfolio should continue to help mitigate that in the quarters to come.

In addition, it is important to highlight that during the quarter, we opportunistically repositioned our balance sheet, which resulted in a pickup in earnings and should continue to help us drive profitability up. As the quality remains challenging in Puerto Rico with higher level of charge-offs this quarter, yet we were able to reduce non-performing assets, and it was a good trend when we experienced a decline in the adverse migration.

Importantly, the key franchise metrics continue to show progress in the right direction: improved efficiency, core deposit growth, deposit mix, and successful growth in loan originations on renewal target for the quarter, up 11% to $898 million, very close to $900 million for the quarter. The highest level since 2014 and we are going to go deeper into this.

Lastly, I want to mention the 2016 DFAST results, which we completed in the second quarter and published yesterday. And the report shows on the remodel (inaudible) which is important to know that we are not (inaudible) nor do we anticipate when the near future our pro forma resulting capital ratio significantly continued to exceed the volatility well capitalized requirements.

I think it is important to highlight that this is a very sophisticated process that will continue to assist us in the capital fund decisions and ensuring the right -- the proper right measures are in place for managing the portfolio risk.

So let's move to slide 5 to do a little bit on the loan portfolio highlights. As I mentioned, we had good activity in our loan portfolio this quarter. We have implemented some growth strategies which we believe are prudent and we have seen the results over the past two quarters. Excluding the charge-offs that we took, our performing loan portfolio increased $32 million in the third quarter.

While we saw these (inaudible) consumer book in Puerto Rico, we also saw the $20 million participation in the commercial portfolio in Puerto Rico to reduce in the borrower concentration risk. On the other hand, (inaudible) business activity drove the growth in our commercial book.

It is important to highlight that during the third quarter, origination volumes increased in all our loan categories -- commercial, consumer, and resi -- and in all our (inaudible) -- Puerto Rico, Florida and the USVI.

I have to say that origination pipeline for the remainder of 2016 looks good, so we feel comfortable about sustaining good volumes.

We will continue to work hard to sustain the portfolio at current levels or above, as I mentioned before. It is our goal to stay closer to the [$9] billion, and we are really hopeful that the (inaudible) provides the opportunity to do that.

Let's move to slide 7 to go over the deposits. Deposits were relatively flat, but I think the metrics that are behind it is continuing to move in the right path. Core deposits grew $45 million in Puerto Rico, and as I mentioned before, we continue to execute cost optimization strategies which actually show a decline in Florida and the VI.

Importantly, we further reduce our reliance on broker CDs by a quarter billion -- $251 million this quarter, and now we reduced from 20% to 17% our broker deposits.

So let's move to slide 8 to cover some government highlights. We always like to cover the government exposure. This quarter it declined slightly by [$11 million]. As we said before, we continue to feel comfortable with the exposure of municipalities, which is a large portion here. This is related to [Premasa]. We are definitely pleased with the initial progress during the quarter on the Premasa front as everybody is aware (inaudible) efforts are taking place on one side by the economic passports that commenced their activities during July. And, on the other side, by the recently appointed board that commenced in September.

We don't expect much to happen from now through year-end. It is mainly to anticipate results, but we do anticipate that we will all have more clear and transparent financial data on Puerto Rico government situation in the near future.

We also continue to monitor progress on the (inaudible) of restructuring negotiations for Puerto Rico debt. And, in parallel, we are also doing the groundwork on our TDF (inaudible) piece to protect our rights on any potential legal scenarios that may arise.

So now I am going to hand the call to Orlando to discuss in details all the financials of the quarter. Thank you.

Good morning, everyone. As Aurelio mentioned, we posted a net income of $24.1 million or $0.11 a share for the quarter. That compared to approximately $22 million or $0.10 a share in the prior quarter.

Assets as of September 30th were approximately $12.1 million, which is down $433 million from the June levels, mostly due to those balance sheet (inaudible) that Aurelio mentioned.

This quarter, we used our $300 million of our cash and money market to repay a $100 million repo that matured in July. That repo had a cost of 2.5%.

We also repaid $100 million in bank advances that matured in September. This one had a cost of about 93 basis points. And we have continued to reduce our level of the broker city portfolio. This quarter we had (inaudible) million of maturing broker CDs with an all-in cost of 94 basis points.

We only issued $113 million with an all-in cost of $112 million, which is slightly higher, and I will talk a little about that in a couple of pages.

In addition this quarter, we decided to sell approximately $199 million of US Agency MBS that carried a yield of around [2.36%] because of the large level of repayment that these securities have experienced over the last few months. The sale resulted in after-tax gain of approximately $5.9 million.

The provision for the quarter was $21.5 million, just a slightly higher than the $21 million last quarter. The quarter -- in the quarter, we had an increase of $5.4 million in the provision for commercial loans. Not being in the (inaudible) large, but there were some changes on specific reserves and some of the nonperforming loans and some increases in the economic reserve for government exposures that we have.

Also, the provision for consumer loans increased by $1.6 million, which is mostly bolts on small loans like they buy a couple of pages on the loans portfolio that we had to adjust values.

This was offset by a reduction of $6.5 million in deprivation for residential. You might recall last quarter discussion, we mentioned that residential provision included an adjustment for the impact of evaluation to the Puerto Rico Home Price Index that was done by the Federal Housing Finance Agency. And also, we had a change in the valuation of (inaudible) loans that was booked last quarter.

The other large component you probably noticed at a higher level of taxes under the quarter. This was made more complicated under GAAP rules. We are required to make the best estimate of the expected effective tax rate to be applicable to the full year and use it for each quarterly tax calculation.

Obviously, this calculation is revised each quarter based on the updated results that we have or we expect for the year. But, in our case, it becomes a little bit more complicated because of the partial evaluation of the [ETA] that we have in First Bank and affects some of the items.

This quarter, we had some changes on the expected reversal of temporary differences that affect the calculation of the amount of NOLs that can be used to offset taxable income for 2016, and these NOLs are the ones that are subject to partial valuation allowance.

In part, this difference has to do with the charge-offs. As a result, the effective tax rate increase for the quarter and we had to book a retroactive effect as part of the calculation. This retroactive impact to the results of the first couple of quarters was $1.2 million, which is almost equally (inaudible) per quarter for each of the two quarters.

In the press release, we also disclosed a non-GAAP adjusted result, which excluding the after-tax impact on the gain on sale and some severance payments for job discontinuance we had in the quarter. So the adjusted number was $18.3 million. We were to adjust for the $1.2 million, which is also a non-GAAP measure, the adjusted number would have been $19.5 million, which compares to a non-GAAP of about $21.4 million last quarter and adjusted (inaudible) also.

If we look at some of the other components, our net interest income is down $2 million for the quarter. The margin for the quarter was 4.06%, which is 5 basis points higher than last quarter, and the expansion on the margin was primarily driven by the use of a cash balance to repay the maturing broker CDs on the repos, as well as the full quarter impact of the reversal purchase agreement we enter into in the second quarter.

If we look at the components of net interest income, interest income on investments securities came down by $1.7 million, and $1.1 million of that relates to a higher premium amortization that we had on a US agency MBS resulting from the higher level of prepayments, which was a significant impact. Also, we had a $400,000 decrease because of the discontinuance of accrual of interest on the Puerto Rico government (inaudible), specifically GDB and Puerto Rico Building Authority. This response replaced the nonperforming status in the quarter.

As you know, the government has been making the interest payments, even though we have taken OTTI adjustments on the securities in the past. But for the month of August, GDB did not execute the payment -- the interest payment. The Puerto Rico Building Authority payment that was due in July was done, but the one in September was only -- I mean, October, was only done partially. So we ended up moving all those securities -- those two securities to nonperforming.

On the loan side, we had a reduction of $1.1 million in interest income, which is a function of 8 basis point decrease in the average yields. But, basically, credit card reversals and some deferred fees we recognized last quarter on some prepayments of loans and a $49.1 million decrease in the average balance of loans. Aurelio mentioned that commercial loans did come up in the quarter, and it is an issue of planning, too, but we saw declines on the consumer side as the originations are not yet replacing the repayments.

On the other hand, in the quarter, the reallocation of a cash on money market to reduce the broker CDs on the repos resulted in an improvement of $900,000 in interest income. This is made up of $1.5 million decrease in interest expense on the broker CDs and our repos, but offset by the $600,000 reduction on the money market interest income that we had since those monies were used to repay the repos.

On the (inaudible) interest-bearing deposits remain basically at the same level, increasing 1 basis point, and overall cost of deposits remained at the same level at 62 basis points.

Average broker CDs -- and I would like to point out that Aurelio mentioned that broker CDs came down by $250 million. On average, we held them at $307 million because of the reductions we also had that quarter. But the average cost of the broker CD was up 4 basis points, based on market cost of the new issuance and also some increases in the average term of used CDs. To the extent possible, we have been extending the term of broker CDs for purchase of interest rate management purpose.

All interest-bearing liability, the costs came down by about 1 basis point. Important to mention that one of the main types of repayment, one of the reasons for the sale of securities is that it is (inaudible) flexibility of renewing only part of $300 million in repos. Part or none, depending on the circumstances. $300 million in repos that mature in the fourth quarter. In October, we had $100 million repo at a possible [340] that matures, and we had in November -- the beginning of November, we have [200] more that mature at a cost of [394]. So the funds came from the sale will be used to eliminate some of these high cost repos, improving future net interest income from (inaudible) the cost of funds.

Other income was up this quarter. Again, it was $26 million, in large part due to the gain on the sale of the securities -- that $6.1 million. On a non-GAAP basis, if we exclude that gain, the adjusted noninterest income was $20.1 million for the first quarter, which was in an increase of $300,000 from the second quarter, the levels of $19.8 million in the second quarter.

$300,000 was $600,000 increasing revenues on mortgage banking. Basically higher level of sales of performing paper originated and a $200,000 increase in servicing from the (inaudible) accounts, mainly corporate cash management fees, which was offset by basically a gain we had on the second quarter on sales of some real estate properties in the Virgin Islands.

On the expense side, we have done, we have continued to identify opportunities where we can further reduce (inaudible) interest expenses. The obvious outliers are always the OREO on credit-related expenses that create a variability on results because of the nature of our NPA book. But, for the quarter, we did achieve a $1.2 million reduction in expenses. This was $1.3 million of reduction that was credit-related expenses, $700,000 in OREO primarily related to lower write-downs to the value of OREO properties, and we have $600,000 we are churning in expenses related to total loan resolution and collection efforts, as well as operations. That is mostly a provisional piece related to those.

The FDIC premium was down $1.4 million in the quarter, which is basically a (inaudible) reduction (inaudible) rates became effective July 1, as well as the impact of reduced levels to broker CDs, an average asset for the quarter. And we also had some reductions in business promotion expenses, which is advertising, and it is timing basically of some of the expense of the year marketing campaign.

Offsetting some of these reductions was an increase in occupancy. Basically, electricity on some rental expenses. And then we have a $600,000 increase in employee compensation and benefits, which include a $300,000 severance payment for some (inaudible) continuance we did in the quarter, and there were some increases -- some additional $300,000 increase in incentive-based compensation.

Also, in the quarter, we posted a provision for possible losses of funded loan commitments for unused facilities and letters of credit that are classified that we posted in our $1.1 million charge.

We continue to work with the expenses, and we feel that we have been achieving a lot of the plans, and we expect to continue to do so.

On nonperforming assets, nonperforming decreased $12.2 million to $744 million as of September compared to $756 million. Nonperforming loans, however, came down by $31.5 million to $606 million.

The decrease in nonperforming loans was basically related to more large charge-offs of commercial loans (inaudible) [22] and collections that have been achieved in some loans where our nonperforming and interest has been applied to principal.

The impact in the quarter was, I mentioned before, that we discontinued income recognition of the GDB and Puerto Rico Public Building Authority bonds. The entity has defaulted on their interest payment, and the carrying amount net of the market -- other comprehensive income market valuation, which is $20 million, was moved to nonperforming status.

You might recall that these bonds were previously classified in the second quarter of 2015 as adversely classified assets. The inflows to nonperforming for the quarter were $50 million, which is an increase of $27.6 million compared to last quarter. You might recall that in second quarter we had an inflow of $35 million commercial relationship.

The commercial and construction inflow decreased by $34 million in the quarter, and and this was offset by some increases of $6 million in the residential portfolio.

(inaudible) classified commercial and construction loans held for investment decreased by $20.1 million to $546.7 million as of September.

OREO increased slightly, $300,000, which is a mix of the additions of -- to the OREO properties of [$15] million. And every option of $12 million in -- due to sales, and there were $3 million in fair value adjustments in the quarter.

Charge-offs for the quarter were $41 million, (inaudible) of assets, which compares to $24 million in the second quarter, and this increase was mainly related to $19 million increase in commercial and construction charge-offs.

I also mentioned the four large relationship total in $22 million. Of that amount, $18.3 million was already -- was going against the tonnage reserves in prior quarters. Included in this amount are almost $14 million -- $13.7 million (technical difficulty) two of the PDF facilities. This was (technical difficulty) we did not anticipate taking charge-offs in the year, but the fact that the government has not been making payments on the facilities, in essence, makes them collateral dependent loans. And, based on collateral dependent loans, we have to take care of the charge-offs on these two facilities. The third facilities has been kept current by the borrower. Therefore, no need to move that facility.

The consumer charge-offs were slightly higher, $500,000 in the quarter telated to the (inaudible) I mentioned.

On the other hand, we had a $3.2 million increase in residential mortgage loan charge-offs, which is an impact in the prior quarter of (inaudible) for loans evaluated for impairment based on delinquency and loan-to-value levels. So, in that sense, that summarizes the charge-off of allowance ratios to loans held for investment decreased to 2.42% because of, again, the charge-offs taking on (technical difficulty) reserves, which is 2.42% compares to 2.64% prior quarter.

On the capital front, the ratios continue to grow as a result of the gains. As you saw in the press release, our total capital is now at 21.3%, and our Tier 1 capital is 17.6%. Our leverage is basically at 13%. So all ratios continue to be high, and as Aurelio mentioned, the impact results that I show that we have adequate capital to sustain an adverse scenario.

The other thing I would like to mention is that if you recall that last quarter, we brought current the interest payments on the drops. We continue and we make the payments on the drops this quarter.

Now I would like to open the call to questions.

(Operator Instructions) Brett Rabatin, Piper Jaffray.

Quite a few things to go over. Let me just, first, ask on the GDB bonds, $35.6 million, and I think you have got them marked at $19.5 million. How do you come up with that valuation, and how do we think about additional write-downs in that? Maybe can you go over also the TDF write-downs in the quarter, your thoughts on that position going forward as well?

The GDB bonds are, Brett, just to clarify, it is $40 million of UPB, and they are being carried around $22 million. Those OTTI adjustments we are taking in 2015 and some earlier this year.

For the analysis, we consider we assumed 100% (inaudible). As you know, we assumed that a few months ago -- a few quarters ago, and the valuation is done using some estimated recovery information between rates, which comes out from some reports that Moody's has on the Puerto Rico market. Moody's updates that not every quarter, but periodically when I guess they feel that things have changed.

So far, if you look at the value of the funds, remain within a range of $0.20 to $.25 per quarter. So we haven't seen any significant change on the market on those funds. So we didn't require any kind of valuation -- additional valuation taken in the quarter. It would be difficult for me to tell you that there wouldn't be any further evaluation in the future. Hopefully, there is a settlement on the agreement. If you look at what the GDB had originally put on the table, it would be very close to what we are carrying the bonds in our books.

So we don't foresee that for now. It depends a bit on what happens in all the negotiations.

So, again, we feel comfortable with today's facts on the valuation that we have on the bonds since we don't have the extension to sell the bonds at this point.

On the PDF -- going to your question on the PDF, the issue with the PDF is part of this are hotels. Part of the valuation is related to real estate, which is the value of the hotels and part was based on the PDF guarantee.

Or GDB.

Or GDB guarantee, which is in some cases applies. So we didn't need to change anything on the provision. The estimates we had on values were the same this quarter we had last quarter. But the big difference is that, since we don't see where it is going to end up at this point, the GDB -- the CDF component, we needed to treat the loans as collateral dependent, as I mentioned. And under collateral dependence rules, any kind of reserves that you have should be charged off when you feel that there is a possibility you would correct on the full value. So we ended up taking the charge-offs for the amounts we had reserved on those two facilities.

The third facility is current so we didn't have to -- we didn't move it to nonperforming. No, we had to take that component. I'm sorry. We didn't take any charge-offs. We (technical difficulty) nonperforming, but we didn't have to take any charge-offs because of the current status of the facilities.

Okay. And then, just to thinking about capital, you are over 21% total risk based. Can you remind me what you have to catch-up and preferred, and then any thoughts on potentially using that capital as we go through the next year for share repurchases, what is the climate for that?

First of all, the preferred has $36 million outstanding on preferred, which bringing them current would cost (multiple speakers).

(multiple speakers). I mean, those are noncumulative shares, so technically we don't owe anything. If we were to execute some capital actions on -- in general, those securities would require that 12-month payment be made on those or they be -- over that 12 months, they would (inaudible). The (inaudible) that those dividends would be $2.7 million to put them current and (inaudible) the 12-month timeframe.

So regarding capital actions, I think we have to think about that as a macro -- as the macro evolves. We continue to produce capital and improve the position and include (inaudible) show, but to be honest, it is going to depend on how the macro continues to evolve when we see Puerto Rico (inaudible) information, when we see more clarity on the fiscal situation, and probably once we see the initial actions on the debt settlement from the Puerto Rico government. So I will say those are probably key milestones to make the regulatory environment feel the macro is actually (technical difficulty) liquidity.

Okay. And then maybe one last one and I will step back. Just thinking about the outlook, are you concerned austerity potentially might have an impact in Puerto Rico, and does that affect your thoughts on loan growth from here and Florida maybe make up the difference or any thoughts on potentially having a more positive tenor on either low growth or NII? I know you are doing a great job with the funding side on part of that equation.

Well, I have to tell you with information that we have on hand, with the (inaudible) that we have at hand, we feel pretty good about the activity that is going out there. The government has a difficult situation, and everybody is trying to understand how deep is the hole on liquidity and cash flow. But, on the other hand, we continue to see investors going in, the deals happening, properties being acquired and business being acquired by new investors. So we are active in the market, the consumer behaviors are stable, and we have taken down the consumer portfolio as a strategy because we are being more conservative on risk. We see some opportunities on the conforming mortgage business, and we have taken and we are making the fees. So we look at Puerto Rico as having 20% market share and all that having 50% market share with other competitors. But when we look at the 20% market share, we still have room to grow in terms of reaching that 20% market share.

And then, as you mentioned, coupled with Florida, probably that continues to be excellent business activity, and we are fully staffed to execute, and we are achieving our goals of origination across the region.

So I have to tell you, yes, there is risk in the market on the (inaudible) normal liquidity. Obviously, that is why it is so important to monitor both the fiscal board and the economy task force recommendations because those are the ones who could generate any additional growth. But we have significant number of businesses, and we still have 3.4 million people living in Puerto Rico and transacting every day.

Okay. Appreciate all the color. Thank you.

Alex Twerdahl, Sandler O'Neill.

First off, Aurelio, you mentioned in your prepared remarks that you are implementing some new growth strategies in the loan portfolio. I was wondering if you could elaborate a little bit on what those might be, if they are specifically in Florida, or if they are also in Puerto Rico, and if there has been impact from those already, or is that something that is purely in the future?

Well, I think, we have the results. Obviously I would not tell my competitors my strategies. But I can (inaudible) outward, it is more a vocal sales effort, reaching from the business of (inaudible) all channels, and it really applies to all the products of the regions. It is not just Puerto Rico or Florida or (inaudible). So, from that perspective, it is really more focus on granular approach to executing sales or executing loan origination piece of the equation.

Okay. And, Orlando, you gave some good color on what was going on in the tax rate, but can you just boil it down for us and tell us what the tax rate should be in the fourth quarter and then, also, for 2017, based on your current projections?

The tax rate -- if you look at the year-to-date effective tax rate, the number and the complexity of terms with all this valuation allowance on the (inaudible) and the fact that each company -- each of the subs have their own tax structure because they are independent of each other.

For 2016, if you take the year-to-date number, which should be in that 20.5%, 25.5% more or less range, it is a good estimate of what we think at this point it is going to be the effective tax rate for the year.

This year, we need to have a couple of things that are not necessarily typical, like, for example, the cancellation of the repurchase of some of the (inaudible) at the beginning of the year. But that enters the holding company, which has limited revenue, so it offsets some of the revenues that the holding company had so probably some benefits.

We obviously had this gain on sale, which part of it is in the international banking entity, which has a different tax status. So, at this point, I would say that 2017 is probably going to be in that range of 26% to 30%.

26% to 30%. Okay.

Yes. I need to get all the updated numbers because, again, depending on how much you use some of the items that have partial evaluation of EPAs could change a bit the rates up or down, and that is what complicates a bit the calculation from quarter to quarter. Once you're up to the third quarter of the year, you more or less know what is going to happen. So it is easier, but going forward, 12 months, it is a little bit more complicated.

Okay. Got it. And then, can you share with us what early-stage delinquencies were at the end of September?

Oh, yes. Sorry. I forgot to mention that. Early-stage delinquencies were up in September versus June by $41 million.

Basically, it was two cases -- it was all in the commercial side with two cases that we have with what we call technical delinquencies. Those two cases matured or expired facilities and had to be renewed. They should have been renewed by September, but (inaudible) completing it with the customers has taken longer. And, therefore, technically, they are past due on the principle side. Both are carrying out the payments. One is going to close this week. The other one, I am still trying to get a date of when it is going to close by (inaudible). But those were the two facilities that changed the number on. The other components were basically the same as last quarter.

Okay. And then, just finally, can you give us expense run rate expectations going forward?

We continue to think it is going to be below [90]. The variability of the credit related affects a bit the number. If you take that one out, it is -- I think the run rate today is pretty consistent with what we expect for next quarter taking out the OREO. And OREO, we are hoping to stay at similar levels we had the last two quarters.

Okay. Great. Thank you very much for taking my questions.

Joe Gladue, Merion Capital Group.

Let me just follow up on the expense question a little bit in a little more detail. You mentioned there were some severance costs in the third quarter. I'm just wondering if there is some expense savings associated with that.

Well, yes. The severance payment was $300,000, and the positions -- there were not many positions. It was related to some specific positions, and those positions are not being replaced. So, clearly, there are going to be some savings going forward on the cost of those positions. Part of the savings we already saw on the third quarter because this was done like two-thirds of the -- like at the end of our others. So we saw part of it, but clearly it was only three positions that we eliminated, so.

And, actually, I think my other question has been answered. Thanks.

Brian Klock, KBW.

So I jumped on late, so I apologize if you guys have already addressed this, but I noticed that -- or it didn't seem like the PREPA fuel line has been moved into held for sale or anything like that. So I was just wondering, with what your peers have done with their PREPA lines, wondering what your thoughts are with what your plans are with that relationship?

Well, we continue to receive interest payments, and we continue to apply those to principal, the most recent one in October early.

We continue to monitor the progress on the RSA. The RSA expired or is (inaudible), what we do for (inaudible) in December, and it doesn't close by December. We continue to feel optimistic that the deal will move through the challenges that are presented. PREPA is pushing for it, and it is normally (inaudible) the PREPA restructuring, but it is a very good step towards making PREPA a better entity.

So for now, it is our position that we will continue to receive monetary (inaudible) and apply the payments to principal. And hopefully, we see it closing by the first quarter at least.

Yes, we haven't had any intention to sell it. That is why we haven't moved any.

Got it. And I guess if that goes well on the RSA, then there is a potential, then, that that can be returned to accrual status, what maybe mid to second half of next year?

Yes. It means if the (inaudible) closes and they chose that they are going to continue making the payments, according to the agreed upon terms, once you have the general rule, once you have gone through the first six months of performance and there is no indication that something has changed in the business, definitely we could start moving it to number two performing.

Okay. And, again, I apologize if you guys addressed this already. I noticed that you did do some de-risking of the balance sheet in the quarter. But it is looking at the migration into NPLs, a pretty meaningful improvement on the commercial mortgage side in the quarter and then, overall, much lower with C&I in both C&I and commercial real estate inflows being lower. So do you think you are seeing some more stabilization in the commercial credits then in Puerto Rico, despite, like you said, all the negative headlines we read about the economy?

Well, you know, there is obviously some stabilization, but remember, we still have some chunky credits in our classified book that are on the social (inaudible). So I think we mentioned this before. Every quarter we continue to monitor, to reassess. And obviously, we see positives in some of the activity that we are seeing, but we have to monitor it closely, any government dependence that could impact any ripple effect that could impact any of those borrowers (inaudible) substandard integrity. We charge obviously the ones that could move to (inaudible) nonperforming. So far, so good.

Well, thanks for taking your time.

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to John Pelling for any closing remarks.

Thank you, Nicole. Thank you for your interest in First BanCorp. During the fourth quarter, we have a few conferences: Bank of America Merrill Lynch Conference on New York on November 17, we will be attending the Sandler O'Neill conference in April in Naples on November 17, and then there is the KBW investor field trip to Puerto Rico December 12 and 13. So we look forward to seeing you then, and thank you for your interest. This will conclude the call.

Thank you, all.

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