First Bancorp

NYSE:FBP

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the First Bancorp's Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Pelling, Investor Relations Officer. Please go ahead.

[John Pelling, IR Officer]

Thank you, Brandon. Good morning, everyone, and thank you for joining First Bancorp's conference call and webcast to discuss the company's financial results for the fourth quarter and fiscal year 2017. Joining me today from First Bancorp are Aurelio Alemán, President and Chief Executive Officer; and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release issued by First Bancorp, you can access them at our website firstbankpr.com.

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

[Aurelio Alemán, CEO & President]

Thank you, John. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and fiscal year 2017 results. Before I begin with the highlights of the quarter, I want to touch on the situation in Puerto Rico following the impact here on the hurricanes in September. So please, let's move to Slide 5.

We're pleased to say that recoveries from the hurricanes continues its path. As you can see in this chart, on Slide 5, most services have returned close or above 90% of service level with the exception of electricity. We all know the electrical grid remains the largest obstacle for the recovery. As reported, we're now at 82% of generation in Puerto Rico which translate into approximately 70% of distribution. So there's still 30% of clients pending to get connected to the grid.

Clearly, the recovery of the electrical grid is moving at a slower pace than we all anticipated. So it's still having an impact on business reopening on some of our borrowers, customers and employees. With regard to our branches today we're operating with 94% of our branch network, 44 out of 47. Three of the branches were damaged and will be in the process of operating [indiscernible] either [indiscernible] or the areas that are fully operational.

The speed of recovery of economy is also dependent on this, the electrical grid, and I will say also very important at this stage, on the short term, the timing of resolution and payment of insurance claims to both businesses and consumers. That's something that we are monitoring, and we're not seeing the speed that we expected through December. So hopefully, this first quarter and next quarter, we see that accelerating.

It is important to highlight, that business activity did continue to improve month by month, December showing good improvement trend versus November. We look forward to that improving trend to continue over the next months as all service get back to normal and obviously, as insurance claims continue to flow into the economy. Now let's move to the next Slide 6 for some of the highlights of the quarter.

I have to say that we are quite pleased with our fourth quarter and year-end results considering the environment under which we operated. Net income for the quarter was $24.2 million, or $0.11 per share, and this included approximately $6.3 million of storm-related provision and expense. So we're still showing the impact of the storms in the quarter. Our PPNR for the quarter continues strong, close to $54 million, demonstrating the franchise strength.

For the year, we posted net income of $67 million or $0.30 per share, which is important to mention that it included about $72 million of storm-related provision expense. Not to mention the impact of lost revenue from reduced business activity primarily mortgage banking and service charges on deposit accounts, and this compares to $93 million in 2016. Again, in spite of the storm impact on our business, PPNR for the year reached strong [$218] [ph] million.

On a year-over-year basis, our NPAs declined $84 million. This quarter, we had a $10 million increase, primarily tied to commercial credit in Puerto Rico and the Virgin Islands that impacted the storm. Orlando -- we'll touch on that even later. We continue tracking the economic indicators and unemployment. We do expect to have a better sense of the impact on our borrowers once we complete this first quarter. Anecdotally, we're seeing life return to normal, definitely. Stores and shopping centers are open, restaurants and hotels are crowded and friends or family returning from the U.S. back home.

The moratorium has given our customers a nice cash cushion, which were seen reflected into the deposit growth. Again, we're seeing some insurance money flowing to the island, but not at the level we anticipate seeing in the coming quarters. Most of our $377 million in deposit growth was private customer deposits both in commercial and retail.

On the capital and corporate governance front for 2017, we made important progress that I wanted to highlight during the course of '17. We repurchased 7.3 million of trust preferred securities. We successfully completed three secondary offerings, in which our private equity owners reduced their position to below 5%. The U.S. Treasury exited its tariff position in the bank. We continue paying dividends on our preferred stock and the Federal Reserve lifted the written agreement. We are aware the liquidity vest on the stocks that were completed during 2017 were viewed as an overhang by some investors, so we're pleased those are now in the past. We continue growing our capital base. On the year-end our tangible book value per share grew to $8.28. Again, our capital metrics continued to grow and we look forward to returning this capital to our shareholder base at some point in the future.

So let's please move to the next slide, Slide 7, to touch on the loan portfolio. The loan portfolio slightly declined by $21 million, again, [long-range][ph] on volumes in Puerto Rico and the Virgin Islands are being impacted by the hurricanes. But obviously, it's important to highlight our steady growth in Florida continues to support our balance sheet.

For the initial renewal volumes on average for the past two quarters are around $640 million compared to the $900 million -- close to $900 million trend that we have achieved in prior quarters, pre-hurricane levels. Definitely, our regional diversification has helped us sustain the loan portfolio, with Florida now accounting for approximately 19% of the loan book.

Ultimately, we look forward to the opportunity to be growing our loan portfolio in Puerto Rico as the island rebuilds. Hopefully, we reach normalized origination levels by the second quarter of 2018. We don't see that happening in the first quarter of 2018.

Let's move to the deposits now. It was a nice, nice growth. So Slide 8 show the deposits trend. Definitely, a good spike in the deposit this quarter. We attribute this primarily to the positive impact of the moratoriums in customer liquidity. Remember, not only the banks, we all provide the moratoriums to our clients, but also service providers postpone their billings such as cable, telephone, electricity, water. Again, as we say, we don't attribute a significant portion of this money in the deposits to insurance. In our case, we estimated about $30 million on the books by the end of the year belong to insurance deposits. The non-brokered, non-government deposit grew $375 million, of which $247 million was noninterest-bearing deposit.

Before I hand the call back to Orlando, I just want to mention that we do continue to monitor on a daily basis the recovery efforts and the impact of the moratorium on our customer base in both Puerto Rico and the Virgin Islands. We're tracking residential and consumer behavior on payments. And I must say, that as of Friday, which is the last report that I have, we're seeing January payment trends quite comparable to August, which was the baseline as most current months prior to the hurricane. So those are, again, positive trends, but it's too early to tell. We need to wait until all moratorium expire and we see at the quarter-end the behavior on payments being completed.

We continue to work very hard in building the pipeline and I expect to see, again, loan growth in the later part of 2018. We transition the island from relief and recovery to rebuilding. In the meantime, the growth in Florida franchise continue to sustain our balance sheet. And we will definitely continue with a strong commitment to support all our customers, employees and communities as our island continues to rebuild, which is a very important path that we're following closely and leading.

With that, I would hand the call to Orlando to discuss the quarter in more detail. Thank you, all.

[Orlando Berges, EVP & CFO]

Good morning, everyone. For the fourth quarter, as Aurelio mentioned, we posted a net income of $24.2 million or $0.11 a share. That compares to a net loss of $10.8 million or $0.05 a share for the third quarter. This quarter results include charges of $4.8 million to the provision for loan losses. Similar to a $66.5 million recorded on the third quarter related to the estimated interim losses that may result from the impact of Hurricanes Maria and Irma in Puerto Rico and the VI regions. On a non-GAAP basis, we adjust results to exclude the storm-related charges and other items that management -- we, as management, believe are not reflective of what is a core operating performance for the institution. The adjusted net income for the fourth quarter would have been approximately $28.1 million compared to $27.4 million last quarter. You can see the detailed calculation on the earnings release, which has all the components.

The provision for the quarter it's down $49.3 million, it's $25.7 million provision down $49 million from the $75 million recorded last quarter. During this quarter, we have continued our detailed monitoring of the hurricane impact on our commercial customers and ended up adding that incremental provision of $4.8 million, as I mentioned, to the $66 million taken in the third quarter for the impact of the storm.

As part of this process, we have also moved some loans to nonperforming based on the reviews and changed the classification of other loans based on the adverse effects the operations had. So far, we have analyzed in detail 81% of the commercial portfolios, and including all the large relationships that we have in the institution. If we exclude this storm-related charges, the adjusted provision for the quarter was $20.9 million which compares to $8.5 million in the third quarter. The increase reflects charge-offs taken on collateral-dependent impaired loans in the fourth quarter and the effect in the third quarter on some reductions in reserves on two impaired commercial loans where we released some reserves.

Our pretax pre-provision for the quarter was $53.9 million compared to $53.5 million in the third quarter. Both quarters, obviously, have been impacted by the reduced level of noninterest income and the flow of hurricane-related expenses that we had in each of the quarters.

It's important to mention for the quarter is that the resulting effective tax rate for the year was lower than we had originally estimated since we ended up with a higher net operating loss utilization rate than the one we anticipated. As you know, these NOLs are subject to a partial valuation allowance and therefore, changes the relationship on the effective tax rate.

With respect to the impact of the tax reform in the U.S. Since our U.S. operations are a branch of Puerto Rico, we are taxed on a worldwide basis in Puerto Rico. Thus, any DTA -- therefore, any DTA we have in the U.S. are mostly subject to an offsetting deferred tax liability or a valuation allowance, therefore, there is no impact. Of course, these results -- we didn't have the DTA revaluation impact that we have seen on other companies in the U.S.

As to the net interest income which is fairly flat from last quarter, is down $600,000 to $122.3 million. The decrease, it's partially related to volumes with average balances of commercial loans down $38 million and those on the investment portfolio are down $39 million. The impact was partially offset by the increase in short-term market rates that have resulted in the repricing of the floating commercial portfolios as well as the increase in deposits that we have maintained at the Federal Reserve Bank, which for us provided additional liquidity. This increased liquidity, however, as you saw in the release, has led to a reduction of seven-basis points in the net interest margin from 4.33% last quarter to 4.26% this quarter.

Noninterest income for the fourth quarter was $15 million compared to $18.6 million in the third quarter. Noninterest income for the third quarter included the $1.4 million gain we realized on the repurchase of $7.3 million of trust preferred securities during that quarter. On a non-GAAP basis, if we exclude the effect of the gain, noninterest income for this quarter was down $2.3 million as compared to last quarter. That includes $1.2 million decreasing revenues from mortgage banking activities, all lower volumes of activity following the storms as well as a decrease of $900,000 in service charges on deposit accounts also related to the decline in business activity caused by the hurricane.

In the noninterest income categories, in general, we have seen significant impact as a result of the hurricane. As you can see in this chart, adjusted noninterest income over the last two quarters, meaning the third and fourth quarter of this year, have been much lower than the approximately $20 million run rate we had in the three quarters prior to the hurricane. And clearly, we have seen some pick up in volumes in December, as Aurelio mentioned, but we still feel that it will take a couple of quarters to reach more normalized levels.

Expenses for the quarter were $85.1 million, a decrease of $500,000 from last quarter. Included in these expenses are $1.7 million in hurricane-related expenses, of which $900,000 is related to the insurance deductibles on OREOs that were damaged by the hurricane. But for this discussion, I think it's better to normalize the expenses by excluding the hurricane-related expenses as well as those amounts that we have booked as receivables since they are likely to be recovered from the insurance policies such as the employee salaries and rents that we incurred while the operations were shut down because of the hurricane. This amount, otherwise, would have been part of our normal operating cost.

So on a non-GAAP basis, excluding these items, adjusted noninterest expenses were $83.3 million for the fourth quarter, a decrease of $3 million as compared to the $86.6 million last quarter. And this has included $900,000 decrease in employee compensation and benefits related to lower accruals for bonus and incentives based on the level of activity, as well as some reductions in the headcount. We had decreases of $800,000 in professional fees that included legal, technology and so. And we have decreases of $700,000 in credit and debit card processing all associated with the lower volume of transactions that we had in the quarter related to a hurricane.

Expenses do have some seasonality such as payroll costs when employees reach limits of our payroll taxes and other benefits. But in overall, we continue to expect that expenses, excluding OREO expenses, will trend at or below the $85 million range we have discussed in the last few quarters.

In discussing nonperforming. I think it's important to first put in perspective how the moratoriums were applied. On the commercial portfolios, we provided moratoriums only as to principal payments and only to those customers that requested a payment extension. Commercial customers had to continue to make their interest payment throughout the process. If the customer did not make the interest payment, the delinquency counters on those customers would continue. Out of the overall commercial portfolio, 42% of that portfolio participated in the moratoriums programs in Puerto Rico and the VI.

On the residential mortgage portfolio. We provided a three-month extension to customers that were current or no more than two payments in arrears. The three-months extension in Puerto Rico was through the end of December. But in the VI, since the hurricane hit early in September, a large portion of the customer -- the extension were through the end of November. If the customers continue to make their payments or if they were removed from the moratoriums for loss mitigation or other types of arrangements, then they were not included as part of the moratoriums. Only 46% of the customers in Puerto Rico and VI ended up participating in moratoriums on the residential mortgage side.

For the auto and personal loans portfolios, we provided a three-months extension to all customers that were current or no more than two payments in arrear. And 82% of the auto and personal loan portfolios of the customers in the auto and personal loan portfolio participated in the moratorium. Now with this in perspective, what happened with nonperforming, as you saw, we ended up with an increase of $9.9 million to $650 million at December compared to $640 at the end of September. Nonperforming loans increased $16 million to $481 million at the end of the quarter, and this increase is really related to the inflow of a few storm-related credits, construction and commercial in both Puerto Rico and VI, either because of the process of analyzing the loan or because they did not comply with these payment components.

This increase in the commercial side was partially offset by almost $10 million decrease in nonperforming consumer loans which are driven by charge-off repossessions and a decline in inflows in part related to the three-month deferral program. Overall inflows to nonperforming loans were $58.3 million for the quarter, which is $45 million down from the $103 million we saw in the third quarter.

Net charge-off for the quarter were $24.7 million or 1.12% of loans compared to $17.6 million last quarter or 80 basis points of average loans. This increase was mainly related to $9.3 million in commercial and construction loans -- charge-offs that were taken on two collateral-dependent loans in Puerto Rico. One of them just moved to nonperforming as part of the review process of the hurricane and the updated appraisals reflected previous values on the collateral. This was partially compensated by a reduction of $1.5 million in charge-offs in residential mortgage.

The allowance continues to have a coverage of 2.62% of loans, very similar to the 2.6% we had as of September, and it's in part driven by the decrease in the portfolio. Related to nonperforming, the allowance coverage is 47.3%. And nonperforming commercial loans are being carried today at $0.52 on the dollar net of charge-offs and reserves.

Looking briefly at the year. Results for the year were $69.9 million, almost $70 million. The almost $67 million on assets of $12.3 billion. This compares with $93 million. Obviously, the results for the year -- were tracking pretty good results over the first eight months of the year, the hurricane created some disruption.

And just to summarize, some of the impacts that we had from the hurricane, we ended up with a provision of $71.3 million from the estimate of the losses that could result from the hurricane. We had $5.3 million in hurricane-related expenses. That includes diesel, increased security, employee assistance, removal of debris, et cetera, et cetera, and a number of things. We paid $1.9 million in salaries and rental costs, while branches were closed. And as I mentioned before, we had significant reductions on other revenues related to transaction volumes that we had over the last two quarters of the year or specifically since September. These amounts were offset somewhat by the $4.8 million that we booked as a receivable because they're very likely to be collected from the insurance company.

As a result of all of this, capital positions continue to improve. As you see, our capital ratios are well above well-capitalized levels that we -- our total capital is at 22.5% and Tier 1 capital, 19%, leverage ratio 14%. So they are all tracking very good numbers, and as Aurelio mentioned, we expect to be able to do something in the future.

With that said, I now would like to open the call for questions.

[Operator]

[Operator Instructions]. Our first question comes from Brett Rabatin with Piper Jaffray.

[Brett Rabatin, Piper Jaffray Companies]

I wanted to first just ask, just from a macro perspective, I was curious to hear you guys thoughts on the FAFAA and PREPA plans that were announced late last week. Can you give us any color on how you feel about those two things being announced?

[Aurelio Alemán, CEO & President]

Well, we're glad we have material to work now with, updated material. To be honest, we have not concluded, we're still digesting and getting more information. There's 90 pages of -- it's really an executive summary of the plan, so there's a lot of moving parts there that we're trying to understand. To be honest, we're more focused on what's going on in the day-to-day than what we're seeing in the plan today. But definitely, in a couple of weeks, probably as we continue to visit investors and -- we'll have more information. But at this stage, we don't have a lot more to -- what you guys will receive as public, and we are in the process of understanding. There's other pieces of projects that we should all be aware that are in discussion or I mentioned in the press like a tax reform in Puerto Rico to mitigate some of the impact of the U.S. tax reform in terms of Puerto Rico as being competitive or not. So all those are important moving parts that we continue to reassess, we cannot conclude on any comments right now.

[Brett Rabatin, Piper Jaffray Companies]

Okay. And then just wanted to get some additional color, if possible. You mentioned early in the call some positive trends on payments. And I think a big concern is post the payment moratorium that you might have an uptick in delinquencies or in [payee] [ph] information. You talked about it quite a bit. Can you give us a little more color, maybe, on just what you're expecting in the first quarter in terms of what you think might be inflows or give us maybe some magnitude of what you expect from the portfolio post the moratorium?

[Aurelio Alemán, CEO & President]

Well, I can comment on the behavior that we are monitoring from the customers. Obviously, the moratoriums gave a few things on the deposit across the banks. When you look at the big numbers, when you look at how much money was deferred on payments, we have to say that we are positively surprised of the trend. We're monitoring daily payments and we're comparing those across all portfolios, not only consumer and residential, not only the clients that received the moratorium. We just want to make sure that we take a picture of the whole portfolio. So when I look at payments, they're basically flat. Meaning, that when compared to August, we are receiving payment at similar trends. That is not necessarily -- hopefully, we continue like that.

We haven't finished the -- all the due dates of the month. There are still remaining due dates through January 31. But that will give us a pretty good picture of who's paying, who's not, and what else we have to do. And this covers our loans that are in our books on the consumer and residential. It doesn't cover necessarily the portfolio that we service that are conforming loans that are not necessarily in the bank balance sheet and the information that I shared with you, it does not include the commercial book as we don't have the statistic available right now.

[Orlando Berges, EVP & CFO]

Another thing, Brad, obviously, the reported unemployment that came out of November, which is slightly higher than what we had as of September. In reality, we think, still has not captured everything that is going on in the economy, either because of that part of it's -- a lot of it's surveys that take a lot of time and not necessarily at some point, people were getting all the responses because of the communication issues. And the other thing is that you see still some announcements of closures of businesses.

[Aurelio Alemán, CEO & President]

Layoff, yes.

[Orlando Berges, EVP & CFO]

But we have been conducting informal surveys with our customers to try to understand. And at this point, at least, we do believe there is going to be some additional losses, that's why we have the reserves. But we don't have any information to assume that those losses will be higher than what we have reserved so far. That's with the information we have been able to gather up to now combining what Aurelio mentioned on payment trends and what we have seen on some of the other economic components.

[Operator]

Our next question comes from Alex Twerdahl with Sandler O'Neill.

[Alexander Twerdahl, Sandler O'Neill + Partners]

First off, I was just wondering if you could elaborate a little bit more on the individual review of commercial loans that you guys did during the quarter. I know you mentioned you did 81% of the loans. Is that 81% of loans in Puerto Rico or the entire book? And then also a little bit more on what would cause a loan through that process to move into the adversely classified category?

[Orlando Berges, EVP & CFO]

Sure. It's 81% of the balances of the loans in Puerto Rico and VI. That's what's been reviewed. We haven't done any detail review of the Florida business because there was no impact there. So what we did is we've been visiting our customers to get very detailed information on -- specifically on damages. What's trending in terms of sales at our business volumes since the hurricanes happened and how we saw the recent weeks from -- most of these reviews were completed between November and December, so a lot of it happened in there. What is the status of the claims and the extent of coverage that they had on the claims, and the toughest one was what are they going to be able to recover from business interruption side of the policies.

So what we have tried to do with that is try to put an assessment of how much time we feel some of these businesses will take to get back to normal. There are some businesses that we feel they're 100% back to normal, so those are very low probability of seeing any impact on those. Other had different levels of risk in terms of what's going to take to get back to normal. So there were a few cases that we feel that, at this point, it's imminent that they're going to have some impact. And we classified a few cases because of that and we moved to more nonperforming others that are based on the feedback we got from the customers or what we saw in there were not. Others, we just try to assess different levels of risk to try to compare with the possible losses with our estimation. Obviously, it's still some information that is not completely certain. But it's a fairly good assessment based on what's on hand on the level of risk that we saw in each of those cases, and that's how we ended up with providing an additional $4.8 million on the commercial side.

[Alexander Twerdahl, Sandler O'Neill + Partners]

Okay. That's great additional detail. And then just a second question regarding capital. I know you talked about hoping to return some capital in the future. But I know that you do have some informal capital restrictions even with that rent agreement being lifted in October. Have you, one, disclosed what those are? And maybe another way of asking that question would be what would be the process to actually turning back on a common dividend through you guys?

[Orlando Berges, EVP & CFO]

Well, the formal agreement, what it says is that we need a regulatory permission to do any capital movement. As I believe Aurelio went into this last quarter, we feel that, obviously, we need some of this process with the hurricane and the impact to be cleared out before you can go with very specific to regulators on where we see that. So these steps haven't changed. We are clearly creating a significant discount from book value. So any kind of repurchase would make sense, but also some kind of dividends will make sense. But it's just a matter of -- there is no hard dollars put on anything. It's a matter of going to the regulatory world and discussing with the regulators our capital plans, good measurement of possible losses coming from all this hurricane. And from there on, it's a normal discussion process.

[Operator]

Our next question comes from Arren Cyganovich with Citi.

[Arren Cyganovich, Citigroup]

You had mentioned that some of the deposit inflows that you had during the quarter -- or the bulk of it was not really insurance related. Are you seeing any signs of insurance coming through in January? And do you worry about after the moratoriums are over, you're going to have a little bit of a pressure on the deposit side near term?

[Aurelio Alemán, CEO & President]

I think, yes, we did mention we tracked -- money comes in and out and claims, and it's been flowing. We tracked approximately $30 million that were there when we closed the year in December that belongs to the commercial. It's a process, obviously, a lot of claims probably use the capacity of all the companies moving those claims through. We expect that, that continues to flow, that is our expectation. So far, we don't see any indications of liquidity concerns from the market. So we don't expect of a negative trend on deposit. This is one piece. Insurance claims is one piece, but there is other money flowing from reconstruction funds that are actually coming from agencies and the federal government that is actually working and have workers in Puerto Rico. So if we compare this to prior hurricanes, we have said before, we do expect deposit trends to continue stable or growing in the coming quarters.

[Arren Cyganovich, Citigroup]

Okay. And then in terms of the business activity slowing down in the fourth quarter, can you talk about how that's starting to look into the first quarter for mortgage getting back on track and maybe on the commercial side as well?

[Aurelio Alemán, CEO & President]

Yes. Obviously, December was better than November, November was better than October. But we're not -- December was not at the level of normalized. If we go by line of business, consumer product like auto lending, personal loans and credit card are -- were closer to the norm, close to 90%. Residential mortgage originations were still about 50% of the norm in December and the commercial is very transactional-driven. So some of the package is delayed in the pipeline because of property inspections, reassessment of property values and deal flow that was postponed. So obviously, we're hopeful that January is better than December. But every line of business has its own challenges in terms of when the volumes normalize. We don't expect that to reach normal until sometime probably in the second quarter. It's not going to be in the first quarter.

[Operator]

Our next question comes from Joe Gladue with Merion Capital Group.

[Joseph Gladue, Merion Capital Group]

I wanted to talk about the net interest margin a little bit and then start just maybe with the loan yields and I guess, the competitive environment there in Puerto Rico. Just where are, I guess, loan yields on your originated compared to sort of the averages and what are you expecting in terms of rate hikes and how that will affect your yield?

[Orlando Berges, EVP & CFO]

Well, loan yields have been fairly consistent. We haven't seen any significant change in loan yields from the prior quarters. Clearly, the change has come from the fact that we have a lot priced out of LIBOR, floating LIBOR, specifically on the commercial portfolio. And as three-month LIBOR has increased, that has increased a bit the pricing but not the spreads necessarily. The consumer portfolios are a lot driven out of prime. We haven't seen any major changes. Maybe a little bit of pressure on the really good credit on the consumer portfolios, but not a lot different from what we had before. On the deposit side, most of the pressure is coming on the wholesale funding where we have seen increases as rates have come up. The margin impact this quarter a lot had to do -- we ended up with significant amount of money on the fed account which -- yields have improved a bit with the discount rates going up, but still it's a low rate.

We haven't reinvested those monies longer term on expectation of what's going to happen with monies flow once moratoriums expire. But that, obviously, affected the yield -- I mean, the margins. Overall, not much change on the deposit side. But as rates go up, we're going to see some pressures on the deposit side going up. I'm not in a position to tell you at this point if it's immediate. But clearly, as the base rates have been moving the last few weeks, we might see some pressure towards the end of the first quarter, beginning of second quarter on what's happening on the deposit side, on the market.

[Joseph Gladue, Merion Capital Group]

All right. And I guess I'd like to see if you could, I guess, give us your feeling on how the different flows will move between when the moratorium ends, when people start rebuilding, when inflows are coming in more rapidly from insurance settlements. Just what do you think in terms of increased liquidity as funding inflows come in versus when loans go out, do you -- first quarter, second quarter, do you think you will have higher liquidity, lower liquidity?

[Orlando Berges, EVP & CFO]

Well, my view is that for the next few months, liquidity will be pretty good. I think that we haven't seen the full extent of the insurance money coming to the market. A lot of the claims are being completed as we speak or being negotiated with insurance companies or what we have seen mostly are advances. That's going to clearly start to come in within the next three months. A lot of the money is going to come in at that time frame. We have to assume that part of that money, obviously, recirculates but part of that money goes out for purchase of materials and a bunch of other things that are imported into Puerto Rico so some of that money is going to leave the island. And in that sense, deposits should be growing for the next few months and then will come down a bit from those levels. But typically, they stay much higher than when -- before the hurricane started, taking into account the significant amount of money that also comes in from FEMA and other kind of relief efforts.

The lending side related to construction, I think we're going to start seeing that later this quarter, beginning of second quarter. As the insurance money comes in, a lot of those things are going to gain some speed. We know there are some reconstruction going in. But at this point, it's not necessarily reflected on lending. We have seen growth in lending requests from large suppliers that have -- people that import materials or people that provide some security service and things like that, but not to the extent -- I think that the large chunk will be seen in the second quarter.

[Joseph Gladue, Merion Capital Group]

And lastly, I guess, I'll ask more of a macro question. Just about the population flows and do you have any insights into migration and actually you can get any insights from your customers moving to your Florida locations?

[Aurelio Alemán, CEO & President]

To be honest, we're gathering data as everybody else. There is no source of data that we believe is reflective of the overall situation yet. There's a lot of moving parts. We track our customers, we track if there's any trend on change of addresses, if there's any trends on voluntary surrenders of vehicles or voluntary surrender of house keys, and we haven't seen any different trend to what we had prior to the storms. Obviously, the moratoriums could have delayed that too, but we're monitoring our workforce, our employees. We always had, for the last five years, our migration. So we have seen some very slight changes, nothing that we can say it would be significant or detrimental at this stage.

[Operator]

Our next question comes from Glen Manna with Keefe, Bruyette, & Woods.

[Glen Manna, KBW]

Aurelio, thank you for that color on the payment trends that you're seeing in January. That's really helpful. I wanted to follow up with something that was in the press release, and you gave some really great detail on what portion of mortgages and commercial loans had taken advantage of the moratoriums. So I believe it was $1.3 billion on resi and $1.2 billion on commercial and construction. You went on to say that in the early delinquencies for payments that were due by December 31, there was $95 million in resi and $3.2 million in the commercial book. Could you tell us what portion of those borrowers that took advantage of the moratorium were due to pay by December 31?

[Orlando Berges, EVP & CFO]

No. Most of the payments were not due by December 31. Most of the payments were due in January. A bit of those payments, the ones due in December were, basically, is part of a VI portfolio. The large chunk was in the Puerto Rico side and they were due in January because the three months extension was provided from the hurricane date, so it basically covered October, November and December. So as I mentioned before, overall on the residential side, 46% of the portfolio participated on the moratoriums and 82% of the consumer portfolios participated on the moratoriums. The reason Aurelio is stressing January is because that's where we feel the chunk of the movement will happen. We didn't see much change in December, obviously, in delinquency because of what -- as Aurelio mentioned, most of these people were -- their payments were not due in December. So the key data, it's going to come in the first quarter, and that's why we're tracking all these payments January 1 on.

[Glen Manna, KBW]

So would it be fair to say when you look at the $95 million in resi that had moved into early stage delinquency, the bulk of that was in the VI which got hit harder by the hurricanes than Puerto Rico and maybe that might not reflect what you would see come on in the first quarter for the overall resi book?

[Orlando Berges, EVP & CFO]

Well, we had an increase in early delinquency in resi of about $15 million. It's either -- again, it's either VI or simply there were people that were not participating. By any chance they didn't make any payment, their December payment, they showed up. But the increase was only $15 million because a chunk of the loans were in moratorium.

[Glen Manna, KBW]

And how have your call centers has been working to get out there to contact your residential mortgage borrowers? And would you say that the bulk of them understand what their obligations are?

[Orlando Berges, EVP & CFO]

Yes, we believe, by now, they're all clear. At the beginning, there were some confusion because when you start talking about moratoriums, there were some differences between the banks and there were clear differences on how the conforming paper you have to follow the guidelines of Ginnie or Fannie. But we've been talking to customers, our call center and our collection group, since we were not doing full collection efforts, we started contacting customers to get vital information and clarify doubts, and that's the reason why we feel that the payment trends we've seen so far are very much in line with August.

[Operator]

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

[Jordan Hymowitz, Philadelphia Financial]

Do you have any sense of numbers yet of insurance proceeds in billions of dollars you expect to get? And also, is there a final number out from the continuing resolution of how much of the 80-plus billion in aid goes to Puerto Rico?

[Aurelio Alemán, CEO & President]

No. There is actually not a final number -- the last question, there's not a final number. And we don't have a total because a lot of the claims are still in process and haven't been concluded. We're going to have those numbers at some point in time of how much we expect as it pertains to our commercial borrowers, but we don't have that data finalized yet.

[Jordan Hymowitz, Philadelphia Financial]

Do you have any ranges for either number at this point?

[Aurelio Alemán, CEO & President]

Not really, not really.

[Operator]

Our next question is a follow-up question from Brett Rabatin with Piper Jaffray.

[Brett Rabatin, Piper Jaffray Companies]

I want to follow up on fee income. You gave guidance around the expenses. I'm just curious on those sort of the fee income level. So you've obviously been impacted by the hurricanes. What's your sense of the pace of recovery or pick-back-up in deposits, service charges? And then any thoughts on mortgage banking as we go into this summer? Can you give us any color on those two line items?

[Aurelio Alemán, CEO & President]

Deposit, we should see normalize probably by the end of this quarter because some of the waivers that we approved were expired in December -- most of them. The -- in terms of the others related to transactional activity on having the POS terminals available, which as telecommunications are restored, that number continues to improve. And on the mortgage, it's a matter of business volume. We're tracking that we continue to reach our approximately 30% market share in origination, but the overall market it's low. [Indiscernible] it's building for a couple of months in the last quarter. Remember, the registry was closed so there was no actual closings on mortgages. We do focus primarily close to 80% of what we originated is conforming so we do sell in the secondary market. So I don't expect that to get normalized until probably the second quarter, mid or later part of the second quarter as -- of the markets. A lot have to do with if that property had a claim or not, if borrowers return or not to the transaction that was pending. So that is a process that we believe is going to take until probably the second quarter here.

[Brett Rabatin, Piper Jaffray Companies]

Okay. And then you talked about the DTA. So can you give us an idea of what you're expecting for the tax rate this year?

[Orlando Berges, EVP & CFO]

Sure. The tax rate for '17, obviously, ended up being much lower than what we expected. I believe the effective rate based on the estimated relationship of exempt income and NOL utilization that we've done for our forecast, it's going to be close to a 28% to 30%, in that range. Obviously, what affects us is that we still have a valuation allowance in there, which any change on the interrelationship of the components could affect the rate, but that's where we're assuming it's going to be somewhere between 28% and 30%.

[Brett Rabatin, Piper Jaffray Companies]

Okay. And then lastly, I wanted to go back to pre-hurricane -- you were trying to lower NPAs particularly the ORE levels. Can you maybe give us an update on just is that part of the potential plan for later this year of getting, especially the ORE properties off the balance sheet? Or are you guys just kind of going to manage inflows this year? And then maybe in '19, you start to try and work those down again? Or maybe just an update on what your plan is to reduce the level of NPAs that you have this year or that you already have, I guess, I should say.

[Aurelio Alemán, CEO & President]

Well, definitely, we're not going to sit and wait. We're reviving some of the deals that were on the table when the hurricane came. Some of the properties are being repaired also as part of the damages that they have with the hurricane. So we have a team that is very active and obviously, we have to manage the inflow, we have to manage the outflows. So it is a priority of the management team to move the needle on that aspect.

[Brett Rabatin, Piper Jaffray Companies]

Okay. And then maybe just lastly, any update on -- I know there's a lot of chatter around the municipalities and they're getting paid. The government exposure, you're moving the TDF lower essentially by putting the interest to principal. Any thoughts on the remaining government exposure and kind of movements you might make in those pieces?

[Orlando Berges, EVP & CFO]

Well, the municipalities, they have continued to make their payments in accordance with the agreements. But I mean, we don't see anything that would change that at this point, and it would be just a normal process. There's nothing special that we have on the plans to do with them. The other -- the TDF or the facilities that were under TDF, as we have mentioned, we've been negotiating with TDF. And eventually, obviously, we'll take some additional negotiations with the borrowers, and that's going to start -- should start happening in the next three quarters so that we can see when are we going to do it. Eventually, we'll end up with facilities that TDF is not involved and it's just borrower restructuring.

[Operator]

[Operator Instructions]. It appears there are no more questions. So this concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for any closing remarks.

[John Pelling, IR Officer]

Thank you. On the investor front, we have a very busy schedule this month and into March. Next week, we'll be in [indiscernible] Florida for the KBW Investor Conference on February 11. On February 15, Merion Capital will be doing an investor tour in Puerto Rico. On February 22, Piper Jaffray will be conducting an investor tour of Puerto Rico. And finally, on March 2, Sandler O'Neill will be bringing a large group of investors down to the island. We appreciate your continued support and look forward to seeing many of you in the coming weeks. Thank you, again. This will conclude our call.

[Operator]

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