First Bancorp (FBP) Q4 2018 Earnings Conference Call Transcript

FBP earnings call for the period ending December 31, 2018.

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First Bancorp  (NYSE:FBP)
Q4 2018 Earnings Conference Call
Jan. 29, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and welcome to the First BanCorp. Fourth Quarter 2018 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Pelling, Investor Relations Officer. Please go ahead, sir.

John B. Pelling -- Investor Relations Officer

Thank you, Chad. 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 year-end 2018. Joining you today from FBP are Aurelio Aleman, President and Chief Executive Officer, and Orlando Berges, Executive Vice President and Chief Financial Officer.

Before we begin today's call, it is my responsibility to inform you 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 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 at 1firstbank.com.

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

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you, John. Good morning everyone, and thank you for joining us to discuss our 2018 results. Please let's begin with the highlights for the quarter and the year on slide five of the presentation. First of all, I have to say that we are very pleased with the result we have achieved on the year, following the storms. I want to recognize my executive team, our officers, our employees, and our Board for the great execution, hard work, achievements of the year that have really positioned the franchise well for 2019 and the future.

This quarter and year-over-year, we did achieve important progress on our key objectives. First of all, improve profitability; second, grow the loan portfolio; derisk the balance sheet; optimize our deposit mix, and report progress on our capital plan. On the profitability front, we closed out 2018 with really strong fourth quarter, generating approximately $101 million of net income, which included a $53 million net tax benefit related to the partial reversal of our DTA valuation allowance.

On an adjusted basis, net income was $44 million, up 28% from the third quarter, and our pre-tax, pre-provision income for the quarter was $67.6 million. For the year, our adjusted net income was $137 million or $0.62 per share, which is up nicely from the adjusted $108 million that we achieved in 2017. I will let Orlando cover the adjustment during his presentation. Pre-tax, pre-provision also grew nicely to $250 million for the year 2018, and tangible book value per share is now at $9.07.

On the loan portfolio, originations and renewals for the quarter were really exciting, $1.1 billion we'd reach(ph)as part of our ongoing strategy to grow the commercial and consumer book and reduce residential with focus on originating more conforming mortgages. Commercial and construction origination and renewal increased to $610 million during the quarter. Consumer loan, auto loan origination increased to $340 million during the quarter, both of which exceeded pre-hurricane levels, and resi mortgage originations were at $129 million.

Our overall loan portfolio increased $118 million for the quarter, and this was impacted by $45 million reduction in mortgage and reductions in non-performing loans. The performing loan book grew $170 million during the year. Puerto Rico grew approximately $78 million and Florida region continued to contribute with healthy origination activity, leading to $112 million loan growth in the quarter.

On the asset quality side, news(ph)are also very good. NPA declined $56 million and now represent 3.8% of assets. For the year, our NPAs declined $184 million or 28%. I think we made great strides derisking the loan book and selling individual non-performing assets during 2018. Improving asset quality continues to be a top priority for 2019. I think we are beginning the year in a good place as early stage and total past due delinquencies are at their lowest level in a decade.

Please let's move to slide six to cover other highlights. On the deposit strategy front, overall deposits were down $40.5 million, but it's important we look at the mix. Puerto Rico deposit grew $15 million, and on that net $15 million growth, $45 million was non-interest bearing, offset by $30 million reduction in interest bearing.

Florida and ECR deposit declined slightly. Florida's reduction of $44 million was driven by our cost optimization strategy, and ECR was down slightly by $11 million. For the year, at the corporation level, we grew overall deposit net of brokered by $567 million, while continued to reduce relying on brokered CDs by $595 million. We have materially transformed the make-up of our deposit mix with non-interest bearing now representing 27% of our deposit base, and brokered down to 6%. We continue to focus on optimizing our mix through 2019.

Execution of our core deposit strategy is definitely supporting the stronger NIM. Our cost of total deposit excluding broker was 66 basis points this quarter, up only 2 basis points from prior quarter.

Last, but very important, please move to slide seven to touch on capital. Well, definitely our capital levels continue to get stronger, now total capital reaching $2 billion. We were really pleased to announce the reinstatement of the common dividend this past quarter. While we cannot control the timing of these events, they are a priority for the management team and the Board, and we realize and we acknowledge the importance of returning the capital to our shareholders and continue doing so.

Looking out to 2019 and beyond, we do plan to use our excess capital first to support organic and non-organic growth in our market, and implement other potential capital actions to return capital to our shareholders. We are optimistic with the strategic momentum of the franchise across our divisions and we look forward to disciplined growth opportunities in 2019 as we continue to deliver solid results.

With that, I will turn the call to Orlando, and will come back to the questions session.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Good morning everyone. As Aurelio mentioned, we had a fourth quarter with many positive points in different fronts. We posted a net income of $101 million or $0.46 a share, which compares to $36 million or $0.16 a share in the third quarter. The results include the $53.3 million tax benefit he made reference to. At the end of the year, we reassessed the need for the valuation allowance on our deferred tax assets. Based on First Bank's sustained period of earnings over the last few years, the fact that some of the impacts that we saw as possible last year from the hurricane have been much lower, and therefore we ended up updating our forecast of future profitability.

In the quarter, we also needed to assess the impact that the tax reform -- the approved tax reform had in -- in Puerto Rico has on the existent DTAs. At the end, we had a net tax benefit of $63 million one-time recorded from the partial reversal of the Corporation's deferred tax asset valuation allowance. This is net of our $2.5 million impact from the tax reform. On the other hand, we had to take one-time non-cash charge of $9.9 million related to also the impact on the -- of the tax reform on all remaining DTAs. We still have remaining about $68 million of deferred tax asset valuation allowance in First Bank, but its realization will depend mostly on the future levels of exempt income and capital gains to offset some of the components that we have.

If we normalize net income for those items that are not necessarily reflective of what's core operating performance, those items are detailed on page 26 of the presentation as well as on page four of the press release, which include obviously the reversal of the DTA valuation allowance, the impact of the tax reform, the hurricane related reserve release, among others. On a non-GAAP basis, the adjusted net income would have been $44.4 million or $0.20 a share, which compares to adjusted net income of $34.7 million for the third quarter or $0.16 a share.

Provision for the quarter was down $3.9 million for a total of $7.6 million compared to the $11.5 million we had in prior quarter. Basically it primarily reflects a recovery of $7 million on a commercial mortgage loan that was paid off in the quarter, as well as $2.9 million of hurricane related reserve releases on top of what -- higher than what we had in the prior quarter, which we also had some releases. As of the end of the year, at December, the remaining hurricane related qualitative allowance amounted to $19 million.

Net interest income for the quarter increased positively. We had a $5 million growth, which shows improvements in different categories. Net interest income on commercial and construction loans grew $2.6 million, driven by both portfolio growth and the repricing of variable rate loans, commercial loans. Consumer loans increased $2.5 million due to an $82 million increase in the average balance based on the levels of originations, and we also had some increases of over $1 million -- just over $1 million in interest income on investment securities as the level of prepayments have reduced considerably.

Margin, as you saw in the press release, increased 23 basis points to 4.77%, which reflects the variable rate repricing on the commercial book, the changes on the asset mix as we have continued to grow the interest -- the high interest consumer portfolio, and obviously the other components that are affecting the level of non-interest bearing deposits we continue to have as well as the fact that we continue to achieve resolution of the non-performing, which has transformed into then some performing kind of assets or reduction of liability needs(ph).

Deposit cost increased 2 basis points, as you saw, and the betas in Puerto Rico have -- continue to be fairly stable. However, we do expect that we'll start seeing some pressure. It's a little bit more obvious on the Florida market where it's been significant on both time deposits and other transaction, interest bearing transaction accounts in Puerto Rico. It's a little bit more on the time deposit side at this point.

Non-interest income was barely(ph)equal to last quarter, if we take out the fact that we had a $2.7 million loss in the third quarter from the sale of a non-performing loan held for sale. Other than that, we had improvement on fee-based income of about $500,000 and we have lower income on mortgage banking from reduced levels of sales of portfolios originated.

Expenses on overall were fairly stable with some increases in compensation, occupancy, and business promotion, offset by a reduction in other expenses related to the quarterly revisions we do on the -- for the operational loss reserves. If we exclude OREO, the expenses for the quarter were $86.5 million, and we've talked about this in the last few quarters, our ongoing expense base has increased a bit as a result of the large investments that are being made in technology related projects as well as higher levels of marketing and incentive compensation as a result of the higher volume of business. As such, we believe that the quarterly expense base will be more toward the $87 million to $88 million range as compared to the $85 million we had talked about before. Obviously that excludes the OREO expenses.

As Aurelio mentioned, we have continued our progress in reducing our non-performing, mostly organic strategies. Non-performing assets declined almost $56 million in the quarter, reaching $467 million, which is about 3.8% of assets. The largest driver being the $27 million sale of a legacy non-performing loan in the VI. The rest of the reductions, you can see on the different categories. It's the result of the efforts that our special assets group put to address different areas to achieve quality improvements on the portfolio.

Inflows have been down. They were $4 million lower as well as early stage delinquencies, which have continued to be at their lowest level. The result, adversely classified commercial loans also came down by $71 million, which is also a positive component.

Charge-offs were also down in the quarter, totaling -- they were $12 million, which is about 54 basis points on loans compared to 33 million or 1.5% on loans in the last quarter -- in the third quarter. The $21 million decrease is mainly two items; last quarter, we took $12.5 million in charge-off for writedowns on loans that were transferred to held for sale. Some of them are being sold or have been sold, and this quarter, as I mentioned before, we had a $7.4 million recovery on a commercial loan that was paid off in the quarter.

The allowance ratio to total loans continue to be at a high level, at 2.22%, slightly down from the 2.30% we had as of September, and the ratio of the allowance to non-performing, it's 62%. Non-performing commercial loans, we carry at $0.56 and we continue to monitor that based on the composition of the portfolio.

Before we go to Q&A from the quarter, I think it's important to mention a little bit about the year. A strong year, as Aurelio mentioned; net income was $201 million, which is $0.92 a share, which compared with $67 million or $0.30 a share. However, there have been quite a few moving parts over the last two years that includes items like the reversal of the deferred tax asset valuation allowance and the impact of the tax reform that I discussed previously, a special tax benefit we'd realized 2017 for a change in the tax status of some of the Bank subsidiaries, the special provision that we took in 2017 for the hurricane with some subsequent releases in 2018, as well as some of the expenses associated with the hurricane. And so to normalize earnings and to be able to see the year, we have excluded all these items, as you can see the detail of the items on page 28 of the presentation and in the press release.

Adjusted on a non-GAAP basis, net income for the year would have been $137 million or $0.62 a share, which compared to an adjusted net income of $107 million in 2017 or $0.49 a share. This is a 27% improvement year-over-year, and adjusted ROA, it's up to 1.12% of assets as compared to 90 basis points in 2017. Overall, significant improvement in the different components, net interest income being the largest driver and lower provision -- adjusted lower provision being the second largest component. So overall, an extremely good year for the Corporation.

Now I would like to open the call for questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning guys.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I guess, just first question, Orlando, I think you've mentioned right at the end in terms of the adjustments and the adjusted EPS given all the moving parts. I think when we sort of think about the $0.20 in adjusted EPS that you reported for fourth quarter and the $67 million in pre-tax, pre-provision income, like when you look at the $0.20, do you think that's sustainable as you think about next year? And I'm just thinking to make sure that we don't get ahead of ourselves around what you could earn even before baking into any capital deployment actions in 2019.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

We -- I mean, $0.20 was extremely good. Many components worked out fine. I think that if you look at the different components, net interest income has shown a pretty good clip of improvement, driven by obviously some higher rates in the market and so repricing and the mix of the assets. It's important that our consumer portfolio has continued to grow at a very good rate. I think that the margin on the short-term could be sustained with the way we are seeing the level of originations.

The question, which is a difficult one, has been when those betas in Puerto Rico will start catching up. The fact that rate increases seemed to have stopped a bit probably will help in that, but we continue to see the challenge in the Florida market. But in the short term, I do believe the components combined with -- as I mentioned, we continue with some of these reductions in non-performing that helps a lot, as we get rid of some of these non-yielding assets and transform it into either some kind of investment or reduction of high-cost funding that we have on the books. So that's one component.

The other income items, I will say, would be fairly stable from where we are now and the expense items, I think it's the one that we'll see a little bit of pickup only because of some of the projects that are being completed, technology projects. We have three large projects that are basically at a final stage. So with that, there could be some adjustment here and there, I would say, $0.20, it's -- might be doable, it's on the high side, but it might be doable.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Helpful and thanks for talking through all of that. And just separately, in terms of deposit growth, so understand what you called out in Florida, Virgin Islands in brokered deposits, and the growth in non-interest bearing that you had was quite strong again. As you think about 2019, how should we think about government fund inflows, other activity that could actually reaccelerate deposit growth at some point in '19, or do we expect more kind of a flattish outlook for deposit growth given the remixing and uncertainty on the federal fund inflows?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Ebrahim, Aurelio. I'll cover that one. I think the variable that we have to monitor, all of us, you know it's really the speed of the inflows of federal funds. Significant money flew in 2018 and part of '17, we benefit of it. The strategies are in place, the sales force are in place, and we will continue to execute on that front. How much we can grow, it's really dependent on the speed of the inflow. We all know that with the closure of the federal government that things got delayed also. So we monitor -- I think we have to all monitor the timing and manage this on a quarter-by-quarter basis. At the end, we are confident that funds will come. It's just a matter of how they show into the market. But we -- on the other hand, our market share of Puerto Rico, it's still only 11%. So we do have a very active strategy to go after deposits and that continue to be so.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. Thank you. And just one quick question on the tax rate for -- going forward, 19, 20? Should we assume more like low 20s, 20%, 21% tax rate?

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

No, that one thing I was going to comment that I should have commented on the discussion. The one component, remember that because of the large valuation allowance, that meant that some of the items that were subject to valuation allowance, depending on the actual results, like what levels of charge-offs we had or what levels of taxable income we had. During the year, you do get some reversals built into your normal tax calculation. That lowers your tax rate a bit. The way -- with the recognition of the reversal of the valuation allowance, we should see some increases in effective tax rates, but at this point, I'm estimating that could be somewhere in the range of 28% to 29% effective tax rate for next year. Right now we were around 25% on a consolidated basis, so it would increase a bit. That would be the pressure on the net results that we are going to see on the other hand.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

The next question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning guys.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Good morning Alex.

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

First off, just wanted to drill in a little bit more to NPLs. You guys didn't -- it looks like you didn't move any of the NPLs to held-for-sale this quarter, which you've done in the past couple of quarters. Is that something that's reflective of appetite in the market for NPLs? Are you seeing a little bit more optimism maybe on your end about being able to resolve some of these things organically?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

You know, we still have some held-for-sale that we are moving. Well, remember, we also have OREOs, large commercial OREOs that are kind of in the same category because they are ready to be moved out. So that continues to be -- if you just add those two components, we have plenty inventory to continue reducing obviously the organic improvement on some of the assets, with some of that happening in the quarter, you know, we expect that some of that will continue too. So it will continue to be a combination. We...

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Remember that the market has changed a bit of what we have seen during 2018, and this is a function of an assessment of the portfolio to determine final disposition or expected final disposition strategy. So we've moved to held-for-sale all those loans that we held at final disposition, will be a sale of the loan as compared to others that there might be some resolution strategies. Clearly, those are analysis that are done every quarter, and it could change the way we see some -- the final disposition. So that's what has changed. But we -- based on what we saw, we did significant analysis during the second and third quarter to determine what wanted to do with some of these non-performing.

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

Okay. And then you kind of alluded to sort of the reason for higher expenses in 2019, as you had some projects that are kind of nearing completion. Are you able to elaborate a little bit on some of those projects? I know that you guys are kind of in a process of sort of transitioning, you've been cleaning up the balance sheet for a long time, and maybe now almost to the point where, dare I say, some offense. Are some of these technology improvements and projects kind of related to that?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Yeah. They are related to that. They are related to digital channels improvement and they are related also to some of the internal process improvement, you know, ERP as an example, and some of the analytics that have to do with SISO(ph), which is also an important technology piece of analytics behind it.

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

Okay. And then just final question on the margin, the 15 basis points of yield expansion in the loan portfolio. How much that was driven by the rate hike in September versus -- I mean, I know there has been some remixing in the portfolio as well, but was there anything like interest recoveries in that calculation in the fourth quarter?

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

No. There were none. All of it, it's a function of -- if you look at the two components, the consumer -- the commercial portfolio, the C&I portfolio, you probably saw there that had a pickup of 50 or 60 basis points. And then obviously, you have a big push related to sort of -- through the fact that consumer portfolio has become a higher percentage of the total. And if you look at those, you are talking about above 8% kind of average yields in those portfolios that you can see on the tables to the press release, that you take a look at them very carefully every time. So I would say, those are the two, and then you have to think that our resi portfolio, it's down, it's lower yielding as compared to the consumer portfolio, and it's a function of the strategy to try to originate more conforming paper to be sold, and obviously we are not originating enough paper -- non-conforming paper on purpose to be able to substitute the levels of normal repayments we have on the portfolio every month.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

(inaudible)

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

But there is no special recognition of interest on something large or anything like that. It was all core components in there.

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

Great. Thanks for taking my questions.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you, Alex.

Operator

The next question is from Brett Rabatin with Piper Jaffray.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Hey, good morning guys.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Hey, Brett.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Wanted to ask, I guess, first, could you give us some color around the Florida growth, $110 million? What loan segments you were growing there, and then just -- is the outlook for '19, is that predicated on Florida or growth in Puerto Rico? What's sort of the thought for '19 related to the geographic areas?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

First of all, it's across the board, mostly commercial, different segments of the commercial. Some of them, you know, we've been originating some construction loans on the commercial side, which some of them grew, specifically in Florida. We have some corporate names that have some transactions that went through the year, that closed in the quarter. Same thing happened with the middle market segment. So it's primarily on the commercial side.

When you think about growth, probably the second half of the year is more reflective of how 2019 will look, meaning the most recent two quarters. Obviously it's very kind of predictable what we can do in consumer and mortgage. You know the commercial and corporate is really deal-driven, so sometimes the deals close later than we expect or earlier, so that also so -- but obviously when -- if you consider net of the sales of non-performing, Puerto Rico should grow, that's our expectation, in addition to achieving some additional growth in Florida.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Brett, yes, we do believe that we are going to see the same trends in 2019 from like residential, it's going to go down. We still see growth potential in consumer and commercial in Puerto Rico as well as commercial in the Florida market.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. And then wanted to go over to credit for a second. You sold the construction loan and you had some upgrades and classification of a couple of commercial loans. And so your classified went down $71 million in the quarter. Would you anticipate additional migration of commercial loans out of classified going forward, or maybe just give us some color on how you see credit progressing with the loans that you have in that bucket, and then just if you happen to have the classified to Tier 1 capital?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Well, the objective is exactly is -- has been that for a long time. Obviously we have to do it on a core basis. We have no loss share agreement, so it takes a little bit longer on our side. So the objective is to both continue improving the legacy loans that still are the ones classified. These are legacy loans and continue improving them as things have normalized for the borrower or asset values have adjusted or cash flows go back to sustainable levels or we do TDRs, and also to continue to dispose specifically what is held-for-sale and what is on NPA. So that will continue to be the focus. Obviously, we were doing -- we were in a good trend before the hurricane that we had a disruption. Now we're back on track and the goal is to continue moving down those $467 million. Yeah.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. And then lastly, just on capital, 24% total risk-based, what would stop you guys regulatorily at this point from deciding to buy back at least some portion of stock or thinking about it at least? Can you give us any color on -- I know you are thinking about growth, both organic and inorganic this year, but why not do some level of buyback?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Well, I think I did mention on the capital front. Obviously it's a priority to do both to achieve some growth in the balance sheet, but also to implement some additional capital actions. As we did in the last quarter, we were not able to announce to the market -- anticipate reactivating the common dividend. You know when the time is right, you know, we cannot control the timing of these events. When the time is right, we will advise the market. But believe me, it is a priority for the management team. It is a priority for the Board to move forward in additional capital actions.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay, great. Appreciate all the color.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) The next question comes from Glen Manna with KBW. Please go ahead.

Glen Philip Manna -- Keefe Bruyette & Woods Inc. -- Analyst

Hi, good morning.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Good morning, Glen.

Glen Philip Manna -- Keefe Bruyette & Woods Inc. -- Analyst

I just have a quick question on the DTA and the VA. The bulk of the decrease looks like it was at the subs. So there is about $32 million in the VA remaining, I guess, up at the parent. So could you just explain to us what it would take to kind of recapture that piece of it? First, what it is, and then I guess, what it would take to kind of recapture that piece up at the parent?

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

The -- it's been like that since -- for a long time. In reality, the parent company, it's -- the holding company doesn't have much in terms of revenues. We do have some expense components in there that generate some -- looking at the holding company only, some losses and unless we put some earnings in there, there will be very unlikely -- it's going to be very unlikely that we will recover any of that DTA that is sitting on the holding company. We would have to change the structure and so it's something that clearly we've been analyzing, but it's not that simple. And that has remained in there for a long time because of that and will probably remain. In the Bank, which is -- when you mentioned subsidiaries, it's basically -- it's a bank, most of it. It's -- what remains is a function of some capital losses that could be used against capital gains only. So it's difficult to predict the capital gain components. Some amounts related to the way tax laws are in Puerto Rico, really -- based on the exempt income you have per year as compared to -- you're not allowed to use NOLs up to the levels of exempt income. So it all depends on the composition of the exempt versus taxable income on the books, on the Bank side. Those are the main components. But that difference that you mentioned, it's not something that I can tell you that it can be realized easily, meaning the difference with the holding company component.

Glen Philip Manna -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. Thank you, Orlando. Have a good day now.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Thanks, Glen.

Operator

The next question will be from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. Just thinking about the loan growth that you've seen in Puerto Rico and then commented on auto and consumer being fairly stronger, have you changed your underwriting at all? Has there been any kind of change in the competitive environment? Just kind of curious as to how you're viewing the origination environment in the competitive side there.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

We have not changed underwriting. There is -- we have expanded sales activity. We have expanded outreach. There has been changes in the auto industry competitive environment with the exit of a large player. So that was planned for early last year and that happened and we acted on it. And on the commercial, obviously, as we have continued to clean up the balance sheet and provide additional space, we have identified industries that we were not attacking before. So obviously, when you look at some of the growth that was achieved in the commercial in Florida also was driven by being fully staffed, which -- you know, that happened early in 2018. So that is really -- those are contributors to our outreach and our goal of actually growing the balance sheet in Puerto Rico. We were not that active in that terms. Obviously, looking at the overall situation, we are expecting that the economy of Puerto Rico continue to grow in spite of the potential timing of events of the funds. So that supports our strategy to grow in certain segments in Puerto Rico.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And then on the M&A front, has there been any kind of increased activity or availability of potential strategic combinations or any loan portfolios that have become available?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

We haven't heard anything publicly on that front. So I think there is still -- you know there is a lot of inflows of investors buying assets. We haven't heard anything publicly on the M&A front.

Arren Cyganovich -- Citigroup -- Analyst

Okay. Thank you.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Thanks, Arren.

Operator

The next question is a follow-up from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hey, guys, just a quick follow-up. Orlando, I think given sort of your credit commentary, the migration trends that you talked about, how should we think about provisioning costs relative to the $13 million adjusted for the fourth quarter? Should they continue to go lower from here, or is the run rate kind of the right -- about $13 million to $15 million the right way to think about it?

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Well, that's been the most difficult part of this business over the last 10 years. Based on the trends we've seen on delinquency and so, I would have to tell you -- I would have to say that I'm expecting provisioning to be in that level of $10 million to $15 million. We don't see any significant things that are going to become worse and make it worse, but we still have non-performing, as you know, and those are the challenges.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

The next question is also a follow-up and it's from Brett Rabatin with Piper Jaffray.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Hey, guys, I just want to follow up on macro Puerto Rico and there's been a lot of dialogue lately with PREPA and some other things on the island. Can you give us maybe your view on PREPA and just what happens with that as we go through this year? And then just thinking about the funds that are coming to the island, like are we starting to see renewed optimism about that or is that sort of tailing off in your view?

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

First of all, PREPA, obviously, as you know, we have no exposure to PREPA or to Puerto Rico bonds. So I think that continues to move probably slower than we expected and we hope for resolution. The only bond resolution that was resolved -- was resolved in the last quarter was GDB. COFINA, it's been voted by the holders on a positive note, pending court approval to move on the COFINA and obviously the yields, there is still -- there is noise, so it's early in the stage. So PREPA, they made some progress on, as you know, the bidding process is ongoing and some of the -- some of the privatization activity, gasification of some of the generating plants is moving. We think there is a lot of -- there is a lot of moving parts there, and there is a lot of governance behind it because everybody's involved, including the Fiscal Board, including independent boards and a special committee. So I think it's going to get resolved. You know, there's been some stability on the services after the hurricane and some money was invested in improving that infrastructure. So obviously, it's very difficult to predict the speed of resolution, but I don't think it will have any change in the economy at all. Obviously, if another storm of that magnitude will come, we have our challenges, but you know, probabilities are difficult to predict on that front.

Regarding the funds, obviously, they are assigned by Congress. There has been noise about using them for something else. We believe that they are assigned -- the fact that they are assigned, they're going to come to Puerto Rico. It's just the timing when they're going to show up. There is still a lot of work happening out there related to the reconstruction of the island, and some of the funds are really designated to do that, including infrastructure and housing.

There are other levers that are included in the fiscal plan that I think we should monitor. Public-private partnerships are moving ahead and there's proposals out there, there are opportunities for financing out there that are being shown to the banks. So that is taking their own -- similar to what the government did with highways and the airport, some of those projects of similar nature, probably more similar to the airport than anyone else, are coming to fruition. I think timing is going to be 2020 in terms of implementation, but the fact that they're moving, it's important.

And I think progress, we expect more progress to happen in some of those matters, because you know 2020 is an election year, and being an election year 2020, there have to be some resolutions prior to that. So we see that happening in every election cycle that things happen, some accomplishments get done over the last couple of years prior to the election. So that's our view.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. Thanks for the color.

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Thanks Brett.

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to John Pelling for closing remarks.

John B. Pelling -- Investor Relations Officer

Thanks, Chad. On the investor front, we have a couple investors tours and a conference in February. On February 12th, we'll be hosting Alden Securities(ph)for their annual investor tour. That same week, we'll be attending the KBW Financial Services Conference in Boca on February 14th, and Piper has planned their annual investor field trip to Puerto Rico on February 27th. We look forward to seeing a number of you at these events, and we greatly appreciate your continued support. At this point, we'll end the call. Thank you.

Operator

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

Duration: 46 minutes

Call participants:

John B. Pelling -- Investor Relations Officer

Aurelio Aleman-Bermudez -- President and Chief Executive Officer

Orlando Berges-Gonzalez -- Executive Vice President and Chief Financial Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Alexander Roberts Hu Twerdahl -- Sandler O'Neill -- Analyst

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Glen Philip Manna -- Keefe Bruyette & Woods Inc. -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

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