Q3 2019 Earnings Call
Good day and welcome to the popular Inc. Q3, 2019 earnings conference call. All participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing star key followed by zero. After todays presentation, there will be an opportunity to ask questions to actually quite she May press Star then one on your telephone.
Key Pat to withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over support Paul Court Yellow Investor Relations Officer. Please go ahead Sir.
Thank you good morning, and thank you for joining us on todays call.
Say that the old Nazi Albrecht, our CFO , Carlos basket, and our cereal video sorry.
They will review our results for the third quarter and then answer your question. Other members of our management team will also be available during the Q1 <unk> session.
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.
That could cause actual results to differ materially from these forward looking statements are set forth in today's earnings press release and are detailed in our atrophy.
On today's press release, and or if you see filings IR webpage at <unk> Dot com.
Well now turn the call over to our CEO Ignacio over it.
Good morning, Thank you for joined the call.
We had a solid third quarter and continued to build upon the success achieved in the first half of the year.
I will address highlights and key events from the quarter, they give an update on our business.
Provide some thoughts around the environment in Puerto Rico.
Carlos will comment on the quarter's financial results and lineal will provide an update on credit trends and metrics.
Turn to slide three.
We reported quarterly net income of $165 million, which is $6 million lower than the previous quarter, but $25 million were 17.5% higher than in the third quarter of 2018.
This quarter results were impacted by higher expenses and higher taxes.
Partially offset by higher non interest income and lower provision.
Net income was net interest income was flat sequentially increases in investment and money market baldness made up for lower yields in our portfolio.
Credit quality results were stable however, some metrics were mixed.
We saw lower NPL and lower provision.
But NPL inflows and net charge offs were higher.
I will provide more detail during his commentary.
Tangible book value per share increased by approximately $2 to $53 at 41 cents.
Now I'd like to give you an update on the business environment in Puerto Rico.
Please turn to slide four.
In general.
Economic activity in 2019 has leveled off.
Okay post hurricane rebound year in 2018. However, this activity continues to trend are well above what was observed in 2016 and 17.
With respect to migration trends.
Most recently released passionately data from the San Juan Airport.
Flex that the net number of people who left the island through July .
Was approximately 20000.
Excluding 2018.
Which was substantially impacted by the inflow people coming back to Puerto Rico following the hurricane.
The data for 2019 reflects a favorable variance compared to the same period in 2015, 16, and 17, which averaged outflows of 63000 people.
Employment trends continue to be positive.
In September .
All employment, which includes self employed individual was up 1% compared to September 2018.
The unemployment rate decreased to 7.6% in September after remained steady in the mid eight 8% range during the prior year.
This is the lowest unemployment rate in Puerto Rico, well I'm back at least 55 years.
Salad employment grew by 7.8% year over year, the improvement was driven by an increase of 1.3% in the private sector offset by 1.1% decline in public sector employment.
The auto industry continued to perform well.
25000 units have been sold year to date to September .
That was 2% compared to 2018, but up 30% and 25% versus comparable periods and 2017 and 16, respectively.
So net sales were down 8% when compared to the first nine months of 2018.
So there was a considerable surgeon activity early 2018 following the hurricane.
However, sales were 23, and a 14% higher than comparable periods in 2017 and 16, respectively.
Internal metrics, we track to monitor economic and client activity continued to show positive site.
Our customers debit and credit card purchases in the third quarter grew by 4% compared to the third quarter of 2018, and 2% compared to the first nine months of 2018.
Consumer loan origination trends in Puerto Rico have also been solid, especially in the auto sector.
Mortgage originations were 3% lower than the previous quarter, but 2% hard year to date compared to 2018 and were driven primarily by higher home purchase activity.
On the commercial loan side.
Balances declined sequentially on higher pay offs.
Are we continue to expect that incremental then activities will be tied to the performance other local economy.
Copper as customers in Puerto Rico grew by 12000 this quarter and have increased by 37000 said to December 2018.
As we have comedy before.
The sustainability and pay a further progress in the putting go county, well be heavily dependent.
On the magnitude and timing of federal recovery funds flowing into the island.
The disbursements sort of fun.
Has been slower than many had hope or anticipated.
This delay is related to concern regarding appropriate local oversight of the disbursement of federal fun.
And the the political uncertainly and we experienced during the summer.
It is difficult to predict whether this increased scrutiny Walton late in fact, the amount of federal funds received however, we continue to believe that these cells will be significant and they will have a very positive impact on the local economy.
I'll turn the caliber to carve those who will discuss the financial result in more detail.
Moving now to good morning.
Please turn to slide five for third quarter results no. The additional information is provided in the appendix slide deck.
Today's earnings press release details variances from the second quarter, primarily higher operating expenses offset impart by higher non interest income on lower provision.
Net interest income for the quarter was 477 million flat to the second quarter.
This number benefited from higher commercial launch in the U.S.
Higher volume of investment security and higher consumer and all the wrong.
Yeah.
There was also one more day in the quarter, which added 3.8 million. So net interest income.
These benefits were offset by lower commercial loan balances in Puerto Rico.
And higher interest expense.
Well deposit costs were lower in the quarter <unk>.
The increase in interest expense on commodity driven by higher volume other positive copier banks digital channel.
From the public sector in Puerto Rico.
We continue to be asset sensitive so lower interest rate negatively impact our result by four to 5 million per quarter for every 25 basis points dropping rates.
Other factors like I said mix and the shape of the yield curve also impact.
Yes.
The 4.4 million increase noninterest income was primarily driven by a 12.3 million improvement in mortgage banking results.
Randy due to a favorable variance in deferred body adjustment of our MSR Rose 1.4 million higher deposit service charges as well as higher credit card fees in Puerto Rico.
This benefit was partially offset by two items.
2.7 million lower other service fees, mainly driven by 3.5 million in contingent <unk> insurance commissions received during the second quarter.
An adjustment to then if anything reserves on previously sold loans, increasing by one by 5.3 million.
Due to their their release over 4.4 million reserve into second quarter.
Total operating expenses were 376 million, an increase of 13.5 million from the prior quarter.
Personnel cost increased by 6.2 million to corridor.
3.9 meal, which was due to annual merit increases and higher headcount headcount.
All 3.2 million was related to annual incentive including the corporations profit sharing plan.
So the first three quarters of 2019, we have accrued to pay totaled 19.4 million in anticipated profit sharing expenses.
Technology and professional fees increased by 3.3 million, primarily due to higher expenditures and regulatory accounting and technology fees.
Offset in part by lower legal fees.
Other operating expenses were $6 million higher mainly as a result of increased legal contingency reserves as well a 2.6 million loss related to undeveloped corporate site moved to held for sale during the quarter.
Or expenses were down 1.4 million sequentially, reflecting a small gaining the third quarter due to higher gain on sale of property.
These increased expenses were partially offset by our lower FDIC deposit insurance of 2.4 million maybe go toward credit received how popular back.
We estimate fourth quarter expenses of approximately 385 million.
That's a result, we now expect our quarterly average expenses for the year to be approximately 368 billion, which is slightly above our original guidance of 264 million.
The average is mainly due to expenses associated with our profit sharing plan.
Our effective tax rate for the quarter was 20%, which includes a benefit of 4.3 million related to increases to the amount of excess accent income for the current year.
Excluding this adjustment our effective tax rate was 22%.
For 29 pain.
We now expect the effective tax rate to between 2022 %.
Prior to the prior estimate aplenty total time before.
This change results from expected higher levels of tax extend income and be PPR.
In the fourth quarter posting team in connection with the filing and true up of our 2018, Puerto Rico tax return.
I wish I would also I mean, it tax returns for the years Plenti 15 through 27th the revising up the amount of excess income for dose years.
We expect these amendments to result in a positive for Q, what tax adjustment of $15 million to $20 million.
Please turn to slide six.
Our net interest margin was 4% down 11 basis points from last quarter.
I thought yields were down 14 basis points in the quarter driven by higher cash investment portfolio was the impact up to 25 basis points be creep into rates.
The higher investment volumes added to our net income for reduce our overall acid you.
Loan yields were down slightly less at 11 basis 0.26, 0.7%.
Total deposit costs in the quarter decreased two basis points to 73 basis points.
Cost of our interest bearing deposits was down four basis points to 92 basis points, mostly due to a lower rate.
What a higher volume of Puerto Rico, probably affected the pockets.
Offset by higher deposit costs in the U.S. driven by mix.
The cost of retail and corporate deposits in Puerto Rico was flat with Q2.
During the third quarter, Puerto Rico, Polys deposit increased roughly 11.4 billion.
However, since the end of the corridor deposits have increased by around 1 billion.
I think that's got my son earlier third quarter auto sales in Puerto Rico were strong.
Even as the market normal life is from higher volumes and 28 Pete.
Our portfolio grew by 45 million into period.
The Puerto Rico mortgage business originated 177 million of loss in the third quarter.
6 million lower down into second quarter, what 5 million higher than the same quarter of 28.
No one box sets were basically flat quarter over quarter.
I'd be PPR, we continued to see elevated levels of commercial loan repayment that exceeded our strong origination levels.
In the U.S. come in the U.S. commercial mortgage loan balances grew by 36 and 37 million respectively.
Well the first name first nine months of 2019 popular as loan portfolio has grown by 500 million.
We expect to end the year with lumbar similar levels at the end of the third quarter fulfilling our outlook of slight growth in overall loan balances Fourtwenty 19.
Please turn to slide seven.
Our capital levels remain strong relative to maintenance peer banks, that's worth with respect to woke up a life regulatory requirements.
Our our common equity tier one ratio was 17.5%.
Print 16.8%.
I never <unk> volume in the quarter squeeze one by $1.97 cents per share to 53 41.
The increase was driven by our quarterly net income and higher unrealized gains on investments, which more than offset the impact of our common and preferred dividends.
Well continue to pursue our target maintaining and improving our dollar the return on tangible equity.
Please turn to slide eight.
We have to Peter <unk> evaluation and implementation efforts for sequel.
Based on our preliminary analysis. After June 30, we estimate that the allowance for loan and lease losses were increased by 362 400 million or 85% to 95%, albeit 16, researchers excluding purchase credit impaired loans.
They made an increase is driven by Puerto Rico mortgage credit card on auto loan portfolios.
Based on these preliminary estimates the day, one impact will be that's kinda Cecil would result in decreased tangible book value of approximately $3 per share.
Probably sitting regulation and assuming no regulatory changes.
Even though aquilar I was already exceeds 1.25% up loans being incremental allowance, resulting from Cecil will be excluded from total capital.
As such we estimate this they want impact will result in a 30 basis points reduction you see the one and total capital.
After the industrial Cecil popular will continue to be wall capitalize on their across all three.
In accordance with breast and regulatory guidance, we plan to facing that they want effects of Cecil on regulatory capital over a three year period.
Well continue to work on our models assumptions and implementation plans through the adoption date in the first quarter 2020 .
We expect partners changes disclosures, an update as we refine fees that.
With that I turn the call over to leave you [noise].
Thank you Carlos.
Good morning tool.
During the third quarter 319.
The corporations credit quality results.
Do you have to show.
It was threatened.
Certain events cost NPL inflows on charge off in Puerto Rico.
The increase this quarter.
First we sold a 40 nearly tripled on a result that any 7 million charge off.
And I make million reserve release.
Second.
We move to nonaccrual certain previously we serve commercial real estate troubled debt restructured loans.
Result that increase to NPL and NPL inflows of 25 million.
The 5 million, Georgia for the experiment.
Finally.
We revised our line pipe auto loan charge off policy in connection with a reliable systems conversion during the third quarter.
We sold that in a 7 million increase in the Georgia.
Their credit quality metrics of our U.S. operation.
Remain favorable.
With lower MPL.
It wouldn't be on inflows on lower net charge offs.
Please turn to slide number nine to begin the discussion.
Nonperforming assets decreased by 7 million.
To fix on their own totaling 6 million this quarter.
Then by a decrease of 7 million in nonperforming loans, coupled with a slight decrease of 1 million in all regions.
Declines were mainly driven by.
By improvements in both Puerto Rico I'm the U.S.
Nonperforming loans in Puerto Rico decreased by 2 million.
Driven by lower mortgage Npls of 13 million.
On lower consumer NPL of 4 million.
Offset impart by higher commercial NPL 17 million.
Decreasing commission MPL, well, it's mainly related.
To have TV on commercial real estate loans that were partially charge off during the quarter.
In the U.S. mpls decreased by 5 million.
Mainly related to charge off.
Our third quarter.
The ratio of Npls to total loans, helping portfolio.
Remained flat at 2.1%.
Please turn to slide number 10 to these calls NPL inflows.
Compared to the previous quarter.
Inflows of Npls increased by 40 million.
Primarily related to higher in closing Puerto Rico.
Driven by the previously mentioned.
TV Ares commercial real estate loans.
Oh gosh inflows in Puerto Rico continued to be considerably lower than in previous years.
Jim I know we're early delinquency.
Inflows to empty building the U.S.
Decreased slightly.
Before museum from 6 million inner body of water.
Turning to slide number 11.
Net charge off for the quarter amounted to 68 million.
For 1.1% of average loans, helping portfolio.
Compared to 47 million.
Of course, Tony one basis point in the prior quarter.
The increasing their job well driven by my an increase of 23 million in Puerto Rico.
Offset impart by.
Well you decrease of 2 million in the U.S.
The increase in Puerto Rico walk through them by higher commercial net job of 10 million.
Hi, consumer net charge off of 9 million.
The commercial net charge up in Greece.
Well, it's driven.
Mainly by the previously mentioned to yours on covered loans sold.
The increase in consumer net charge off.
Was largely due to the revision I lightening of the auto loans, Georgia policy in connection with a reliable system conversion.
The decrease in the U.S. was mainly driven by lower consumer net charge off.
The corporation, allowing for no losses decreased by $30 million from the prior quarter to boil down 12 million.
Do you run by a decrease of 25 million in Puerto Rico, coupled with a decrease of 6 million in the U.S.
The decrease in Puerto Rico was principally driven by.
Our job on previously we serve lawns, sorry of 13 million.
Reserve releases from the Jo Malone sold 8 million.
I'm continuing improvement in the last month.
Mortgage portfolio.
These decreases were partially offset by higher resort for auto auto loans, mainly related to the growth of the portfolio.
The decrease in the U.S.
Reflect settlement on charge offs related to attracting a lot in portfolio.
Also be another third quarter.
The ratio of <unk> losses to MPLX Trued up 92%.
Compared to 96% <unk>.
The provision for loan losses totaled 36 million.
He down from 40 million for every quarter.
No we started to be increasing net charge off the for region degrees.
Due to the effects of the loans sold on the improvements in the Puerto Rico mortgage portfolio.
To summarize critic why do we Totesport <unk> third quarter computer showed stable trends.
Although certainly been affected NPL inflows on charge offs in Puerto Rico.
Credit quality metrics of our U.S. operation remain favorable with strong performance public water.
With that I would like to turn that going over to Ignacio for his concluding remarks. Thank you.
Thank you ladies and Carlos for your update.
The third quarter was another solid one as we can you continued to build on the strong performance or the first half of the year.
Our Puerto Rico franchise is unrivaled.
Consistently grown our retail and commercial costs customer base and serve approximately 1.8 million customers.
We do not take our leadership position for granite, however, and we remain focused on enhancing our customers experience across all our channels.
Our unmatched branch network is enhanced by anybody innovative digital solutions.
Proximately 893000 of our clients are active online and 78% these clients use mobile devices to interact with us.
In September of this year, 52% of our deposit transactions in Puerto Rico.
Were processed through Smartid dams and mobile devices.
I figured it has been growing consistently.
The Brad.
And the depth of our retail and commercial product offerings in Puerto Rico, how allow us to meet the evolving banking needs of our customers.
Our operation the mainly United States, while more focused.
Providing diversification to our footprint.
We have a strong commercial lending unit is complemented by to specialize national lending businesses condo sanitation banking and health care.
Our investments in Evertec and BHD now.
Contribute to earnings.
And also represent unrecognized value.
We are encouraged by our results and remain focused on enhancing shareholder value.
We're now ready to answer your question.
We will now begin the question and answer session to actually quite she May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then to at this time, a pause momentarily to assemble roster.
Our first question will come from Brett Rebecca and that's Piper Jaffray. Please go ahead.
Hey, guys good morning.
Morning.
[laughter] Kinda talk to questions. Let me, let me just start with the balance sheet and I'm talking about money market was up 2 billion in a period the billing on average and 2 billion in deposit growth I assume a lot of that was.
Government deposits can you just talk about won the deposits in the quarter and then you know kind of what do you plan on doing what the excess liquidity relative to the build up and three Q.
Yeah meet your your I'd be curious assumption is correct.
A big the biggest part of the Delta on deposit was holding off the.
As I mentioned.
We closed the quarter would probably talked about the or 11.4 billion I have actually gone down by about 1 billion soon and the.
We ended the quarter as we do not have fill a visibility on exactly how that money will be used bodily harm and we are keeping a lot of it in short cash and short term investments.
Which explains the that's why the bonds.
Okay.
And then Cecil ended up being just a little bit less and then then I always thought maybe a talk question here, but it would seem like you'll be in a net reserve release position.
Next year is there or is there a possibility that provisioning could be.
Pretty modest relative to the buildup in Cecil in 2020.
I mean, we.
Brett maybe I mean, we tend not to provide what we're looking.
Provision numbers I think are we to exercise work or.
Let me jump forecasting was difficult prior to Cecil I think after diesel.
So many moving product or is that it would be even even more difficult thing we're still going through.
And our modeling and understanding sensitivities. So there are not much information or we can provide you this stuff.
Okay.
And then just thinking about capital Yeah, you know ever talk the excess reserves.
The goal is to get to 11% to 12% seat you on your 17 and a half Cecil doesn't have packet that much how do you go out and I know the payout ratio is not expected to be even.
Even 100% how are you guys going to deploy capital in the next year kind of absorb some of that access level.
Yeah, I think the the the answer to that it is.
Hasn't changed very much from their ones you've heard a.
<unk> for a very unfortunately, we gonna have to to try to pull all the levers available to us for doesn't have to Oh, hopefully find some some assets that we can purchase hopefully we get some organic growth both in the main on Puerto Rico, and there will be the best partial deployment of capital.
Obviously his or her.
As for term business, we are in the midst of our discussions with regulators with respect to cover return.
My way since I part of the next question will be timing or that I'd be hasn't changed where we're in discussions on we're hopeful that will be in a position to share something with the market in our in our fourth quarter webcast in January .
So hopefully we can within compared to the share more more more of that with with our shareholders.
I mean do cores for lets you know we've kind of really do emanating from recalling do of course, I will look at opportunities in that front as well so when I could go to them.
To try to pull all the levers.
And overtime.
Hopefully our capital levels will trend in the direction of our maintenance Peters.
Okay. Just one last quick one I'll hop back in the queue, where you guys did you guys get a look at the card portfolio that Santander did not include and the transactional NFI.
No no we are well, we though we don't comment on deals going to their now right.
Okay, great. Thank you.
The next question will come from Scott Valentine with Compass point. Please go ahead.
Thanks for taking my question just with regard to launch expense. Another couple of items professional fees were up and costs you gave guidance for a three to 5 million.
In the fourth quarter I assume that includes the added incentive accruals and then if everything that okay. That's everything Okay. And then just I don't come on 2020, when we think about a base rate.
For for non interest expense, if we exclude the accrual is that then kind of a good base rate to go forward and then it would assume grow a little bit with inflation and and maybe some some investment, but but that would be a good base rate ex actually accrual.
We are still the mess Oh Oh of.
Trying to finalize our own budget and that is usually the based as always we share with the market or our estimate for party expenses for this year, but so we haven't concluded that you got yet.
So I I Kinda give you Wouldnt tell you guys are quite yet.
I have to give me a few more refunds.
Okay Fair enough and then on the change in auto policy I assume that was I guess rivals policy now is in effect the same as be Pops policy I assume that but that was the driver.
Our job policy it starts to <unk>, yeah, Yeah were aligned for both groups.
Okay, but it was reliable moving to be pop and not be pop moving to reliable I assume.
There were two changes while the changes was a reliable moving to beef up on but otherwise I think a reverse.
Okay, and then last question I'll hop back into queue Cross you mentioned I guess, a a legal expense that was in not interesting expense is that a onetime item or is that something to watch going from now that that's mostly related to the securities arbitration case, it the accrual increase that growth.
You know they there they FINRA has like a six year statute of limitation and a that well that was coming up I believe in August and so we had to.
A number of new cases are filed before the deadline. So we've we've increased the the reserve for security.
Situation really closely to the political bond.
Okay, all right thanks very much.
The next question will come from Alex Twerdahl with Sandler O'neil. Please go ahead.
Hey, good morning, guys.
Morning.
I'm, just hoping maybe you could shed a little more light on a the expectations for a longer I guess, it's kind of a little bit surprised to hear they said that it really expecting law is to be flat in the fourth quarter, just given some of the positive economic trends that you're setting earlier in the call on unemployment seems like its or employment and it seems like it's kind of broken through that.
Darren level of a million jobs recently and.
Money coming to the island, Yeah, what do you think is getting a really be.
When do we gonna start to see loan growth pick up in a more meaningful fashion from some of the sectors. There not just the consumer piece.
As this is like now says that's very hard to predict I mean, we have seen when you go around and you talk to clients that you see it seems.
More sort of positive attitude and you see people looking at things.
I just like I said it during the call the flow of federal funds has been slower so that has stopped the construction industry a bit but we continue to see hotels that added four going to be added next year, so that should help the employment.
And so long growth, but there's still a lot of liquidity in the system and we are you know we are originating a lot of loans, but we're getting a lot of payoff. So.
Again, we're you know I don't I don't see I don't see this is gonna be like it.
Hey, one.
One moment jump off I think said it'd be a gradual increase or we are still optimistic that long growth will pick up and they see 2020 as the economy picks up but again, we've been we've been it's itself because there's a lot of liquidity in a lot of loan pay offs. So.
We're working very hard to a two originate loans, we do we do see a positive sentiment at our clients.
So, but I don't think I see an immediate jumped from one quarter or the other right I mean, our bankers are very busy Alex there they actually disbursing alone, but they're not just said.
Part of the challenges our clients have lot of money as well and actually we've seen that you know increasing our commercial deposits.
Oh, no level payoff continues to be high.
So it is our best guess for for this quarter hopefully it ends up whether or not.
But far basket you know the right now.
Okay, and then just a little bit more color on the deposit flows yeah, and anything you've already seen a billion or so deposits flow out quarter to date or since the end of last quarter to to now do you think that's kind of the start of a a long trend of deposits flowing out or is there some specific payments or the government had to make that caused that that outflow or.
I mean youve any visibility just over at least next couple of quarters No no no no specific fame and as you know the.
Outside of adjustment has been filed with the court, which would provide for certain payments to me. He made for retirement plans at the beginning of the team at a dead, but that has not been approved so there really hasn't been a any change in that a government obviously.
Time to time Relocates reallocate it deposits from different banking institution. So not only the use you can assume we get all the deposit so they may reallocate some of those funds with time, we all expect the government deposits to go down we know that they see that plan I guess that will be a reach the money will be used will have less excess liquidity.
That's been very very very hard to predict that.
So we'll see I think we're getting closer to a plan of adjustment.
Maybe sometimes it doesn't 20, but you know that's is gonna be all kinds of litigation all kinds of complications so.
Okay very difficult to predict one but in the long term, we know those subs will go up but nothing specific has happened other than I would say certain reallocations among different depository institutions.
Okay. Thanks for taking my questions.
The next question will come from Mark Palmer BT hygiene. Please go ahead.
Yes. Thank you.
Wanted to see if you could comment on.
The pipeline for a asset acquisitions, which is one of the means through it should deploy capital.
Bulls and Puerto Rico and also on the mainland.
No we're always Oh always looking for asset acquisitions Mark.
So in in Puerto Rico, it's a little bit easier because almost all financial assets are in our bucket list.
Very few effectiveness in Puerto Rico, we're where we don't participate.
In the U.S. It is it's a bit less so because we have a more folks whose operations U.S.
No there's always things being worked on or nothing specific that I can comment on right now.
And the ones I can say is that we don't seem to be working anything on the magnitude of reliable [laughter]. Unfortunately, so a working in a bunch of Oh things that we're always looking at they are not.
I mean do they tend to be.
Smaller pockets of assets.
But nothing specific.
Okay and also if you could comment on what impact you see from consolidation on the island and in particular, the just announced.
Santander deal with first Bancorp.
As it pertains to be pop and opportunities well, yeah, I think I think that obviously, we're seeing a big change and the in the local banking industry that obviously I think many of us including he is anticipated. So he will be seem to be international bank Scotia and sent them there assuming all regulatory.
Boozer acquired will be exiting the market Vida first half of next year.
Hi, This Lee we think that will create a lot of opportunities for us.
You know clients will have to deal with a disruption of these mergers as well as the institution itself.
You never know that some clients may have met inclined to be at either one or both of these banks because.
They wanted to be with a big International Bank.
You know you don't know what motivate customer so that they that there'll be an opportunity for us to two.
To to to go after clients and up that you know they had been a those banks for a specific reason that no longer applies. So we see a lot of opportunity there may be operating to pick up a good talent also.
Well, there's gonna be synergy to these mergers other well.
Presumably you know they'll be there'll be some talent that there will be available.
So we think there's a lot of opportunities that and and you know obviously in most large transactions where a play already we may become a larger play are having met or cancel those that were not.
That said, we are well, it's gonna have to up our game. Eventually after these conversion has done we're gonna have to local to local competitors. There that'd be great focus on this market. So we're going to have to up our game. It becomes very very you know it to execute even better than we've done the pet. So we see lots of opportunities that were also you know we're also going to be a aren't.
<unk>.
Thank you.
The next question will come from Glenn manner with Keefe Bruyette <unk> Woods. Please go ahead.
Hi, good morning.
Morning Arnie.
I.
I just have a question on the T. So on the impact the 360 to 400 million does that include both the originated Buck in kind of the P to P. C. D and then when I take the 360 to 400 and divided by the 85% to 95% I get in the 420 million for reserve, but I think.
Your reserve is over 500 million tickets wonder what am I missing there on that math.
I mean, we we stated that we're excluding from the analysis.
Purchase impaired loans, so somehow though.
The answer to the first your first question Charles will be answered the second question.
<unk>.
Okay. Thank you.
And well show.
Yeah sure you had cited a better auto sales somebody auto sales. This year have been fleet sales does reliable and be pop participate in that market also.
Yeah, we participate and all that and and that market every year. This fleet sales you know so in some of that is seasonal but I wouldn't I don't I don't think a you know I wouldn't make.
The Delta as are the difference in the years Presales are always important but yes, we do participate.
And that market.
Okay. Thank you.
Again, if you have a question. Please press Star then one our next question will come from Brett Rebecca and of Piper Jaffray. Please go ahead.
[noise] Hey, thanks for the follow up wanted to talk about the margin a little more for a second I know, there's a lot of components that go into it but given you know your stated asset sensitivity and the liquidity on the balance sheet can you give us some color on how you're thinking about the margin in the fourth quarter and then.
Cuts from here, you know kind of impact that you would see from not.
Yeah, I mean the.
Uh huh.
Got it it's a margin, but I can I can talk of other components over what ends up in our margin.
This or three pieces to to our Mark <unk>.
The first pick piece is on mix.
And is driven by you know when we have a significant influx and deposit defense soon to be I live in the short term to short term investments.
So investments are low lower yielding the loans. So when this happens with that makes our margin will suffer even though we'll make more more more money more <unk>, our net income where our margin will suffer a again that the asset side of that mix will very much and on on deposit flow.
Those the second part of the margin is is loan yields.
Uh huh.
And.
If you look at the loan yields this quarter or the change your loan yields is serving the right ballpark. If you think done around a third our loans are variable and and.
The the fact that rights twice for the actual market rates went down more than by 25 basis points for the quarter. The average market was probably went down.
Mid Thirtys, although 30 basis points third or that it sounds about right given our.
Our loan mix and that's why you saw on our on our.
On the loan yields to be then that there is no change in mix of loans.
And to the extended the changes in rates going forward. The same as Hoffman third quarter. Then the effect on loan yields will be will be similar ER and the last piece is a core crosses the office. That's composed of two pieces or our personal commercial deposit book in Puerto Rico that as we comment that I have known.
Changing cost this quarter and then our public the buses, Puerto Rico that would come in to prove as they have to be.
You don't want to reduce is market linked.
But to the extent that that.
The bottom so both above and go up and down he will affect our overall reported across telephones I mean that since it will be reduced so overall the sensitivity our cost of the buses as low as you know so the outcome depends on this three pieces.
The depending on what your assumptions are for Lucerne FISA, you'll get the answer [laughter] okay.
Thanks, Carlos and then I I guess going back to credit maybe video can you talk a little bit you talked about credits.
The 41 million of TDR commercial real estate loans was there anything.
There was similar with all three of them or what what.
What are not I guess in North Korea came around when they were but what kind of resulted in those becoming inflows in the MPL category.
Hmm goes were I mean, there there are two or three big ones.
The number on the where you have.
Yeah, we see every loans over into problems are being.
The RIN renegotiated undeveloped process.
Maybe a determination, but given <unk> they were.
And now we're putting to nonaccrual nothing specific <unk> other than the fact that.
There are no no no owner occupied so their own related bone, though there has to be important to know that they have continued to pay I mean, we just based on current accounting guidance in women with regard to them as we felt.
Hi movement to mimic what was appropriate.
Okay Fair enough and then a one last one just on competition you know some banks in the U.S. So as I've noted to another ratcheting of.
Competitive pressures relative to the GE Connolly thought in rates and now Puerto Rico essentially has three institutions can you talk maybe you bet about where rates have gone on new originations versus the decline in and interest rates and kind of how you see that playing out.
Well I think it depends on have you seen our variable rate book, obviously goes down with market rate fell as close as saying about a third of our book is tied to variable rate. So it's going to go down what the market in Puerto Rico. Then you have you had different sub segments of the market right you have the.
The residential mortgage market, which you have the the one that spacing conforming, which you know it's based on on really almost national pricing from the from Fannie Freddie Ginnie.
Yeah, the nonconforming book I think that.
Probably you know we've been able to protect our loan yields.
But that are there some banks for the state, but there is competition in Puerto Rico. So you know we have to we had to be competitive yeah. I mean, one thing to keep in mind is that Oh, we have.
Our competition is really sector independent.
So not necessarily only the local bank.
No in the middle and smaller commercial segment I seem to local banks are our core competition in the large commercial segment, we compete with would stay type banks and pension funds and hedge funds and everybody else. So that that competition actually will not change as a result from a local local.
Elevation.
In some of that consumer products Oh, we compete.
For example in auto we compete with the.
The captives from the different our company a credit under credit unions very big in the personal loans we compete.
One level with National offers from Marcus I know people and all that level with local credit unions.
Credit cards is really a national market that we compete with American Express and bank of America different Morgan and et cetera. So so the the oh, so some of that pricing competition, we feel with every day is not all necessarily local.
Okay, I'm not to belabor it too much but maybe a better way to ask the question you know your U.S. operations versus your Puerto Rico operations.
Have loan spreads in Puerto Rico held up better than what you've seen the U.S., yes, yes, yes, yes.
Yes, all right [laughter], yeah, Yeah, Yeah, Yeah, easy answer [laughter], especially the CE Mark in the U.S., which is then the most competitive involved.
Okay, great. Thanks, it or some color.
This concludes our question and answer session I would like to turn the conference back over to Ignacio Alvarez for any closing remarks. Please go ahead.
Thank you for joining us today and for your questions.
We're pleased with our results.
I look forward to share results for the full year in January .
Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.