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Popular Inc
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Good day, and welcome to the Popular, Inc. Fourth Quarter 2017 Earnings Conference Call and Webcast. [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'm joined by our CEO, Ignacio Alvarez; our CFO, Carlos Vázquez; 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 web page 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 2 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 has 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 Article of Engineers' latest estimate, substantially all of Puerto Rico should have electricity restored by the end of February. While the restoration of power generation has been frustratingly slow, our operations and several measures of economic activity have returned close to pre-storm levels.
Regarding Popular's operations, currently 157 out of 168 of our Puerto Rico branches are open, and 541 out of 635 of our ATMs are operating throughout the entire island. These metrics represent significant progress from the weeks immediately following 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 has 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 level. The trends are encouraging, but credit demand in some sectors, like auto and personal loan, have recovered faster than others, such as mortgage.
On the commercial side, while still early, we have seen higher demand from financing from clients. They are taking advantage of opportunities that have risen as a result of the hurricane. We expect additional lending opportunities to come in sectors such as construction.
Despite the interruption for the operation of many businesses on the island, employment was only down 3% in November compared to August. With much of the decline in the hospitality sector, jobs we expect to return once larger tourist hotels reopen later in the year. The pace of economic recovery will be heavily dependent on the speed of the remaining power restoration and the magnitude and 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 a stimulating impact on the economy. The island has not yet received the vast majority of expected insurance payments and U.S. federal relief funds.
Insurance companies have begun to make advances to our clients, but the pace has been slow due to the massive volume of clients. Regarding federal funds, more than $1.4 billion have been awarded in emergency relief assistance to individuals, private corporations and municipalities. In addition, the U.S. Congress approved a relief package that includes up to $4.5 billion in loans to improve Puerto Rico government's liquidity position. However, the dispersion of these funds has been delayed pending more clarity on the government's cash balances. There has been much discussion of the population decline on the island due to the increase in emigration after the hurricane. There is no doubt that the trend that we have been observing in recent years has accelerated since the hurricane. That being said, some of the numbers that have been published appear to us to be overstated. At this point, it is not clear how many of those who have left the island will eventually return as 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 decline in population, Popular's deposits and customer accounts were up for the fourth quarter.
Looking beyond the immediate impact in 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 festering for 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 for 2017. Please turn to Slide 2. While much of the discussion of 2017 naturally centers on the impact of the hurricane, the year also included important accomplishments. We grew commercial loans in our U.S. business by 16%, increased our total deposit base by 17% and achieved a slight decline 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.-based DTA. Adjusted net income from continuing operations was $276 million, down from the prior year's $358 million, mostly due to both the impact of the hurricanes and $64 million in provision expense related to our U.S. Taxi portfolio.
Credit quality metrics include the effects of hurricane-related relief measures for our customers. We have offered a moratorium on consumer, residential and commercial loans and waived late-payment fees. Nearing all these payment moratoria ended during the fourth quarter, but still have an impact on both full year and fourth quarter credit metrics. Total nonperforming assets, including cover loans of $743 million, were down from $774 million at year-end 2016. Non-covered nonperforming loans decreased slightly to $551 million. Nonperforming 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 remain strong, with year-end Tier 1 capital and Tier 1 common ratios at 16.3%.
Please turn to Slide 3 to touch upon fourth quarter highlights. In the fourth quarter, Popular reported a net loss of $102 million, including the effect 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 to experience 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 discusses 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 Slides 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 ] affected by the hurricanes, including lower noninterest income and higher operating expenses. Hurricane Maria negatively affected many parts of our business, including credit and debit card 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 increased 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 yields of our $1.7 billion Westernbank loan portfolio increased to 8.59% from 8.5% last quarter. Over time, we expect this yield to 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, this 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 deposits across products in Puerto Rico. This was offset slightly by higher yield and money market deposits in the U.S., driven by continued organic commercial loan growth. In our U.S. operation, the commercial portfolio grew 4% in the fourth quarter, and we continued to see a strong pipeline. For 2018, we anticipate slight growth in overall loan balances, with U.S. growth more than compensating for Westernbank run-off. 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 if attractive opportunities become available.
For the fourth quarter, noninterest 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 valuation 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 Hurricane Maria. Despite this drop in production, we have seen originations grow each month since October, with more than half of this quarter's originations happening during the month of December.
Total operating expenses for the quarter were $322 million, up $5 million on the impacts of 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 at a smaller magnitude than in the last 2 quarters. The hurricane's effect 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 under our E-LOAN brand and a white label credit card offering in the U.S. mainland, are expected to diversify our origination channels and contribute to the company's profitability over time though these initiatives will have a larger effect on expenses in 2018. Both of these initiatives have been in the works for a couple of years, but are only now becoming visible in our financial results. For the full year 2018, we expect quarterly operating expenses to average $328 million, higher than our current run rate due to the investment in these growth initiatives as well as other efforts, such as strengthening the bank's cybersecurity, continued compliance of regulatory investments and the implementation of [FLSA] For the fourth quarter, we 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 affects 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 has no impact on our regulatory capital position or the related ratios since due to Basel 111 limitations, most of our U.S.-based DTA was already excluded from regulatory capital.
Popular's tangible book value per share dropped by only $0.10 the past year to $43.02, despite the charge related to our U.S. DTA and the effect of the worst hurricane in nearly a century. These strong capital results are a testament to the resiliency of our operation and the strengths of our business model. The strong results of our Dodd-Frank Stress Tests were made public in October. Timing of any announcement related to capital 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 affected by the moratorium granted to consumer and commercial borrowers for Hurricane Maria. Puerto Rico credit metrics reflect lower NPLs, lower inflows to NPL, lower provision for loan losses and higher net charge-offs. In the U.S., we recorded a provision for loan losses of $10 million and charged off $32 million related to our taxi medallion portfolio, impacting the U.S. credit metrics medics for the quarter. Excluding the taxi medallion portfolio, which we acquired in Doral Transaction, asset quality in the U.S. remains strong.
Please turn to Slide #8 to begin the discussion. Our current outstanding direct exposure to the Puerto Rico government, municipalities and other instrumentality 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 had 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 municipality is pledged to the repayment of the loans. Our top exposures are to 4 large municipality 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 Bayamón, the second most populous municipality. These municipalities comprise 74% of our total exposure. Our municipal borrowers typically make 2 payments annually: interest and principal on July 1, and interest on January 1. The January 2018 payments were received as scheduled. 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 the 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 FHA programs in the U.S.
Turning to Slide #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 of Hurricane Maria. Nonperforming assets, including covered loans, decreased by $44 million from $788 million in the prior quarter to $743 million this quarter, driven by an NPL decrease of $35 million, coupled with an OREO 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 a lower inflows due to the suspension of foreclosure activity as a result of Hurricane Maria.
Please turn to Slide #10 to discuss NPL inflows. Compared to the previous quarter, NPL inflows decreased by $81 million, mainly due to the moratorium implemented after Hurricane Maria. NPL inflows in the U.S. remained flat on a linked-quarter basis, up $9 million.
Turning to Slide #11. Net charge-offs 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 net charge-offs was primarily driven by higher charge-offs in our U.S. taxi medallion portfolio. This was coupled with higher charge-offs in the Puerto Rico commercial portfolio related to 2 large previously reserved relationship of $9 million and higher charge-offs in the Puerto Rico mortgage portfolio of $7 million, due to lower recoveries after the hurricanes.
The Corporation's allowance for loan losses decreased by $24 million from the prior quarter, driven by a decrease of $80 million in the U.S., due to the previously mentioned taxi medallion charge-off of $32 million. At the end of the quarter, our taxi medallion portfolio had an unpaid principal balance of $232 million. Net of reserves, the current value of this portfolio is $83 million or approximately 36% of its UPB, representing less than 1% of our total loan portfolio, 95% of the taxi portfolios in New York City with an average current loan value 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 the taxi portfolio in the U.S. As stated in the last webcast, we are unlikely to have meaningful new credit information in Puerto Rico until the first half of 2018, sometime after the moratorium expire. That being said, through the fourth quarter, 2/3 of our mortgage borrowers continue to make payments similar to October. Similar metrics for all the loan portfolio are mixed.
Given the expiration of the moratorium at the end of 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, these 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, the U.S. asset quality remained 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 and expense categories due to the disruption of operations following the hurricane. Some of these factors are temporary, but an event of this magnitude will undoubtedly have longer-term effects. We face serious challenges, but there'll also be 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 on 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 clients while providing innovative solutions as part of our digital transformation efforts. As we shared in our last call, our focus following the hurricane was 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 relief measures for our customers, including, but not limited to, the moratorium. And we mobilized to raise funds to assist severely impacted communities, mainly through our Embracing Puerto Rico initiative.
To date, 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 so many projects -- is focused in so many projects that will help stabilize communities, such as providing access to clean water and installing solar-energy panels. Our longer-term plans include 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 4 months have demonstrated their unwavering commitment to our organization, our customers for their continued support and our shareholders for their trust. We look forward to 2018, aware of the challenges we face but energized and committed to continue and deliver results and honoring that trust and support. We look forward to updating you on our progress over the coming months. Thank you.
[Operator Instructions] Our first question comes from Arren Cyganovich with Citi.
It was good to hear the early results from the consumer portfolio. I was wondering if you could just talk a little bit about what other efforts you're doing to help get a view into the potential risk there? How confident are you in terms of your current estimates of potential loss? And when the timing you'll see in getting that kind of confirmation, is it just the delinquency or rate trends that we'll see over the next few months?
Yes. I think we're -- I'll let Lidio go into more detail. But we're watching the consumer behavior very carefully. We're looking at the general macro economic indicators all for the economy, such as employment, spending in terms of debit and credit card and how that impacts everything and we're looking at payment. Obviously, we're not going to get real definitive data until after the first quarter. So that's when we'll be able to dig in more. I don't know, Lidio, if you want to add anything on that?
Maybe also that we have contact with a number of our commercial clients. I would say, the majority of them are either open or partially open. Of the ones that we have contacted, the majority of them have some type of insurance. And we're encouraged by those trends.
And in terms of direct capital actions, one of the pushbacks you got from that recent initiation was the timing of that. Do you feel as though you have to go through a DFAST with the Fed again to potentially push that back, the capital actions towards the end of the year? Or how confident -- do you think you'll be able to have capital returns in the middle of the year?
Yes. And welcome to the call, Arren. The -- well first of all, will we be required to do a new DFAST come the second part of this year is in question. I think a robust capital discussion with regulators always includes a DFAST-like announcement in any sort. And that is always included in our consultations with them. So at this point in time, we are -- you are correct in that we have historically tied our timetable to the DFAST filing. We are not doing that at this point in time. We're still looking at, sometime 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 something.
The next question comes from Alex Twerdahl of Sandler O'Neill.
First one, just to drill down a little bit more into the deposit inflows that you guys saw this quarter. I mean, $1.2 billion of deposit inflows seems pretty awesome for an island the size of Puerto Rico. Can you just break out how much of that was continued inflows from the government versus potential insurance money flowing down to the island versus anything else we might be missing?
No. We -- I don't think we have the breakdown of the insurance inflows but I can definitely say that most of the increase in the fourth quarter was not related to public deposits, it's related to private deposits.
Okay.
Do you want to add something, Lidio?
I mean, the more -- the major point is Ignacio's point that it was actually not public deposits, there's a lot of core client flows, private clients and individual clients and commercial clients. So that's probably the critical thing. The other things to keep in mind, though, 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. The fact that our clients are not making payments on their loans and mortgages or don't have to make payments, many of them are, does help to have slightly higher balances in their account, so....
Yes, I think, what we're seeing is not different than what you've seen a lot of places have disasters. I think people hoard cash for a while, so -- and are a little bit more conservative. So I don't think what we're seeing is atypical of what other jurisdictions that had major disasters have seen.
That all make sense. I have another, question, somewhat related. I think you said the number is something like $25 billion-plus of insurance claim money that could flow down to the island, I've heard similar estimates from elsewhere. I'm just wondering, would it be a crazy leap to say that if you guys are banking 67% of Puerto Rico that you should see a proportion amount of those deposits flow through BPOP's balance sheet over the next 12, 18, 2 years.
Well, again, we said $25 billion federal funds and insurance, which is a pretty conservative number because as you said, some people have estimated insurance might be $10 billion to $20 billion by itself. We said $25 billion both. I think it's -- I mean, we are the dominant player in Puerto Rico so -- in terms of deposit shares, so we can expect that we will get a -- our fair share of any deposit. I don't think it's fair to quote me, but I don't think we should get [indiscernible]
Well, I think it's more flow than stock. So in all probability, something like 60% of that will flow through us, but it doesn't mean it will sit in, in our deposit accounts for our reporting quarter end.
Yes, okay. That all make sense. And then just one last question for me. The loans that got pulled back onto the balance sheet, the Ginnie Mae 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 everyone is on the same page. Under the Ginnie Mae program, if the loans are 90-days-or-more delinquent, even though they have a moratorium, the seller issuer has a right to repurchase them, the right, but not the obligation. So we're bring them back for accounting purposes. We actually haven't bought those loans back.
The next question comes from Gerard Cassidy with RBC.
Can you guys give us an update now that the tax law has passed in the United States, what type of impact, what early read is on Puerto Rico. And then there was some concern about the taxes on patents and stuff for companies located in Puerto Rico. Do you guys have any feel of, early on, what the impact could be to Puerto Rico?
I think it's too early to tell. The provisions to the tax code are complex. Unlike 936, which affected most companies similarly, this is going to have a disparate impact on different companies. It will depend on what percentage of the revenues are tied to intangibles that would have been transferred to Puerto Rico. So that you could expect that it would affect more the pharmaceutical and the medical and the medical instruments than other industries. It will not affect foreign operations in Puerto Rico. So we have a number of foreign -- our pharmaceuticals, it won't affect. So I think it will take a while to play out. I think most of these companies are looking at how these measures are going to work out. There's also been talk that there maybe some technical amendments in the coming months, some of which may address Puerto Rico. So I think you're not going to see a very large impact in the immediate future. We'll have to keep an eye on it, what it entails 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's relief for the smaller banks and there's talk, as you guys know, to move the SIFI designation to banks up to $250 billion from $50 billion and possibly, other relief for smaller banks. If that happens to pass and you don't officially have to go through DFAST because of your size, would that change your approach in talking to the regulators about returning capital? Or how could the change be [indiscernible] to that?
I'll let Carlos go in more detail. But I don't think, in general, I mean, as 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 -- I think stress testing is here to stay, and I think we're 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?
Yes. I mean, we are, obviously, in favor and happy to see any improvement in the regulatory environment. But as Ignacio said, some of the practices have really become management practices now. And we don't do it because they're required, we do it because some of these things actually make sense as we run our business. Now they may be done with a different level of third-party review, a number of other things. So we hopefully can be more agile 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 hope some of that goes through. But it is not like we're going to stop doing stress test. We actually have now incorporated that into our discipline, and we will continue to do some version of it.
Very good. And then just finally, maybe Lidio can share some thoughts on the medallion portfolio. If I recall, you guys, when you boarded on to your books, you guys did a good job of marking it down to the approximate value at that 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 write it down further?
All right, yes. I think when we first brought into our portfolio after going through the valuation exercise, we brought into our books about $0.60 on the dollar. That number is now down to about $0.36 of the unpaid principal balance. And as we said in the prepared remarks, most of our portfolio is in New York City, 95% of it, and we have -- we're carrying it around 233,000 of medallion -- per medallion in terms of loan balances. I think we feel comfortable with the levels that we have today. But certainly, it's a portfolio that we will continue to watch, given the situation of medallions in New York city.
The next question comes from Brett Rabatin with Piper Jaffray.
I wanted to first ask, are you guys pretty excited about the PREPA news yesterday? Because that's, to 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 statement as very positive. Obviously, it's a very conceptual statement, I think we all recognize. We all knew even before that statement that electricity was a -- one of the obstacles to our growth in Puerto Rico, and then PREPA had to be changed dramatically. I think privatization, obviously, is a good solution if it's done well and 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 that's also complex because PREPA is in a Title III proceeding on the PROMESA. So it will have to go through that judicial proceeding. But, yes, 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. So I'm just -- I want to go through -- your balance sheet is actually pretty asset-sensitive, 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 in the securities book. It looked like it had to have been pretty short duration stuff, given that flattish linked-quarter performance in yields.
Yes. The most important effect on our margin and one -- the main reason it dropped is asset mix. You are correct that our investment portfolio went up. The investment portfolio continues to have, I think, characteristics it has historically with us, it's 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 of our investment portfolio is...
about 3.5 years.
About 3.5 years, so we gravitate around that. Some of the stuff we added this quarter may have been a bit slower -- shorter because we're all looking at a lower rate. So...
But there are some tax reasons, including treasuries as well, given that [indiscernible] for Puerto Rico entities. So there was a massive effect consideration in the purchase mix of treasuries versus mortgage backed securities which is the other asset class that we usually use for the portfolio.
And with regards to your comment, yes, we continue to be asset-sensitive. So if rates go up, we like it.
Okay. Would the margin -- would you expect the margin to be higher from here assuming additional Fed hikes?
Well, it depends -- since the main driver of the drop in margin is asset composition, the answer to that question will depend on the asset composition as well.
Okay. Fair enough. And then, just wanted to go back to talking about the end of 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 hoarded cash? Or what trends do you think have led to that?
I'm not sure about -- I mean, the reasons behind it, quite frankly. But the data we've shown is that looking at delinquency and comparing to days in a month compared to the same stage prior to the hurricane and prior to the beginning of last year, we've seen improvements or similar results in most of our consumer portfolio. Obviously, the moratorium have an impact in terms of providing the consumer an insurance relief for the last quarter of the year, and that could potentially impact the level of delinquency that we've seen in the first month. So we're still -- we were encouraged, but, I mean, it's a trend that we need to continue to follow very closely.
Okay. And then maybe just one last one. The initiatives that you have that are going to result in 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 -- see income over the next 12 months as well?
Well, it will eventually, and I'm not sure it will over the next 12 months. I think what we'll see in this instance, in the next 12 months, is mostly the investment phase as opposed to the benefiting from the [crop] phase.
The next question comes from Glen Manna with KBW.
A quick question. On the fee income, waiving deposit service charges and 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 under the Fannie Mae or the Freddie Mac program at the JVA they have asked us to continue to waive late payment fess on mortgages. But on the consumer products, yes, the moratorium on late payment fees is over. So we'll see some return to normal, but it won't be 100% at the beginning.
Okay, great. And a quick question also on the government deposits. I think the U.S. Treasury and FEMA 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 that the Puerto Rico government had, where they were and whether they were restricted, because remember, these community delta 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 fund. We are expecting and we are anticipating they'd be -- our public fund levels will go down over time. But again, there's a question as Carlos would say, it's lower stock. Some of this money goes up, comes in, some of this money is restricted. But we are projecting that these funds will go down over time. We're anticipating that.
The next question comes from Joe Gladue with Merion Capital Group.
I guess, just wondering -- I guess, sort of recognizing the issue with your currency, but does the new lower tax rate, the corporate tax rate, affect your calculus on your thoughts on further investments in the U.S. mainland?
Not really. No. We're not driven mostly by taxes. No. Not really. We were happy to have a lower tax rate base, but I don't think that drives the relative -- where we invest our dollars.
We try to run our bank not on a tax position.
The next question comes from Josh Stirling with Off Wall Street.
I just wanted to follow up on -- and just reconfirm. So I think what I heard you say in the scripted comments was that 1/3 of the clients are noncurrent as of the end of the year? And I think you said it was all categories and not just mortgages. So I just wanted to make sure that it's actually, that is true. And then if it is, clearly, you made a point that there was better performance on auto, credit cards and some personal loans, and I wonder 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. And I'd love to get a sense of and if we can get a real-time snapshot of what's going on in those 2 important loan books. And all that would be really helpful.
Maybe to clarify, what we said in the prepared remarks was that 2/3 of our portfolio has continue -- of our mortgage portfolio has continued to make payments despite the moratorium. So even though we offered them or they were eligible to -- for the moratorium, they continue to make payments as scheduled. So it doesn't necessarily mean that once they are delinquent, so it just means the 2/3 continues to make payments...
They didn't take advantage of the moratorium.
Notwithstanding the moratorium. In terms of early trends in delinquency, it's a little bit more difficult in terms of our mortgage portfolio because, I mean, the moratorium requires a legal agreement related to the postponement of the payment, so that is a process that is ongoing. So in that front, when you compare delinquencies, January 2018 to January 2017, the reality you're not 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 gave as part of all the earlier questions, we have contacted most of our clients. We're happy to say that most of our clients have returned to operation, either completely or on a partial basis. Most of them had insurance. I think that will have to continue to normalize as time has passed and as electricity has begun to stabilize.
Yes, in terms of the commercial clients, most -- many of them, as smart businessmen, took advantage of the moratorium, but we've been in contact with most of them. But certainly, our larger clients are all starting to pay as normal. Some of the smaller clients, we've given them another 30 to 60 days, especially if they have an insurance claim pending. And it's a way to sort to bridge the insurance claim as it comes in. But normally, we're seeing our commercial clients coming back to payment without problems. And they appreciated the help.
Okay. So but you guys can't give us a number...
I don't have the number, yes.
Sort of a number around, because you were relatively clear about -- on the personal line side, where you were actually seeing repayments so far this year in line with last -- this year, this point last year.
I -- we don't have that number at hand for commercial. But I can say anecdotally, most of the clients, they have begun to pay. Some -- a few, asked for a few months to bridge the insurance. That's basically it.
And on the mortgage side, on the residential mortgage side, since the beginning of the year, what's been the change there?
Well, as Lidio said, it's complex. I mean, we have seen clients starting 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're going to take to solve the 3 months that they didn't pay.
Many of the clients in mortgage will require formal modifications for their loans to become officially current again. And modifications, in many cases, will -- may take months to process and do the paperwork 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 the status of where our clients are.
Okay. So that's -- I appreciate it. This is so complicated. And I appreciate you guys taking the time on it. If you were to map this like, based on all that complexity, if you were to sort of look forward and say, March 31 or June 30, you're thinking about delinquency data, like what should we expect? I'm not asking you to forecast the future, but just the accounting for this 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 cleared. I think the best thing we can say at this point in time is that it seems that most of our consumer portfolios are trending to getting sort of normalized. And maybe some version of that will happen in the mortgage as well, but again, mortgage will take time to play out.
Okay. Okay. And if I could just sneak in one more quick -- more of an accounting question. So obviously, your earnings in the past couple of quarters have been -- a lot of driven by accrual policy. There's a lot of customers who aren't paying their loans but you still recognize interest on them and you're building an 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 balances due from the customers, basically from the interest that you recognized but not actually received? And the principal that you'd expect to be paid but hasn't been received since the storm and then I'll drop off of for someone else.
I don't believe that we have that number at hand. So I mean, obviously, we don't accrue any interest we don't expect to receive. I mean, that's the basic accounting rule. So all the interest we have that we accrue, we expect to receive. But we don't have the -- I don't think we have that breakdown between accrued versus actually cash received.
[Operator Instructions] The next question comes from Jesus Bueno with Compass Point.
Very quickly, I appreciate the color on your employee base. We feel a lot of headlines on negative population outflow does not seem that you're anywhere close to that, I mean your employee base. But are you seeing any trends on -- maybe on the credit and debit card transactions side, for example, maybe more transactions taking place in the mainland from your accounts versus 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 '16 numbers. So we're seeing much more activity. It's hard to tell because when a card is not present, it could be someone ordering something over the internet or could be in the states. So we really don't -- we don't have that breakdown.
So there's 2 things. First of all, the data obviously shows is a non-local transaction. But even some very large retailers in Puerto Rico as well, their merchant system is run out of their headquarters in the states. So even though the purchase may have happened here in Puerto Rico physically, it may show up through -- in a non-Puerto Rico report. So that is a hard -- you're asking an interesting question that we try to get our arms around. But it's actually hard to reach a conclusion from the data, because the data has all of those limitations.
Well, where -- as an example, Carlos was mentioning the big box stores, like Costco, will probably clear to a big merchant or client back in the states.
Got it. Fair enough.
The rest of commentary is Ignacio's. We know what our client base is like.
Right.
And but it's hard to reach a [indiscernible] conclusion.
But as I say, we have not been swamped by people asking to change their billing address to Florida or something like that. So that has not occurred.
That's a good sign. And if you could just help me on the -- it was very helpful to receive the transaction number for December. I guess, if you have to -- if you could state that, or do you have a number as how that relates to kind of pre-storm levels? I think that's how you provided on the last call.
I had the number versus December of last year, but on a pre-storm, I think it's certainly -- you mean August or December. I think it's certainly higher than August. Yes, definitely higher than August.
We were at [indiscernible]
Definitely higher in August. I compare December because of the seasonality of the Christmas holiday season. But it's definitely higher than August.
That's a good sign. Very positive and helpful. And if I can just ask one last question. What were you thinking of the other income line? I know there are a few items in there, and you have your bank in the Dominican Republic about your ownership runs through there as well. But I guess, it's stable compared to 3Q but still down from the first half of '17. How should we think about that line as we progress through 2018?
We're very cautious, as you know, in what forward-looking statements we share with the market. We try not to comment too much within the clients, and that is one that we have not commented on before.
The next question comes from Jordan Hymowitz with Philadelphia Financial.
A couple of quick questions. One, do we know what dollar amount of aid from the CRE is earmarked to Puerto Rico yesterday yet?
No. And I don't -- the continuing resolutions that they pass or the resolution that they passed in the past have been aggregate members, which have not segregated per jurisdiction. I don't know what they're going to do in the newer one. 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. You mentioned that December this year exceeded December last year. Have those trends continued into January?
I do not -- in terms of debit, and to be fair, credit, I don't have those numbers. It's hard to pick those numbers into -- I mean, it is for debit easier, but for credit, I don't have the numbers.
[indiscernible] it's actually [indiscernible]
Yes, I don't have the numbers.
Okay. Can you break out the interchange income from EVERTEC or that's only in the Q?
It's only in the Q.
Okay. And my last question, almost all of this aid, I would imagine has to be electronically 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, -- FEMA tries to have it done electronically. They do, believe it or not, they still issue checks for certain people. But most of the aid to individuals is electronic. The aid [indiscernible] What's that?
Most of it, call it $10 billion to $12 billion a year in aid, the majority will be electronic, it's not like they're coming down there in trucks and handing out cash. So that should be good through electronic payments mechanisms.
Yes. Sure.
What else in the trucks now?
Big planes, though.
The next question comes from Bob Napoli with William Blair.
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'm just trying to -- do you have a feel -- is 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, but 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, mortgage loans. Second of all, people were not paying their electricity bills because, obviously, they didn't have electricity or water. So they were saving on utility bills. And so -- and I think that a lot of people went out to dinner. And if you don't have electricity, it's hard to cook at home. So I think a lot people were going out. How sustainable is it? We don't know. People are spending again. I mean, just anecdotally, if you go to the stores that are open, they're busy. So we'll have to see how sustainable it is. It's hard to predict. Were some people replenishing things that got damaged in the storm? Possibly. We'll have to -- we're going follow that carefully. It's hard to predict. We're looking at it closely, believe me, but obviously, now we're encouraged but we're going to make sure it's not a one-time blip.
Now you also made a statement that you think that the number that's being bandied about the number of people leaving Puerto Rico is way overstated. Why -- what -- other than looking at your company, which is just one company might not be a good indicator, why do you believe those numbers are overstated?
Well, let me begin by saying, I don't think our company is a good indicator. And I wouldn't [indiscernible] rate our company with the general Puerto Rico. But the reason, I think, is more methodology. I've read in some press releases that some people, for example, in Florida, were measuring them out of migration by the number of people going on an airplane and went to Puerto Rico to Florida without counting literally how many people may have come back. Just how many people got on the plane from Florida -- from Puerto Rico into Florida in those months. So those numbers, by definition to me, be exaggerated, because I've gone to Florida 4x after the storm, and I haven't migrated 4x. So I think those are -- I don't want to tell people that the numbers are -- I don't want to diminish the issue, migration definitely has accelerated. I'm just saying there's some crazy numbers were being thrown out, some very high 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, more real look at the number. Again, migration has accelerated. I just think that -- the people have turned around some very, very large numbers with very, I think, questionable basis for those numbers.
And just last question, do you have any indicators of whether the people who might be migrating or lower or higher income than those that are not?
The numbers that I've seen, and we would ask some people, again, it's across the board. Again, again, there is not -- and I've asked for some recent numbers, but again, these are basically surveys. Traditionally, in Puerto Rico, the last few years, there has -- the bias, if anything, was to youth 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 hurricane. I'm not sure that has changed. I don't think it has from the early data that we've seen. So there -- if you want to call it a brain drain and that said, it isn't -- there isn't a more -- a higher level of university graduates leaving. It's really across the population. The bias being youth. One thing that did change a bit from hurricane, and we don't know if it's 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 elderly people will come back or will stay with their relatives in Florida or elsewhere in the United States, that we don't know. But generally, you do not see a bias towards higher education. Now there are certain elements that we can't finish. In the medical profession, we have seen a higher number of doctors leave. So that is something that I heard. But in general, university education is slightly higher in the general population than the migrating population.
The next question comes from Jerry Howarth with Howarth & Associates.
Mucho Gusto and gracias, greetings from Puerto Rico Norte, Florida. The government has been very instrumental in stemming the brain drain. There's incentives that are given to the doctors' income taxes, so can you clarify on some of that stuff of 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 passed legislation that will give specialists a tax exemption. I don't know if it was 90%. But I don't know the exact number yet. But certain tax incentives income for specialists, that's one of the things that they're doing. In terms of youth, there was a law that, I think, the first $40,000 of income for people under 26 was exempt. And then we have that -- some sort of help keep people here -- then we have the famous, I think, I would call Act 22, which is for individuals that applies to everyone. Puerto Rico residents have to have been outside the island for a certain period of time, usually 5 years, I think they may have lowered that down to 3 years. And if you come back, then most of your capital gains will be exempt in Puerto Rico, as well as investment income from the state. So those are the type of things that people are doing. Frankly, I believe those things are nice. But at the end of the day, what you have to do is get the economy moving. And that's what's going to keep people here and bring them back.
[Operator Instructions] And as 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. It's now over. You can please disconnect.