Popular Inc (BPOP) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Popular, Inc. earnings conference call. My name is Tahitia and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Enrique Martel, Manager of Corporate Communications. Please proceed.

Good morning, thank you for joining us on today's call. Chairman and CEO, Richard Carrion; our CFO, Jorge Junquera; and our CRO, Lidio Soriano, will review our fourth-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 Web page, which you may visit by going to www.Popular.com.

We also want to remind shareholders and analysts that we will hold our Investor Day on Friday, March 1 in San Juan. You can find a link to the webcast in the Investor Relations section of our website. For further information, please contact us via e-mail at investor-relations@bppr.com. I will now turn the call over to Richard Carrion.

Good morning and thank you all for joining the call. I would like to first address the highlights and key events of the quarter and then discuss our progress in priority areas. Jorge will go into greater detail on fourth-quarter and full-year financial results and Lidio will provide an overview of credit trends and metrics. With that please turn to the second slide.

What we reported $84 million and net income in the fourth quarter; this included a $27 million after-tax gain or equity pickup from our 49% interest in EVERTEC. Excluding this gain, net income amounted to $57 million for the fourth quarter, which was marked by another strong performance from our core businesses and continued improvement in credit. The sequential increase of $10 million in net income was driven by greater interest income, lower loss estimates for our covered portfolio and further declines in our funding costs.

The fourth-quarter marked a strong finish to a good year that positions the Company for continued progress in 2013.

The $27 million after-tax gain was our proportional share of a tax grant received by EVERTEC from the Puerto Rico Treasury. Excluding the EVERTEC gain, we earned $218 million for the year, in line with our expectations. Including it, net income for the year amounted to $245 million.

We continued to make significant progress on the credit front. The $125 million decline in held in portfolio non-performing loans was our largest quarterly decrease during the current credit cycle, excluding bulk sales, while NPLs I quarter-end reached their lowest level since December of 2009.

More than two-thirds of the decrease in NPLs this quarter occurred in our Puerto Rico commercial portfolio, which underwent its annual credit review in the third and fourth quarters. The reduction in Puerto Rico commercial NPLs was mostly driven by lower NPL inflows and loans returning to accrual status.

We enter 2013 with strong capital levels. At year end, our common equity Tier 1 ratio reached 13.18% and our total capital exceeded the current well-capitalized threshold by $2 billion. Our tangible book value per share at quarter-end stood at $32.55.

I also want to highlight that in December we received a $24 million cash dividend from EVERTEC.

Some of the analysts who cover Popular have published estimates of the value of EVERTEC and of our 49% stake. I won't comment on those estimates, but I will say that based on EVERTEC's total adjusted EBITDA of $118 million for the first nine months of 2012, we believe that our stake in the Company is worth substantially more than its current book value of $74 million.

Improved credit performance increased the contribution of our $3.8 billion covered loan portfolio in the fourth quarter while our Puerto Rico mortgage operation had another superb performance.

Excluding the EVERTEC gain, gross revenues amounted to $452 million and our net interest margin increased to 4.41%, which continues to stand well above our peers.

Our continued improvement in credit, our unique franchise in Puerto Rico and our strong capital levels were the primary reasons cited by Fitch Ratings for their one-notch upgrade of Popular last week.

Please turn to the third slide. In 2012 we made clear and consistent progress on our number one objective -- reducing NPLs. For the year non-covered NPLs declined by $313 million to the lowest level since 2009, and NPAs fell $384 million to the lowest point since 2010.

These reductions were the result of aggressive loss mitigation efforts, resolutions and restructurings, NPL sales and stabilizing economic conditions. These results have helped lower the provision expense in the fourth quarter by 30% when compared with the year-ago quarter.

We've added resources to our credit management function and are operating with both greater speed and higher efficiency in addressing NPLs. We will continue to pursue all opportunities to reduce NPLs, including bulk sales, provided that they make economic sense and create value for our shareholders.

Our significant progress on the credit front in 2012 did not have the benefit of a tailwind from an economic recovery. While we are seeing some stabilization, additional measures are needed to put Puerto Rico's public finances on a sustainable footing, as recent credit rating agency reports attest to. We are our, however, very encouraged by the new economic and fiscal teams the new governor has appointed. As the largest financial institution on the island, we continue to promote economic development and capital formation to help spur growth.

Another important area of focus is continuing to take actions to put Popular in the best possible position to exit TARP at the appropriate time with the least possible dilution. We have nothing new to report on this front, but of course we'll continue to keep you posted.

Please turn to slide 4. Based on the latest market share data, we increased our share in four out of nine banking categories, maintaining leading share in seven of them. Nobody in the Puerto Rico banking sector can offer the range of financial services we provide and we are making sure that we do so in the best possible way for our clients.

Our 32% share of the mortgage origination market and our $22 billion mortgage servicing portfolio has helped us capture much of the opportunity presented by low interest rates, federal refinance programs and local housing incentives. Our Puerto Rico mortgage business increased total originations by 15% to $446 million in the fourth quarter. For the year, mortgage originations were up 21% to $1.5 billion.

Increased activity in the Puerto Rico commercial sector during the fourth quarter led to a $113 million increase in loan volume from the previous quarter.

In the US our loan balances have been decreasing as a result of our exiting from discontinued businesses. However, in Q4 we succeeded in growing the loan book again through higher originations as well as renewal and additional borrowings by clients. US non-legacy commercial volumes grew by $117 million.

We would like to see more consistency in loan demand, but we are encouraged by recent loan activity from our commercial clients.

To supplement originations, we acquired close to $800 million in high-quality assets during the year, $475 million in US mortgages and $321 million in Puerto Rico consumer and mortgage loans. We will continue to seek opportunities to add low risk assets to our existing infrastructure as well as to capitalize on our unique market position to reap the benefits of greater economic stability.

Our revenue generating capacity remains strong. Popular produced $1.8 billion in gross revenues in 2012. And despite the low rate scenario, the net interest margin of our Puerto Rico operations increased to 5.18%. Going forward continued improvement in credit performance will support a strong net interest margin and revenue growth by reducing the drag from non-earning assets.

As I stated last quarter, we are viewing all of our strategic decisions through the lens of driving shareholder value by increasing ROE. If we can grow quality assets and generate returns in excess of our cost of capital then and only then will we do so. If that can't be done prudently then we will not pursue growth simply for the sake of growth. With that I would like to turn the call over to Jorge now.

Thank you, Richard. Please turn to slide 5. Our fourth-quarter performance capped a good year. On the revenue side we saw a 4 basis point sequential increase in the net interest margin. While the 4.41% NIM was harshly driven by the spike in the accretable yield of the covered portfolio, the margin was still above 4% excluding the impact of the covered portfolio.

Cost of funds was down 5 basis points on a quarterly basis and 26 basis points when compared with the year-ago quarter.

In 2012 we made additional progress in further aligning the cost of deposits with mainland banks. Despite the additional rate cuts we implemented in a low rate environment, we were successful in maintaining our core deposit base. Our average balance of deposits, excluding brokered, public funds and demand deposit accounts remained relatively stable in quarter four versus the previous year, declining by only $13 million. DDA accounts during the same period increased $315 million, which helped support our NIM.

Declines in deposit costs have slowed down recently, but we think there is still some room left for additional savings.

Fee income remained stable but other operating income was pushed higher by the EVERTEC equity pickup, which, as mentioned earlier, included a $32 million pre-tax benefit related to our proportionate share of the tax grant received by EVERTEC. We also recorded a $12 million increase in net gain on loan sales driven by higher gains on mortgage loan securitizations in Puerto Rico and sales of commercial loans held for sale in the US.

The performance of the covered portfolio continues to exceed our expectations. Lower loss estimates, resolutions that exceed the book value on certain commercial loans helped push net interest income higher and lowered the provision for covered loans by $26 million. However, the benefits were offset by a $30 million increase in FDIC loss share expense.

Keep in mind that in the long-term lower losses will result in loans generating higher cash flows for a longer period of time.

Credit-related operating expenses remain at elevated levels. Higher operating costs associated with the covered portfolio, which are reimbursable by the FDIC, increases in the cost related to performance-based compensation, seasonal ad campaigns and reserves for operational losses led to an increase of $6 million in total operating expenses for the quarter.

We expect operating expenses to decline with further reductions in non-performing loans since lower NPL levels should reduce costs associated with collections, legal fees, appraisals and OREO expenses. As we said last quarter, we have identified about $18 million in quarterly non-personnel costs that are related to collections and OREO expenses. In a normalized environment, we should aim to cut about half of that.

We've also generated savings as a result of the retirement window we implemented at the beginning of the year. Despite the greater need for personnel in credit and risk management functions, salary expenses are down at $9 million annualized when compared with the fourth quarter of 2011.

Please turn to slide 6. We started 2013 with a strong capital levels relative to US and Puerto Rico peers and regulatory requirements. Our common equity Tier 1 ratio increased to 13.18% and we have approximately $2 billion in excess common equity Tier 1 capital over the well-capitalized requirement of 5%.

We anticipate maintaining strong capital levels during the next several years as the Basel III rules are implemented. Under Basel III we expect continued growth in excess capital but at a slower pace.

Building on our progress in 2012, we remain focused on continuing to increase our strategic and financial flexibility in 2013. Additional declines in NPLs and further strengthening of our capital resources will provide enhanced flexibility for the eventual structuring of our TARP exit. With that I turn the call over to Lidio. Thank you.

Thank you, Jorge. We are pleased to report that we continue to make steady progress on the credit front. Before going into the details, let me highlight the key credit trends.

Non-performing loans and non-performing assets continue to decline and are at the lowest levels since 2009 and 2010 respectively.

NPL inflows reached the lowest level in three years in the fourth quarter. On a year-over-year basis NPL inflows were down approximately 27%.

The net charge-off ratio remained below 2% for the third consecutive quarter.

Please turn to slide 7. On the top half of the slide we summarize the trend in NPLs over the last year. Since peaking in the third quarter of 2010 NPLs are down approximately $920 million or 39%.

For the quarter a $90 million reduction in Puerto Rico commercial portfolio, a $17 million reduction in the US commercial portfolio, an $8 million drop in the US legacy portfolio and a $6 million decline in the US construction portfolio led to a gradual reduction of $120 million (sic -- see slide 7) in NPLs.

In Puerto Rico, most of the decrease in commercial NPLs was driven by lower inflows of non-performing loans and loans returning to accrual status after sustained performance by borrowers.

In the US two milestones are worth highlighting. First, commercial and construction NPLs, including legacy loans, are below $200 million. Second, from a peak of $250 million in non-performing construction loans in 2009, we are down to one non-performing construction relationship for approximately $6 million, for which we expect resolution during the first quarter of 2013.

On the bottom half of the slide, we illustrate the steady decline of non-performing assets during the year. The $384 million decrease for the year is primarily driven by -- the previously mentioned decrease in NPLs held in portfolio and a decrease in NPL held for sale driven by loan resolutions and sales.

As Richard alluded earlier, we are seeing signs of economic stability while at the same time we are also seeing the benefits of our NPL reduction strategies and the increase in resources added to the workout areas. As a result, total NPAs are down $729 million (sic -- see p. 8 of script) or 29% since peaking in the third quarter of 2010.

The fourth-quarter increase in OREO reflects our continued efforts to aggressively resolve non-performing loans. The increase was primarily caused by properties foreclosed from the Puerto Rico mortgage and commercial portfolio.

During the second half of the year, we restructured our mortgage OREO sales process by assigning our properties to regional management companies that have the responsibility of maintaining and selling the collateral. During the fourth quarter the number of Puerto Rico mortgage OREO sales and the realization of these sales reached the highest levels for the year.

Please turn to slide 8 to review NPL inflows. On the top right corner of the slide, we illustrate NPL inflows excluding consumer loans. As stated in the introduction, NPL inflows in the fourth quarter declined to the lowest level in the last three years and decreased approximately $436 million in 2012 when compared with 2011.

The year-over-year decrease was primarily driven by decreases in the commercial and construction NPL inflows, coupled with a slight improvement in the mortgage portfolio.

Commercial and construction NPL inflows, including legacy, amounted to $69 million during the fourth quarter, a decrease of $73 million or 51% when compared with the previous quarter. For the year, total commercial and construction NPL inflows declined $402 million or 47%. The decrease is driven by improvement in both Puerto Rico and the US.

Mortgage NPL inflows increased by $8 million or 5% during the fourth quarter compared with the previous quarter. The increase in mortgage NPLs was driven by a greater level of loss-mitigation activities from our mortgage portfolio with recourse. We are aggressively working problem loans through our loss mitigation program, which continues to produce good results. Approximately 70% of our restructured mortgage loans are performing a year later.

As we discussed in previous calls, we stopped selling mortgages with recourse in early 2009. These loans have an average seasoning of seven years and an average size of approximately $100,000. Repurchase activity peaked in 2011 with approximately $60 million per quarter.

For the year, mortgage NPL inflows decreased by approximately $34 million.

Please turn to slide nine. As I mentioned earlier, our net charge-off remained below 2% for the third consecutive quarter at 1.94%. Net charge-offs amounted to $101 million compared with $96 million a quarter ago and $126 million in the year-ago quarter. Net charge-offs for 2012 totaled $403 million, an improvement of $131 million or 25% compared with 2011. The decrease in net charge-offs for 2012 was mainly driven by improvement in the commercial and construction portfolio in both Puerto Rico and the US.

The provision for loan losses increased slightly by $3 million from the third quarter to $86 million due to higher net charge-offs in the Puerto Rico commercial loan portfolio, offset in part by lower losses in the US loan portfolios. The increase in net charge-offs in Puerto Rico commercial portfolio was mainly related to one relationship.

For the quarter provision to net charge-offs remains relatively flat at 86% with a decrease in the ratio for the US offset by an increase in the ratio for Puerto Rico. Notwithstanding the decrease in NPLs and net charge-offs in 2012, our provision to net charge-off for the year increased slightly to 83% from 81% in 2011.

The last item that I would like to cover is the allowance and related ratios. For the fourth quarter the allowance for loan losses decreased slightly by $15 million driven by the improvement in credit quality and stability of our net charge-off ratio. The coverage ratio increased to 44% from 41% in the third quarter driven mainly by the $125 million decrease in NPLs. As discussed in previous calls, please bear in mind that our coverage ratio is influenced by the percentage of loans subject to specific analysis on our mortgage portfolio.

Approximately 50% of our NPLs are subject to individual analysis and thus have been written down to estimated net realizable value.

We continue to experience low levels of losses in our mortgage portfolio. The mortgage net charge-off ratio stood at 1.37% for the fourth quarter.

With that I would like to turn the call over to Richard for his concluding remarks. Thank you.

Thank you, Lidio. Please turn to slide 10. Let me conclude today's call by summarizing the key takeaways.

We closed the year with a solid performance and strong capital ratios. Our covered portfolio continues to produce better than expected results. We've added resources to our credit management function and are operating with both greater speed and higher efficiency in addressing NPLs, as demonstrated by the continuing improvement in the credit quality of our portfolios in both the US and Puerto Rico.

Notably the substantial decline in Puerto Rico commercial NPLs was the main driver behind our largest organic quarterly decrease in NPLs. We continue to explore all avenues to reduce NPLs, including resolutions and sales that make economic sense.

The leading market positions of our unique Puerto Rico franchise are allowing us to benefit from a rebound in loan demand in certain sectors of the economy and sustaining above average margins.

In the US we will continue to build on the improvement we made in 2012 and seek to originate quality assets to offset runoffs and pursue profitable growth.

The corporation's revenue generating capacity remains strong despite current economic conditions, while our total capital exceeds the current well-capitalized threshold by $2 billion.

When we reported Q4 2011 earnings, we made an exception from our historical practice and provided guidance for 2012. At that time there was a wide disparity between our expectations and analyst estimates for 2012, and we felt the need to address that by offering some clarity regarding our outlook.

We want to be as simple as possible, but we don't believe that providing annual net income guidance is the most meaningful way to do that. So we are returning to our historical practice of not providing annual earnings guidance. We intend to provide an update on our estimated normalized earnings at our Investor Day in just over a month. We believe this is a more appropriate metric for the underlying performance and value of this Company.

To be clear, we feel good about the progress we've made over the past year and are optimistic that we can continue to build on this progress to increase our strategic and financial flexibility in 2013.

Lastly, as you saw this morning, we announced that Carlos Vasquez has been appointed CFO of Popular, succeeding Jorge, who is transitioning to a new role as Vice Chairman. As I stated in the press release issued this morning, Carlos has an extensive financial background and brings a wealth of experience to the CFO position, having shown a great ability to perform in critical and diverse positions at Popular and previously at JP Morgan. Most recently he restored our US operations to profitability.

This change is part of Popular's normal management succession process and reflects the depth of talent available in the Company. We expect a seamless transition. I want to reiterate we are pleased with the progress we made in 2012 and are optimistic that we can continue to build on this progress in 2013 with Carlos and Jorge in their new positions.

Jorge has demonstrated uncompromising commitment and made invaluable contributions during his more than 40 years of service to Popular, the last 16 as CFO, including playing a key role in the development of our business in Puerto Rico. During the financial crisis Jorge ensured that the Corporation and its banking subsidiaries always maintained adequate levels of capital and liquidity. I'm confident he will continue to make important contributions in his new role as Vice Chairman.

To Carlos and Jorge, my sincere congratulations. And with that I would like to open the call for questions.

(Operator Instructions). Ken Zerbe, Morgan Stanley.

First question, just in terms of loan growth, you obviously seemed a little more -- probably much more positive on the outlook for loan growth or the activity -- commercial activity that you are seeing in Puerto Rico right now. When we think about 2013, is it fair to assume that we could continue to see positive commercial growth from here or was this more of a one quarter unusual positive? Thanks.

Well, it's one quarter in a row so far, but we are hoping -- yes, we are hoping that we can generate more commercial loan activity in both Puerto Rico and the US. And that is our plan.

So the economy is strong enough that actually that is a viable possibility?

You know, strong is not what I would say, but there are some encouraging signs and we are encouraged, absolutely.

Okay, that helps. And then, I guess the other question, just on the NPAs coming down -- so good job in terms of getting those down a little bit. Was any of that -- were there any bulk sales of any size in the quarter and, if not, what is the outlook for bulk sales going forward? Because I know it's something you have been working on for a while, we just haven't seen --.

Well, no bulk sales in the quarter and, as we have said probably too many times, we will look at bulk sales and if they make sense we will go ahead and pull the trigger and execute them. But key is that they make sense and we are happy to do them. We are also happy with the progress we have made in bringing down NPAs and think we can continue to do that even absent bulk sales.

At the same pace?

No, bulk sale will be faster, obviously.

No, no, I mean without the bulk sales, do you think you can get the NPAs down?

Yes, I think we can continue the pace, yes.

Okay, great. Thank you very much.

Gerard Cassidy, RBC.

Can you guys talk about the cost of deposits? Can you bring that -- you've got such a great market share in Puerto Rico, can you bring that down from the current levels where you are today?

You know, I think as Jorge mentioned, we have succeeded in bringing it down, we do have a high component of passbook and other types that it gets tougher to bring it down. I think we operate better; our margin operates better in a higher interest rate environment.

That said, we have had a lot of success in bringing it down, the margin increased this quarter, which is not what you have seen in the mainland. So we do -- we have had success bringing it down. We think there is still a ways to -- there is still a ways to go there.

And to follow up on your guy's comments about the EVERTEC investment, what kind of analysis do you do to determine -- you pointed out that the market value is materially greater than what you carry it for and everybody has their own estimate of course. But what kind of analysis are you doing to determine whether you should just keep it on the books or should you sell it, realize the sale and then use it to possibly write down distressed assets more quickly?

Well, you know, we are a passenger in that car, not in the driver's seat. We like where the car is going, but we are -- we don't have control of that asset, we have 49% and there are some governance provisions, which determine what we can and cannot do with our stake. That said, we think that the capital is earning a very good return. And if there is an opportunity down the road we will certainly execute.

And then the final question -- on TARP you pointed to that you could potentially start paying it off in segments or chunks. Should we anticipate that there could be a possible partial TARP repayment in 2013 or is that too optimistic?

Well, we didn't -- what we said is we have no new news on exiting TARP. Obviously we want to do it, but we want to do it in terms that are favorable and in terms that we think are just. So we will continue to work on that, we will continue our dialogue with regulators, since anything we want to do will need to be approved by them.

What we do think is that the better we improve our condition the more flexibility and the more optionality that we will have regarding a TARP exit. And as I think we've mentioned, there will be -- the interest rate reset doesn't really affect us in the sense that we have that discount and the effective rate will not really change. There will be some slight impact on cash, but nothing that we [can't] handle.

So in that sense we don't feel this immense pressure. Although I must mention, some of my guys occasionally talk about the cash bonuses, but not too frequently.

Understood. Thank you for your answers.

(Operator Instructions). Todd Hagerman, Sterne, Agee.

A couple of questions I guess for Lidio on the credit side. One, on the commercial, obviously very good progress again on the commercial side, but as I look at the numbers and I think about the clean up in Q2 with the held for sale and the marks there, charge-offs fairly heavy again this quarter.

But I guess the question simply is as we think about the charge-offs and the marks taken on the commercial portfolio over the last six months, how should we think about the outlook going forward again assuming that NPAs will continue to trend lower?

As it relates to charge-offs specifically?

Well, yes. Just in terms of the marks on the commercial book, the progress you are making and, again, like if I think about Q2 and the held for sale and the charge-offs in Q4 in the commercial portfolio, you are obviously making progress, but I'm just trying to think in terms of more order of magnitude, are we getting closer in terms of the appraised values?

You mentioned the deep dive that you've done the last two quarters in terms of reviews. What is the comfort level now in terms of the underlying book value on these credits?

I will say much more comfort than the first time I sat in this to take a call. I mean over the last year we have seen tremendous progress in the commercial front and net charge-off, as we mentioned, for the Corporation has been under 2% for three consecutive quarters. So to answer your question I would say outlook is more positive than what it has been last year and the recent experience.

In other words, $57 million this quarter, obviously a fair amount of cleanup. But again, in terms of order of magnitude could we possibly see that number drop in half? Is it going to come down more modestly? How should I think about that (technical difficulty) portfolio (technical difficulty)?

Generally I mean this is a difficult question to answer what is going to precisely be the number; we should have 70% to 80% clearly. I mean things are trending in credit quality, there's improvement in both Puerto Rico and the US. So we will expect those numbers to show equal improvements as we continue to move forward.

Pardon the interruption, we just lost him I guess, his line went idle. So we will move on to the next question. Alex Twerdahl, Sandler O'Neill.

First off, I was wondering if you could elaborate on the drop in the FDIC deposit insurance that happened sequentially, just talk a little bit about what changed. And can we take that to assume that maybe your (inaudible) rating has improved?

No, I would not assume that. I mean it is a tough formula to really look at. We did do a deep dive and we found some savings opportunity. So I think that Q4 expense decline reflects the benefits of certain risk-based adjustments to the calculation that we made as a result of that review.

Another example is we merged our mortgage subsidiary into the Puerto Rico bank and that reduces the annual expense by about $10 million based on the related asset classifications under that assessment methodology, which is, to say the least, pretty convoluted.

Okay, so is the $13.7 million number, is that kind of around the run rate that we should expect going into 2013 per quarter?

Well, again, remember that that assessment will depend on asset size and the balance sheet risk composition. So it is a variable that it could change over time. The fourth quarter number did include some one-time benefit. We would expect the near-term normalized expense under $20 million a quarter.

Okay, thank you.

That will depend on what happens on the balance sheet.

Okay, and then just -- I didn't see the level of accruing TDRs in the press release. Lidio, do you have that number in front of you?

Sure. Our current TDRs for the quarter stood at approximately $650 million from a total of $1.15 billion.

Of total TDRs, okay. And then, Lidio, you also talked a little bit about how 51% of the loans have been -- are subject to individual analysis and have been written down to an estimated realizable value. And I was wondering if you could just put some numbers around that and talk maybe about sort of where that -- what that estimated realizable value would be for some of those loans as a percentage of unpaid principal balance?

Okay, I mean, we have -- in previous releases we have provided much more details into the coverage ratio and the information. But generally it is about 30% mark in terms of lifetime charge of valuation [vis-a-vis the unpaid] principal balance, so it's about 30% more.

Okay, and then just final question. On the joint venture that you sold the $360 million of commercial and construction loans to about a year and a half, can you maybe give us a little update on how the resolutions are going there and whether or not you think they might have some appetite for further loan purchases off your balance sheets in the future?

Well, let me say, I think they are going a lot better and a lot faster than was originally forecast. And the evidence is that the loans we made to the entity are being made off at a much faster rate. And our loans need to be paid off before any cash distributions get made. As to whether they want to do some more, you'll have two ask them, I don't know.

Okay, thank you very much.

Derek Hewett, KBW.

I'm not sure if you guys mentioned this earlier, but what portion of the island commercial loan growth was organic versus purchased?

In this quarter it was all organic.

It was all organic?

Yes.

Okay. And then, how much cash is currently at the parent given the EVERTEC dividend?

300 -- I'm getting the sign that it is 300 -- around $300 million, Derek.

Okay, great. And then maybe asking that credit question a different way. I mean, if you take a look at your total level of NPAs -- what percentage of a mark on the entire portfolio do you guys currently carry those loans?

I'm sorry, Derek, related to commercial or the whole books?

On the entire book.

It is quite different because obviously a significant portion of our NPA books is mortgage loans. As we have mentioned before, in that particular book the losses in Puerto Rico, which is the biggest component of the portfolio, has been low and therefore the mark on that portfolio is much different than in the commercial piece. In that portfolio the mark is in the teens while in the commercial book, as I mentioned, it is closer to 30%.

Okay, and that's --

OREO would be at market value less --

Yes, disposition --

(multiple speakers) costs, yes.

Okay, and so that would be 30 -- you have a 30% mark on the entire commercial portfolio in terms of OREO?

Correct, yes.

Okay.

Lifetime charge adding to (inaudible) yes, about 30%.

Okay, and of that 30% mark, what percentage is current reserves on that versus (multiple speakers)?

Most of it is a charge-off. Most of our portfolio, as we have mentioned, is specifically analyzed. Back in 2010 we changed our charge-off policy which we don't reserve, I mean we take any impairment we charge off from promptly. So most of it is lifetime charge-offs.

Okay, great. And then maybe one final question on credit is do you think that the pace of NPL inflows will kind of improve from kind of these low fourth-quarter levels going forward?

We are very encouraged by the trends and we think that we continue to see positive (inaudible) as we move into 2013.

Okay, great. Thank you.

Todd Hagerman.

Let me move on. But Lidio, now I wanted to transition to the mortgage portfolio if I could. And what I'm trying to get at is really the split and a better understanding between the core portfolio and the repurchase portfolio.

I notice in the quarter that I effectively charge-offs relatively flat, NPLs came down, but NPA inflows actually ticked up a little bit. Could you give me a little bit more insight between the core portfolio and the report purchase portfolio and how those optics really come together?

The recourse portfolio, as we have said, is part of our legacy activities that we did. We stopped that activities in early 2009. That portfolio is down to about $3 billion. It has come down over the last two years about $1 billion. And in terms of our asset quality has gone done from double digits in highly (inaudible) delinquency to a number that is closer to 5% today.

We used to and you'd speak during 2011 repurchase about $240 million of a mortgage from our recourse portfolio, we are down to $35 million a quarter, and this quarter was about $41 million. As we mentioned, I alluded during the script or the conference, part of that increase related to loss mitigation activities.

As clients come in and they are looking for loss mitigation activities we are providing them such benefits to them and when we do that we purchase the mortgages from the recourse portfolio. So that was the increase that you saw during the fourth quarter. Overall -- just let me finish, I'm sorry. Overall, we feel very comfortable with the risk that we have both on books as well as off books portfolio.

And then just in terms of the past due number, the 90 days past due, just in terms of some insight there?

For the on books or off books?

For your book, yes, again the core portfolio.

In terms of our core portfolio, the 90 plus is around 12% in the Puerto Rico -- I'm talking about mostly Puerto Rico, but --

Right.

-- (inaudible) the number. So it is about a 12% number for -- which includes the loans that we have repurchased.

Okay, terrific. And then, Jorge, a question for you. Just in terms of the spread income, again, it looks like essentially kind of a reclassification this quarter with the covered portfolio and the cash flows. How should we think about that on a go-forward basis? And kind of the benefit, if you will, in spread income with this reevaluation this quarter? I'm trying to get the numbers squared away.

As you know, you know, we do have to do the recasting every quarter. And the nature of this portfolio is that it is reducing and it is a high-yielding portfolio. So it will continue to put pressure, downward pressure on the yield on loans.

We are continuing to try to offset that by lowering the cost of deposits both here in Puerto Rico and in the US. But as we mentioned earlier, the drop that we have undertaken is beginning to slow down, the continuous drop is beginning to slow down.

We still see some more room for improvement. By nature you are going to get the margin to gravitate lower, but slowly. We still see that we will maintain a very comfortable margin in our operations for the next few quarters.

Okay. And just in terms of the quarter itself, about what was the influence on the cash flow adjustment in terms of basis points? Do you have that number?

(Inaudible) we don't have that number, no. But as we mentioned, if you exclude the entire effect of the covered portfolio the margin will still be above 4%.

That's very helpful. And if I could, just one quick last one. It looks like the disallowed DTA ticked up a little bit in the quarter. Could you just talk a little bit about that?

Okay, we will have Jorge (inaudible) answer that.

Yes, good morning. The change is mainly related to the tax basis, it's more of tax strategy. It's not related to any type of book income or anything like that, it is more on the tax side.

Was any part of that type to the EVERTEC?

No.

Okay. And on a go forward -- again, just you think about the improving profitability of the Company. I know a lot of this or [essentially] all of it is tied to North America. But would I -- how should we think about the pace of that coming down?

The (multiple speakers) is really in Puerto Rico, it is all in Puerto Rico.

Excuse me, I'm sorry, Puerto Rico, correct.

And the changes on the disallowed will depend -- it depends a lot on the actual statutory tax impact of Puerto Rico. So it is not just simply on a GAAP accounting basis.

Okay. All right, thanks very much. Appreciate it.

Ken Zerbe, Morgan Stanley.

Just a quick one here. Just in terms of total operating expenses ex anything related to the FDIC, it just seems that they were a little bit higher. I mean personnel, occupancy, professional fees -- how should we be thinking about this going forward? I mean is it -- as you continue to grow loans do we see more related expenses or is this -- or is there something unusual or do they just stay high?

No, there wasn't really anything extraordinary in the quarter. As we have mentioned, we are running relatively high on operating expenses due to the cost of managing credit. And to the extent that we continue to lower the non-performing loans, we will be looking for reductions in expenses and that is going to be the main driver of the reduction in expenses going forward. And there is some room -- there is some room for reduction. But it will be principally dependent on the activity of reduced NPLs.

Okay, thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

Thank you.