First BanCorp. (FBP) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the First BanCorp Fourth Quarter and Fiscal Year 2015 Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note today’s event is being recorded. I would now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead sir.

Thank you, Rocco. Good morning everyone and thank you for joining First Bancorp's conference call and webcast to discuss the company’s financial results for the fourth quarter and fiscal year 2015. Joining me today are Aurelio Aleman, President and Chief Executive Officer and Orlando Berges, Executive Vice President and Chief Financial Officer. Before we begin today’s call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure as well as statements on the plans and objectives of the company’s business. The company’s actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release issued by First BanCorp, you can access them under the IR section of at our website at www.firstbankpr.com. At this time I would like to turn the call over to our CEO, Aurelio Aleman. Aurelio. Aurelio Alemán-Bermudez: Thank you, John. Good morning everyone and welcome to the New Year and thank you for joining us again to discuss our end of year results and fourth quarter. On the call with me today is Orlando Berges, our CFO, who will provide significant details on the quarter and the year. Please let’s move to slide five. I would like to first of all do a summary of the year. It is a busy slide, it was a very busy year for First BanCorp. And first of all I would like to thank my dedicated officers, employees, and Board members for all the hard work during the year. I also want to thank our shareholders for their continued support during 2015. Honestly 2015 seemed like two years in one. Before the June announcement and after the June government announcement and I would like to spend some time on this significant milestone that we achieved. The first half was full of multiple achievements starting with in line with submission of the 10-K, the recognition of the BPA approximately 300 million. The Consent Order which had been in play for a long time was lifted. We participated in an important transaction we acquired with the acquisition of Doral branches and loans and deposits. We successfully completed existing transaction. We closed the first half of the year also releasing our DFAST results which showed our capital strength on the severely adverse economic environment. Despite those headwinds that came elevated during the second half of 2015, there were significant progress in franchise metrics. When we look at the franchise by itself, NPAs was declined by 107 million. NPAs by itself declined 107 million, Inflows declined by 133 million. Deposits, it was a great year for our deposit franchise. Overall we increased 472 million of which Puerto Rico continued to 685 million. We actually achieved some strategy to reduce closing of deposits and they contracting other geographies. But it was an intentional strategy. Broker deposits decreased by 790 million over the year which is a significant enlarged number. And most importantly we achieved important market share gains in deposits, branches, mortgage, POS, APMs and transacting service that will definitely support revenue growth in the coming years. Very importantly we solidified our presence in Florida and by growing the loan portfolios and branches and we solidify our presence in the Eastern Caribbean region. Net income was 21 million, obviously compared to a very large number in 2014 which included the 302 million on the BPA. But adjusted net income non-GAAP pretax income which Orlando will cover later it increased to 101 million versus 98 million. Again due to the macro events, financial results were adversely impacted by OTTI and increased provisioning on the lower level. From high level we have to say that the core business steady improvement and the government risk deteriorated at the start of the macro news. Definitely we are very disappointed with the macro impact on our stock price but we are pleased with the significant progress and macro share gains that we achieved in 2015. Now let's look at more closely through the quarter. Slide 6, during the quarter we generated 15 million of net income and as we said negatively impacted by 19 million increase in provisioning for the government. Orlando will expand later in this area in more detail. PPI continued stable at 50.6 million and obviously we also have significant -- several significant items in expense on revenues that Orlando will cover in the presentation. And during the quarter NPAs declined slightly and Inflows also declined. We continued to see stability on the consumer out there, we continued to see sufficient economic activity to sustain their portfolios. And again our capital ratios are very solid and we obviously support the current challenges that we are facing in Puerto Rico. Now let's move to the deposit loan portfolio slide to cover it in more detail, slide 7. On the left column we have the portfolio strength, on the right we have originations. On the bottom we have the quarter trends and then the year highlights. A slight decrease of 25 million we announced in the quarter, 34 million in consumers primarily auto. We also transferred loans to OREO. And we had some decline in prepayments in construct channels in Florida. That said the C&I book increased 24 million. We saw a 50 million increase in residential also. I think the recent quarter importantly to hide like self sufficient activity to sustain the loan portfolios in Puerto Rico. In Puerto Rico the most impacted sector I will have to say is the mortgage business but in our case we are compensating with a larger share of the pie as the new channels after the [indiscernible] are producing a larger share to us. Regarding auto, we continue to be a top competitor but we continue also with our proven policies and it is very clear that portfolio quality is also improving. For the year we grew our performing portfolio at the corporation level by 1%, Puerto Rico saw a contraction of 3% due to in large part the bulk sale that we did in the second quarter and Florida grew by 15%, the loan portfolio and the Virgin Islands year-over-year grew by 13%. So obviously the geographical diversification, the line of business diversification is an important asset of our prime check with share price [ph] compensate the different environments that we operate. Again our finance continued stable and we will continue to work hard to sustain the loan portfolios in Puerto Rico and achieve growth in Florida and Eastern Caribbean again. I have to say, the quarter also, when you look at the portfolios on the asset quality and the delinquency remains stable during the quarter, which is something that we are monitoring very closely based on Puerto Rico condition. Let’s move now to slide 8 on the deposit front. There was definitely a noise in the deposit trend during the quarter. It was an expected noise. We announced previously in the third quarter that we received almost $180 million temporary deposit from a government agency. And this deposit we were expected to deliver before year end and it happened. I think most importantly the year-over-year growth on non-core or on non-broker on our core franchise is what really is a great achievement under the current economic environment, $685 million in Puerto Rico and for $472 million overall. Importantly also, the non-interest bearing piece continued to improve. We moved the needle from 10% of total deposits to 14% at year end. The reliance and the reliance year-over-year continues to improve. Again, solid year for the franchise and the channels that we have to continue originating core accounts, deposits, and fees and also the market share gains in the mortgage origination to support our mortgage business growth. Now let’s cover an important part of the equation, our government exposure, which I'm sure everybody wants to talk about. Again, certainty still dominating the macro and there is not a definitive timeline for resolution of fiscal matters. I think everybody is clear on that. That said there continues to be progress in paper and there is progress in Congress effort to support Puerto Rico which are taking more attention and are moving on a faster pace in the recent weeks. Also in today’s newspaper there is news about meetings beginning to happen to take place between government officials and bondholders to discuss potential -- of payment. So I'm sure you saw in the press the prepared events, negotiation was halted for a moment but it got renewed and we feel it is a critical component as a pact to fiscal resolution for the island and we're hopeful the legislation gets approved and we can bring that into closure, the sooner the better. In our case our government also remained at similar levels during the quarter. We took an additional OTTI charge on our Puerto Rico securities and more importantly we increased our reserve base on qualitative adjustments by approximately $19 million, Orlando will cover that detail. We continue to feel comfortable with our exposure to municipalities. These municipalities are very well managed MPPs, they have a strong sort of repayment assigned to their facilities. The 80% of our municipality exposures will focus on four municipalities, who are the largest municipalities of Puerto Rico, with the best cash flow so we feel very comfortable about this exposure. Again, we continue to be vigilant regarding potential short-term government liquidity events that definitely could impact the exposure. We’re vigilant to government suppliers that depends on payments. There is -– we see all those getting accumulated and the government has to mention some of the amount, and some of those relations are already being classified or moved to another classification because of liquidity. Again, in the mean time we need to focus in the origination [ph] of our business plan and migration opportunities while also continuing our efforts to work through the Virgin Islands and keep working with the government in supporting the path to recovery. I think the activities are gaining momentum and we are hopeful that 2015 will bring the solution to -- 2016, I'm sorry, will bring the solution to the fiscal matter. The franchise capital position is strong, diversified, and our team has plenty experience executing and achieving progress in this challenging economic environment. With that said I'm going to hand the call over to Orlando to discuss the quarter in more detail. Orlando Berges-González: Good morning, everyone. Aurelio mentioned the quarter – net income for the quarter was $15 million or $0.07 a share compared with $14.8 million last quarter. But the results do include several significant items that I’ll like to touch up on first of all. The first one was $7 million pretax gain that resulted from a long-term strategic alliance we entered into with Evertec, where we sold our merchant contracts portfolio and our POS terminals. On the contraction we received an initial amount of $3 million that was deferred and will be recognized as income over the year term of the agreement. The agreement thus includes revenue share component based on volumes where Evertec and FirstBank will share on revenues from both existing contracts and new contracts that we enter into throughout the term. During the quarter we also had a $2.2 million expense for about voluntary early retirement program that we expect that will result in approximately $2.5 million in expense savings going forward, was completed by the end of this year 2015. In addition there were two items that were government related. Obviously, we all have seen that there have been a number of events related to the government this quarter that have increased the level of uncertainty in the market and have affected the value of the bonds. To name a few, the activation of the Governor [ph] or the flow back probations had an effect. The treat [ph] still have the ability to produce financial information and among other factors that happened in the quarter. As a result we ended up taking an additional $3 million other than temporary impairment charge on some of the Puerto Rico government securities mostly GDB, based on our assessment of the default liabilities and the loss severities that are implied from the current market valuations of the bonds. So far for 2015 we took -– we have taken $15.9 million in OTTI charges on those securities whereas we mentioned before its basically GDB and Puerto Rico building, most of it being GDB. Also in the quarter we increased our general allowance for loan losses on government exposure by $19.2 million as Aurelio mentioned. To explain, our general allowance methodology includes several qualitative factors that adjust the historical loss experience based on economic conditions. Some of the factors include for example the Puerto Rico -- changes in the Puerto Rico economic indicators, changes in property values, the trends in property values, changes in early delinquency on the bank, loan concentrations etcetera, among others we have. The recent events, given the lack -- the level of risk associated -– we would deem associated with this uncertainty surrounding the next February we’ll be required to address the financial situation of the government, we decided to stress the qualitative factors that affect the historical loss rates and government exposure. To assure that in fact all this risk have been -– are being properly captured. The result of this resulted in the increased provision that you saw. It is important to mention that this adjustment do not include anything on municipalities. It was driven on general allowance adjustments, on general -– in direct and indirect exposures excluding municipalities. Overall provision however, this increase was partially offset by -– we had lower migrations through worst categories and we have reduced charge off for the quarter. And also we had a release an 8 million general reserve on construction or loans given the stabilization trends that our landlords have had over the last couple of years. On the net interest income side, net interest income reached 125.2 million, increase of 300,000 when compared to the third quarter. The net interest margin as reported, the GAAP net interest margin was 407 [ph] which is 12 basis points lower than last quarter. This margin compression was driven by 405 million increase in the average balance of cash and money market investment basically in anticipation of rise in interest rates and expected government deposit would grow. The 405 million include, we had a large deposit from a municipal agent at the end of the third quarter related to property tax collection that was going to be temporary. You probably saw a lot of that on the news. The average balance includes 150 million on average that’s related to those deposits. The deposits were mostly withdrawn at the end of the fourth quarter. But because of its short-term nature the reinvestment component was small and the impact of this deposit on the margin was approximately 5 basis points. The second component that affected margin during the quarter we took 130 million in Federal Home Loan Bank advances. It was for interest rate with management purposes since we didn’t knew their liquidity but in reality it’s a four year money at a very reasonable funding rate of 164 that at this point we decided not to reinvest based on where market interest rates are thus affecting the margin again. This one component also affected the margin by approximately 6 basis points. If we look at the other component we see that loan yields for the quarter remained at the same level as last quarter. Any impact was volume related and we had some improvements in investment interest income with prepayment levels of investments were lower affecting the amortization of trading. On the funding side we saw a 1 basis points increase in the cost of core deposits mostly time deposit impact. And obviously the funding cost increases related to the Federal Home Loan Bank advances that I mentioned. Also a broker CD cost went up on the interest cost side even though the volumes are lower. The balances are down 171 million from the end of the third quarter but the average cost of the broker CDs increased by 8 basis points based on the market cost of the originations, cost of broker CD market itself but also on increasing terms we have done on recent renewals. Our strategic focus, we have mentioned before remain well known broker deposits and improving the overall funding mix. And as Aurelio mentioned noninterest bearing deposits have grown to 14% of our total deposit base. Looking at noninterest income I think that the key component of net interest income I mentioned but our noninterest income was 23.2 million, compares with 18.8 the third quarter but that includes the 7 million gain on the sale of the merchant contracts and the 3 million on temporary impairment on the government securities. Excluding those noninterest income increased 400,000 showing some improvement in service charges on deposits and mortgage banking revenues. On the expense side, expenses for the fourth quarter amounted to 96 million which is 2.7 million higher than last quarter which was 93.3 million. This amount however includes the non recurring 2.2 million in expenses related to a voluntary early retirement program. Excluding these items expenses for the quarter were 93.8 million, an increase of only 500,000. The increase was basically driven by the new 4% sales of used tax applicable to business transactions that was effective on October 1st and an increase in the VAC [ph] or insurance cost related to the component, the earnings component ratio that considers four quarters of earnings. Asset quality Aurelio made some reference to it, it was a stable quarter with nonperforming continue to chose stability decreasing 7 million to 610 million. Nonperforming loans decreased by 29 million or 6% from the third quarter. This decreasing nonperforming includes our commercial mortgage loans of 200 million that was transferred to OREO as well as 9 million in residential mortgage loans that were transferred. Important to mention that nonperforming inflows for the quarter were 42 million, decrease of 8.8 million as compared to the 50.8 million we had in the third quarter showing reductions in residential and commercial. Residential inflows which have been the largest component of the inflows over the last few quarters were 20.2 million in the fourth quarter which is 7 million lower than in the third quarter. And also as Aurelio mentioned that the inflows to the nonperforming for the year are down 133 million as compared to the year 2014. OREO balance increased by 22 million, that’s a function of a 32 million in migrations of transfer to OREO, mostly the 20 million commercial facilities I mentioned offset by the sales that were achieved over the quarter. Also showing improvement is the level of adversely classified commercial and construction loans which decreased by 48 million to 522 million at the end of December and part of this was the transfer to OREO and a part was classification on two facilities which added to $27 million. Regarding charge off for the fourth quarter were 21.9 million and a 95 basis points of average loans as compared to 23.7 million or analyzed 102 for the third quarter, 102%. The decrease was mostly for 2 million reductions in consumer loan net chargeoff improvement. Mostly improvements in the auto portfolio loss experience. The allowance for loan loss have increased to 240 million at the end of the quarter and their ratio of the allowance went up to 2.6% as compared to 2.46 at the end of September. The allowance ratio to nonperforming also went up to 54.4 as compared to 48.4 last quarter partly driven by additional provisioning taking on the government exposure. Nonperforming -- net carrying amount of nonperforming commercial loans it’s at 57.9% which is similar to what we had last quarter. Now we can talk a bit about the year. Aurelio mentioned a couple of things but I’d like to touch upon some significant component. The net income for the year was 21.3 million that compares to 382 million in 2014. However, the net income for 2014 includes the 302.9 million impact of the partial reversal of the deferred tax asset valuation allowance thus affecting comparability. Pretax income was 27.7 million and in 2015 and 91.6 million in 2015. But these numbers are affected by a number of other items in both 2015 and 2014 that we -- that’s been analyzed either from normal operations or that we consider are unusual in nature and thus effective to comparability. For example the one time impact of the acquisition of the Doral branches, the bulk sale of loans, the sale of the merchant business in early retirement and so on. So, in order to facilitate a comparing result we are including this chart which is a non GAAP, our GAAP pretax calculation showing the impact of all this unusual items on the different components of net income. As you can see on the chart there were 66.1 million in provision charges that are related to the bulk sale of loans and the adjustments to required factors that have the historical loss experience on government exposure. If we were to exclude these items, the provisions for 2015 would have been 3.6 million lower than in 2014. Same thing in expenses there are 11.7 million in expenses in 2015 and 2.2 million in 2014 that are not considered for normal operations as detailed in this slide that includes conversion cost and our position interim service and bulk sale expenses, etc. If we were to exclude those 9.5 million net effect from the adjustment on both years, expenses for 2015 would be down around $4 million from last year. On the non-interest income side, the growth would have been $8.9 million when we exclude the unusual items that are also detailed there rather than in the $20 million increase that is reflected on the financials, because of the large impact of things like the bargain purchase gain on Doral and the merchant contract sales. Considering all these adjustments, pretax non-GAAP income would have shown a $3 million improvement from 2014 to 2015, from $98.6 million to $101 million, which for us is an indication of the stability of the franchise day-to-day business, so we wanted to share this with you. Many of you have asked at times that on what we expect on the expense side. Clearly the largest, more difficult component to estimate has been OREO and some of the non-performing related expenses. But based on recent trend we believe that if we exclude OREO expenses, our expenses should be around $90 million a quarter. So we should -– normalizing OREO expenses should continue trends similar to the ones we have seen in the last few quarters. Also in terms of taxes, we see 2016 yearly tax rates -– effective tax rates are going to be somewhere between 24% and 26%, in that range, depending on components. But it’s a good indication for any kind of guidance. On the capital front, capital ratios continue to show improvement with Tier-1 increasing to 16.92% and total capital to 20%. Obviously, with the income for the quarter all ratios improved except for the leverage ratio which was affected by the fact that average assets went up resulting from the increased average cash that I mentioned before. Still the leverage ratio, it’s strong to 12.2% for the quarter. So with that we would like to open the call for questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Hey, good morning. Aurelio Alemán-Bermudez: Good morning, Alex.

Just wanted to go back to the reserve that you took this quarter related to the government exposure and you kind of went through it, but is that $19.2 million, is that totally related to the four loans that are direct to the government exposure or is it quantitative for all commercial loans to any sort of exposures that might exist out there? Orlando Berges-González: No, this one component was totally associated with the direct and indirect loan exposures to the government excluding municipalities. So it’s not related to the other. The main thing here is that we feel all economic components are considered on the other portfolios but the government-specific uncertainty had additional risks that we felt needed to be considered on any kind of qualitative adjustment factors. Aurelio Alemán-Bermudez: Yes, I think the indirect -– just to clarify, the indirect portion that Orlando commented is what we include in slide 9, the TDF exposure of a $129 million. So it is the four loans that you see on the right side plus the $129 million of TDF.

And the TDF loans, those were -– those have a special reserve that were associated with them in the third quarter, is that correct? Aurelio Alemán-Bermudez: And they also have -– they have like collateral as some of the other banks of the government have real estate collateral so… Orlando Berges-González: Yes, the third quarter, we put in some reserves which are also general reserves based on loan classifications of the TDF facilities. This quarter we just classified versus additional amounts considering the risk, the uncertainty of risk.

Okay. So the total reserve, I mean, is there a way that we could back into it or can you tell us what the total reserve against your direct and indirect government exposure is? I mean if you just divided that $19 million by the $111.5 million, you get like 17%, but is that kind of where the entire reserve for the total government and direct and indirect exposure is or is it lower than that? Aurelio Alemán-Bermudez: I think if we exclude municipalities its approaching 20%.

Okay. Aurelio Alemán-Bermudez: The municipalities will chart a difference methodology because of their cash flows assigned and directed.

Okay and the TDF loans are the only ones that are currently included and adversely classified is that correct? Aurelio Alemán-Bermudez: That’s correct. Orlando Berges-González: Plus we prep up.

In prep okay, and can you just help us think through, it seems like based on some of the headlines that I am reading and you have kind of eluded to that Congress is working on some sort of a solution for Puerto Rico whether its full access to chapter 9 or if it is some variation of restructuring, can you just help us think through sort of how your thinking about your exposures to various indirect, various commercial customers and consumer customers that rely on the government and whose cash flows could potentially be reduced in some sort of a restructuring? Aurelio Alemán-Bermudez: Well you know to be honest some sort of restructuring will mostly impact the investment portfolios on the bonds. More than the other exposure of the loan side because the restructuring is aligned to the $72 billion in bonds. So any restructuring we can put actually a framework, and I think any restructuring is also linked to how before we do a restructuring, how we make sure that economy is going to get back on track. So if we are going to frame, we have to frame the two together. My answer is Alex, a restructuring is not bad for the banks because in the headlines because we can frame the potential of government losses. The other is a small portion of the portfolios compared to a real balance sheet. But when you look at the economic uncertainty is what basically everybody is more concerned that and obviously a restructuring will bring better outcome to the economic uncertainty. It would put a more positive future into the economic development of Puerto Rico. So we have to look at them together. Yes, restructuring is going to take a hit, it's going to be losses associated. But it is going to bring together the tools for the economic development of Puerto Rico. It is not going to happen by itself.

And then final question just to that point if there is some future outlook for Puerto Rico suggesting that the economy should improve dramatically and pricing for some of these troubled loans that you have on your balance sheet in a possible bulk sales should improve is that something that you could consider at this point or is it still totally depending on…? Orlando Berges-González: Right now we haven't got it reserve. We feel we are on the safe side of the equation based on the conditions that we have today. If we see better news on the restructuring there is really three main points that are common ground for everyone, health benefits, equalization, economic incentives, and restructuring. With this restructuring there are different flavors of groups that favor chapter 9, other group favor some other entity. But the three main objectives of the effort with Washington and local politicians is they help industry, the economic incentives and restructuring. So at the end of the day if bonds are restructured then the loans that we have and government base, the pliers that is pending, environment base, tax reform that are pending then we are going to see a better outcome, a better projection on the potential losses on the loan portfolios.

Okay, I appreciate the color guys, thank you. Aurelio Alemán-Bermudez: Thank you.

Our next question comes from Brian Klock of Keefe, Bruyette & Woods. Please go ahead.

Good morning gentlemen. Aurelio Alemán-Bermudez: Good morning Brian.

And I think just before I get into question just thinking about back in the year all the hard work you guys did, obviously the macro environment is something that was pretty challenging but thinking about the 170 basis point plus pre ROA, continued declines in your NPAs and capital ratios that continue to build. So I mean, pretty darn good quarter and good year for you guys. So I guess good work for the year. Aurelio Alemán-Bermudez: Thank you, Brian. Thank you.

So I guess just two questions, follow-up on the government exposure questions, can you just remind us on the TDF that there’s -– the commercial real estate that is the primary source of payment and the cash flows you're getting there. So I guess maybe two things, is there a way to tell us what the loan to values we will have on those commercial real estate loans? And then was there -– what's the payments that you’re -– you’ve received in 2015 from the TDF? Orlando Berges-González: We got -– we can't give you the data. I think we put some data in the Q, we put some data in the last Q and we're going to put some data in the K. I don’t know if we have it right away here but the -– there's partial payments made by the entity and there’s -– the difference is paid by the TDF fund. We don’t have that onto values and we don’t publish that onto values. But these are key properties like at least the share, the Conventional Centre Hotel is the largest one and right near the Conventional Centre is we have some property in Doral and the properties in the Caribbean. So those are quality real estate behind them. And obviously when we say we’re taking a conservative approach it’s also linked to the government liquidity concerns and that’s why –- but we continue to see the tourism industry on the other hand as the priority, one of the priorities that the government would continue to support and we’ll continue to support. Because remember, it’s very important to understand that these hotels contribute more to the government coffers in terms of room tax and casino revenues, casino tax than the portion of the payment that the government supplies back to the TDF. So it’s still an excellent business to the government to continue protecting. Aurelio Alemán-Bermudez: I don’t – Brian, I don’t have the numbers through the end of the year. We’ll get that. Obviously it’s going to be included on the K. But through September we had about $4 million of payments received from TDF.

Okay. Aurelio Alemán-Bermudez: Government financing on these facilities and the number on 2014 was about $4.5 million. So there is – the $4 million we have received obviously is in the last quarter.

Okay, great, thanks for that. And then a secondary point really on those hotels, I mean you’ve got good cash flows on the primary source of payment on those and like you said the government’s getting more revenues than what the TDF payments are being made out and the guarantee, so it’s still… Aurelio Alemán-Bermudez: Less.

Yes, exactly. So I guess thinking about, staying with credit as a follow up on that, with this what I think is a prudent reserve build you did in the fourth quarter. You had really good migration trends in the underlying credits especially on the commercial and even the consumer. So I guess with everything that’s going on and the issues related to the macro, maybe you can just kind of highlight again just what you’re seeing with the underlying trends and the formation trends and the more higher severities of the commercial and construction, seems like the – that migration trend is going in the right direction. Aurelio Alemán-Bermudez: I – yes, I think obviously we've been cleaning up, after a 10-year recession cycle it’s doing a lot of cleanup in old bank balance sheet. And the very large chunk of credits are less now than what we were years ago. I think the consumer side has been supported by the reduction in oil costs, early delinquencies looking good. So they -– and obviously, we've been originating with conservative policies for some time now. So I think those components are important to be laid out. I think the risk of extended uncertainty and liquidity is more – we monitor it very closely and we have classified some relationships that are dependant –casually dependent on payments from government. We don’t call them indirect, we call them casual dependent, so when we mention indirect we don’t include those. So we have those as individual loans analyzed based on their own merits in the residual cash flow and in the -– how the receivables are moving or not, so some of them are being already classified. The government mentioned that they owe $1.8 billion to suppliers so some of those are probably the ones that we have already moved the needle into classification. So we are monitoring that very closely and that is a risk definitely that we look at every month how those cash flows are drilling on them. One of the areas for example was the health industry, the health payments that were due last year have been reduced dramatically. So they have been making payment to suppliers. So that area show an improvement. On the other hand if we look at contractors and mechanical contractors or construction you know we see those are piling up as belong -- regarding the government. So that is a risk. Obviously the ability of the government to restructure their objective of the restructuring behind any research is to pay back. That is what is going to support the economy getting on track and continue to move forward. So that is -- we see enough activity for we continue maintaining the portfolios, because we are significantly less number of players as banking institutions and while we don’t see today still volume to grow Puerto Rico loans. Obviously our focus of growth is Florida and Virgin Island. We see the opportunities there too. We see Puerto Rico volumes as good enough to sustain our portfolios. Mortgage was impacted by -– it has been impacted as a business both by regulation and by the loan to values in Puerto Rico. So when you look at the overall market contracted in 2015, on the other hand we are approaching 24% origination market share would be acquisition and the restructure that we deal in the mortgage business. So for us we are concentrating, if you look at the trend in volumes in the loan origination graph you see that we have sustained in the 2.30 [ph] per quarter range our mortgage origination business. So we feel that we can continue with that if the industry gets better and the world macro gets better then definitely that Puerto Rico we estimated been about 2 billion to 2.2 billion last year versus 3.4 billion the year before versus 4.6 billion a year before. So it has been coming down that the overall volume of -- that is probably the most impacted sector. And on the other hand we are seeing a lot of deals, investments coming into the Island, buying property, buying real estate that they are putting money into. We are participating in some of those last year and we have a pipeline, active pipeline in Puerto Rico that we will continue to see on where those investors -- in getting properties and getting investment in the mortgage.

That’s great. Thank you that’s some similarly good color Aurelio. I think I mean one of the things you mentioned there with a lot of good nuggets was and everyone to worry about oil and gas prices and it is one area in the U.S. that benefit significantly that is the Puerto Rico economy. So definitely it is a big help for you guys at this point? Aurelio Alemán-Bermudez: Yes, but remember that we don’t have public transportation. So everybody owns a car, one car or two so they depend a lot of the price of the gas or the pump. It is a subsidy right now.

Yes, perfect. And just my other question is really just on the expenses, like you said I think you guys have done a good job on expenses control even in the quarter with the FDIC insurance premium that went up in the business to business tax. You still had pretty steady control on expenses. If you could just give us a little color on that -- on the early retirement program, I guess maybe just talk about how many people actually did take advantage of it and now is that all in, whether something that happened in the fourth quarter at the end so the benefits will be fully reflected into the first quarter, and should we think about the run rate of the 2.5 million cost saves starting in the first quarter of 2016? Aurelio Alemán-Bermudez: We decided to before the opportunity offered to people with some definitions of years of service and years of age opportunity to take an early retirement. We don’t have a pension plan. We have a 41k but it was general. The 2.2 million is a impact in the quarter of the amount that we offer those employees in both salaries or benefits -- and/or benefits. Or as part of the program it was not a large chunk of employees. It was about 53 employees, but obviously because of the tenure some were higher salary employees. Not officers, we did not extend to executive officers or to any Senior Vice President of the Institution. The $2.5 million I mentioned, it’s based on our estimate of what the positions that we will be, we will fill some of those positions but it’s only a small percentage of that. And it should start –- most of it should start on the second month of the year. There are some people that are still in the bank within the first month. And it is going to be spread out. The $2.5 million is estimated annual savings, so we’ll see our 11 months of that. But starting, definitely starting in February.

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

And our next question comes from Taylor Brodarick of Guggenheim Securities. Please go ahead.

Thank you. Just two for me. I think the first question would be assuming a more normalized Puerto Rico environment, I mean your CET1 ratio obviously about a 1000 basis points above well capitalized levels. What levels do you think you -– could you give a sort of a more detail around your thinking of what level you’ll be more comfortable running the bank at? Orlando Berges-González: Tough question, Taylor. Aurelio Alemán-Bermudez: Yes, let me answer. I think there is a framework Taylor. And we have obviously be satisfied that -– there is a framework to get to that, to get quantitatively based on the qualitative factors. And definitely we're going to run it again. I think if we look at the disclosure of DFAST there is a quotient that have to placed and there is obviously, we do have plenty of capital to -- for that number to be lower than what we have on hand today. But to give you a definitive answer I would like to look at numbers first and… Orlando Berges-González: I mean, keep in mind that we need to -– any bank needs to run the institution most likely at a level that its well capitalized and have to built in the buffers associated with the impact that are required, the 2.5% box. So those levels, but what I have done Taylor it’s that with all the uncertainty and all the things going on, obviously the DFAST numbers include that uncertainty. It wouldn’t be responsible to give you numbers at this stage without making a humongous number of assumptions on what's happening in the future, how those macroeconomic variables that go into DFAST for unemployment, inflation and so on are going to be affected. But clearly the number is lower than the one we have today.

Right, right. And speaking of DFAST looks like the Fed is going to require the CCAR banks to stress their severely adverse scenarios even more this year. I know you can’t really telegraph any details of your conversations but do you feel like your numbers, which were pretty draconian for your DFAST results last year will materially change, given just asset quality remaining fairly stable? Orlando Berges-González: I mean based on current numbers and there is no changes on -– dramatic changes on assumptions it should remain. Aurelio Alemán-Bermudez: Remember that those scenarios included very higher employment numbers that have not materialized and included very high utility ratio and property values that have not changed from -– significantly from last year. So, I think just considering how the parameters are remodeled then on the assumptions and employment has remained stable, employment ratios and the house price index and CRE index has also remained fairly stable which are some of the components. And even GDP, retail sales, the intrinsic metrics have remained really stable to last year on that trend. So we are not approaching any scenario in terms of mere what the DFAST economic scenarios that were modeled.

Okay, great, thank you for the comments.

[Operator Instructions]. Showing no further questions, I would like to turn the conference back over to Mr. Pelling for any closing remarks.

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

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