Popular Inc (BPOP) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013's earnings call for Popular, Inc. And now I will turn the call over to the Investor Relations Officer, Mr. Brett Scheiner.

Thank you. Good morning and thank you for joining us on today's call.

Today I am joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our full-year and 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.

I will now turn the call over to Mr. Richard Carrion.

Good morning and thank you all for joining the call. I'd like to first address the highlights and key events of 2013. Then I will discuss the fourth quarter, share our progress in focus areas, and provide some updates regarding the economic situation in Puerto Rico.

Carlos will then go into greater detail on the quarter's financial results, and Lidio will provide an update of credit trends and metrics. So with that, please turn to the second slide.

In 2013 Popular produced $1.9 billion in gross adjusted revenues, in line with the prior year. For the year, we earned net income of $599 million and adjusted net income of $256 million, both improving on the prior year's results.

We made clear and consistent progress on a key objective: improving credit quality. Total NPAs including covered loans of $922 million were down from $2.0 billion at year-end 2012. Noncovered NPLs declined $827 million to $598 million or 2.8% of noncovered loans, the lowest level since 2007. These reductions were the result of aggressive loss mitigation efforts, resolutions, restructurings, and NPL sales.

Earlier in the year our former processing subsidiary, EVERTEC, completed its IPO. This transaction, in addition to two subsequent share sales, generated after-tax gain sales to Popular of $424 million.

Our adjusted net income, in addition to the EVERTEC gains, drove tangible book value to $37.56, up from $32.55 last year. Our Tier 1 capital and Tier 1 common ratios are 19.4% and 15.0%, up 206 and 186 basis points, respectively, year-over-year.

Turning to slide 3, you can see that these income and credit results are due in part to our leading market share in Puerto Rico. Based on the latest data, we increased our share in most of the eight banking categories on the island, maintaining our leadership position in six of them. This leading franchise value positions us well for an eventual economic recovery on the island, but also provides meaningful earnings power in the interim.

On slide 4 we show a solid performance to close the year. Total reported net income for the fourth quarter was $163 million. Excluding the impact of the sale of the EVERTEC shares, the adjusted net income figure for the quarter was $74.6 million.

We continued to generate strong revenues, with capital levels above peer averages. Our Tier 1 common equity ratio of 15.1% exceeds the CCAR 5% target by $2.3 billion. As previously announced, on December 13 we sold 5.8 million shares of EVERTEC, reducing our stake to 14.9%. The sale provided $118 million in cash and resulted in an after-tax gain of $99 million.

EVERTEC remains an important business partner and a valuable asset that represents an additional source of capital flexibility. The market value of our remaining stake is approximately $300 million and significantly exceeds the position's current book value of $20 million. As investors, we will continue to participate in a proportionate share of the company's income.

Our margin of 4.74% remained strong relative to peers, with our Puerto Rico net interest margin over 5.5%. Our NPL-to-loan ratio continues to improve to its low point in the cycle and at quarter end was 2.8%, down from 2.9% last quarter and down 75% from the Q3 2010 peak of 11%.

NPL inflows were down $21 million when compared to the previous quarter, the lowest level in three years. And early delinquencies in Puerto Rico were stable.

Noncovered NPLs were down $20 million as continued improvements in the US and Puerto Rico commercial portfolios were offset by slightly higher nonperforming Puerto Rico mortgage loans. Puerto Rico mortgage inflows of $95 million were essentially flat to last quarter's $94 million. Our net charge-offs were $35 million or 66 basis points, reaching the lowest level since 2006.

Please turn to slide 5. Last quarter we announced our application to repay our outstanding TARP funds. We continue an active dialogue with our regulator, but our application has not yet been approved.

As we said last quarter, we cannot speculate on the timing or the conditionality, if any, of an approval. As our 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.

Slide 5 includes pro-forma capital ratios for the fourth quarter, excluding all $935 million of TARP funds. These ratios include the impact of the reversal of the approximately $404 million of unamortized discount related to the TARP funds.

Before I turn it over to Carlos, let me comment on the Puerto Rico economy. We mentioned last quarter that, despite the volatile environment, we were more confident in the island's fiscal outlook than we were six months prior, given recent government actions. Since that time the Puerto Rico government has announced additional pension reform and provided data showing both revenues and expenses are ahead of budget for the first half of the island's fiscal year.

We are encouraged by these additional government measures, though we recognize that the markets and financial press may not share our view. In the short term, measures taken throughout 2013 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 continue to be particularly attentive to our portfolios and 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, our excess capital levels, and strong internal capital generation will be key to our future performance.

Lidio will expand on our Puerto Rico government exposure later in the call. I would note, though, that as we stated last quarter, this exposure does not represent a random sample of Puerto Rico municipalities or government entities, but 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.

So with that, please turn to slide 6, and our CFO, Carlos Vazquez, will discuss our financial results in further detail.

Thank you, Richard, and good morning. On slide 6 we present our adjusted financial summary for the fourth quarter, excluding the impact of the sale of EVERTEC shares. Please note, this 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, first, stability in net interest income and, second, improving credit trends. Variances to third quarter's results stem mainly from the net interest income, FDIC loss share, provision, and income tax lines. Details of these variations can be found in our press release.

Net interest income for the fourth quarter was $376 million, up $22 million from last quarter on continued strength in covered asset cash flows, the absence of the mortgage interest reversal reported in the third quarter, and the benefits of last quarter's note prepayment. The prepayment of the $233 million note in Q3 with an average cost of 7.7% saved $4.5 million in the fourth quarter. This transaction will result in savings of more than $17 million in 2014, coming down thereafter.

Our loan portfolio was up slightly from the prior quarter, as higher commercial balances offset covered loan run-off. While the economic weakness and covered asset runoff are headwinds, we remain hopeful that we can maintain flat noncovered loan balances through the end of 2014.

We continue to work on reducing our funding costs. This quarter, total deposit costs fell 1 basis point to 60 basis points on slightly lower cost of time deposits.

Puerto Rico deposit costs also fell 1 basis point from Q3 to 59 basis points. The rate of reduction of deposit costs has slowed, as we run out of older, higher priced deposits to reprice and our clients begin to expect interest rates to increase. Nevertheless, we still believe some incremental opportunities exist for cost savings.

The average yield in our $3.0 billion covered loan portfolio increased to 11.43% from 9.13% last quarter due to greater actual and projected cash flows. While we expect the majority of this increased yield to be maintained in the next few quarters, approximately 50 basis points of the increase was due to specific loan resolutions and adjustments in the quarter.

The net impact of the quarterly covered asset recast includes this additional spread income. But be mindful that the FDIC transaction affects our income statement through many lines. Some of the additional spread is offset by higher amortization expense for the indemnity asset, which is reflected in the FDIC loss share expense line.

Noninterest income declined compared to the prior quarter due to: higher FDIC loss share expense; a lower contribution from mortgage banking, resulting from negative MSR valuation adjustment; and the lack of recourse reserve releases that were present the last quarter. As mentioned earlier, this quarter's increase in the FDIC loss share expense of $22 million includes higher indemnity asset amortization, resulting from better than expected performance in the covered loan portfolio.

Our Puerto Rico mortgage business originated $287 million of loans in Q4, flat to last quarter. Volumes are down from last year, partly due to the phaseout of government incentives favoring home purchase activity and also higher interest rates. We expect to maintain through 2014 an average quarterly pace of originations similar to that of this quarter.

Last quarter we added disclosure around our mortgage banking business on Table F of the press release. While there are many moving parts in the mortgage line items, this quarter's decline in mortgage banking related income was largely due to a negative MSR valuation adjustment, which was only partially offset by larger gains from the sale of mortgages.

Trading account activities were $5.1 million higher than the prior quarter, due to last quarter's marks taken on the inventory of Puerto Rico bonds and closed-end funds held by our broker-dealer subsidiary, Popular Securities. This is only a $12 million portfolio, which is flat to last quarter.

Total operating expenses for the quarter were down $4 million to $323 million as expense reductions in personnel cost, other taxes, and OREO were partially offset by higher professional fees, a seasonal increase in promotional costs, and a higher provision for unused commitments. While expenses remained elevated this quarter, we continue to expect this number to trend down below $310 million.

Our adjusted tax rate for the quarter was approximately 22% due to higher income from our US subsidiary. We continue our tax mitigation efforts and reiterate our estimate for an annual effective rate of 31% for 2014, comparable to the 30% adjusted full-year 2013 figure mentioned in the press release.

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 Tier 1 common equity ratio stands at 15% and represents an excess of $2.3 billion over the 5% CCAR target. Adjusting for the potential repayment of TARP, we expect our capital levels 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. With that, I turn the call over to Lidio.

Thank you, Carlos. Please turn to slide 8.

While continuing to operate in a challenging economic environment, we are pleased to report that asset quality continued to improve during the fourth quarter, as nonperforming assets, NPL inflows, and net charge-offs reached their lowest levels in more than five years. In addition to markedly improved credit metrics and stronger capital levels, we continue to feel confident with our exposure and risk profile.

As we presented last quarter, slide 8 compares and contrasts Popular's current portfolio mix to the mix prior to the financial crisis. The key message is that changes in our portfolio composition, coupled with changes in underwriting parameters and improvements in credit administration practices, have led to a lower risk profile and better credit performance.

In the US, we no longer have a national lending platform or a subprime consumer and mortgage business. In short, we are now a community and niche lender with a much lower risk profile.

In Puerto Rico, our commercial exposure, including construction, has decreased from 55% of our total loan book to 42%. Construction lending has decreased 87% and now stands at $161 million.

On the bottom of the slide, we also segment the commercial portfolio and include net charge-off distribution by segment since 2008. The important message from the table is that our commercial mix has significantly improved by reducing exposure to asset classes with historically high losses. In the consumer portfolio, secured exposures are now 75%, up from 65% -- 66% in 2007.

These changes are among the drivers behind the positive credit trends in our portfolio. The quarter marked new record lows in the credit cycle for nonperforming assets, net charge-offs, and inflows into NPLs.

Let us turn to slide number 9 to go into the details. Nonperforming assets decreased $22 million on a linked-quarter basis, primarily driven by a decrease in nonperforming loans in the US region. At 2.57%, the nonperforming asset ratio is at the lowest level since 2008.

Nonperforming loans held in portfolio also decreased by $20 million from the previous quarter, led by declines in the US, offset in part by a slight increase in Puerto Rico. At 2.77%, the nonperforming loan ratio is at the lowest level since 2007.

In the US, NPLs excluding consumer loans decreased by $26 million, mainly due to the continued improvements in credit performance and loan resolutions, marking the 16th consecutive quarterly decrease of nonperforming loans.

In Puerto Rico, NPLs increased slightly, by $6 million, mainly driven by higher residential mortgage NPLs, offset in part by reductions in the commercial and construction portfolio. The increase in mortgage NPLs is mostly driven by the reduced level of outflows as a result of the bulk sale completed during the second quarter of 2013.

Please turn to slide 10 for a brief recap of trends in NPL inflows. NPL inflows, excluding consumer loans, reached a record low for this credit cycle for both Puerto Rico and the US.

On a linked-quarter basis, NPL inflows decreased by $21 million, principally driven by improvements in the commercial inflows in both regions. Mortgage NPL inflows remained flat quarter-over-quarter. Since peaking in the second quarter of 2009, NPL inflows have decreased approximately $801 million or 85%.

Puerto Rico commercial NPL inflows including construction reached a new low in this cycle, decreasing $10 million to $32 million in the quarter. In the US, commercial NPL inflows were only $10 million, reflecting improving economic conditions.

Please turn to the next slide. Net charge-offs this quarter reached the lowest levels since 2006.

Net charge-offs for the fourth quarter amounted to $35 million or 66 basis points on an annualized basis, compared to $58 million or 1.08% in the previous quarter. The decrease of $23 million is mainly driven by higher recoveries of $17 million, which includes a $9 million recovery associated with the sale of a portfolio of previously charged-off credit cards and personal loans in Puerto Rico. Excluding the effect of this sale, the net charge-off ratio was 83 basis points, a linked-quarter improvement of 25 basis points.

In Puerto Rico, the net charge-off ratio decreased to 90 basis points from 1.15% in the previous quarter. Excluding the effect of the sale, the net charge-off ratio decreased slightly to 1.12%.

In the US, net charge-offs were $110,000, a decrease of $13.1 million from the previous quarter, primarily due to lower gross charge-offs across all loan categories, coupled with increased recoveries, mainly in the commercial and legacy portfolios. The provision to net charge-off ratio increased from 95% to 135%, driven by an increase in this ratio for Puerto Rico, offset in part by a decrease in the US.

Notwithstanding the improvements in net charge-offs, NPL inflows, and stability of NPLs, we increased reserves in Puerto Rico by providing 142% of net charge-offs during the quarter. This ratio excludes the quarter's recovery on the sale of charged-off consumer loans.

As discussed previously, our allowance for loan losses methodology incorporates current economic conditions in the estimation of inherent losses. Given the continued weakness in some of Puerto Rico's economic indicators, our methodology led to an increase in reserves. I should note, however, that we are not seeing any significant stress in our Puerto Rico portfolio, with improving lagging indicators, such as inflows and net charge-offs, as well as stable leading indicators.

In the US, continued improvement in credit metrics and economic conditions led to a reserve release of $15 million for the quarter. The ratio of allowance to loan losses to nonperforming loans increased to 90% from 85% in the third quarter as a result of the increase in provision in Puerto Rico.

To summarize, while continuing to operate in a challenging economic environment, positive credit trends continued during the fourth quarter of 2013. Notwithstanding these trends, we added reserves in Puerto Rico due to the economic environment.

Before turning the presentation over to Richard for his concluding remarks, let me briefly summarize our Puerto Rico government exposure. Please turn to the next slide.

Our current direct exposure to the Puerto Rico central government, municipalities, and other instrumentalities is $1.2 billion. Of this balance, $950 million is outstanding, consisting of $789 million in loans and $161 million in securities.

We carefully monitor our government exposure. Like every entity to which we extend credit, our diligence process is extensive and revolves around available cash flow for debt service and repayment of principal.

Given the cash flow and collateral position of our exposure and based on current yields, we believe the risk/reward is favorable and we will continue to selectively participate in funding the government's capital needs. Please keep in mind that any participation in additional government financing will comply with all internal limits and risk controls.

Our direct exposures can be divided into two categories. The first includes the central government and public corporations, while the second group includes municipalities.

Our largest exposures among loans and securities to the central government and public corporations are approximately $200 million in tax and revenue anticipation notes. These are short-term notes issued to fund Puerto Rico cash requirements prior to expected reimbursement 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.

Additionally, we have indirect exposures of $216 million which are facilities in which the government is not the primary source of repayment. In the case of these loans, our primary credit exposure is to a nongovernment borrower and to the underlying collateral.

In short, as stated by Richard, our exposure to the Puerto Rico government represents a deliberate and carefully underwritten book of business.

Regarding the public deposit balance at BPPR, the vast majority of this approximately $1 billion in funding is held in transaction and operating accounts, which we believe are highly unlikely to be meaningfully wound down. In addition, the majority of these deposits are collateralized with US government securities, whose funding could be rolled to repo or brokered deposits that would be comparable to or inside of muni time deposit rates. As such, we see no meaningful risk to our earnings or liquidity position due to the shift in this funding source and have seen no sizeable drawdowns in these balances.

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

Thank you, Lidio. Please turn to the last slide. 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're taking to drive shareholder value.

While the economy remains weak, the recently implemented fiscal measures have been significant. As the Puerto Rico government announced earlier this month, both revenues and expenses have come in on target for the first half of the Commonwealth's fiscal year, which began this past July 1.

In addition, over the past six months the government has passed legislation reforming the two largest pension funds. Given the current economic environment, we are working closely with other business leaders to offer cooperation and guidance to the government where appropriate.

At Popular, the leading market position of our unique Puerto Rico franchise continues to allow us to sustain above-average margins. Our covered portfolio continues to produce better-than-expected results. In addition we have reported cycle lows for both NPLs and NPL inflows in the noncovered portfolio.

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.

We continue to see additional value in our EVERTEC ownership and 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.

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

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

Hey, good morning, guys. First question for Carlos. I was just wondering if you can maybe discuss a little bit more what you have done over the past couple months to drive that tax rate down to the 31% range. And also, what drove it down all the way to 22% in the fourth quarter?

The tax equation obviously has a lot of parts to it, but the biggest contributor to the tax rate being better this quarter is the fact that a higher percentage of our income came from our US operation, which is effectively the income that flows straight to our bottom line. That was the biggest contributor.

Okay. Then what about for 2014, the 31% compared to the -- is that just the mix of operations that are in the United States versus Puerto Rico? Or are there some other things that are going on?

I think it is partly that and partly we do have some tax strategies in place. So that we are targeting a 30% rate, as Carlos mentioned.

Okay, and would that include -- does that include the TARP repayment? Assume that (multiple speakers)

We are not including anything for TARP right now.

Okay. That's good. Then just also, hypothetically if Puerto Rico were to be downgraded by one of the rating agencies, are there any direct implications on your balance sheet?

I would think in the short term, I think they would be minimal. You saw the size of the securities portfolio, so we don't see anything material there. I think our concern would be what would be the impact of any measures taken by the government, what the impact would be on the economy, and how would that affect us.

So we don't see any immediate impact on the balance sheet. It's just how the economy would get -- would work through that.

Okay. Then just lastly, Lidio, do you have a number of accruing TDRs handy?

The number of accruing TDRs for the quarter is $762 million out of $950 million.

Great. Thank you very much.

Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen. I think what was interesting to me is you guys continue to work down the high-risk, high-severity NPLs. Lidio, I know you talked a little bit about the back-row factors you have to think about.

If you look at the NPL formation trend and what you have provisioned for new NPL formations at BPPR, the last four or five quarters it has averaged between 35% to 40%. This quarter is about 50%.

So I think what is interesting, too, is that there have been some positive economic trends with better revenues from the government, say, revenue side, expenses coming in a little bit lower. So do you think that maybe we should be thinking about NPL formations and the level of provisionings returning back to that maybe 40% level of provisioning and new NPL formations going forward? Or how should we think about that relationship of provisions to new NPL formation?

I think provision is a function of internal and external factors. And some of them, certainly related to the economic environment in which we operate, is weighing into the numbers.

But in terms of internal numbers that you have alluded to, they have been strong and trending down over the last two years. So therefore I think as the external environment improves, I think you will see improvements in our provisioning.

Okay. In the US, the BPNA franchise, again the charge-off and NPA formation is down significantly. Still have 195 basis point reserve-to-loan ratio. It just feels like there is probably more room to actually release reserves in the US.

Is that reasonable to think that maybe we could see that? Maybe more reserve releasing in the US mainland?

It will also be a function of internal metrics. Certainly there the external factors are much different than in Puerto Rico, and we see the potential for that to be the case as we continue to work down some of our NPLs in the US.

Okay. Then just one last question on the Puerto Rico exposure. So the government and the public corporations, the $527 million outstanding at the end of the year, can you remind us again how much was central government and how much was the public corporations, and what the maturities in each of those buckets might be?

We haven't provided that information. Maybe for the Q we will go into that a little bit, or the K. But we have not provided that information.

I think it is roughly half. To the central government it's mostly in the TRANs, and that has very short-term maturities.

You are right, Richard. I mean, the bulk of the central government exposure is (laughter)

So within that, is the increase from the linked quarter, the $139 million, was that to the public corporation or to central government?

That was the public corporation and the use of an existing line by what is called CRIM, which is --

It's the authority that collects the property taxes for municipalities. It's a revolving line and it's somewhat seasonal. So half was a new loan to one of the utilities, and the other half was this [TRANs-like] authority that collects the property tax using their line.

Got you. Actually those are both backed by either the utilities assessment rates, so a specific revenue source, or like the tax revenue collection on the other one. So --

Exactly right.

Great. All right. Thanks for taking my questions, guys.

Todd Hagerman, Sterne, Agee.

Good morning, everybody. A couple questions for you. First, just in terms of, Carlos, the $1 billion of funding held on the balance sheet as relates to the government. I am just curious. You mentioned there has really been no visible activity in terms of the balances.

But I am curious in terms of over the course of 12 months and thinking about seasonality, how those balances may change over the course of the year, if much at all, on an average basis.

They move up and down. Our view is we have a high concentration of operational accounts, and with those accounts we provide a lot of services to the different entities in the government, that a lot of those accounts and the corresponding balances will remain.

So actually at this point in time, first, as we mentioned and Lidio mentioned, we haven't seen any material changes on our balances. And at this point in time we are not expecting very material changes, either.

Yes, about 80% of those balances are in transaction type accounts. And as was mentioned they're essentially flat year-over-year.

So the important point here is that for -- to understand that these are required to be collateralized by local regulation. So whatever part of the funding moves, if it were to move, we'll just simply move the funding to other sources or move the collateral to other sources of funding. And we have ample liquidity available, so we don't expect this to be a problem whatsoever.

Okay. Then just in terms of going back to an earlier question in terms of the government and any potential default or downgrade in the debt, you mentioned no expected real immediate impact. But as you look through the various exposures, direct and indirect, that you disclose, is there any particular segment, whether it is part of the GO or other obligations, that -- granted there is a very strong legal structure in Puerto Rico. But any certain amount of that or a particular issue that would be vulnerable in terms of any kind of a structural impairment, as you see it today?

No. The short answer is no. As we have tried to very deliberately underwrite these credits, so we have specific revenue sources, and we know where those sources are coming from, and we have good collateral, so I guess the short answer to that is no. Obviously, we are not anticipating any kind of default. But the answer is, we think we have a very well underwritten book of business there.

, Okay. Then to that end, as you mentioned, the government has actually done everything, if not exceeded the plan that was passed last year, hitting every target if not exceeding. The last piece of the puzzle, so to speak, remains returning to the long-term capital market, if you will, which has obviously been in discussion and a lot of speculation in the press over the last couple weeks.

That being said, do you think there is -- based on what you see and what you're aware of in terms of the government's fiscal situation, is that something that is a risk near-term or longer-term? In other words, presumably the plan was laid out over a 12-month time period. Now it seems as if the market is getting a little impatient in terms of Puerto Rico's ability to go back to the capital market.

The way you see things now and a diminished concern, if you will, is that something that you think is becoming a bigger factor as relates to the fiscal situation in Puerto Rico?

Clearly there have to be some transactions? And I think they have a liquidity position that just takes them forward.

I think they are looking at the different possibilities. Some have been mentioned in the financial press. I don't know how accurate or not those are.

But they do have to, at some point, come to the market. They cannot indefinitely stay out of the market.

And we are looking at different possibilities, as I am sure other financial institutions are as well. So, yes, you are right in that the market is getting antsy to see what they will finally do in the short term.

Okay. Then just finally, Richard, I am going to ask you a TARP question anyway.

My lawyer is grasping me by the throat firmly, but go ahead.

Exactly. I know he is wielding that big bat. But if I go back in time to thinking where the Puerto Rican banks were a couple years ago and the credit issues, for example, each of the banks now has lowered their credit measures, for the most part within the acceptable band or to a more manageable level that presumably is acceptable to the regulators.

The other piece of the puzzle has always been the regulators' comfort with the economic situation in Puerto Rico. And obviously, as I mentioned before, all the marks have been hit to date.

Is that something that at this point in time, relative to when you initially requested the exit of TARP, is that something you think that is potentially a delay or a potential issue as it relates to your repayment? Or do you think on a standalone basis Popular is in a position, regardless of the external forces or speculation, that they are on track to repay TARP?

Listen. All of us around this table would like to pay as soon as we get off the call, and we are ready to do it. Unfortunately, it is not up to us.

So yes, we think we can; we are in a position to pay it. But it is a decision that is in the regulators' hands, and we keep having that dialogue with them.

We understand. They have to feel satisfied. We try to answer all their questions.

And when they are ready to go ahead, we will immediately go ahead. We have learned whining doesn't help. But other than that, we are ready to go.

Okay, terrific. Thanks for taking my questions.

Ken Zerbe, Morgan Stanley.

Thank you. Lidio, I was actually hoping you could just provide a little more clarity. I've got two conflicting things that I just want to make sure I reconcile.

On the call, you mentioned that on a lagging indicator basis and on a forward indicator basis, in terms of credit you are not seeing any deterioration. Things continue to get better.

But at the same time, you guys did increase your provision expense in Puerto Rico; and in the press release you did mention that you are increasing the allowance because of environmental factors, given the economic conditions. What is it that you are actually seeing in the economy that is leading you to increase your allowance and increase your provision, but at the same time no indicators would suggest credit is getting worse?

Uncertainty and certain economic indicators, the same ones that you see, those are leading. And we think the actions that we have taken are prudent.

But I think more important, the key message from today that I want all investors to take is that notwithstanding all of that, our internal metrics continue to be very strong and stable. So we haven't seen any type of stress in our portfolio.

But in terms of our provision, we have been prudent given the uncertainty of the economic environment.

Understood. So no impact so far, but -- not to put words in your mouth, but you are concerned about the future, which I think is fair.

I did not say concerned about the future. I spoke about uncertainty and some of the indicators that we are seeing, the current and present economic indicators.

Understood. Do you guys put much faith in the GDB's Economic Activity Index that they report? I think it was down 5.7% year-over-year.

That is one of the elements that goes into our analysis of the external factors that impact operations.

Understood. Okay. Thank you very much.

Gerard Cassidy, RBC Capital Markets.

Thank you. Good morning, guys. Question on the deposit rates that you guys indicated were down I think a basis point, if I heard you correctly, in Puerto Rico. With your strong market share in Puerto Rico, do you envision or can you see those deposit rates falling in 2014? Or should we just assume they are going to just stabilize at these levels?

I think our market share is always a plus. But the other, the counterbalance to that is that we have to also take care of our clients and be mindful of our clients. So it is a combination of an effort that we have.

I think the market in Puerto Rico has been very constructive with regards to deposit costs for all the banking industry. But what you are seeing in the slowdown now is just -- it's just a matter of time. We have been in a low rate environment for so long that some (multiple speakers) improvements in deposit costs get increasingly more difficult.

So is there potential for additional improvement? Yes. We said so.

Some of that may be particular products, some of that may be deposit mix. There may be a number of things that contributes to that, and we will continue to work to lower the cost. But it has just been too long with too low rates for it to continue at the pace it was.

Thank you. And on your investment in EVERTEC, you obviously have done a very good job in monetizing that for shareholders in 2013. What is the outlook for the remaining ownership position? Is it something that you are very strongly committed to keeping? Or no, under the right circumstances you would consider monetizing the remaining portion as well?

We like the investment and we will keep it, unless we think there is a better use for the funds. It is just -- it will depend on the circumstances.

Right now we are very happy with the investment. It has done quite well, as you heard in the talk. We made $424 million after-tax just this year alone, so on the sales, plus our share of the equity there.

So we are very happy with it. If there are some circumstances that come along, we will look at it when the time comes. Is that vague enough for you, Gerard?

No, that is very good. Then finally -- and this is obviously philosophical and is putting the cart before the horse, and we all recognize the challenge that the island is going through, economically speaking. But I would be interested in your views.

Your capital ratios are obviously so strong. So when TARP is eventually paid off and you are going to have the decisions, I would assume, to start returning capital to shareholders, clearly under the new capital regulations, the banks are required to keep 7% Tier 1 common. And again you guys are well above that.

So again I know this is philosophical; it's cart before the horse. But if we look beyond the period of -- you pay off TARP at some point, what are you guys comfortable with in terms of capital levels and then return of capital to shareholders at some point in the future? Is a 50%, 60% combined payout ratio, which includes a dividend and a buyback, something you are comfortable with? Or no; it would be lower, or higher?

Let me just preface -- I will let Carlos say it but let me just preface, we are all looking forward to the day when we can really have these philosophical musings. But it really -- a lot of it depends on what the regulators will allow. But let me let Carlos take it over.

Yes, conceptually, we obviously would look to manage our capital and return capital to the shareholders if that makes sense. I think the banks in general are, depending on the bank, averaging payouts between 30% and 60% or 70% of earnings, and we would seek to be in line with the rest of the banking industry.

So conceptually, we will be moving to look like most of our peer banks look when the time comes. As Richard said, we are quite keen to be in a position to have that discussion to the level of basis points with you, but it is not the time yet.

Thank you.

Taylor Brodarick, Guggenheim Securities.

Great, thank you. I think most of my questions have been answered. I just have one on the competitive landscape. Just looking at slide 3 and the recovery and market share dominance since 2012.

Are you seeing less competition from the multinationals? Or is there any interesting data points on why that has occurred?

No, I wouldn't say -- I don't think we have seen much change in the competitive landscape in the past year or two. It really -- the players are -- there was one consolidation a year ago; but aside from that, we haven't really seen any major change.

We still have to work hard to get our clients.

That's right.

Got you.

2 digits of market share.

Sure. Okay, great. That's it for me. Thank you.

Brian Klock, Keefe, Bruyette & Woods.

Hey, thanks for taking a follow-up, guys. Carlos, I guess, thinking about the FDIC transaction, the covered loans with Westernbank, in Table O you guys actually have a lot of detail there. What I am interested in, it seems like the accretable yield -- there was obviously the increased accretion this quarter. You guys did move -- you increased the accretable yield balance.

So should we expect there to be some more, I guess, a higher level of accretion coming into the next few quarters? Probably not as high as what was in that $83.7 million this quarter, but probably higher than what it was in the third and second quarter. Does that make sense?

Brian, the complex part of this is that since we have to reclass the whole portfolio on a quarterly basis, the cash flows could change significantly in any given quarter. So it is hard to forecast this. Do you want to --?

Yes, I think the nominal dollars, I think you would expend -- just by the level yield basis you would expend the nominal dollars to come down. But we are comfortable with the yield.

We did provide 50 basis points this quarter on the yield that were for items that were loan resolutions or adjustments. But we are comfortable with the adjusted number for the next -- in the short term.

Yes. That commentary we gave on the yield, Brian, is a lot better soon and it gets a bit more -- the range gets wider as we move out in time. But for the moment I think that is a reasonable indication.

Okay. Then just thinking about the indemnification asset amortization, $45.2 million was amortized in the quarter versus $37.7 million in the third. Obviously part of that was due to some of the increased cash flow that came through in the NII, right?

Correct.

So should we be thinking about going back to a level that is closer to amortizing at about $38 million going forward for the next what, five and two-thirds quarters?

This is Jorge Garcia. I think, again, the amortization of the indemnity asset or the negative amortization is going to depend on the reclass and the changes in expected cash flows going forward. That one is a little bit harder to identify.

I would say that the closer that we get to the end of that LSA, loss-sharing agreement, the more impact those reduced losses will have. Because we need to amortize -- be able to amortize that indemnity asset through the life of the LSA, which is shorter than the average life of some of the loans (multiple speakers).

That is slightly counterbalanced by the fact that the indemnity asset is going down. So it will be two contrary effects. And really hard to forecast which one wins out, Brian. This is futile.

Right. But really we know that the amortization drag that is going through the negative fee income item, that is going to be gone by May of 2015. Right?

June 2015 for the non-single-family portion, which is the bulk.

Yes, yes, yes. (multiple speakers) accretable yield going through, because the loans are still going to have a longer life than the loss-share (multiple speakers).

That is exactly correct.

Right. Okay, great. Thanks, guys.

There are no more questions at this time. Thank you for your participation, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a good day.