Brett Scheiner - Investor Relations Richard Carrion - Chairman & CEO Carlos Vázquez - EVP & CFO Lidio Soriano - EVP & Corporate Risk Management.
Alex Twerdahl - Sandler O'Neill Ken Zerbe - Morgan Stanley Taylor Brodarick - Guggenheim Securities.
Welcome to the Popular, Inc. Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brett Scheiner, Head of Investor Relations. Please go ahead, sir..
Good morning. Thank you for joining us on today's call. Today, I am joined by our Chairman and CEO, Richard Carrion and our CRO, Lidio Soriano, who will review our second quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.
Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. You may find today's press release and our SEC filings on our webpage at www.popular.com.
I will now turn the call over to Mr. Richard Carrion..
Good morning and thank you all for joining the call. I would like to first address the highlight and key events of the second quarter that will present an update on the assets deposits that we acquired in the Doral transaction and provide our thoughts regarding the fiscal and economic situation for Puerto Rico.
Carlos will comment on the quarter's financial results and Lidio will provide an update on our credit trends and metrics. Please turn to the second slide, in the second quarter Popular earned adjusted net income of 90 million, flat to last quarter and up 4 million from last year's second quarter.
We continue to generate strong revenues with capital levels well above peer average. Tangible book value was $41.75 up from $36.33 last quarter due mostly this quarter's partial reversal of the allowance against our U.S. deferred tax asset reflecting the improved profitability and outlook of our U.S. operations.
Our net interest margin were 4.67% decreased slightly from last quarter's 12.67% as a full quarter's contribution from our acquired Doral assets was partially offset by higher levels of liquidity. We must note however that net interest income increased $19 million sequentially.
Our spreads remain strong relative to peers where our Puerto Rico net interest margin of 4.92%. Total NPLs this quarter of 806 million including covered loans were down a 129 million from last quarter's 935 million. NPL inflows decreased 31 million when compared to the previous quarter driven by lower mortgage and commercial inflows in Puerto Rico.
Non-covered NPLs were 576 million or 2.6% of non-covered loans down 89 million from last quarter. Our net charge off excluding write-downs were 46 million or 89 basis points up slightly from last quarter's 36 million or 72 basis points on higher commercial charge off and below trend results last quarter.
This quarter we completed the majority of our previously announced plans to compose our Illinois and Central Florida operation centers transferring most of these support functions to Puerto Rico and New York. These actions have simplified our operations providing an opportunity for capital levy [ph] and improving the return on capital of our U.S.
region. At quarter-end available holding company liquidity could have approximately 234 million. Our liquidity position provides in excess of [indiscernible] investor coverage with no maturity on 2019.
In addition the market value of our remaining stake in EVERTEC is approximately $224 million and significantly exceeds our positions current book value of 29 million.
As investors we will continue to participate in a proportion share of the company's income while our investments also represent an additional source of capital flexibility and potential holding company liquidity. As we discussed last quarter we filed our Dodd-Frank stress test at the end of March, the strong results of which we made public in June.
In addition we filed our capital plan in April. We remain confident in our capital plan submission and expect to update you during the third quarter. In February, we’re required approximately $1.7 billion of loans and $2.2 billion in deposits from the FDIC as receiver for Doral Bank.
So far the acquired loan portfolios have perform as expected and this quarter our Puerto Rico mortgage origination shows increased volumes partially as a result of Doral's exit from the market. We have also seen strong commercial production in the U.S. operation, aided in part by the addition of Doral's New York based commercial origination team.
As noted last quarter, Popular's bid to purchase approximately 5 billion of GSC mortgage servicing rights was also affected the FDIC and these transactions have now been completed. Popular's total Puerto Rico MSR portfolio now stands at $20 billion. In May, we also purchased Doral Insurance agencies portfolio for $17 million.
These transactions represented an efficient deployment of capital with meaningful earnings accretion and the in-market expansion provides significant cost saving opportunity. Please turn to Slide 3, before I turn it over to Carlos, let me comment on the Puerto Rico economy which has been in the news quite a bit lately.
The government of Puerto Rico continues to face multiple fiscal challenges in the coming weeks and months. In order to address the challenges the government formed a working group task with creating a five year fiscal stability plan and started discussions over debt renegotiations.
The government has also proposed the creation of our financial control [ph] as detailed [indiscernible] we will continue to assist every way we can to enhance the execution of this plan. We hope that the political leadership will arrive at solutions that will achieve fiscal balance and more importantly put the economy back on the growth track.
We will do everything in our power to support this result. However as a result of the work done in the last few years we shift the risk profile of our credit profile, enhance operations, increase profitability and grow our capitals. We’re prepared to manage through a variety of potential scenario.
Regarding our exposure to the Puerto Rico government, our underwriting profits, the structure and the size of our exposure relative to our capital base uses comfort. Keep in mind that the majority of our direct Puerto Rico government exposure is in loans to municipalities not publically traded securities of potential goal.
Our direct exposure is down 266 million for the previous quarter and down a 104 million compared to last year's second quarter as some balances were paid down to deferred tax a year. However we will continue to collectively participate in funding the Puerto Rico government's capital needs where we feel that risk reward is in our favor.
As will be described in further detail later by Lidio, there have been some changes in our Puerto Rico public sector exposure further than usual repayment. We have agreed to sell the majority of our brief exposure at a price close to what we have reserved down two quarters ago.
As a result we have moved along the help sales and reached down quarter by $30 million. We have also recognized an OTTR charge of $14 million in some of the securities of our small Puerto Rico government bond portfolio. We continue to monitor events in this portfolio closely and we'll make future adjustments if they work.
We have operated in weak economies for the past nine years, despite that the strong revenues generated by our Puerto Rico banks after this positive earning in each of those years.
We are confident that a strong market position, significant liquidity, excess capital levels, and internal capital generation will continue to be key to our future performance. Please turn to Slide 4, as our CFO; Carlos Vázquez discusses our financial results in further detail..
Thank you, Richard, and good morning. On Slide 4, we present our adjusted financial summary for the second quarter. This quarterly data is reconciled to GAAP figures in the appendix to the slide deck. The second quarter's earnings were impacted by fourth quarter worth of revenue in Doral acquisition.
Off that partly by higher expenses related to the ramp up of commercial real estate. To date, earnings press release detailed various estimate in the first quarter, the largest being higher net interest and net interest income offset by higher loan loss provision and operating expenses.
On an adjusted basis, net interest income for the second quarter was $353 million, up $19 million from the first quarter. As the quarter included three full months of spread income from the acquired Doral asset compared to one month last quarter. With restructuring of Popular's U.S.
operation largely behind us, we are pleased to have achieved organic growth of 9% in U.S. commercial loans this quarter, excluding Doral. This healthy growth is followed last quarter 6% increase in U.S. commercial loans. Despite the U.S. based growth, our outlook on overall loan balances remains unchanged.
Going forward, we are hopeful that we can maintain flat loan balances till the end of 2015. In Puerto Rico, we have offset limited organic growth with selected loan portfolio purchases over the last few years. We will continue to pursue this acquisition strategy if attractive transaction becomes available.
The average yield on our $2.4 billion covered loan portfolio increased to 9.4% from 9.1% last quarter. This increase is due to ongoing loan resolutions, repayments and a quarterly recast of the portfolio's expected cash flows. Our interest rate deposit fell 3 basis points from the prior quarter to 50 basis points.
Non-interest income excluding FDIC loss share activity, increased by $25 million compared to last quarter. This was mostly the result of higher service fee, higher income from our mortgage business, and higher income from our equity investment. These plus variances were offset by march downs on the small trading portfolio on our broker deal.
Popular's Puerto Rico mortgage business originated $399 million loans in the second quarter, up from $340 million last quarter, partially due to the rough exit from the market. Total operating expenses for the quarter were up $31 million to $322 million.
This increase was mainly driven by headwinds of higher loan resolution expenses, many linked to the exploration in this quarter of the last portion of the commercial [ph]. $5 million of elevated personal cost related to annual employees cost based compensation were also recognized during the quarter.
Our non-GAAP results retails under all transaction related expenses that we have adjusted for in the last two quarters. In addition to those adjustments, we are also incurring other expenses that are not adjusted. As we operate two parallel platforms prior to the full integration of Doral's banking systems during the third quarter.
These increased expenses are concentrated in a professional fees and personal equipment line items. Given these slightly elevated expenses, we expect partially operating expenses leverage approximately $305 million for the second half of 2015.
While this figure is up from last quarters estimate, better than expected performance from Doral transaction offsets the majority of this increase. As Richard mentioned, given the more favorable earnings stream and outlook for our restructured U.S. business, we have recovered $545 million of our U.S. DTA.
This recapture will require our GAAP results to incorporate an effective tax rate of approximately 44% on our U.S. earnings redeeming in the first quarter of 2016. For the remainder of 2015 results, we will continue to use a zero percent marginal tax rate for our U.S. business.
Our adjusted tax rate for the quarter was 19%, mostly due to a larger proportion of contribution to our earnings from our U.S. bank. Given our revenue mix expectations for the rest of the year, we estimated tax rate at the low end of a 26% to 29% range. For 2016 expectations incorporating the whole U.S.
tax rate will move up to the high end of that range. Doral related transaction test encouraged in the second quarter were $13 million. We expect an additional $5 million of such cost to be incurred in the third quarter.
We also expand $6 million of BPNA restructuring cost this quarter, and expect significantly reduced restructuring expenses moving forward. Please turn to Slide 5. The last year portion of the commercial expired at the end of the second quarter.
On Slide 5, we provide an overview of the losses expected to be realized and collected from the FDIC through the close out period of the commercial loss share agreement. Our total $393 million refill from the FDIC include $85 million related to the single family mortgage loss share agreement which expires in five years.
The remaining $308 million includes $79 million of first quarter losses already collected from the FDIC during July, and $88 million expected to be built for second quarter loss. In addition, a $141 million of reimbursable losses remained in dispute.
While we currently expect to collect the remaining balance, any amount remaining in the last year asset not collected from the FDIC will be charged up. Please turn to the next slide. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to world capitalized regulatory requirement.
Our Cowen equity Tier1 ratio was down 14 basis points to 15.6%, as our positive earnings were offset by the higher risk rated assets resulting from the reclassification of $1.5 billion of the Western Bank portfolio to non-core. Our Tier 1 ratio decreased 51 basis points to 15.6% for the same reasons.
As mentioned earlier, the DTA reversal has a minimal effect on our regulatory capital. All of Popular's capital ratios remains robust and well above regulatory requirement. As reflected by the results of our Dot stress test made public last month which Lidio will cover later.
It is our goal to maintain strong capital levels that are appropriate to Popular's risk profile as we continue to work for our target of a double digit return on tangible equity. With that I turn the call over to Lidio..
Thank you, Carlos, and good morning. While operating in a challenging economic environment, we are pleased to report that asset quality continues to improve during the second quarter as non-performing assets, non-performing loans, and NPR inflows improved over the previous quarters.
This quarter's net charge-off of $46 million or 9 basis points, up from last quarter are in line with our trends in 2014. In addition to improved credit metrics and strong capital levels, we continue to feel confident with our exposures and risk profile. Please turn to Slide 7.
This slide compares and contrasts what will our portfolio mix prior to the financial crisis. The key methods is the changes in our portfolio compositions, coupled with changes in underwriting parameters, less to a lower risk profile and better credit performance. In the U.S. we no longer have a supply consumer and mortgage business, our U.S.
bank is now a community and niche lender with a much lower risk profile. In Puerto Rico, our commercial and consortia exposure excluding loans we classify to one cover during the second quarter decrease from 55% over total loan book to 38%. Structural lending has decreased 94% and now at $77 million.
On the bottom of the slide, we also set the commercial portfolio and include net charge-off distribution by segment since 2008. The important message for the table is our commercial mix has significantly improved by reducing expansion through asset class with historically high losses.
In the retail portfolio, mortgage exposures are now 65%, up from 45% in 2007. In addition to a marginally improved risk profile, our recently published disclosures [ph] stress test provides us with additional comfort.
The stress test we did in June incorporates a severe adverse in Puerto Rico in which the unemployment rate is up 20.4%, and economic activity measured by BNP decreases by 6.3% during the first calendar year.
On the best A scenario, we forecast over 10 percentage point's non-losses in the 9th quarter period and reflect a 3.3% in part to our Tier1 common equity ratio, maintaining a meaningful solution in excess of growth at all time.
As Richard covered on Slide 3, our current outstanding direct exposure to the Puerto Rico government municipality and order into liquidity is $673 million, a decrease roughly this quarter.
The decrease is mainly due to the full payout of $100 million in tax revenue anticipation note and $20 million coming to [ph] coupled with a $30 million write-down in our relationships. As we have discussed in the past, more than Popular's direct Puerto Rico government exposure is in the form of municipal loans, and not security.
Having said that, we do have a small portfolio Puerto Rico government securities with a fair value of $44 million, which is totally quality with a corresponding on realized gains and often reflected in multi-year. This portfolio is subject to correct review or evaluate if any of them reported changes in volume are other than Doral.
During the second quarter we recognized an OTTR charge of $14 million on a functional portfolio, we will continue to evaluate all the securities in a normal flow of business. We believe our total exposure to the central government and public corporation is manual representing only 4.6% of total Q1.
Our municipality exposure is more than diversified portfolio of senior priority loans to a select group of municipality whose revenues are independent of the central government. As discussed in previous earnings goal, we have also had indirect lending facility in which the government acts of Doral zone.
The largest such exposure is in the form of residential mortgage loans, for individual borrowers in which the government provides a government fee, similar to programs in the U.S..
In addition to this exposure to the Puerto Rico government we also have commercial credits where a significant portion of the clients ability to service the debt comes from very utilized from government sources, and consumer credits, where borrowers are employed by the Puerto Rico government and related agencies.
We ask that mention our commercial portfolio exposure into the most of risk category based on dependence of government revenue and criticality of government services in which our clients are involved. We have all the stress our entire consumer portfolio assuming it represents a big proportion of our clients, our government employees.
We continue to analyze and monitor this higher results though at this time we feel confident our exposures are both, properly sides, where our risk tolerance are manageable given our earnings value and strong capital base. Please turn to the next slide to discuss credit metrics for the quarter.
In addition to nominal improvements in our credit metrics this quarter there is classification of the commercial portion of our already long portfolio impacted some of our credit metrics. Going forward only the $600 million of single family loans covered under the respected NSA through 2020 will be presented as cover in our financial statements.
Non-performing assets including cover loans decreased by $120 million to $106 million driven by a decrease of $104 million were mainly associated with a draft for sale of our relationship and an overall decrease of $66 million on the sale of government commercial properties.
These decreases were offset in part by an increase of $42 million in NPL inflows due to Doral. Please turn to Slide 9 for our summary in inflows.
On a linked quarter basis, NPL inflows excluding consumer loans and NPLs were classified on loans decreased by $31 million, mainly due to the conversion of mortgage influence in Puerto Rico of $11 million and $22 million. Mortgage influence in the first quarter included $70 million from Doral.
Please turn to the next slide to discuss major job provisions add on for loan loss. Net charge-offs excluding loans of $30 million per breakup amounted to $46 million or analyze 89 basis points of average loans helping portfolio compared to $36 million or 72 basis points in the previous quarter.
The increase was managed by higher commercial and consortium net charge-offs in Puerto Rico as the prior quarter reflected a lower loss including higher reforms. This increase was partially offset by $5 million recovery associated with a sale of a portfolio previously charge-off credit cards on auto loans in Puerto Rico. In the U.S.
charge-offs amounted to $1.3 million compared to recoveries of $882,000 in the previous quarter, remember lower recoveries in ALLL portfolios. This quarter $60 million non-cover provision was up from last quarter reverted back to the charge from previous quarter prior to the first quarter 2015.
The corporations allowing for loan losses decreased slightly by $3 million from the previous quarter and remember that was mentioned in the write-down in Puerto Rico.
The ratio of allowance for loan losses Doral portfolio stood at 2.3% compared to 2.5% in the previous quarter, excluding the reclassification of the commercial portion of our cover portfolio. This ratio will remain flat. The other ratio for loan losses is non-performing loans improved to 89% from 78% in the previous quarter.
With that, I'd like to turn the call over Richard for his concluding remark. Thank you..
Thank you, Lidio. Please turn to Slide 11. Before we open the line to questions, let me conclude today's remark by reviewing the actions we are taking to drive shareholder value.
Our healthy revenue generation uniquely positions us to benefit from an eventual economic recovery of Puerto Rico and yields reasonable returns, while the leading market position of our Puerto Rico franchise to allow us to earn above average margins.
Notwithstanding ongoing stability in our main credit quality indicators in Puerto Rico, we remain attentive to fiscal and economic trends. Popular's credit risk profile is meaningfully different from the one with which we entered this credit cycle which together with our strong capital position improves our outlook.
We are driving shareholder value as we remain focused on creating revenue opportunities while effectively managing credit, our capital, and our overhead costs. We have started the year with continuous stability in both revenue and credit metrics and are encouraged by the organic growth in the first half of the year from our restructured U.S. business.
Our acquisition of the Doral assets and assumed deposits will further enhance our ability to grow earnings in an otherwise sluggish macro environment in our main market. We continue to benefit from our EVERTEC ownership, our stake in Banco BHD Leon, the second largest bank in the Dominican Republic, and the improved performance of our U.S. operations.
We are certainly aware that Puerto Rico has been very much in the press lately, and we're monitoring event flows. Given the fiscal and economic challenges we face on the island, we will focus our attention on understanding the situation and its potential risk while acting to minimize their impact.
Nonetheless, we will continue to seek opportunities in the current environment. While the Puerto Rico economy has been soft, in the past 12 months we have with the approval of our regulators, we take close to $1 billion to credit MOUs which restructured our U.S.
balance sheet and back office and purchased $1.7 billion of loans in the Doral transaction. Our story is to a large extent linked to Puerto Rico, its economy and future. We are aware of that and remain committed to working to improve the island's prospects.
But Popular is also a story of a solid organization that has navigated through a complex environment and has emerged as a stronger, better capitalized, and more diversified institution. We're encouraged by the progress we're seeing in our U.S.
operation, and by the strength of our Puerto Rico franchise which has been demonstrated in the past few years. We look forward to reporting on our progress in the next few months. And with that I'd like to open the call for questions. Thank you..
Thank you, sir. [Operator Instructions] Our first question comes from Brian Clock of Woods [ph]. Please go ahead..
Hey, good morning gentlemen..
Good morning, Brian.
How are you?.
Good, thanks. So I guess my first question is really about the capital plan and I guess probably what kind of color you can give to what timing or what expectations you might have of getting some sort of feedback from the Fed on your capital plan.
It just seems like when – from an outsider's perspective you look at your deep bad results and with the Puerto Rico franchise you've got a strong core earnings power, pre-tax pre-provision earnings to absorb a lot of those losses. You do have purchase accounting marks and other things to absorb some of the losses.
I look at the credit quality today, I look at the – even whatever thing in the news with Puerto Rico, there is the NPL formations that are pretty low today and it keeps going down, so how to feel like where the capital we've got core pre-tax, pre-provision earnings power in Puerto Rico, it seems like there could be an opportunity to ask for buyback with your capital plan.
Rick, maybe you can just let us know what your thoughts are, and if there is any way to know when you could find out any answer on your capital plan this year?.
First of all we agree a 100% with your position and we like to tell you that – you think with over.
At any rate, look we submitted it in April, there has been a looking at it that let us know when they are done, we are – we think that will happen this quarter, specifically sometime in September and there is not much we can do, it's their cost and they determine when they respond. We agree with that being said..
Okay, that's fair enough.
And just a quick follow-up, on the prep exposure, I guess can you maybe kind of give us your thoughts on your decision to move with the help of sale, does that mean they actually do have something that's actually a signed contract or it's just been moved?.
We do have something, it's the waiting, it needs to get approved by our loan syndicate, the lawyers are doing their thing. And we just made the decision that we'd rather be out of it, we are less than 10% of that syndicate and less than 1% of prep, so we really don't – we just prefer to be out there.
So as you saw, we brought it down by 40%, last December we had written down pretty close to that. I think we have written down by 30% in change. So we have the full write-off this quarter..
And then just I guess quickly on that one too and I'll get back in the queue. So was there any indication there then it seems like there are lot of things and deadlines for around the September 15 and that would almost seem to be positive so I was wondering by the decision is so ahead of that..
Well, you know, we rather have it out of non-performing and in fact, we have – I hope they sort the things out by September but we're not playing a meaningful part in these discussions so we rather have an earning asset..
Okay, fair enough. Thanks for your time..
You know, we've got some money on the table..
Okay, thanks for your time. I appreciate it..
And our next question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead..
Hey, good morning guys..
Hi, good morning..
I just want to ask a little bit more about the DFAS process and your assumptions in the severely adverse scenario.
Would you have had any sort of government default or government austerity built into that severely adverse scenario given that the situation in the island is kind of, I mean, even with the governments comments three weeks ago it's really kind of largely unchanged from what it's been for the last two years and we kind of knew what the governments liquidity was like, etcetera, etcetera.
So would you have included any sort of austerity or government default or anything like that in the DFAS plan?.
I'll let Lidio tackle that one..
As discussed today, and we may probably multiple weeks ago, our scenario of Puerto Rico incorporates the very severe scenario in which the unemployment goals speaks off 20.4% and economic activity goes down to 6.3% in the first calendar year, this is an ideal scenario.
And you can imagine there would be a lot of effective in the island potentially including a government shutdown..
Okay, thank you for that. And then just to extend upon Brian's question on the capital plan, you filed in April, obviously a lot changed in terms of mentality on the island and from investors and probably assuming regulators as well over the past couple of weeks.
Would there be any need to file a update at capital plan following the governors comments a couple of weeks ago, either at the request the regulators are not bullish [ph]?.
No, not really. In the first half we have mentioned that I think our stress test scenarios will be severely adverse, are much worse than what we expect would happen in case of a partial shutdown..
Okay, great..
That's a result of what within – what is in the severely adverse scenario..
Okay, great.
And then just my final question, of the municipal exposure on the island, do you have specific reserves associated with those exposures and would you be willing to share with us what those were or if they changed since the end of March?.
No, on the municipal exposures, we don't have any specific reserves in part. Bear in mind, the municipalities have three different sources of revenues which are independent of the central government; the property tax, the municipal license tax, and 1% of the sales tax. So we feel much better about those expulsions..
Okay, great. Thanks for taking my questions..
Absolutely..
And our next question comes from Ken Zerbe of Morgan Stanley. Please go ahead..
Great, thank you. First question, just on the DTA recovery, if I heard you right, I think I heard you say that you're going to have a zero tax rate in the U.S. for the rest of the year but I guess I was under the impression that when you get the DTA back, you actually start booking whatever 35% tax rate.
What's the difference?.
I'll let Carlos handle that, this is one of the rules that the account – go ahead..
Yes, this is where the reversal of EBITDA is considered discreet event and therefore you measure it for 2016 forward. The impact in 2015 has just blended to the effective rate for the remainder of the year, that's why you won't see a spike in the effective tax rate in 2015 where we would expect that in 2016..
Got it, Okay. Alright, I'll bill NOL, that's totally fine. And then from – just on the FDIC the commercial loss here that it expires, it looks like it expired at the end of the quarter, probably didn't see any – presumably any impact from the exploration in the quarter.
So when you look ahead to third quarter, like from a margin perspective, anything else like what but actually margin in particular, but what will change going forward because of this?.
Two things, one is we did had an additional $10 million. It's there in the last – in this quarter to adjust the BIA. The technically – the other stage does not end now because it has a three year provision for any recovery. So technically, the commercial is not over.
We don't expect any meaningful impact on them in the sense that the loan will continue to yield, the impact on them as the loan will start to yield run in loss, it will be impacted, it is an asset that is – that will diminish overtime but we don't expect any meaningful impact on over the next few quarters..
Got it, okay. And just on them broadly speaking is the 454 kind of decent run rate to assume going into third quarter or do you maybe – you can write in guidance..
We have it in the press and I don't want to start now. Our earning is pretty strong and particularly in our quarterly cooperation, you've seen it fluctuates two to three basis points over the last couple of quarters, we don't see anything very meaningful to that..
Great. Okay, that helps. Thank you..
Okay..
And our next question comes from Jeff of Woods [ph]. Please go ahead..
Hi, thanks for taking my questions.
I was just wondering if you could go into a little bit more detail or give the back on for the release of the valuation allowance this quarter, just given the economic headwinds, the fiscal reality on the island, why do you think that now is the time to make that release?.
I'll let Carlos take it but if I remind, this is the U.S. operation, not Puerto Rico, and this is mostly driven by the accounts. We're not really – it's an accounting thing for us, we're not getting any cash or reinstating capitals is not a fact that this is more accounting rules than anything else.
I'll let Carlos add some more color, he can go on, and it's his birthday [ph]..
This is – we look at the present profitability and the outlook for continuous properly for our U.S. business, we make adjustments on – that will allow us to reverse some of the allowance to get DTA, some calculations attached to it and then reverse it accordingly.
As Richard mentioned, this is mostly an accounting decision as oppose to a better decision, and something that we will continue to review on an ongoing basis.
You want to add something?.
Yes, I just want to confirm that the Puerto Rico scenario does not impact the U.S. taxable income or tax structure and it's really separate, there are two decisions that are individual to those geographies..
Okay, thank you for that.
And then as it relates to just the Puerto Rican direct government exposure, I know you've answered some questions on that but can you just give us – can you clarify whether on the chart in the presentation, are those exposures listed at face value, market value, or some other metric, and I guess can you give us sort of the average mark on the Puerto Rican exposures?.
Well, I think on the securities, I think it's roughly 20% is the mark-for-mark from our book value. The securities under there are – the central government securities are at market. And then the only other mark there is on that loan which is a $75 million loan we took a 40% hit on it so that has reached at $45 million, so that's net of our market..
And that means securities are mainly – at book value which is if I heard correctly – I'm sorry, couldn't hear that, that's at par on the service?.
The central government securities are at market value, and the municipality securities are at basically on cost basis, they are at health maturity..
Okay, thank you for that. I appreciate the time..
[Operator Instructions] Our next question comes from Taylor Brodarick of Guggenheim. Please go ahead..
Great, thanks. I think everybody has covered most of mine, Carlos, quickly, would you just say again the tax guidance, I didn't catch that at the beginning..
We're happy to do that, let me see through my pages here. It's going to be – for the rest of this year the low end of 29%, and for 2015 the high end of that range..
Perfect, thank you.
And I guess just, looking at business activity, have you found that your capital position just to relative strength compared to your competitors is attracting significantly more customers than maybe in the past, is there more of a dislocation occurring since the governors comments a couple of weeks ago?.
We haven't seen any unusual movements, we leave the process of a strong but we haven't seen any unusual movements one way or the other. The government deposits are higher than they were at the beginning of the year and other case the positive general have been strong but not being very good..
Okay, great. And thank you for your comments in the capital plan, I appreciate it..
And our next question is a follow-up from Brian Clark of Woods [ph]. Please go ahead..
Thanks gentlemen, I just wanted to follow-up on an earlier question that was asked about the municipal exposure.
So when I look at Slide 3, the $430 million which is most of your municipal exposures in the form of blown which – correct me, neither loans, these are not mark-to-market, right?.
These are credit loans that [indiscernible]..
Right. And can you remind us so I think if you guys – and we've talked about before you guys have managed the operating accounts for a lot of these municipalities and I think you have probably the – I would say the stronger municipalities that you went to, I guess maybe just a little color on those municipalities..
Yes, it's definitely not a random walk in the municipalities, we do lose trust at the municipalities, we have had relationship with them for a long time. There are 78 municipalities where we go, we maintain 10 of them, and we look up at other statements, how well they are managed and the normal thing we would look at it and create a relationship.
We specifically have their operating income..
And in some way, I mean, actually you have more information and what you get from some of your commercial customers having this loans to municipalities.
Is that right?.
Yes, we feel very comfortable with that, absolutely..
Okay, thanks for your time guys..
[Operator Instructions] Our next question is a follow-up from Alex Twerdahl of Sandler O'Neill. Please go ahead..
Hey, just one other question here.
I wanted to ask Carlos is there any change in your P&L or any expected change in the coming quarters as the island switches towards the VAT tax and also is that business taxes implemented?.
It will be a general increase in our operating expenses on a quarterly basis is not significant..
Okay..
We've estimated that, it doesn't seem to be a major issue..
Okay.
So that would be encoded in the guidance for expenses the $305 million per quarter going forward?.
Yes..
Great, thank you..
[Operator Instructions] Our next question is a follow-up from Jeff Wolver at Woods [ph]. Please go ahead..
Hi, thanks.
I was just wondering if you can give a little bit more color on the deposit side of things, how much of your deposits are related to government entities or municipalities? And as a side question, given that the recent regulation and the driving more of those deposits towards the GDB, government development bank, are you seeing an impact here to your deposits there?.
Again, most of these deposits are an operating account but we don't think that we provide services that we don't think that other bank or certainly the government bank would provide to them. The reason I excluded from Doslu [ph] that are being to drive those deposits back, mostly operating accounts very little in the way of the five months.
So we feel it behaves – as I said, there are higher words to be endorsed and the end of the last year. So we haven't felt any impact from that..
Great, thank you very much..
Okay..
[Operator Instructions] Seeing no further questions, this concludes the second quarter Popular Inc. conference call. You may now disconnect your lines at this time, and have a wonderful day..
Thank you..
Thank you..