Popular Inc (BPOP) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarterly Popular earnings conference call. My name is Philip and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Enrique Martel, Corporate Communications. Please proceed, sir.

Good morning. Thank you for joining us on today's call. Our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, will review our first-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.

I will now turn the call over to Richard Carrion.

Good afternoon and thank you all for joining the call. I'd like to first address the highlights and key events of the quarter, and then discuss our progress in priority areas. Carlos will then go into greater detail on the quarter's financial results, and Lidio will provide an overview of credit trends and metrics.

So please turn to the second slide. Popular reported $60 million in net income for the first quarter, excluding the impact of the NPA sale. The quarter was a solid start to the year, as we continue to take actions to capture the full earnings potential of our unique franchise.

Our revenue-generating capacity remains strong, with overall net interest margin at 4.39% for the quarter, and Banco Popular Puerto Rico margin remaining at just over 5%. On the credit front, our intensive efforts are bearing fruit, and we continued to make significant progress on key metrics. We will provide more details in a few minutes, but suffice it to say that we have made dramatic improvements over the past few years, and we continue to do so.

When discussing normalized earnings with you, we have indicated that we expected reductions in credit costs to be the largest contributor to closing the gap between current and estimated normalized earnings. About a month ago we took a huge step in that direction with the completion of a sale of a large block of NPAs that were dragging our earnings. That sale included Puerto Rico commercial and construction NPLs with a book value of $401 million.

While the NPA sale modestly reduced our excess capital, this will be largely replaced in the second quarter with the after-tax gain from the successful EVERTEC IPO, which was completed last week. The EVERTEC IPO also represents an important step towards clarifying and realizing the significant value of our stake.

I've mentioned before that we are very encouraged by the fiscal team that the new governor has appointed. The recent signing into law of the Puerto Rico Retirement Plan reform was a big accomplishment early on for the administration. And that, along with completing the airport transaction and other steps being taken, advances the agenda to improve the fiscal standing of the Commonwealth and pave the way for an eventual economic recovery.

Lastly, including the effect of the NPA sale, we ended the quarter with strong capital levels. Our common equity Tier 1 ratio reached 12.4% and exceeded the well-capitalized guideline by $1.7 billion. Our tangible book value per share at quarter-end was $31.21. These capital metrics will all be augmented by the impact of the EVERTEC IPO in the second quarter.

So I want to spend a few minutes providing a little more perspective on the NPA sale and the EVERTEC IPO. While we discussed the sale in detail in the Investor Day presentation, we thought it would be helpful to review it today because of its material effect on the quarter's results and the Corporation's credit profile moving forward.

Please turn to the third slide. We sold a package of commercial and construction loans and residential and commercial OREOs with aggregate book value of $509 million. The purchase price was $338 million, and we received $92 million in cash at closing.

By selling nearly a third of our NPAs, we have substantially de-risked our balance sheet and made a positive contribution to future profitability. In addition, we retained a 24.9% interest in the acquiring entity, which ensures that we will participate in any future upside.

The structure of this deal, including seller financing, is similar to the structure of the NPL sale we completed in 2011, which is a transaction that has performed very well for us. The seller-financing loans we provided for that deal have been substantially repaid much sooner than we expected, and the value of our joint venture interest has appreciated.

Please turn to slide 4. Let me provide some additional color on the EVERTEC transaction and its financial impact. This was a very successful transaction. The deal was upsized, due to strong demand, and we raised a larger than expected total of $505 million.

The public offering establishes a market value for this asset and gave us an opportunity to monetize a portion of our stake. Based on the shares we sold in the IPO, we will record a $169 million after-tax gain in Q2.

At this point I should note that EVERTEC benefits from a special tax rate applicable to service-export companies in Puerto Rico. Therefore this and any future gains will be taxed at 4%.

At roughly $1.6 billion, EVERTEC's market cap based on the IPO price places an approximate value of $530 million on the 33.5% stake that we retain following the IPO. This compares to a book value of $75 million on our position.

We will assess further opportunities to realize value from this investment. While the economic value exists and is there, we will only recognize additional gain if and when we sell additional shares.

From a balance sheet perspective, we will receive $254 million of cash from the transaction, including $92 million from the repayment of EVERTEC debt we previously held. As I mentioned, realized gains from the transaction will be reflected in our second-quarter earnings and capital ratios.

Please turn to the next slide. In the first quarter, we continued to make major progress towards our number-one objective -- reducing NPAs. Clearly the bulk sale drove the majority of the improvement in credit metrics, but it is important to note that we continue to drive improvement through our organic efforts outside of the loan sale. Total NPAs have declined $885 million year over year, while total NPLs held in portfolio decreased by $631 million.

Lidio will provide more detail. I will just note that continuing to reduce NPAs remains our top priority.

With regard to TARP, the EVERTEC IPO clearly brings us cash proceeds and a boost to our capital ratios. It represents another important step towards an ultimate TARP exit.

I know many of you would like to know when we might exit from TARP. What I can tell you is that we continue to work with our regulators to chart a path towards exit. I cannot provide a definitive time frame for you, since the ultimate decision is up to the regulators.

Please turn to the next slide, and I will let our new CFO, Carlos Vazquez, discuss our financial results in further detail.

Thank you, Richard. Good afternoon. With the sale of NPAs having a significant impact on several line items of our income statement, this was a noisy quarter. But once you clear the noise, as the columns on the far right show, you see good underlying performance anchored by three things -- steady net interest income, lower provision, and lower expenses.

Net interest income for the first quarter was $345 million, down a bit versus Q4, mostly due to having two fewer days in the quarter. Loan demand from small and middle-sized businesses remains low, but we continue to offset that with strong mortgage origination volumes in Puerto Rico and opportunistic mortgage purchases.

Our Puerto Rico mortgage business originated $357 million in Q1, up from $315 million in the same quarter last year, even if slightly down when compared with our close-to-record $446 million originated last quarter. Please remember that the fourth quarter is typically the best origination quarter of the year.

We also added $860 million in mortgages via purchases, mostly in Puerto Rico, but also some in the US. These purchases allow us to leverage our $22 billion servicing platform.

While the small commercial loan growth is slow, we can and have taken advantage of our unique presence to successfully execute significant transactions. In the large corporate sector, where demand is stronger, during the quarter we closed a $250 million commercial real estate transaction with one of Puerto Rico's strongest clients.

We also continue to lower the cost of deposits in Puerto Rico, which fell 5 basis points on a linked-quarter basis and 19 basis points when compared with the year-ago quarter. While many of the opportunities to lower deposit costs have already been captured, a few alternatives remain to potentially achieve more savings.

The decrease in non-interest income was mainly driven by a number of fourth-quarter items not present in the first quarter -- the $32 million tax benefit related to our EVERTEC stake; seasonal contingent commissions from our Puerto Rico insurance businesses; and a large securitization by our mortgage business in Puerto Rico.

That brings us to the performance of our $3.4 billion covered portfolio, the average yield of which increased to 8.31% due to greater cash flows in the first quarter. The credit quality of the covered portfolio continues to improve, notwithstanding the higher provision for the quarter. Remember that while overall loss estimates for these loans continue to be lower, there are specific loan pools that require additional reserves and are offset by the 80% mirror accounting of the indemnity asset under the LSA.

Lower estimated losses will result in greater cash flows through the life of the covered loans, but also drive the negative amortization of the indemnity asset, since lower loss estimates result in lower future FDIC payments. The LSA expense was $10 million lower this quarter, mainly due to the 80% mirror of the provision for covered loans. Table O in the press release provides greater detail on our covered portfolio.

The largest driver of this quarter's reported financial performance was the provision for non-covered loans, which increased by the charge resulting from the sale of NPAs. Excluding the impact of the sale, the provision fell by approximately $27 million as a result of lower charge-offs and continued improvement in credit quality in both the US and Puerto Rico portfolios. Lidio will expand on the credit results.

We recorded $37 million in expenses related to the NPA sale. Otherwise, operating expenses came down by $17 million.

Nearly a third of the decrease was related to year-end expenses, such as institutional advertising and promotional campaigns. The rest was mainly driven by lower legal and collection fees, reimbursable expenses from the covered portfolio, and lower FDIC assessment fees.

Please turn to Slide 7. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to well-capitalized regulatory requirements. Our common equity Tier 1 ratio stands at 12.4% and represents an excess of $1.7 billion over the Basel I 5% well-capitalized requirement. The NPA sale in Q1 modestly reduced our excess capital, but we expect it to be more than replaced in the second quarter with the after-tax gain on the EVERTEC shares sold and current earnings.

We remain focused on continuing to increase our strategic and financial flexibility in 2013, while maintaining strong capital levels. That, together with additional declines in NPLs, will position us better for an eventual exit from TARP.

With that, I turn the call over to Lidio.

Thank you, Carlos. Before discussing the credit metrics for the quarter, I will start by highlighting the two key themes.

First, from a risk-management standpoint, the completed sale of non-performing assets is a transformative transaction that strengthens our balance sheet and improves asset quality. The Corporation's non-covered non-performing assets and non-performing loans ratios stand at 3.81% and 4.86%, respectively, both lowest since 2008.

Second, credit metrics, excluding the impact of the NPA sale, continue to show steady improvements in both the Puerto Rico and the US regions. Net charge-offs decreased by $20 million on a linked-quarter basis, reaching the lowest level since the first quarter of 2008.

Inflows of non-performing loans held-in-portfolio, excluding consumer loans, declined by $60.3 million or 25% on a linked-quarter basis, the lowest since 2009. Improvements were noted in both regions. Excluding the sale, non-performing loans decreased by $42 million -- $21 million in the US and $21 million in Puerto Rico.

Please turn to slide number 8 to discuss some of the details. On the top right side, we summarize the trend in NPLs over the last two years. Since peaking in the fourth quarter of 2011, NPLs are down approximately $687 million or 40%.

The decline was driven by sales of NPLs and credit improvements in our main markets. As discussed before, excluding the sale, on a linked-quarter basis, NPLs decreased by $42 million, mainly driven by a $23 million improvement in the Puerto Rico mortgage portfolio, coupled with a $14 million improvement in US commercial, construction, and legacy portfolios.

It is worth highlighting that, after the sale, we feel comfortable with the risk profile of the remaining NPLs, which are mostly in the Puerto Rico mortgage portfolio and to a lesser extent in the US commercial portfolio. We remain focused on reducing these NPLs.

Since peaking in the fourth quarter of 2011, Puerto Rico mortgage NPLs have decreased by $77 million or 12%. Equally important is that our average realization on loans foreclosed continues to be above 80% of the unpaid principal balance at default. Our US NPL exposure has continued to improve along with the economy and also as a result of our de-risking strategies put in place in the beginning of the cycle.

On the bottom right of the slide, we summarize the trend in NPAs over the last two years. Mostly as a result of the NPA sales, the NPA ratio reached its lowest levels since 2008 and has declined by over $1 billion or 46% over the last two years.

In comparison with the previous quarter and excluding the effect of the sale, NPAs decreased by $65 million, driven by the aforementioned improvement in NPLs. In addition, and for the first time in this cycle, the OREO balance excluding the sale decreased slightly by $3 million. The decline was driven by sales of Puerto Rico mortgage OREO properties.

Please turn to slide number 9 to review NPL inflow trends. NPL inflows excluding consumer loans reached a record low for this cycle. As stated in my introduction, NPL inflows declined by approximately $60 million or 25% on a linked-quarter basis. Since peaking in the third quarter of 2011, NPL inflows have decreased approximately $300 million or 62%, driven by improvements in Puerto Rico mortgage, Puerto Rico commercial, and the US commercial portfolios.

The $57 million sequential quarterly decrease was driven by improvements in the Puerto Rico mortgage portfolio. The decrease primarily reflects stabilizing credit conditions and excludes $24 million of repurchased loans from our recourse portfolio that are accounted pursuant to ASC 310-30.

Commercial inflows for the first quarter of 2013 remained at the record low level reached during the fourth quarter of 2012, with a slight increase in Puerto Rico offset by improvement in the US.

Please turn to slide number 10. The $245 million net charge-off recorded in the first quarter included a $163 million write-down from the NPA bulk sale. Excluding the impact of the sale, net charge-offs decreased by $20 million from the fourth quarter to $81 million. The decrease was mainly driven by a decline of $16 million in Puerto Rico, mostly from the commercial portfolio, coupled with a $4 million improvement in the US.

Excluding the effect of the sale, the annualized net charge-off ratio of 1.55% is at the lowest level since 2008 and approaching pre-recession levels, with improvements across both regions. In Puerto Rico, the net charge-off ratio was 1.64%, while in the US the ratio was 1.33%. Both are record levels for the cycle.

When compared with the fourth quarter of 2012, the NPA sale led to a $120 million increase in provision for loan losses. Excluding the impact of the sale, the provision for the first quarter decreased by $29 million to $57 million, reflecting lower losses in Puerto Rico and sustained credit quality improvement in the US.

For the quarter, provision to net charge-off ratio, including the effect of the sale, remained relatively flat at 84%. Also, as a result of the NPA sale and sustained credit improvements, the allowance for loan losses decreased by $38 million, while the coverage ratio increased from 44% to 56%. As discussed earlier, most of our NPLs are now in Puerto Rico mortgage and US commercial loan portfolios, two portfolios that we feel very comfortable with.

To summarize, the completed bulk sale was or is a transformative transaction that significantly strengthens our balance sheet and improves asset quality. Credit trends, excluding the effect of the sale, continue to show steady improvements with NPLs, NPAs, net charge-offs, and inflows into NPL reaching their low points in this credit cycle. And finally, we feel comfortable with the remaining NPL exposures and risk.

With that, I turn the presentation to Richard for his concluding remarks.

Thank you, Lidio. Please turn to slide 11. Before we open the line to questions, let me conclude today's remarks by reviewing the actions we are taking to drive shareholder value.

Our priorities have not changed since we discussed them a month ago in our Investor Day. The NPA sale is of course a huge step, because it accelerates our progress.

The leading market position of our unique Puerto Rico franchise is allowing us to benefit from a modest rebound in loan demand in certain sectors of the economy and sustain above-average margins. Our covered portfolio continues to produce better than expected results.

We are operating with both greater speed and efficiency in addressing NPLs, as demonstrated by the continuing improvement in the credit quality of our portfolios in both the US and Puerto Rico, on top of the improvements resulting from the NPA sale. We continue to explore all avenues to reduce NPAs, including resolutions and sales that make economic sense.

We remain focused on building increased optionality to generate higher returns on the capital deployed in our US operations. We are continuing a thorough analysis of our options and are prepared to execute on the best path to value creation.

In summary, we are driving value for our shareholders with the two significant transactions we recently completed and our ongoing efforts to de-risk our balance sheet, build capital, and determine the best path to value creation for our US operations. We look forward to reporting to you on our continuing progress.

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

(Operator Instructions) Ken Zerbe, Morgan Stanley.

Great, thanks. Question on provision expenses, this is on the non-covered or the core provision. If you back out the bulk sale loss, it looks like your core provision is pretty low. I guess about $58 million. But it seems that the annualized number is lower than the core or your long-term normalized provision number.

How should we be thinking about that? Is that a sustainable number right now? Have you already reached your normalized provision numbers?

Lidio will take that.

Sure. Provision is a function of charge-off and overall credit quality in the portfolio. The trend, as we have discussed in our call over the last year, year and a half, has been very positive in terms of reduction in NPLs, reductions in charge-off, reduction of inflows into NPLs. So based on that, what you see in the quarter is accumulation of that trend that we have -- has been present over the last year.

In terms of whether that could change or not, if you go back to the history of Popular, our charge-off ratio used to be somewhere around the 1%. We are still slightly above that number; so as that number comes down there is a possibility for our provision to also come down.

So we should probably think about the provision expense may go artificially low near term, and then rebound up higher longer term to the $250 million normalized number?

I did not say that. I said --

Sorry, I misunderstood. Go ahead.

I said when you look at -- provision, again, is a function of charge-off; it is a function of overall credit quality of the portfolio. When you look overall we are still providing in excess of 80 -- in Puerto Rico we are providing close to 90% of charge-offs, excluding non-covered transactions. So we have seen peers in the US number which have much more significant releases.

As we move forward it will be depending on the level of net charge-off and the credit quality of the portfolio. I mentioned that if you look historically, our charge-off in the past used to run around 1%. For the quarter, we still were at 1.55%. If that number would continue to come down, you will see a provision that should come down accordingly.

Do you still feel good about your $250 million provision estimate or guidance for normalized?

We are not providing guidance in terms of provision or any of the numbers. I cannot comment on that.

Okay, understood. Then just maybe a quick follow-up. Can you quantify if there is any EPS or earnings reduction from the lower ownership stake in EVERTEC? What does that do to go-forward earnings?

I don't think it should make a big difference. Bear in mind that we account for this using the equity method, and that has been -- given EVERTEC's high leverage up to this point, that has not amounted to much. Now, that they have refunded all their debt, that should improve their earnings; and we will take 33.5% of that.

Their earnings from EVERTEC could actually -- or your portion of earnings could go up?

Yes, it should go up, but I don't think it is a big driver of earnings going forward.

All right. Perfect. Thank you.

Maybe if I can go back to just one topic of the question. I looked at the investor presentation that we had in Investor Day, and we had a 1% provision to charge-off, to loans charge-off. As we said, I think based on the number that we are showing, we are getting closer to that number. So I mean, (technical difficulty) will be our long-term target, the 1%.

Alex Twerdahl, Sandler O'Neill.

Hey, guys. First off, Lidio, I was wondering if you could update us on what the carrying value of the remaining nonperforming loans is relative to the unpaid principal balance? And maybe if you could get a little bit more specific into where you're holding the various segments of those portfolios, commercial and mortgage and etc.

Sure. In terms of -- as we alluded to in the presentation, most of our NPL now is in Puerto Rico mortgages. Specifically, the number is -- total exposure in terms of mortgages is $600 million, which the majority being in Puerto Rico, as I said. That should be at more or less $0.90 on the dollar; don't quote me on that. I mean, roughly $0.90 on the dollar for the mortgage piece.

For the commercial piece, which is the majority of the remainder, the remainder portfolio, that is about $0.65 to $0.70 on the dollar in our books.

Okay. That's helpful. Thanks. Then I was just wondering if you can give us a little bit more color on the big improvement in the mortgage nonperforming loan inflows during the quarter. What drove this improvement in the level of inflows? And it's something we should expect going forward?

As I mentioned during the presentation, it was a function of stabilizing economic conditions in Puerto Rico. And we have stated in previous presentation, a significant portion of our NPLs from the mortgage portfolio comes from the repurchases of our legacy recourse exposure. That exposure has continued to wind down.

The level of purchases has gone from $65 million a quarter, down to $40 million a quarter last year, down to $24 million this quarter. So that has also contributed to the improvement, plus accounting for those assets under ASC 310-30.

Okay, thanks. Then I was wondering if you could just share with us the level of accruing TDRs at March 31.

Sure. The Corporation total TDRs is about $1.1 million, which is down about $100 million from the last quarter. The decrease is mostly driven by assets that were sold as part of the NPA sale; and accruing TDR is about 66% of that number, of the $1.1 million.

Okay, great. Thank you very much.

Robert Greene, Sterne, Agee.

Thank you very much. I just have a quick question on the mortgage portfolio acquired in the quarter. I was wondering how that fits into, I guess, your core mortgage portfolio in terms of underwriting and then what your strategy is going forward.

Well, I think in general what we are trying to do is add assets to the platform where the marginal cost of handling those assets is minimal and where we feel very comfortable with the asset class. And that was the case in the two portfolios that we acquired in the quarter. I don't know, Lidio, if you want to add something to that.

I think not only (inaudible) but the quality of it was very good. It was better than what we have in our books. So therefore it increases the quality of our books.

Okay, that's helpful. I've got a question. I know, obviously, the timing of the TARP repayment is uncertain at this point. But I was wondering if you have given any thought to, I guess, the consideration that you would utilize to repay TARP, whether it's a combination of liquidity at the HoldCo, in preferreds, or exactly the mechanisms you would use to accomplish that.

Yes, we have quite a few different scenarios where we could do that. As you can imagine we are in discussions with the different -- well, both the Fed and Treasury. The main regulator is the Fed, and they are the ones who have the ultimate say.

We have had this EVERTEC IPO event just recently, so you can imagine also that we have let them know about that. And hopefully, that will help advance the discussion. But, yes, we have looked at different scenarios for paying it off, with clearly some component of the EVERTEC proceeds.

Okay. Because if you put that with the quarter's events, with the $92 million related to the bulk sale and cash proceeds and then the EVERTEC gains, it looks like you've got about $350 million just in this quarter of cash at the HoldCo. I was just wondering, do you disclose what the total cash in the Holding Company is?

Total cash in the Holding Company now is around $440 million. That will actually go up slightly in the next few days, because part of the EVERTEC transaction is the repayment of the debt, and that won't happen until later this month. So when all is said and done, the number is going to be something in the ballpark of $530 million.

Okay. That's very helpful. Thank you very much. That's all the questions I had.

(Operator Instructions) Gerard Cassidy, RBC.

Thank you. Good afternoon. Can you guys give us some flavor on the inflows? You have obviously had some good success in bringing the inflow numbers down. Do you recall what this level will be in normal times, when you think back maybe 10 years ago or eight years ago?

Well, Lidio wasn't here 10 years ago, but we will let him take a crack at it.

You are putting me in a difficult situation, Gerard, but I will give my best. I think if I can relate to, as I said before, the level of NPLs and the level of net charge-offs that we had in the organization, our numbers are still slightly above the numbers that we had pre-recession pre-2010, 2008.

If we think that we ought to aspire to go back to the levels that we had prior to the recessions in Puerto Rico and the US, I think you could potentially see slightly better numbers than what you are seeing today. But more than that, I cannot give you any more specific than that. I am sorry.

That's okay. Maybe to make it even more difficult for you, when we go back and look at your numbers, like the banking industry, 20 years, these cycles have repeated themselves. This one by far was much worse than the other cycles.

But your net charge-off ratio in prior cycles after going through the difficult time was down in the 50 to 70 to 80 basis point range. Do you think that this cycle that we are in today could reach -- when it gets better with the economies improving, that we should see a similar cycle repeated like we saw in your past recoveries?

I don't know if I would say that we will go down as low as 50 or 60 basis points. I think internally when we do analysis, we think the number should be closer to 1%.

We are still a little gun-shy, Gerard. Until we see a long time -- we see a good trend, we will be hesitating to bring it down further, frankly. And this is very formula driven in many ways.

I certainly understand. Richard, maybe can you give us just a little color? You put in your appendix some of the highlights of what is going on in Puerto Rico with recent government actions.

What are you guys seeing economically speaking in Puerto Rico? Is there still momentum in the economy growing from the five-year recession?

Well, we see some hopeful signs. There are clearly a lot of structural issues that need to get tackled.

We thought that it was a good sign that the airport privatization deal went through. We thought it was a good sign that they tackled the retirement fund issue, which you can imagine had a lot of political overtones to it. There are still a couple of areas that need to get tackled, specifically the highway authority and the power authority seem to be two large structural issues.

The governor is focused, I think, on job creation, and we think that is the right metric. But he has been here 100 days, so can't expect too much change.

Sure. Then just finally, I don't know if you could -- if you're willing to expand upon your comments about you continue to build optionality for your US operations and you want to determine the best path for value creation. What are some of those options that you guys are considering?

Well, they range all over the place. We have looked at different regions, as we have spoken in the past. We have looked at maybe rationalizing that distribution network.

The problem always has been that each of the regions makes a positive contribution to the whole. So that even if we were to be able to sell one, we would be worse off.

So nothing of all the options that go from rationalizing those regions to downsizing to increasing in one particular area, nothing jumps off the page. What we have been doing is improving the performance, improving the strength of the balance sheet. And that is what we mean by trying to build optionality.

There is nothing yet, frankly, that makes a compelling case to go one direction or the other. The minute we see that, we are going to move; and it is something we go at hammer and tongs every week.

Great, thank you.

Brian Klock, KBW.

Good afternoon, gentlemen. Just a quick follow-up. Most of my questions have been answered.

Just thinking about, with all the noise of the bulk sale, I think what I thought was impressive is you guys were actually able to cut down on your core operating expenses. So maybe, Carlos, maybe you can talk about -- it does seem like the reduction in the FDIC deposit insurance you talked about, the benefits there and the incremental credit, so that seems like that should be -- that lower run rate should stick going forward.

Correct? Is that the right way to think about (multiple speakers)?

We discussed the FDIC assessment I think in the last call, and what you see there is a result of us doing a deep dive on the components of the very complex formula that comes up with the assessment. When we did that, we found a few things that we could do to help move that number down.

Now, the expense for this quarter not only reflects what we hope to be a large running rate, but also reflects some of the catch-up that resulted from those efforts that we did. So some of that, what you are seeing there, is some credits from efforts that were getting -- some credits we're getting from -- at the [ASC], prior payments and assessments.

But when you want to think -- if you want to think about the right running rate, you think take those out. So probably, right, running maybe something in the ballpark of $19 million a quarter.

Of course that depends on our (inaudible) component, composition, and everything else, and that could change. But the right number to think about is something in the ballpark of $19 million.

Okay. Then I guess the other -- outside of that, the other operating expenses, you did have a pretty decent reduction quarter-to-quarter. Is there anything in there that we should think about that should be normalized as well? Or is that -- the other operating that dropped to $17 million from $26 million?

Yes, we have had -- the two quarters look pretty different. But if you take away some of the year-end effects of the fourth quarter and you take away the transaction effects of the first quarter, they are actually not that different. And they are hovering around a level of around $280 million per quarter for the expenses.

That is probably a reasonable indication. And we hope that as we start seeing the benefits of the reduction in NPLs that we can make that number better.

Great, great. Just one last question, too. I guess just thinking about -- you did talk about the strong level of securitization activity in the fourth quarter. I guess thinking about the gain on sale number in this first quarter, I guess how should we think about that going into the second quarter?

Well, securitizations happen all the time. The point we are trying to make (technical difficulty) in the first quarter is there for recent -- the very recent being slightly larger than typical. But they happen all the time.

This number will be volatile, because in that number you also have the affects of some resolutions in NPLs that sometimes result in gains and other times it is [all-in cost]. So it will be a very volatile number going forward.

Okay, great. Thanks for taking my questions, guys.

Todd Hagerman, Sterne, Agee.

Good afternoon, everybody. A couple questions, just a follow-up just in terms of the expenses. I want to make sure that I understood your comments right.

Carlos, I think you mentioned $280 million per quarter. What I want to understand is, with the sale and the high proportion of problem commercial assets that were sold, where do we -- what is the right way to think about the credit-related costs, in the sense that we have now transitioned to a large proportion of mortgage-related problem assets? Where is those costs today relative to where they were prior to the sale? Generally speaking.

The quick answer is that they haven't changed very much yet, because we are still in transition period and servicing the portfolio and things like that. We expect to have some cost savings from the sale, and those will become evident in the next few months. I'm talking about non-personnel related costs.

So we expect to see some of that with respect to the sale. The number that we are looking at is something in the neighborhood of $3 million a quarter. But that is not going to be evident right away; there is a process.

Non-personnel?

Non-personnel, yes. There is a process where we are still in transition in this portfolio, as we continue to do a lot of things on it. But we hope to get to that level.

Okay, that's helpful. But I guess the -- as you mentioned before, kind of a normalized on the provision side, 1% of loans, if you will. With the concentration in mortgage-related assets, which is always going to be there so to speak, how do you think about an average carry cost? For -- again, like if you referred back before, if we think of 80 to 100 basis points in terms of average charge-offs, what would be, in your opinion, the average cost tied to those assets outside of the provision?

You would have to look at the different portfolios and tie the costs related to all the workout activity in each portfolio. We haven't done -- I don't have that information with me. I have to look at it and get back to you. (multiple speakers)

No, but he's saying with the preponderance of mortgage.

Were you talking about operating costs?

I can take that off-line. But then just finally, again with the mortgage purchase this quarter and you have done a couple last couple of quarters, but what I am curious about, with the residual problem asset exposure, largely mortgage in Puerto Rico, and again liquidity that is out there in the market, do you see any -- well, there is an appetite for earning assets, certainly. Is there an opportunity perhaps that there might be some smaller loan pools that might be sold down the road as it relates to mortgage?

Well, I am not sure I am following the second question. But if what you are trying to ask is -- will we consider additional bulk sales of loans? We will always look at ways to forward our goal of reducing NPLs. If there is a bulk sale of loans that make sense, we will consider it.

Are we talking about additional purchases or additional sales?

No, I am specifically talking about sales on a smaller scale in terms of the mortgage portfolio. In terms of -- your residual problem assets right now are predominantly mortgage. And so -- and then, whereas the bulk sale was predominantly commercial, which was terrific.

So I am just thinking about, with that residual mortgage portfolio, if -- given the investor liquidity that is out there in the market are the economics there that you would consider potentially, say, a smaller sale of, say, a pool of mortgage loans?

You weigh a lot of these things. As Lidio mentioned in the presentation, we are getting about a little north of $0.80 UPB on foreclosed properties. We will take -- if there is a sale that makes sense and it will just accelerate us lowering NPLs lower, we will take a look at it, without a doubt.

Okay. No, that's helpful. I appreciate that. Thanks very much.

(Operator Instructions) Alex Twerdahl, Sandler O'Neill.

Hey, guys, just a couple follow-ups here. First off, Richard, I think you said that any future gains related to EVERTEC would be taxed at 4%.

That's right.

Is that also applied to the $530 million in potential hidden book value on the balance sheet?

Yes, that's correct.

Okay. Thank you for clarifying that.

Then just secondly, can you just remind us? When you converted the TARP a couple years ago from preferreds to trust-preferreds you took about a $450 million book value gain.

Yes.

In order to repay TARP, what is that book value gain that is still on the balance sheet today?

Right now, it is 423 right now. I am being -- Carlos very deftly put the figure right in front; I was going to say 430. But it is -- [423 500] is the un-amortized piece right now

Okay. Thank you very much. That's it for me.

Absolutely. Thanks, Alex.

Ladies and gentlemen, that concludes the question-and-answer session and today's conference. Thank you once again for your participation and you may now disconnect. Have a good day.

Thank you.