Popular, Inc. (BPOP) Q4 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Popular, INC. Fourth Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Brett Scheiner, Investor Relations Officer. Please go ahead.

Good morning and thank you for joining us on today's call. Today I am joined by our CEO, Ignacio Alvarez, our CFO Carlos Vazquez and our CRO, Lidio Soriano. They will review our fourth quarter and full year 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'll now turn the call over to Ignacio Alvarez.

Good morning and thank you for joining the call. As all of you know, in September, Puerto Rico was impacted by two major hurricanes. While Irma caused significant damage to the Virgin Islands and interrupted our business activity for a short time in Florida and Puerto Rico, Maria's impact on Puerto Rico was extensive. Although Puerto Rico have made meaningful progress in its recovery efforts, we are still experiencing challenges in the restoration of electric power. Power generation is currently at approximately 85% of normal production, up from 30% at the end of October, now reaching approximately 67% of all customers. According to the Army Corp engineers latest estimate, substantially all of Puerto Rico should have electricity restores by the end of February. While the restoration of power generation has been slow, our operations and several measures of economic activity have returned close to pre-storm levels. Regarding Popular’s operations, currently 157 out of a 168 of our Puerto Rico branches are open and 541 out of 635 of our ATMs are operating throughout the entire Island. These metrics represents significant progress from the weeks nearly powering the storm. Consumer activity has picked up and in some cases, it’s close to pre-hurricane levels. Debit and credit card activity after the storm was severely impacted by power and telecom service interruptions. However, there’s been significant progress since then. For the month of December, our clients’ credit and debit card transaction activity exceeded December 2016 levels. Consumer loan origination is currently approximately 80% of 2017 pre-hurricane levels. The trends are encouraging but currently managed some sectors like auto and personal loan have recovered faster than others such as mortgage. On the commercial side, we have seen higher demand from financing from clients, they are taking advantage of opportunities that a reason as a result of hurricane. We expect additional lending opportunities to come in sectors such as construction. Despite the interruption to the operation of many business on the Island and was only down 3% in November compared to August. With much of the client in the hospitality sector, jobs we expect to return once larger tourist hotels we open later in the year. The pace of economic recovery will be heavily dependent on the speed of the remaining power restoration and the magnitude in timing of funds flowing into Puerto Rico from federal agencies and insurance companies. These funds which are estimated to exceed $25 billion are likely to have similar impact on the economy. The Island has not yet received the vast majority of expected insurance payments and U.S. Federal release bond. Insurance companies have begun to make advances to our clients but the pace has been slowed due to the massive volume of clients. Regarding federal funds, more than $1.4 billion have been awarded in emergency, relief assistance to individuals, public corporations and municipalities. In additional, the U.S. Congress approved a relief package that includes up to $4.5 billion in loans to improve Puerto Rico’s government’s liquidity position. However these sponsors been delayed pending more clarity on the government’s cash balances. There have been much discussion of the population on the Island due to the increase in our migration after the hurricane. There is no doubt that the trend that we have been observing in recent years have accelerate since hurricane. That been said some of the members have been published appear to us to be overstated. At this point, it’s not clear how of those have left the Island will eventually return at the power and economic situation continue to stabilize. Since the storm, we have had approximately 80 popular employees leave the Island or about 1% of our local workforce. Despite the impact of the hurricanes and the declining population, deposits and customer account were up for the fourth quarter. Looking beyond the immediate impact and the recovery process, the Island’s longer term economic prospects will depend on the decisions regarding Puerto Rico’s rebuilding. The Island was facing structural problems which have been in years and we now have a unique opportunity to tackle these problems. Not to go back to where we were but to make important structural changes in areas such as energy, housing, health and education. Now let me address the highlights of 2017. Please turn to Slide 2. While much of a discussion of 2017, naturally centers on the impact in hurricane, the year also included important accomplishment. We grew commercial loans at our U.S. business by 16%, increased our total despite base by 17%, and achieved a slightly kind in deposit cost despite rising rates. On the capital front, we also repurchased 75 million of our common stock and increased our quarterly common dividend by $0.10 per share. For the full year 2017, we reported net income of $108 million, which includes the effect of $168 million expense related to the impact of the U.S. tax reform on our U.S. base DTA. Adjusted net income from continuing operations was $276 million, down from the prior year’s $258 mostly due to both the impact of the hurricanes and $64 million in provision expense related to our U.S. taxy portfolio. Credit quality metrics include the effects of hurricane related relief measures for our customers. We have offered a more term on consumer, residential and commercial loans and wave late payment fee. Nearly all these payments ended during the quarter but to have an impact on both full year and fourth quarter in credit metrics. Total non-performing including covered loans of $743 million were down from $774 million at year end 2016. Non-covered non-performing loans decreased slightly to $551 million. Non-performing loans were 2.3% of non-covered loans compared to 2.5% last year. Lidio will explain these results later in the call. Our capital levels remained strong with year Tier 1 capital and Tier 1 common ratios at 16.3%. Please turn to Slide 3 to touch up on fourth quarter highlights. In the fourth quarter, Popular reported a net loss of $1.2 million including the effects of the $168 million tax adjustment. Adjusted net income was $66 million compared to last quarter’s reported net income of $21 million. Tangible book value per share was $43.02, down from $44.79 last quarter. In terms of business activity, we continue experienced strong commercial loan production on our U.S. business and we also saw improved commercial loan production in Puerto Rico. Now please turn to Slide 4, as Carlos discussion our financial results in further detail.

Thank you, Ignacio, and good morning. Slide 4 presents our financial results for the fourth quarter. Additional information is provided on Slide 5, 6 and the appendix. Today’s earnings press release detailed variances from the third quarter driven by higher net interest income and a lower loan loss provision, offset by other captures effected by the hurricane including lower in non-interest income and higher operating expenses. Hurricane Maria negatively affected many parts of our business, including credit and debit cards processing income, ATM fees and the pace of mortgage originations. Net interest income for the fourth quarter was $387 million, up $9 million from the third quarter on higher loan volume as well as higher volumes and rates on investments. Our net interest margin was 3.9%, down from 3.96% last quarter. The reduction is mostly due to asset mix, as balances in our lower yielding investment portfolio. Our overall asset yields were steady, although in this quarter, we experienced some variation due to the effect of payment moratoriums and fee waivers in Puerto Rico. Our cost of deposits dropped in the fourth quarter. The average yield of our $1.7 billion Westernbank loan portfolio increased to 8.59% from 8.5% last quarter. Overtime, we expect these yields decline as a result of repayments and loan resolutions. The natural runoff of this portfolio has slowed considerably in recent quarters. In the fourth quarter, the slower runoff was aided by the payment moratorium offered to clients. The cost of our interest bearing deposits was down 2 basis points to 54 basis points on the lower cost of deposition across products Puerto Rico. This was offset slightly by higher yields on money market deposits in the U.S. driven by continued organic commercial loan growth. In our U.S. operations, the commercial portfolio grew 4% in the fourth quarter and we continue to see a strong pipeline. For 2018, we anticipate slight growth in overall loan balances with U.S. grows more than compensation for Westernbank runoff. Loan balances in Puerto Rico are expected to remain relatively flat, but we are encouraged by the rebound in credit demand that we have seen in November and December. We will continue to pursue selective loan portfolio purchases on the Island, with attractive opportunities become available. For the fourth quarter, non-interest income excluding FDIC loss-share activity, decreased by $21 million, mostly due to the effect of Hurricane Maria on fees, and the write-down of our MSR. FDIC loss-share expense decreased $7 million as a result of the quarterly evaluation of the FDIC true-up liability. Our Puerto Rico mortgage business originated $98 million of loans in the fourth quarter, down from $126 million in the third quarter reflecting a significant impact to originations from hurricanes Maria. Despite this drop in production, we have seen origination grow each month since October, we more than half of this quarter’s recognition happening during the month of December. Total operating expenses for the quarter were $322 million, up $5 million on the impacts from the storm including occupancy expense and business promotion. We also saw higher professional fees, as many activities and projects were delayed into the fourth quarter. We expect Hurricane Maria to continue to have an impact on our revenues in 2018, particularly in some income lines, but on a smaller magnitude that in the last two quarters. The hurricane’s effects on revenues for the fourth quarter was a decline of approximately 20 million. Storm related expenses in the fourth quarter were 7 million. While responding to the many hurricane related challenges, Popular continues to invest in our future. Projects such as a new online lending platform and there are E-LOAN brand, and wide level credit card offering in the U.S. mainland are expected to diversify our origination channels and contribute to the company’s profitability overtime, though these initiatives will have a larger effect on expense in 2018. Both of these initiatives have been in the works for couple of years but only now becoming visible in our financial results. For the full year 2018, we expect quarterly operating expenses to average 228 million, higher than our recovering run rate, due to the investment in these growth initiatives as well as other efforts such as strengthening the bank’s cyber security, continued compliance of regulatory investments and the implementation of [indiscernible]. For the fourth quarter, we’ve recorded 168 million tax expense due to the impact of the U.S. tax reform on our U.S. based DTA. For 2018, we expect our tax rate to be between 21% and 24% incorporating the effects of U.S. tax reform. Please remember that the U.S. tax reform only effects Popular’s U.S. based income. Please turn to Slide 7. 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 Common Equity Tier 1 ratio was 16.3%, down 33 basis points, reflecting our adjusted operating earnings, offset by the payment of our quarterly common stock dividend and an increase in risk weighted assets. The write-down of our U.S. DTA had no impact on our regulatory capital position or the related ratios. Since Basel 11 [ph] limitations, most of our U.S. based DTA was already excluded from regulatory capitals. Popular’s tangible book value per share dropped by only $0.10 the past year to 43.02, despite to our U.S. DTA and the effect of the worst hurricane in nearly century. These strong capital results are testament to the resiliency of our operations and the strength of our business model. The strong results, our Dodd-Frank Stress Test were made public in October. Timing of any announcement related to Popular’s actions would likely come in the middle of the year. We will continue to pursue our target of a double-digit return on tangible equity while keeping capital levels that are appropriate for Popular's risk profile. With that, I turn the call over to Lidio.

Thank you Carlos and good morning. As discussed by Ignacio and Carlos, Hurricanes Maria and Irma have had a significant impact on our Puerto Rico operations, including the reported credit quality metrics and our assessment of the allowance for loan losses. Almost every credit quality metric for Puerto Rico has been effected by the moratorium granted to consumer and commercial borrowers for Hurricane Maria. Puerto Rico credit metrics reflect lower NPLs, higher inflows to NPL losses and higher charge-offs. In the U.S., we recorded a provision for loan losses of $10 million and chart-off $32 million related to our taxi medallion portfolio, impacting the U.S. credit metrics for the quarter. Excluding the taxi medallion portfolio, which we acquired in the Doral transaction, impacting the U.S. credit metrics for the quarter. Excluding the taxi medallion portfolio, which we acquired in the Doral transaction, asset quality in the U.S. remains strong. Please turn to slide number eight to begin the discussion. Our current outstanding direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $484 million, increasing by $2 million from the prior quarter, mainly driven by line of credit utilization. At the end of the quarter, we have no direct exposure to the Puerto Rico central government or its public corporations. Our municipality exposure consists mainly of senior priority loans to a select group of municipalities whose revenues are largely independent of the central government. In most cases, the good faith credit and unlimited taxing power of each municipalities is pledged to the repayments of the loans. Our top exposure are to four large municipalities in the San Juan metro area, Carolina, where the airport and several major tourist hotels are located, San Juan, the capital of Puerto Rico, Guaynabo, the municipality with the highest per capita income and Bayamon, the second most populous municipalities. These municipalities comprised 74% of our total exposure. Our municipal borrowers typically make two payments annually. Interest on principal on July 1 and interest on January 1. The January 2018 payments were received on schedule. In the interim period, prior to the next payment, all property taxes for mortgaged residential and commercial properties are collected in escrow by the servicing bank and remitted to a central collection agent for the municipalities. We also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee, similar to associate programs in the U.S. Turning to Slide number 9, to discuss credit metrics for the quarter. As discussed in the introduction, almost every credit quality metric for Puerto Rico has been affected by the moratorium post Hurricane Maria. Non-performing assets including covered loans decreased by $44 million from $788 million in the prior quarter to $743 million this quarter, driven by NPL decrease of $35 million coupled with an order decrease of $9 million. The decrease in NPLs was driven by lower Puerto Rico mortgage NPLs of $31 million, mainly due to lower inflows as a result of the moratorium granted to customers. In the U.S. NPLs increased by $2 million, driven by the consumer portfolio. At the end of the fourth quarter, the ratio of NPLs to total loans held in portfolio decreased to 2.3% from 2.5% in the third quarter. The decrease in OREOs was mainly driven by lower inflows due to the suspension of a foreclosure activity as a result of hurricanes Maria. Please turn to Slide number 10 to discuss NPL inflows. Compared to the previous quarter, NPL inflows decrease by $81 million, mainly due to the moratorium implemented at Hurricane Maria. NPL inflows in the U.S. remains flat on a linked-quarter basis of $9 million. Turning to Slide number 11. Net charge-off amounted to $94 million or annualized 1.6% of average loans held in portfolio compared to $53 million or 92 basis points in the third quarter. The increase of $41 million in charge-off was primarily driven by higher charge-off in our U.S. taxi medallion portfolio. This was coupled with our charge-off in Puerto Rico commercial portfolio related to two large previously reserved relationship of $9 million and higher charge-off in the Puerto Rico mortgage portfolio of $7million, due to lower recoveries after the Hurricanes. The corporation allowance for loan losses decreased by $24 million from the prior quarter, driven by a decrease of $18 million in the U.S., due to the previously mentioned taxi medallion charge-off of $32 million. At the end of the third quarter, our taxi medallion portfolio had an unpaid principal balance of $232 million. Net of reserve, the current value of this portfolio is $82 million or approximately 36% of its UPV, representing less than 1% of our total loan portfolio. 95% of the taxi portfolio is in New York City with an average current loan volume of 233,000 per medallion. The provision for loan losses decreased by $88 million quarter-over-quarter, as the prior quarter included $66 million related to Hurricane Maria estimated impact on our Puerto Rico loan portfolio and $37 million related to taxi portfolio in the U.S. I stated in the last webcast, we are likely to have meaningful new credit information in Puerto Rico until the first half of 2018, sometime after the moratorium expiry. That been said, through the fourth quarter, two third of our mortgage borrowers can be used to make payment similar to October. Similar metrics for all the loan portfolio are mixed. Given the expiration of the moratorium on December, the early weeks of the first quarter of 2018 have given us a first look into eventual credit trends post hurricane. Early delinquency data for auto, credit card and personal loans for the first few weeks of January was similar or better to that of early 2017, though limited in scope this metrics represent an encouraging trend. To summarize, Hurricanes Maria and Irma had a significant impact on the reported Puerto Rico credit quality metrics and our assessment of the allowance for loan losses for the fourth quarter of 2017. In the U.S., the taxi medallion portfolio impacted the credit metrics for the region. Excluding this portfolio, U.S. asset quality remains strong. With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Thank you Lidio. Excluding the impact of Hurricane Maria, our fourth quarter results reflected strong margins, healthy net interest income and stable credit metrics. Maria impacted our results for the quarter in several revenue expense category, due to the disruption of operations following the hurricane. Some of these factors are temporary but an event of this magnitude that undoubtedly have longer term effects. We face serious challenges but there also been many opportunities. Our unique franchise in Puerto Rico places us in a strong position to successfully manage both. We continue to improve our leading market position on the Island. As you can see of Slide 12, we have consistently grown our retail and commercial client base. We currently serve close to 1.7 million customers or approximately 67% of Puerto Rico’s bank population. Notwithstanding the continued economic recession in Puerto Rico and the effects of the hurricane, we were able to grow our deposits in Puerto Rico by $4.3 billion and our customer base by 34,000 customers in 2017. Our focus is to continue strengthening the relationship and satisfaction of our current while providing innovative solution as part of our digital transformation effort. As we shared in our last call, our focus following the hurricanes were to restore operations as quickly as possible and to address the needs of our employees, customers and communities. We identified those employees most affected by the hurricane and provided financial assistance and many other types of support. We offered relieve measures for our customers including but not limited to the moratorium and we mobilized to raise funds to assist severely impacted communities mainly through arms race in Puerto Rico initiatives. Today, we have commitments of $5.1 million including our initial contribution of $1 million. We are touched by the generous contributions of many partners and friends. Our foundation was able to deliver immediate relief to the communities most affected by the disaster. The foundation’s focus in funding projects that is focus in funding projects that will help stabilize communities such as providing access to clean water and installing solar energy panels. Our longer term plans includes supporting the work of community based organizations as they implement innovative solutions to our pressing social problems. While the hurricanes were undoubtedly devastating, they also brought out the best in people on the Island and beyond. I would like to take this opportunity to thank our colleagues who for the past four months have demonstrated their unwavering commitment to organization. Our customers for their continued support and our shareholders for their trust. We look forward to 2018, aware the challenges we face, but energized and committed to continuing deliver results and ordering that trust and support. We look forward to updating you on our progress over the coming months. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from [indiscernible]. Please go ahead.

Thanks. It was good to hear the early results from the consumer portfolio. I was wondering if you could talk a little bit about you know what other efforts you are doing to help get a view into potential risk there, how confident are you in terms of our current estimates of potential loss and when the timing you’ll see in getting that kind of confirmation, is it just the delinquency low rate trends that we’ll see over the next few months? Thanks.

Yeah, I think - I’ll let Lidio go into more detail, but we’re watching the consumer behavior very carefully. We are looking at general macroeconomic indicators for the economy such as employment spending in terms of debit and credit card and how that impacts everyone and we are looking at payments. Obviously, you know we are not going to get real definitive data after the first quarter, so that’s when we be able dig in more. I don’t believe if you want to add anything on that.

Maybe also that we have our contact with a number of our commercial clients. I will say the majority of them are either open or partially open, one that we have contacted, the majority of them have some type of insurance. Then we are encouraged by those trends.

Thank you. And in terms of the capital actions, one of the pushbacks I got from the recent initiation was the timing of that, do you feel as though you have to go through DFAST with the fed again, so potentially push that back as the capital actions towards the end of the year, how confident you think you’ll be able to have capital return in the middle of the year?

Yeah, may I - hi and welcome to the call. The - well, first of all where we will be required to do a new DFAST come in the second part of this year is in question. I think a robust capital discussion were also includes DFAST like analysis in any sort. And I believe that is always included in our consultations with them. So at this point in time, we have - you are correct and that we have historically tied our timetable to DFAST filing. We are not doing that at this point in time, we are still looking at some time in the summer when hopefully we have enough good information to have robust enough consultations with the fed where we might be able to announce some things.

Great, thank you.

The next question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Hey, good morning, guys.

Good morning.

I first wanted to just drilldown a little bit more into the deposit inflows you guys saw this quarter, I mean a $1.2 billion of despite inflows seems pretty awesome for an Island the size of Puerto Rico, can you just breakout how of that with continued inflows from the government versus potential insurance money flowing down to the Island versus anything else we might be missing?

You know, we - I don’t think we have to breakdown the insurance inflows but I can definitely say that most of the increase in the fourth quarter was not related to public deposits, it was related to private deposits. Lidio, do you have something?

I mean the - the point is Ignacio’s point that it was actually not public deposits, there is a lot of core client flows, private clients and individual clients and commercial clients. So that does probably the critical thing. Other things to keep in mind is in addition to some as Ignacio mentioned some of the insurance money is probably showing up already even though it seems to be slow. DFAST that our clients are not making payments on their loans and mortgages or don’t have to make payments many of them are, those have to have slightly higher bonds in their account.

I think what we are seeing is not different, we have seen lot of places have disasters, I think people hold cash for a while and are little bit more conservative so. I don’t think what we are seeing is a typical from other jurisdiction they have had major disaster.

That all make sense. I have another question somewhat related, I think you said a number something like $25 billion plus of insurance play money that could flow down to the Island, I’ve heard similar estimates on elsewhere, I am just wondering, would it crazy lead to say that if you are guys are banking 67% of Puerto Rico that you should see a proportion amount of those deposits flow through deep balance sheet over the next 12, 18, two years?

So, again, we said 25 billion federal funds and insurance, which is a pretty conservative number because as we said some people have estimated insurance might be 10 to 20 by itself. We said 25 billion both. I mean you know we are the dominate player in Puerto Rico, so in terms of deposit share, so we can expect that we will get a far fair share of any despite. I don’t think it’s fair to correlate but I don’t think we should get you know…

But I think it’s more flow than stock. So in our probability, something like 60% of that will flow through us, but doesn’t mean it will stay in our deposit accounts for reporting quarter end.

Yeah, okay, that will make sense. And then just one last question from me. The loans that got pulled back on to the balance sheet GNMA loans, did you have to take a reserve associate with those?

No, we did not, we did not. To be clear, those loans get pulled back to make sure everything on the same page, under the GNMA program, the loans are 90 days or more delinquent even though they have a moratorium, the seller issuer has the right to repurchase them, the right but not the obligations that we bring him back to accounting purposes. We actually haven’t bought those loans back.

Okay, thanks for taking my questions.

The next question comes from Gerard Cassidy with RBC. Please go ahead.

Thank you. Good morning, guys.

Good morning, Gerard.

Could you guys give us an update, I know that the tax lower has passes in the United States, what type of impact on Puerto Rico, I know there were some concern about the taxes on patterns and stuff for companies located in Puerto Rico. Do you guys have any feel early on what the impact could be to Puerto Rico?

I think it’s too early to tell the provisions or tax are complex unlike 936 which effected most companies. Similarly this is going to have a despaired impact on different companies, it will depend on what percentage of their revenues are tied to intangibles that have transferred to Puerto Rico. So you could expect that you know it would affect more the pharmaceutical and the medial instrument than other industries, it will not affect foreign operations in Puerto Rico, so we have number four on pharmaceutical. So I think it will take a while to play out. I think most of these companies are looking at how this measure is going to work out. There is also been talk that there may be some technical amendments in the coming months, some of which may address Puerto Rico. So I think you are not going to see a very large impact in the immediate future. We’ll have to keep an eye on it what are in tales in terms of growth in that industry, but I don’t think you’ll see an immediate impact.

Okay, very good. And then second, if there is relief for the smaller banks, you know there is talk as you guys know to more the designation to banks up to 250 billion from 50 billion and possibly other relief for smaller banks, is that happens to pass and you don’t officially have to go through DFAST because your size, would that change your approach in talking to the regulators about return in capital or how could it change the approach to that?

I’ll let Carlos to go in detail but I don’t in general I mean most people have said stress testing is here to stay that we may have more flexibility in how we do it, we won’t have to necessarily follow the models that the fed gives us and we may have. But I think stress testing is here to stay. I think we can expect that the fed will expect us to present some kind of stress test results as part of our capital discussions. But Carlos, you have?

Yeah, I mean we are obviously in favor and happy to see any improvement in the regulatory environment. But as Ignacio said some other practices have really become management practices now. We don’t do it because they require, we do it because some of these things actually make sense as we run our business. Now they might be done with different level of third party review, a number of other thing, so we hopefully can be more ideal at doing it and they may become less rigid, so that should help as well. So we think all the talk you referred to Gerard is positive, we help someone that goes through, but it is not like we’re going to stop doing the stress test, we actually have now incorporated that into and we will continue to do some variation of it.

Very good. And then just fine, maybe Lidio you can share some thoughts on the medallion portfolio. If I recall you guys when you brought it on to your books you guys did a good job of marking it down to the approximate value at the time. Can you give us some further color, is it just a deterioration in the value of the medallions in New York that’s caused you to have to write it down further?

Yes. I think when we first got into our portfolio of going through the evaluation exercise, we’ve bought into our books about $0.60 on the dollar. That number is now down to about $0.36 of the main principal balance. And as we said in the prepared remarks, most of our portfolio is in the New York City, 95% of it and we have - we’re carrying it of around 233,000 per medallion in terms of loan balances. I think we feel comfortable with the levels that we have it today but certainly portfolio that we will continue to watch given the situation of medallions in New York City.

Great. I appreciate it. Thank you, guys.

Next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

Hi. Good morning, everyone.

Good morning.

Wanted to first ask, are you guys pretty excited about the proper news yesterday is that, give you guys some hope that they’ll be able to do some improvement on the cost of electricity and the infrastructure on the Island?

I’m definitely - I think we’re looking at that same as very positive, obviously it’s a very conception statement, I think we all recognize. We all knew even before that statement that electricity was one of the obstacles for growth in Puerto Rico and that had to be changed dramatically. I think privatization obviously is a good solution if it’s done well, transparently, so we look forward to it, actually we look forward to the process. Obviously the process will be complex because it’s a big organization but also complex because tried of preceding under PROMESA so. It have to go through that you there’s a proceeding but yeah I think it’s a step in the right direction that the government has announced that policy decision.

Okay. And wanted to talk about the margin, I just want to go through your balance sheet actually pretty asset sensitive or I think more so than people realize, so wanted just to talk about the impact of additional fed hikes from here and then what you bought in the quarter on the securities book, it looks like it had been pretty short duration stuff given flattish linked quarter performance and yields?

Yeah, the most important effect on our margin and one of the main reason it dropped is asset mix. You’re correct that our investment portfolio went up. The investment portfolio continues to have same characteristics it has historically with us, is very high quality stuff and most of the securities we added were U.S. treasuries. We do not extend our investment portfolio significantly, the average duration our investment portfolio is about three and a half years, so we gravitate around that. Some of the stuff we added this quarter may have been a bit slower, shorter because we all look into the rate, so.

That there are some tax reasons to include treasuries as well given that right example for Puerto Rico entities, so there is an after tax consideration and the purchase, a mix of treasuries mortgage loan securities which is the other asset partner we usually use for the portfolio.

And with regards to the comment, yes we continue to be sensitive, so it's - if price go up, we like it.

Okay. What the margin, what do you expect the margin to be higher from here assuming additional Fed hikes?

Since the main driver of the dropping margins is asset compensation, to answer that question will depend on the as a compensation as well.

Okay. Fair enough. And then just wanted to go back to talking about the moratorium and mortgages obviously we may have to wait until April to really get a clear view on how delinquencies trend particularly in the mortgage book but I’m curious to hear additional color if you can give any around the statement about delinquencies and the consumer book being better or similar to prior performance so far post the moratorium, what - is that because people have already cash or what trends do you think of led to that?

I’m not sure of all of them. The reasons behind it is quite frankly but the data we’ve shown is that looking at the delinquency and comparing today’s amount compared to the same page prior to hurricane and prior to beginning of last year, we seen improvements in or similar results in most of our consumer portfolio. Obviously the moratorium had an impact in terms of providing the consumer additional relief for the last quarter of the year and that could potential impact the level of delinquency that we see in the first month. So there is still - we were encourage but I mean these are trend that we need to continue to follow very closely.

Okay. And then maybe just one last one. The initiatives such you have that are going to our results and expenses a little higher from a run rate perspective, I realize some of that’s operational and doesn’t provide revenue but is there any thought that some of this will filter through and aid fee income over the next twelve months as well?

It will eventually, I’m sure it will over next twelve months, I think what we will see is next twelve months that is mostly the investment phase as opposed to the benefiting from the crop phase.

Okay. Great for now, thanks for the color.

Thanks.

The next question comes from Glen Manna with KBW. Please go ahead.

Good morning.

Hey, Glen.

A quick question. On the fee income waiving deposit service charges in kind of the slower money management income, is the moratorium on waiving fee income also over and are those lines expected to kind of return back to normal within the next couple of quarters?

It is - this is Ignacio. It is on most consumer products mortgage not the case because of the Fannie Mae, Freddie Mae program FHAVA, they have asked us to continue to waive late payment fees on mortgages, but on the consumer products yes the moratorium late payment fees is over. So we’ll see some return to normal but it won’t be 100% right at the beginning.

Okay. Great. And a quick question also on the government deposits. I think the U.S. Treasury and sent a letter down to the Island earlier this week saying that the government wouldn’t release some loan funds until the central government accounted for some of their deposits. Do you expect that to have any impact on your government deposit balances in the near term?

I’m not sure that letter will but obviously what the letter was looking into was to more transparency into the amount of the funds the Puerto Rico government had, where they were and whether they were restricted because remember these community loans are supposed to be emergency last resort fund. So the federal government wanted to have given the fact there was a lot of publicity about almost $6 billion in local banks. They wanted to make sure that it was in fact last resort funds. We are expecting and we are anticipating they be our public fund levels will go down over time. But again there’s a question as Carlos say slow in stocks, some of these money goes out comes in, some of this money is restricted but we are projecting these funds will go down overtime, we are anticipating that.

Great. Thanks for the clarity.

Okay.

The next question comes from Joe Gladue with Merion Capital Group. Please go ahead.

Good morning.

Hi, Joe. Good morning.

I guess just wondering, I guess recognizing the issue with your currency but does the new lower tax rate corporate tax rate affects your calculus on thoughts on further investments in the U.S. mainland?

Not really, we are not driven mostly by taxes. No, not really. We are happy to have lower tax rate in the stage but I don’t think that drives a relative where we invest our dollar.

But we try to run bank in another tax position.

Yeah.

Alright, I think my other questions been answered. Thanks.

Thank you.

The next question comes from Josh Stirling with Off Wall Street. Please go ahead.

Good morning, thank you for taking the question. Hey, I just wanted to follow-up on and just reconfirm. So I think where I heard you say in the scripted comments was that a third of the clients are non-current as of the end of the year, and I think you said it was all categories and not just mortgages. I wanted to make sure that facts that I got was true and then if it is, clearly you made that there was better performance in auto, credit cards, and personal loans and wondering if you can give a sense of magnitude of the performance improvement? And then just as importantly I think, you didn’t comment about either commercial loans or residential mortgages since the beginning of the year, I’d love to get a sense if we can real type snapshot on what’s going on those two important loan books and all that be really helpful? Thank you.

Maybe to clarify, what we said in the prepared remarks was two third of our portfolio has continue to make - of our mortgage portfolio has continue to make payments despite the moratorium. So even though we offer them or they were label to for the moratorium, they continue to make payment as scheduled. So it doesn’t means that one third are delinquent, so just mean that two third continue to make payments.

They didn’t take advantage of the moratorium.

Notwithstanding the moratorium. In terms of early trends in delinquencies, a little bit more difficult in terms of our mortgage portfolio because I mean the moratorium requires a legal agreement related to postponement of the payment, so that is a process that is ongoing. So in that front when you compare delinquencies January 2018 January 2017, the reality even through going to be comparing apples-to-apples as we have done with the consumer portfolio. In terms of the commercial portfolio, I think as I mentioned some of the color that I have as part of all the earlier questions, we have contacted most of our clients, we are happy to say that most of our clients have returned to operations either completely or partial basis, most of them had insurance. And I think that is also continue to normalize as time as past, electricity has begun to stabilize.

Yeah, in terms of commercial clients, most yield, many of them have small business man took advantage of the moratorium, but we’ve been in contact with most of them, certainly our larger clients are all have started to pay as normal. Some of the smaller clients we have given them another 30 or 60 days especially if you any insurance claim pending and it’s a way to sort of bridge the insurance claim as it comes it. But normally we are seeing our commercial clients you know coming back to payment without problem. And we appreciate it.

Okay, so - but you guys can’t give or say…?

We don’t have the number.

Sort of a number around because you were relatively clear about the on the personal sides that you were actually seeing repayments so far this year in line with - this point last year.

We don’t have that number in handful in commercial, but I can tell you anecdotally most of the clients that have been and to pay some after few month to bridge the insurance.

And on the mortgage side, on the residential mortgage side since the beginning of the year, what puts, what’s been the change there?

Well, it’s complex. I mean we have seen clients started to obviously to pay again but mortgage is a little bit more complex because every program is different, they have to come in and decide which option they are going to take to solve the three months that they didn’t pay.

Many other clients’ mortgage will require formal modifications for their loan to become official current again and verification will in many cases will may take months to process and do the paper work and everything else. So in the case of mortgage, as Lidio mentioned earlier, it will take us some time to get a real reading on titles of where clients are.

Okay, so that’s - I appreciate. This is so complicated and I appreciate you guys taking the time. If you were to map this like based on all that complexity if you were to sort of look forward and say March 31st or June 30th you are thinking about delinquency data, like what should we expect. I am not asking you to forecast the future but just the accounting for the sounds complicated and I think that’s where we would all benefit having a better sense of what it is that we should anticipate?

I mean, again mortgage will take time to get clear. I think the best think we can say at this point in time it seems that most are consumer portfolios are trending to getting normalized and then may be some version of that will happen in the mortgage as well but again mortgage will take time to play out.

Okay. And if I could just make one more quick more of an accounting question. So obviously your earnings in the past couple quarters have been a lot of driven by accrual policy you know there’s a lot of customers who aren’t paying their loans but you’re still recognize interest on them in your building and unpaid balance on the balance sheet. I’m wondering if you can give us a like the number of the incremental growth in the unpaid balance due to customers basically from the interest that you recognize but not actually received and the principle that you have expected to be paid but hasn’t been received since the storm and then I’ll drop off for someone else?

I don’t believe we have that number in hand. I mean obviously we don’t accrue any interest, we don’t expect to receive, I mean that’s the basic accounting rules. So all the interest we have we expect to receive but I don’t think we have that breakdown between accrued versus actually cash received.

Okay. Thank you.

[Operator Instructions] The next question comes from Jesus Bueno with Compass Point. Please go ahead.

Hi, thanks for taking my questions. Very quickly, appreciate the color on your employee base, we got a lot of headlines on negative population outflow, does not seem you’re anywhere close there under your employee base, but are you seeing any trends maybe on the credit and debit card transactions side, for example maybe more transactions taking place in the mainland from your account sources maybe the same time last year?

First of all, as we said on the scripted comment, the debit and credit card volume in December actually exceeded December 2016 numbers, so we’re seeing much more activity. It’s hard to tell because when a card not present, it could be someone ordering something over the Internet or it could be in a state, so we really don’t we don’t have that breakdown.

There’s two things, first of all, the Internet obviously shows the non-local transaction but even some very large retailers in Puerto Rico as well there are merchants system is run out of their headquarters in the states, so even other purchase may have happened here in Puerto Rico physically, it may show up through in a non-Puerto Rico report. So that is the hard - you asked an interesting question that we tried to get our answer around, but it’s actually hard to reach a conclusion from the data because the data has all limitation.

As a quick example Carlos was mentioning the big box stores like Costco would probably clear to a big merchant acquiring back in the States.

Got it.

I think the rest commentary as Ignacio, we know what our clients, and but it’s hard to reach.

We have not been swamped by people asking to change their billing address to Florida or something like that, so that has not occurred.

Oh that’s a good sign. And if you could just help me on it was very helpful to receive the transaction number for December, I guess if you could state that or do have a number how that relates to kind of pre-storm levels I think that’s how you provided on the last call?

I had the number verses December of last year but I mean to pre-storm, I think it’s certainly I mean August for December, I think it’s certainly higher than August, yeah definitely. Definitely higher than August, I compared December because of the seasonality of the Christmas holiday season, but it’s definitely higher than August.

Thanks actually very, very positive and helpful. And if I can just ask one last question. When we’re thinking of the other income line another few items in there your bank in the Dominican Republic or that your ownership runs through there as well but I guess you know it’s stable compared to 3Q but still down from the first half of 2017. How should we think about that line as we progress through 2018?

We were very cautious as you know in what forward looking statements we shared with the market, we try not to comment on specific lines and that one is one we have not comment on before.

That’s fine. Thank you for taking my questions.

Thanks.

The next question comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

Thanks, guys. A couple more questions, dollar amount of 8 on CR is EMR [ph] the Puerto Rico yesterday yet?

No. I don’t - the continuing resolutions of the past or the resolution of the past in the past have been aggregate numbers which have not segregated per jurisdiction. I don’t know what they’re going to do in the new one then with people have been trying to get a specific amount earmarked for Puerto Rico but the resolutions that have been passed to date have not had earmarks per jurisdiction.

Okay. Second question is you mention that December this year exceeded December last year, have those trends continue the January?

In terms of debit and to be fair credit, I don’t have those numbers, it’s hard to pick those numbers, I mean it is for predominant fees here but for credit, I don’t have the numbers. Yeah. I don’t have the numbers.

Okay. Can you bring out the interchange income from EVERTEC or that’s only in the queue?

That’s only in the queue.

Okay. And the last question is almost always I would imagine has to be electronic versus cash so that should also benefit debit and credit too correct?

Well the aid to individuals is primarily electronic, you’re right, most of the FEMA tries to have it done on product, they do believe or not do still you still issue checks for certain people, but most of the aid to individuals is electronic. The aid is always… what’s that?

The most of it is 12 billion, the majority will be electronic, still like to coming out and there is trust in handing out cash, so that should be good for the electronics payments mechanisms?

Yeah. Sure you are.

Thank you.

We are in the track now.

Big play though. Thank you.

The next question comes from Bob Napoli with William Blair. Please go ahead.

Hi. Good morning and thank you. And Jordan asked some of my questions. I guess trying to dig in a little bit further into and I think it’s very surprising to have debit and credit volume up year-over-year in December, I am just trying to, do you have a feel was that of the sustainability of that metric and is some of that driven or you think that’s being driven materially by relief efforts or is it driven by market share?

No, I don’t think it’s being driven by relief efforts, I think there’s a couple of things that may be impacting it. One is the moratorium, obviously people were given a chance not to pay their credit and auto loans, mortgages loans. Second of all people were not paying the electricity bills because all people didn’t have electricity or water, so they were saving utility bills. And so I think that a lot of people went out to dinner and if you don’t have electricity, it’s hard to a cook at home. So I think a lot of people are going out. How sustainable is, we don’t know, people are spending again I mean if you know - you know just anecdotally you go to the stores that are open, they’re busy. So we will have to see how sustainable it is, hard to predict, where some people purchasing things are got damages in storm possibly, we’ll have to - we’re going to follow that carefully, it’s hard to predict, of course we believe it, but now we’re encouraged but we’re going to make sure it’s not onetime.

You also made a statement you think that the numbers being bandied about the number of people leaving Puerto Rico is way overstated, other than looking at your company which just one company might not be a good indicator, why do you believe since those numbers are overstated?

Let me begin by saying I don’t think our company is a good indicator and I wouldn’t make our company with the General Puerto Rico. That the reason I think is it is more of a methodology I’ve read in some press releases that some people for example in Florida were measuring the amount of migration by the number of people got on airplane and went to Puerto Rico to Florida without counting literally how many people may have come back, just how many people got on a plane from Florida from Puerto Rico went to Florida in those months. So those members by definition to me be exaggerated because I’ve gone to Florida four times after the storm and I haven’t migrated four time. So I think those are you know I don’t want to tell people that the numbers are, I don’t want to diminish the issue migration definitely has accelerated, I just saying there are some crazy numbers were being turnaround, some very hard numbers and I think we have to wait to get better numbers from the Census Bureau, I think we’re going to get better numbers from school enrollment both in Puerto Rico and in Florida for example, those are numbers that will give us a better a better more real look at the number. Again migration have accelerated, I just think that the people who are here around some very, very large numbers with very I think a questionable basis for those numbers.

And just last question. Do you have any indicators of whether the people who might be migrating are lower or higher income than those that are not?

The numbers that I’ve seen and we have some people, again it’s across the board again, again there is not and I see and I’ve asked for some reason numbers but again these are these are basically surveys. Traditionally in Puerto Rico the last two years that there has been - the bias in anything was to use versus education. In fact if you look at it just on university level, the people who are leaving tend to have a lower level of university education than the population in general. That has been the trend prior to the hurricanes, I’m not sure that has changed, I don’t think it has from the early data we’ve seen. So there if you want to call it a brain drain in that sense, it isn’t, there isn’t a more a higher level of university graduates leaving, it’s really across the population, the bias being used. One thing that did change a bit from the hurricane, we don’t know its permanent or not, is that we saw more elderly people leave Puerto Rico because of the health situation and the access to medical treatment. Whether those older people will come back, over stay with their relatives in Florida or else United States that we don’t know. But generally you do not see a bias toward higher education. Now there are certain elements that we can’t finish. The medical profession, we have seen a higher number of doctors leave, so that is something there. But in general, university education is slightly higher in the general population than the migrating population.

Thank you very much. Appreciate it.

The next question comes from [indiscernible] Associates. Please go ahead.

[Foreign Language] Greetings from Puerto Rico, and Florida. Government has been very instrumental in stemming the brain drain, there are certain sentence that are given to the doctors income taxes, can you clarify and they had stopped what the government is doing to not only that but bring people back to Puerto Rico?

Well there are different incentives, for the doctors, they recently pass legislation, they will give specialist a tax exemption, I don’t know if it was 90%, I don’t know exact number, but certain tax exemption income for special is that’s one of the things that they’re doing. In terms of youth there’s a law that I think the first $40,000 of income for people under 26 would exempt. And then we have that sort of help keep people here then we have same as, I think of what’s called Act 22 which is for individuals that apply to everyone, Puerto Rico residents have to have that but outside the Island for a certain period of time it used to be five years, I think they may have lowered that now to three years and if you come back then most of your capital gains will be exempted Puerto Rico as well investment income from the States. So those are the type of things that people are doing. And frankly I believe those things are nice but the end of the day, what you do is get the economy moving and that’s what’s going to keep people here and bring them back.

Thank you so much. You guys are doing a super job and a sterling reputation. Thank you again.

Thank you very much.

[Operator Instructions] And so it appears to be no other questions, this will close our question-and-answer session. Thank you for attending today’s presentation. This conference call is now closed is now over, you can please disconnect.