Popular Inc (BPOP) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Popular Inc. earnings conference call. My name is Derek and I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to Mr. Brett Scheiner, Head of Investor Relations. Please proceed.

Good morning and thank you for joining us on today's call. Today I'm joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our third-quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start I would like to remind you that on today's call we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release, and supplements.

You may find today's press release and our SEC filings on our webpage, which you may visit by going to www.popular.com. I will now turn the call over to Mr. Richard Carrion.

Good morning and thank you all for joining the call. I would like to first address the highlights and key events of the third quarter, discuss our progress in areas of focus, and provide some updates regarding the economic situation in Puerto Rico. Carlos Vazquez will then go into greater detail on the quarter's financial results and Lidio Soriano will provide an update of credit trends and metrics.

So please turn to the second slide.

Total reported net income for the third quarter was $229 million. Excluding the impact of the previously announced sale of additional EVERTEC shares results in an adjusted net income figure for the quarter of $61.3 million. We continue to generate strong revenues with capital levels above peer averages.

The Tier 1 common equity ratio at quarter end was 14.2%, which exceeds the CCAR 5% target requirement by $2.1 billion. Tangible book value ended the quarter at $35.32 per share, up from $33.38 last quarter.

On September 13, we sold 9 million additional shares of EVERTEC, bringing our stake down to 21.3%. The sale provided $197 million in cash and resulted in an after-tax gain of $168 million.

EVERTEC remains an important business partner and a valuable asset. The market value of our remaining stake is $406 million and significantly exceeds the position's current book value of $42 million.

As investors we will continue to participate in a proportionate share of the company's income. While we hope to maintain our current stake in the company, this investment represents a potential source of additional capital.

Our net interest margin of 4.49% remained strong relative to peers. Credit metrics continued to improve and are near pre-crisis levels. The NPL to loan ratio as of the third quarter is 2.88%, down 74% from the peak on the third quarter of 2010 of 11%.

NPL inflows were down $24 million when compared to the previous quarter, the lowest level in three years. Although NPLs are up slightly by $4 million driven by the Puerto Rico mortgage portfolio, we note that Puerto Rico mortgage inflows were down by $5 million compared to last quarter and early delinquencies were stable. Our net charge-offs were 1.08%, reaching the lowest level since 2007.

Please turn to slide three.

Robust levels of excess capital, continued credit quality improvements, and improve financial performance have paved the way toward our objective of the most shareholder-friendly exit from TARP. And I'm happy to report that we have submitted our application to repay TARP.

While we are hopeful our application will be approved, we cannot speculate on the timing or the conditionality, if any, of an approval. As our ongoing dialogue with our regulator is confidential, we are also not in a position to expand on the details of our application or the specific funding plan for our repayment at this time. We are, nevertheless, confident that we are closer to a resolution of our TARP participation in a manner that will be positive for our shareholders.

Slide three includes pro forma capital ratios for the third quarter, excluding all $935 million of TARP funds. These ratios include the impact of the reversal of the approximately $411 million of unamortized discount related to TARP funds.

Before I turn it over to Carlos let me comment on the Puerto Rican economy. As you have surely noticed, the local economy has received more than its fair share of press in the last few weeks. Yet despite the volatile environment, today we are more confident in the island's fiscal outlook than we were six months ago given recent government actions.

Last quarter we mentioned that recent actions by the government, including pension reform and debt reduction, were necessary to address the island's difficult fiscal situation. As a sign of progress on these initiatives, last week the government released first-quarter fiscal 2014 revenue numbers which were better than the prior year and above the government's forecast as well. We recognize that in the short-term measures to improve the government's fiscal health may decelerate the pace of Puerto Rico's economic improvement, though we continue to believe they are positive reforms for the long-term strength of the economy.

While we have operated in a weak economy for most of the past seven years, the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years. We are being particularly attentive to our portfolios, and so far we see no indications or signs that would lead us to anticipate a material change in the stability of our credit metrics in the coming quarters.

While sustained economic weakness is not an ideal business condition, it would not represent an environment that is particularly foreign to us. We are confident that our significant liquidity, excess capital levels, and strong internal capital generation will be key to our future performance.

As Lidio will expand on a little later, our Puerto Rico government exposure ended the quarter at $1.4 billion, of which $1.2 billion is outstanding. This includes $359 million of indirect exposure to the government in mortgage-backed securities, residential mortgage loans and industrial development loans payable by private parties.

We note that our government exposure does not represent a random sampling of Puerto Rican municipalities or government entities, but rather a deliberate and carefully underwritten book of business, particularly with our senior interest in the borrowing entities' cash flows, identifiable revenue as sources of payment, and specific collateral. Given the cash flow and collateral positions of our exposure and based on current yields, we believe the risk/reward of these positions is in our favor and we will continue to selectively participate in funding the Puerto Rican government's capital needs.

Please turn to slide four as Carlos Vazquez will discuss our financial results in further detail.

Thank you, Richard, and good morning. On slide four we present our adjusted financial summary for the quarter, excluding the impact of the EVERTEC sale. Please note that data is reconciled to GAAP figures in the appendix to the slide deck with supporting information disclosed in today's earnings press release.

As was the case last quarter, our underlying performance continues to be driven by, one, stability in net interest income and, two, improving credit trends.

There are a number of variances to last quarter's results which impact pretax income by approximately $28 million. The main contribution to this variance are related to our covered portfolio and are reflected in the FDIC loss share expense, the covered provision, and the covered OREO expense lines. Details of these variations can be found in the appendix to this deck and in Table O of our earnings press release.

Net interest income for the second quarter was $354 million, flat to last quarter as lower income from securities was offset by improved deposit funding costs. Our loan portfolio for this quarter dropped slightly, mostly driven by the early prepayment of a large relationship in Puerto Rico, continued covered loan run-off, and fewer attractive opportunities for portfolio purchases.

While economic weakness and the covered asset run-off are headwinds, we are hopeful that we can maintain flat, non-covered loan balances through next year.

We continue to work on reducing our funding costs. Total deposit Costs fell to 61 basis points this quarter from 68 basis points last quarter. Puerto Rico deposit costs fell 4 basis points on a linked-quarter basis to 60 basis points, continuing our trend of the last 18 quarters. The rate at which deposit costs have fallen is slowing as we run out of older, higher-priced deposits to reprice and our clients begin to expect interest rates to increase, but we still believe some incremental saving opportunities exist.

This quarter we are also able to reduce our overall funding costs by prepaying a $233 million note with an average cost of 7.7%. This transaction includes a $3.4 million debt extinguishment charge, but will result in savings in excess of the extinguishment charge for the remainder of this year and more than $17 million in savings next year. We believe that these efforts, in addition to lower financing costs resulting from our eventual TARP repayment, will contribute to our continued stability in net interest income.

Average yields for our $3.1 billion covered loan portfolio increased to 9.13% from 8.6% last quarter due to greater actual and projected cash flows. Non-interest income declined slightly compared to the prior quarter, mostly related to a lower net gain on sale of loans stemming from higher asset resolution gains in the prior quarter. The FDIC loss share expense increased by $11 million this quarter, including higher covered OREO recoveries and other income reimbursable to FDIC as detailed in Table O of the press release.

This quarter we have added disclosure around our mortgage banking business. These mortgage-related line items are broken down in Table S of the press release.

Our Puerto Rico mortgage business originated $288 million of loans in Q3 compared to $387 million in the same quarter last year. This lower volume is partly due to the phase out of government incentives designed to support home purchase activity and to higher interest rates. While there are a number of moving parts in the mortgage line items, the overall results of our mortgage business at $19 million was essentially flat to last quarter.

Trading activities were $2.3 million lower than the prior quarter. This result includes $6.4 million of losses in the period due to marks taken on our inventory of Puerto Rico bonds and closed end funds held by our broker-dealer subsidiary, Popular Securities. This drop in value reflects the market volatility alluded to earlier by Richard.

While trading is not a principal activity for Popular Securities, the brokerage business holds a $12 million portfolio of these securities to support the activities of our clients.

Non-personnel costs include a one-time reclassification of tax expense, which added $3 million to this quarter's operating expenses. It also includes the previously mentioned $3.4 million debt extinguishment charge, plus an $11 million increase through higher covered OREO spend, which is mostly offset in the FDIC loss share line.

Slightly higher professional fees were related to increased regulatory requirements offset by lower FDIC insurance expense. Our income tax line benefited from $19 million of favorable tax adjustments related to prior periods. Excluding these unusual events in the quarter, we estimate the adjusted tax rate would have been around 40%.

We continue our tax mitigation efforts and are targeting an annual effective rate of 30% for 2014.

Please turn to slide five.

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 Tier 1 common equity ratio stands at 14.2% and represents in excess of $2.1 billion over the CCAR target requirements of 5%.

Adjusting for the potential repayment of TARP, we expect our capital level to continue to exceed well-capitalized requirements under the Basel III guidelines. We remain focused on continuing to increase our strategic and financial flexibility while maintaining strong capital levels. That, together with stable credit metrics, strengthens our position to exit from TARP.

With that, I turn the call over to Lidio.

Thank you, Carlos. While continuing to operate in a challenging economic environment, we are pleased to report that asset quality continued to improve during the third quarter as non-performing assets, NPL inflows, and net charge-offs have reached their lowest levels in more than five years.

In addition to the markedly improved credit metrics and capital levels, we are confident in the underwriting of our portfolios. On the consumer side, our FICO distribution today is significantly improved from the beginning of the credit cycle and on the commercial side our exposure to construction and middle market is down 54% from 2007.

Before going further into the details, I want to take a step back and compare our portfolio mix today versus the mix prior to the start of the financial crisis. Please turn to slide number six.

First, in the US we no longer have a national lending platform, a subprime consumer and mortgage business, and for the most part, we exited construction lending. In short, in the US we are now a community and niche lender with a much lower risk profile.

I want to also emphasize Puerto Rico, where changes have been equally profound. Our commercial exposure, including construction, has decreased from 55% of our total loan book to approximately 40%. Construction lending has decreased 80% and now stands at $252 million.

On the bottom of the slide, we further segment the commercial portfolio and include net charge-off distribution by segment since 2008. The key message from the table is that our portfolio mix has significantly improved by reducing exposure to asset classes with historically high losses.

In the consumer portfolio, secured loans are now 69%, up from 56% in 2007. Within our unsecured portfolio we have increased the proportion of FICO scores over 660 by 6% from 70% to 76% and the average FICO has increased by 18 points from 693 to 711. The changes in our portfolio mix, along with investments in technology, changes in underwriting parameters, and improvements in credit administration practices, make us feel comfortable with our exposure and risk profile.

These changes are among the drivers behind the positive credit trends in our portfolio. In this quarter we had new record lows in the credit cycle for non-performing assets, net charge-offs, and inflows into NPLs with improvements across both regions.

Let us turn to slide number seven to go into the details. Non-performing assets decreased $49 million on a linked-quarter basis, primarily driven by continued OREO dispositions in both Puerto Rico and the US. At 2.6%, the non-performing asset ratio is at the lowest level since 2008.

Non-performing loans held in portfolio increased slightly by $3.7 million from the previous quarter. While the inflows were lower, the small increase in NPLs was mainly caused by lower outflows. The Puerto Rico commercial portfolio, including construction, experienced an $11 million sequential reduction in NPLs, mainly due to the resolution of a significant borrowing relationship in the construction portfolio.

In the US, we experienced improvements across all portfolios. The $18 million decrease in NPLs marks the 15th consecutive quarterly decrease of non-performing loans in the US. Please turn to slide eight for a brief recap of NPL inflow trends.

NPL inflows, excluding consumer loans, reached a record low for this credit cycle. On a linked-quarter basis NPL inflows declined by approximately $24 million or 13%. Since peaking in the second quarter of 2009 NPL inflows have decreased approximately $800 million, or 82%, driven by improvements in the Puerto Rico mortgage, Puerto Rico commercial, and US commercial portfolios.

Commercial and mortgage NPL inflows in Puerto Rico reached new lows in this cycle. Commercial decreased by $20 million, while mortgage decreased by $5 million. In the US, NPL inflows decreased slightly, also reaching a new low. Please turn to the next slide.

Net charge-offs this quarter reached the lowest levels since 2007, decreasing to $57.9 million, or 1.08%, on an annualized basis, mainly driven by the commercial portfolios in both Puerto Rico and the US. In Puerto Rico, the commercial net charge-off rate decreased 91 basis points to 1.03%, a new low for the cycle.

In the US, the net charge-off rate decreased below 1% to 0.91% for the first time in the cycle, with commercial net charge-offs decreasing by 58 basis points to 0.51%, also a new low. US mortgage also experienced significant improvement with the net charge-off rate improving to 0.41% from 1% in the previous quarter, the lowest level since the first quarter of 2011.

Excluding the impact of the bulk sale completed in the second quarter, the provision for the third quarter remained relatively flat at $55 million. An increase in the US provision reflected lower reserve releases and was offset by a decrease in Puerto Rico. The provision to net charge-off ratio increased from 69% to 95%, excluding the effect of the bulk sale.

Notwithstanding the positive credit trends in Puerto Rico, we increased reserves slightly by providing 113% of net charge-offs during the quarter.

Our allowance for loan losses methodologies incorporates certain macroeconomic environmental factors, such as unemployment rate and other economic indicators, to account for current market conditions that may cause estimated credit losses to differ from historical losses. Given the recent weakness in some of Puerto Rico economic indicators, our methodology led to the previously discussed increase in reserves in Puerto Rico.

I should note, however, that we are not seeing any significant stress in our portfolio with improving lagging indicators, such as NPLs, inflows, and net charge-offs, as well as stable leading indicators. The coverage ratio remains relatively flat at 85%, which is a significant improvement from the low of 40% reached a third quarter of 2011.

To summarize, while continuing to operate in a challenging economic environment, positive credit trends continue during the third quarter of 2013 with charge-off ratios at a new low in this credit cycle. Notwithstanding these trends, we added reserves in Puerto Rico due to the economic environment. Again, let me reemphasize that we are not seeing any significant stress in our portfolio.

Finally, the transformation of our loan portfolio, both in Puerto Rico and the US, along with improvements in credit underwriting and credit administration has led to a much lower risk profile.

Before turning the presentation over to Richard for his concluding remarks, let me provide you details on our Puerto Rico government exposure. Please turn to slide number 10.

As Richard mentioned, there have been a number of reports regarding the condition of the Puerto Rico economy and the volatility in Puerto Rico municipal securities. Our current outstanding exposure to the Puerto Rico government, municipalities, and other instrumentalities is $1.2 billion, consisting of $951 million in loans and $204 million in securities.

Our facilities to the government can be divided in three main categories -- direct exposures, municipal exposures, and indirect exposures. Direct exposures are loans or securities to the central government or public corporations. Our largest exposures, $200 million, are in tax and revenue anticipation notes which are short-term notes issued to fund Puerto Rico cash requirements prior to expected repayment upon receipt of taxes and revenues.

Our municipality exposure is mostly a diversified portfolio of senior priority loans to a select group of municipalities whose revenues are independent of the central government. Our position is senior to operating costs and expenses in the municipality.

Indirect exposures are facilities in which the government is not the primary source of repayment. It includes $272 million of residential mortgage loans, $52 million of Ginnie Mae, Fannie Mae, and residential loan-backed CMO, and $35 million of industrial loans to non-government tenants.

In the case of these loans, our primary credit exposure is to a specific non-government borrower and secondarily to the underlying collateral. Excluding this, our exposure to the Puerto Rico government is $796 million.

In short, as alluded to by Richard, our exposure to the Puerto Rico government represents a deliberate and carefully underwritten book of business. Given the cash flow and the collateral position and based on current yields, we feel comfortable with our exposures and risk profile.

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 11.

Before we open the lines to questions, let me conclude today's remarks by reviewing the Puerto Rico government financial situation and the actions we are taking to drive shareholder value. While the Puerto Rico economy remains weak, the recently implemented fiscal measures have been significant. Additional fiscal measures should further improve the budget deficit and pave the way for an eventual economic recovery.

As I mentioned earlier, we are more comfortable with the Puerto Rico fiscal situation today than we were six months ago. The leading market position of our unique Puerto Rico franchise is allowing us to 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.

Popular's credit risk profile is materially different from the one with which we entered this credit cycle. And together with our strong capital position, this improves our outlook, even in potentially weak economic environments.

In summary, we are driving value for our shareholders as credit improves alongside our ongoing internal capital generation. We have robust capital under existing Basel I capital requirements, which we expect to continue under the Basel III rules. On these merits we are moving toward the exit from TARP in the most shareholder-friendly fashion.

We continue to see additional value in our EVERTEC ownership; our stake in BHD, the second-largest bank in the Dominican Republic; and the improved performance of our US operations. We look forward to reporting to you on our continuing progress.

With that, I'd like to open the call for questions.

(Operator Instructions) Gerard Cassidy, RBC.

Thank you. Good morning. Richard, you mentioned about extending maybe more credit to the Puerto Rican government if it is needed. Do you have a sense of how much more you would be willing to extend to the government?

No, I think what we said is we find that the situation is really much better from a risk/reward viewpoint and we are in conversations to see what their needs are. But we are comfortable, and if we are comfortable with the conditions and the structure we will move ahead.

Okay. On your TARP comments, I know you can't give us any of the details. Can you just remind us, I think you mentioned it already on the call, how much money is the write-down that you are going to take -- I think you said it was over $400 million -- on the repayment of TARP?

My general counsel just picked up a baseball bat, so I have to be careful here, Gerard. But the unamortized discount, what we are referring to as the unamortized discount, that is roughly $411 million.

Great, okay. Then, third, what is your -- what is the bank's exposure to the direct consumer lending area for margin loans for customers that have bought those closed-end mutual funds that own the municipal bonds of Puerto Rico? If you have any exposure.

It is pretty small. We have looked at it. We have no margin lending inside popular securities for those accounts. There is some in the bank, but there are other sources of collateral as well. We have looked into that and it is really not a problem for us.

Not significant.

It is not as significant?

It is not as significant says my risk manager.

Great. Thank you very much.

Ken Zerbe, Morgan Stanley.

Thanks. First question I have for you was just on credit. I know Lidio said that you are not seeing any deterioration in the credit quality of your portfolio currently, but if we look at your core provision which is about $55 million this quarter and it has been pretty consistent for the full year, puts you at about $220 million run rate.

If I remember right, I think your normalized provision expense is about $250 million. My question is if you look out over the next 12 months, given what is happening with the Puerto Rican economy, do you expect your provision expense in the future to remain below your normalized level of $250 million?

I am going to let Lidio answer that, but very carefully.

I also have the lawyer here with the bat looking at me. We don't tend to provide forward-looking statements, but I will go back to the comments that I made during the presentation.

We have a much more different portfolio than we had times ago. We are much less concentrated on middle markets, which was where you see most of the losses on construction, and we have a much stronger consumer business compared to the one we had prior. So I think I will stick to that, that will be my answer.

Okay, fair enough. My follow-up question; on a pretax earnings basis, and I'm looking at slide four, it looks like you are at $71 million. We can even add in the extra $3 million from the debt extinguishment costs should put you at, call it, $74 million.

When you look ahead, because I think the $74 million was considerably below my estimates at least, is $74 million the right run rate going forward? Because it looks like you had both lower fee income, including the FDIC stuff, plus higher expenses. I'm just trying to get a sense of what to expect going forward.

I will let Carlos fill you in on the details. There was a lot of noise on the expense line this quarter, but -- and the tax also. I think Carlos alluded to that, so I will let Carlos tackle this one.

Sorry, give me a second.

I am assuming the tax goes back up as you had mentioned, so I was looking at a pretax basis. Trying to figure out if expenses stay as -- basically expenses stay high and income stays lower?

I think, Ken, when you look at our expense level this quarter had a number of instances on which we mentioned the tax effect -- the tax extinguishment. We also saw a high increase in the other expenses that we are hoping some of them will not repeat and the OREO expense we continue to expect to move down over time. So I think you can assume that some of the expense -- the level of expense that we have seen this quarter is on the high side.

Due to the elevated OREO?

Partly and some of the other expenses which are unusual as well, like the debt extinguishment and the effect of taxes.

Okay, thank you very much.

Alex Twerdahl, Sandler O'Neill.

Good morning, guys. First off, can you just tell us how much cash you have at the holding company?

$410 million according to our treasurer here.

$410 million. And how much under a normal operating environment do you need to hold at the holding company for the cash balances?

Your question is to get at how much cash we have available. We are not going to touch or tell you that. We have a policy that we need to keep cash at the holding company to take care of one year's worth of forward-looking needs and we are way beyond that policy.

Okay, thanks. Then, second, Lidio, maybe you can go into a little bit more detail about just on loans that you are resolving in your portfolio today, just the loss content, both on the commercial side and the residential side for loans being resolved today versus maybe 12 months ago.

Obviously last year when we had the discussion there was -- the portfolio there was a lot of non-performing loans and the tactics were different than what we are today, but we haven't seen any significant change in terms of the loss contents a year ago versus today.

Then just finally, just elaborating on the tax rate comments that you made, Carlos, about going from 40% during the third quarter down to a goal of 30% for 2014. Can you just elaborate a little bit more on some of the things that you are going to be able to do or trying to do in order to get that tax rate down?

Yes, I mean our tax rate gets affected by a number of things. One of them, for example, is the mix of our income tax expense versus taxable income. Another thing that affects our effective tax rate is the location of our income, whether it sits in an entity that has tax protection or not.

We do have some capacity to move some of our revenues and our income within the organization, so we have some capacity, it's kind of limited, to affect our tax rate and we are trying to pursue these opportunities. There are different levels of complexity in achieving that.

So is the 30% going to be for the whole year or is that something that is going to sort of be like a first quarter (multiple speakers) 35% and then --?

The 30% is a commentary intended to cover the whole year.

Okay, great. Thank you very much. That is all of my questions for now.

Herman Chan, Wells Fargo Securities.

Thanks. You talked about it in our prepared remarks that EVERTEC represents a potential source of capital. Can you give us your updated thoughts on the retention of that stake?

Well, we very much like the business and we very much like the ability to like their prospects. We prefer to continue booking the equity portion of their income moving forward. But it is -- we just wanted to highlight that there is some hidden value there that the market value of our holding is significantly above what we hold it in our books at.

So that is -- we have already raised after-tax close to $325 million in the two sales that we did in the last two quarters. So it is there; our intention right now is to keep holding that stake.

Understood. On the forecast for flat, non-covered loan balances looking ahead, can you talk about your expectations for different loan buckets and also expectations for further resi mortgage loan purchases as well?

Well, again, we are trying to keep a flat, non-covered loan book. We have surely seen a slowdown in mortgage activity in the past compared to last year, but we -- so it is about a 25% decrease in originations.

We are still targeting about the $300 million a quarter in new loan originations and that should not be a problem. We are looking at some selected loan books that we want to grow in the consumer area where we have had very good experience and where we have the machinery in place, the infrastructure in place so the marginal costs of adding, the loss content will be low. But that is about it.

We are seeing a slowdown, particularly in Puerto Rico, but it applies to the US as well. And middle and small commercial loan demand has been very, very sluggish. That has also been one of the areas where we have had historically high losses or higher losses.

Right, understood. Yes, that is great. Thanks for the color there.

Lastly, with loan growth a challenge, credit still a potential issue how do you think about the expense base from here? Are there opportunities to rationalize expenses a little bit lower given the extended low growth environment and the issues in Puerto Rico?

Absolutely, and I think, as we mentioned in the call, I think one shouldn't take this quarter's level of expenses as normal. I think they were higher than we think.

We would like to see that quarterly number in the range of 305, 310 moving forward and we will drive to that. There is obviously less cost in handling some of the legacy portfolio. We have seen already some of those come in. We expect we will see more of that.

At the same time, we still have quite a bit of costs handling the covered loan portfolio, albeit those are 80% reimbursable. We also have a lot of pressure on the regulatory side for compliance with just the new rules that come into play. So we will probably move some people around, but, yes, the answer is that we do feel there are opportunities for cost savings and we are going to try and drive towards that 305 to 310 band.

Excellent. Thank you very much.

(Operator Instructions) Todd Hagerman, Sterne, Agee.

Good morning, everybody. Richard, I just want to follow up on your comments related to TARP. They have been very consistent for some time now in terms of doing what is best in terms of -- for the shareholders, if you will.

You also referenced a number or the optionality in terms of your balance sheet. You have more than $2 billion in excess capital relative to the requirements -- EVERTEC, cash, the parent, and so forth. Should we think about the potential for any common equity raise as being part of that optionality in the equation, or is that something that is just not on the table right now in terms of the repayment?

I will tell you, my general counsel is swinging that bat right now in the air, so I just I don't want --.

I think he missed.

So far he has missed, but he is getting closer. He is like Carlos Beltran right now.

But we are not going to -- you mentioned -- we call it excess capital. Regulators think that is an oxymoron, but at any rate. As I said, we have raised $325 million in profits on EVERTEC sales this year. We think we can -- we do have the capital so let's -- I just don't want to speculate on what the funding plan is going to be.

Okay, fair enough. Then in terms of the government exposure, if you could help me reconcile -- the way I am thinking about it, I am thinking about tangible book value and again kind of how the regulators are looking at your capital position today, which again is quite strong relatively speaking. But the thing that I am thinking about is the accounting for the banks and the underlying cash flows relative to those exposures in comparison to the marks that were taken at the broker dealer in terms of the bonds and obviously trading-related assets.

So the way I am thinking -- so how do they -- if I were to think about mark to market on the bank's portfolio and capital, is that something that is very much a consideration, either for yourself or for the regulators? Or just because of the way it is carefully underwritten, it is a completely different ballgame between the broker-dealer and the banks?

I guess the short answer is, no, and this is why we tried to give you the full detail of this. There is only -- I think there is roughly less than $200 million that you would call as bonds. Some of that, a very small amount of that is held in the trading portfolio, I think it was $12 million, and some, about $54 million, is held in the available for sale portfolio.

So the bulk of our exposure is in the form of loans to the government and those have very specific revenue sources. They have very specific collateral and a duration that we are comfortable with. So other than the general reserve, the fast five reserve, we have no specific reserves for this and we don't think there is any need to do that.

That is helpful. Then just one last one, going back to, Carlos, your comments on the funding side that you think you have got more room to go. Could you just elaborate a little bit more on that in terms of what you think some of the levers are to further reduce that funding?

Well, we have a privileged position in the [deposit] market in Puerto Rico that allows us to be a little bit of a price leader, but we have to be very careful to serve our clients properly and fairly as well. We have been very successful the last few years in reducing funding costs, but part of that success is the fact that we are repricing rollovers prior to higher-priced deposits.

We have been in this very low rate environment for a long time, so there is very few of those left so that is the reason the (inaudible) is slowing down. So we still look forward and think there is opportunities in different types of accounts where we could -- and in the mix of our deposits that we could end up lowering deposit costs. But that opportunity is getting smaller as we go.

That is fair. I don't know if you can do this, but -- and I don't want the bat to come up again --

That never comes down. (laughter)

If you think about again the opportunities you have within that deposit base and your market share, if you will, as I think about 2014 and the potential funding opportunities, in order of magnitude are we talking 10 to 15 basis points or is it something perhaps a little bit less than that? I'm just trying to get my arms around order of magnitude in terms of how much leverage we may potentially see, all else being equal.

It is a good question, but I don't think we are going to go there. We are trying not to provide guidance. I think the conceptual guidance is your best guide.

We expect to continue to get some benefits, but those will probably not be smaller than the ones we have seen.

Maybe an overall -- I guess the challenge from our point of view is less on the margin side than on the volume side, so it is more the volume variance that concerns us than the rate variance.

Great, that is very helpful. Thanks very much for taking the questions.

Taylor Brodarick, Guggenheim Securities.

Most of my questions have been answered; just had one question for Lidio. Lidio, have the trends in new delinquencies reflect kind of the decrease in NPL inflows or have they been different?

I think we alluded to in the presentation that the inflows into NPLs are at an all-time low. So I think a reflection of the changes in quality of our credit portfolio, so they have helped us with bringing down delinquencies overall.

Okay, great. That is it, thank you.

At this time I'm showing no further questions in queue. Popular Inc. would like to thank everybody for participating in today's conference. This will conclude today's conference and have a great day.