Popular Inc (BPOP) 2014 Q4 法說會逐字稿

Good day and welcome to the Popular, Inc. Q4 2014 earnings conference call and webcast. (Operator Instructions). Please note, this event is being recorded. And now I will turn the call over to the Investor Relations Officer at Popular, Inc., Brett Scheiner. Please go ahead.

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 webpage at 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 pursue address the highlights and key events of 2014, then I will discuss the fourth quarter, give an update of our US reorganization and provide our thoughts regarding the fiscal and economic situation in Puerto Rico. Carlos will then comment on the quarter's financial results and Lidio will provide an update of credit trends and metrics.

Before we start I'd like to acknowledge our Vice Chairman, Jorge Junquera's 43 years of service at Popular. Jorge will be leaving as at the end of February as we recently announced. And serving as CFO of the Bank through both prosperous and difficult times, we are forever indebted to his passion, to his dedication and thankful for his many contributions to Popular.

Please turn to the second slide. This year we reached a number of key milestones in improving the performance of our bank. In July we repaid our outstanding TARP funds without raising additional equity. In August and September we completed the sales of our Illinois and Central Florida regions. And in November we completed the sale of our California region.

In addition, we have seen our credit MOU lifted, refinanced a meaningful amount of high-cost funding and sold the majority of our US legacy and classified assets. These accomplishments come in concert with improved financial results for the Company.

For the full year 2014 we reported a net loss of $309 million which includes the effects of the repayment of TARP and our US restructuring. Adjusted net income from continuing operations was a positive $305 million improving on the prior year's $256 million.

Our credit quality was stable as total NPAs including covered loans of $928 million were down slightly from $932 million at year end 2013. Non-covered NPLs increased slightly to $625 million from $598 million. NPLs to non-covered loans was 3.2% compared to 2.8% and that ratio increase is mainly due to lower loan balances as a result of our US reorganization.

Our stable credit metrics were the result of aggressive loss mitigation efforts, resolutions, restructurings and NPL sales. Our Tier 1 capital and Tier 1 common ratios at year end are 18.2% and 15.9% respectively.

If you turn to slide 3 you can see we continue to maintain our leading market position in Puerto Rico. Our franchise position us well for an eventual economic recovery on the island and also provides meaningful earnings power in the interim.

Please turn to slide 4. In the fourth quarter Popular earned adjusted net income of $81 million, down $1 million from last quarter and up slightly from last year's fourth quarter. We continue to generate strong revenues with capital levels above peer averages.

Tangible book value was $35.93, down from $36.24 last quarter, driven by a $100 million non-cash OCR charge related to pension plan accounting, partially offset by our net income for the quarter.

Our adjusted net interest margin of 4.70% increased slightly from last quarter's adjusted 4.64% on improved borrowing costs in the US and higher commercial loan yields in Puerto Rico, offset by lower spread income from our covered loan portfolio. Our spreads remain strong relative to peers with our Puerto Rico net interest income margin at 5.15%.

Total NPAs this quarter of $928 million, including covered loans, were down from last quarter's $943 million. NPL inflows increased $83 million when compared to the previous quarter, non-covered NPLs were $625 million or 3.2% of non-covered loans, basically flat from $622 million or 3.2% last quarter, helped by the fact that the $52 million Puerto Rico commercial NPL inflow which we reported in the first quarter has returned to accrual status.

Puerto Rico mortgage NPL inflows of $89 million were down $6 million from last quarter. Our adjusted net charge-offs were $50 million or 1.04%, up from last quarter's adjusted $40 million or 83 basis points from slightly higher Puerto Rico commercial charge-offs and lower recoveries.

As previously announced we are focusing Popular's US mainland strategy on our New York Metro and our South Florida regions. This quarter we completed the sale of our California operations and made significant progress on our previously announced plans to consolidate our [Roseman], Illinois and Orlando, Florida operation center, transferring most of these support functions to Puerto Rico and New York.

These efforts are on track to be concluded in the first half of 2015. These actions have simplified our operations, providing an opportunity for capital [release] and improving the return on capital of our US region.

At quarter end holding company liquidity stood at approximately $231 million. Our liquidity position provides in excess of two years debt service coverage with no maturities until 2019.

In addition, the market value of our remaining stake in EVERTEC is approximately $235 million and significantly exceeds our position's current book value of $25 million. As investors we will continue to participate in a proportionate share of the Company's income while our investment also represents an additional source of capital flexibility and potential holding company liquidity.

Our repayment of TARP this past summer better positions us for more active capital management and we expect discussions around capital return to be part of our next capital plan which will submit at the end of the first quarter of 2015 along with our annual stress test.

Before I turn it over to Carlos let me comment on the Puerto Rico economy which continues to be challenging.

Over the next few months comprehensive tax reform and the ongoing restructuring of the Puerto Rico Electric Power Authority will be the critical events impacting the fiscal and economic outlook. We also believe the recent decline in the price of oil will be a positive for the broader Puerto Rico economic environment, but it is still too early to assess the impact on our clients directly.

We have operated in a weak economy for most of the past eight years, but the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years. We are confident that our strong market position, significant liquidity, excess capital levels and internal capital generation will continue to be key to our future performance.

Lidio will expand on our Puerto Rico government exposure later in the call, but I would highlight that our selective underwriting process has provided us a senior interest in many of the borrowing entities' identifiable revenues and cash flows as evidenced by the volume of repayments we saw in 2014.

It is this underwriting process and the size of our exposure relative to our capital base that gives us comfort. Keep in mind the majority of our direct Puerto Rico government exposure is in loans, not publicly traded securities. Our reported exposure is up $84 million from the previous quarter, but down $139 million compared to last year's fourth quarter.

As we noted last quarter, in October we participated in the tax revenue anticipation note financing by the Puerto Rico government extending $100 million of principal in transaction, which will mature later this year.

This quarter we placed one of our public sector relationships with $75 million outstanding on non-accrual status. We are monitoring developments in this portfolio closely and we believe this exposure is manageable as a percent of capital and in proportion to the rest of our loan book.

We continue to believe the risk/reward of our Puerto Rico government exposure is positive and, as such, we will continue to selectively participate in funding the Puerto Rico government's capital needs.

Please turn to slide 5 as our CFO, Carlos Vazquez, discusses our financial results in further detail.

Thank you, Richard, and good morning. On slide 5 we present our adjusted financial summary for the fourth quarter. This quarterly data is reconciled to GAAP figures in the appendix to the slide deck.

As detailed in today's earnings press release, [various hits] from the third quarter affected many lines on our income statement. The largest contributor to these variances were lower loan loss provision, which was partly offset by higher operating expenses and additional income tax expense.

Please note that the results of the US regional sales are reported in the line item for discontinued operations. On an adjusted basis net interest income for the fourth quarter was $345 million, down $2 million quarter on quarter as the benefits from lower borrowing costs were offset by lower covered loan spreads.

Our non-covered loan portfolio grew $45 million compared to the third quarter. But total loans declined on covered loan runoff and our sale of legacy and classified assets in the US. We remain hopeful that we can maintain flat non covered loan balances through the end of 2015.

In Puerto Rico limited organic growth has been offset by selective loan portfolio purchases over the last few quarters. We will continue to pursue that strategy if attractive asset purchase opportunities materialize.

The average yield of our $2.5 billion covered loan portfolio declined to 9.31% from 9.95% last quarter. This decline is due to ongoing loan resolutions, repayments and the quarterly recast of the portfolio's expected cash flows.

Our funding cost improved with total borrowing cost lower by 26 basis points, partly due to the refinancing of wholesale funding announced last quarter. Total deposit cost also declined 2 basis points to 53 basis points.

Noninterest income decreased by $2 million compared to last quarter on higher MSR valuation adjustments and lower gains on sales of loans. These negative variances were offset by higher other service fees which are typically elevated in the fourth quarter by seasonal insurance revenues.

Our Puerto Rico mortgage business originated $275 million of loans in Q4 down from $340 million last quarter. For the full year 2014 mortgage originations were $1.2 billion.

The fourth quarter variance in the FDIC loss share expense line was not meaningful. But with two quarters of potential amortization remaining on the commercial portion of our loss share agreement, please keep in mind that any future changes on expected cash flows or losses could result in a magnified effect prior to the expiration of the LSA in the second quarter of 2015.

Total operating expenses for the quarter were up $8 million to $311 million. This increase was mainly due to higher professional fees driven by additional legal expenses in addition to higher personnel-related expenses. While subject to a degree of variability, we expect quarterly operating expenses to average approximately $290 million through 2015 on increased employee benefit cost and additional investments in our US business.

Our adjusted tax rate for the quarter was 16%, due mostly to larger contribution to our earnings from BPNA and additional exempt income in Puerto Rico. While this effective rate is below our 30% expectation, we are pleased to have been able to reduce our tax expense, but are hesitant to update this number until we have a better feel for Puerto Rico's upcoming tax reform.

The sale of -- sorry, please turn to slide 6. The sale of our operations in California, our third and last region to be sold, generated a net gain of $8 million, in line with previously disclosed estimates. This gain was reflected in the discontinued operations line.

As Richard mentioned, we are consolidating our Roseman, Illinois and Orlando, Florida operation centers, transferring most of these functions to Puerto Rico and New York in early 2015. We expensed $14 million of restructuring cost this quarter and expect the remaining $22 million of estimated restructuring expenses to be spread over the next two quarters.

As part of our US restructuring we completed additional loan sale transactions in the fourth quarter. BPNA sold $93 million of book value legacy and classified assets. This leaves our US region with total NPLs held in portfolio of $19 million or 55 basis points of loans, plus an additional $19 million of NPLs in loans held for sale.

Last quarter we announced the refinancing of $638 million of high-cost repo funding. While incurring a total refinancing penalty of $40 million we have already seen the beginning of the resulting savings as the US adjusted NIM increased to 3.82% from the prior period's 3.23%. The remaining $19 million portion of this refinancing penalty was expensed as part of our borrowing cost in the fourth quarter.

The BPNA strategic realignment will right size our operation and adjust the back office to appropriately reflect the Bank's size and regional presence. The related portfolio transactions have cleaned out remaining legacy credits and high cost liabilities and are intended to simplify our operations, provide capital release and improve the returns for our US business.

Please turn to the next slide. 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 15.9%, which is 110 basis points higher than the same ratio as of year-end 2013, which still included our TARP capital.

Under Basel III transitional rules taking effect on January 1 of this year we would have seen a 55 -- 59 basis point increase in our Tier 1 common equity ratio to 16.5% and a 127 basis point decrease in our Tier 1 ratio to 16.9%. We expect our capital levels to continue to exceed well capitalized requirements under Basel III guidelines.

We seek to maintain strong capital levels appropriate for Popular's risk profile and eventually pursue, with the approval of our regulators, other capital management distribution strategies. We continue to work towards our target of a [solid] digit return on tangible equity. With that I turn the call over to Lidio.

Thank you, Carlos, and good morning. Credit metrics for the quarter were highlighted by continued improvement in our US operation and stability in our Puerto Rico operations. In the US we continue to reflect strong credit performance with lower NPLs, lower net charge-off and stable NPL inflows. The improvements were led by favorable economic conditions coupled with the sale of certain nonperforming and legacy assets.

In Puerto Rico the classification to nonperforming of one borrowing relationship of $75 million from the public sector impacted the results for the quarter. Notwithstanding this classification and a challenging operating environment, credit metrics in Puerto Rico remain stable.

Please turn to slide number 8 to review the details. Nonperforming assets decreased to $928 million from $943 million in the previous quarter driven mainly by a decrease in covered loans and covered other real estate only in Puerto Rico. Nonperforming loans increased slightly by $3 million from the previous quarter driven by increasing Puerto Rico offset in part by a decline in the US region.

In Puerto Rico non-covered NPLs increased by $14 million during the quarter driven by higher commercial and mortgage NPLs of $13 million and $8 million respectively, offset in part by a reduction of $5 million in construction NPLs.

The commercial NPL increase was mainly driven by the previously mentioned $75 million public sector credit offset by the return to our growth status after a period of sustained performance of the previously disclosed $52 million addition to NPLs during the first quarter of 2014.

In the US total NPLs held in portfolio decreased by $11 million or 36% to $19 million from the previous quarter. The decrease was primarily driven by a reduction in commercial, legacy and mortgage NPLs resulting from loan resolution and the previously mentioned nonperforming loan sales.

Turn to slide 9 for a summary of the trends in NPL inflows. On a linked quarter basis NPL inflows in Puerto Rico increased by $83 million mainly from increasing the commercial portfolio due to the previously mentioned public sector credit. This increase was partially offset by a reduction of $6 million in mortgage NPL inflows. In the US, NPL inflows were flat at $10 million.

Please turn to the next slide to discuss net charge-off provision and allowance for loan losses. Excluding write-downs of $3 million associated with the US legacy and classified asset sales, net charge-offs for the fourth quarter amounted to $50 million or [annualized] 1.04% of our ratio loans held in portfolio compared to $40 million or 82 basis points in the previous quarter. The increase was primarily driven by the Puerto Rico region.

Net charge-offs were $53 million in Puerto Rico, an increase of $14 million from the previous quarter. The increase is principally driven by higher commercial net charge-offs of $13 million mainly due to a combination of our discounted payoff transaction for one relationship and from higher recoveries of $5 million during the previous quarter.

In the US that charge-off excluding the effect of the sale amounted to recoveries of $2.3 million, a positive variance of $4.1 million compared to the third quarter. The ratio of net charge-offs to average loans held in portfolio was a recovery of 27 basis points on an annualized basis compared to a charge-off of 19 basis points in the previous quarter.

The provision to net charge-off ratio excluding the impact of the sale was 99% driven by the Puerto Rico region as the US experienced a reserve release of approximately $600,000. This US reserve release was driven by continued improvement in economic conditions and credit metrics.

The [Corporation] allowance for loan losses decreased slightly by $2 million from the previous quarter driven by the reserve release in the US. The ratio of the allowance for loan losses to loans held in portfolio stood at 2.68% in the fourth quarter compared to 2.69% in the previous quarter. The overall ratio of allowing for loan losses to nonperforming loans remained at 82%, essentially flat from the previous quarter.

To summarize, the key takeaways in the quarter include stable quality in Puerto Rico and continued improvement in the US operation.

Turn to slide 11 to discuss our exposure to the public operations and the Puerto Rico government.

Our current direct exposure to the Puerto Rico government municipalities and other instrumentalities is $1 billion of which approximately $811 million is outstanding, an increase of $84 million compared to the previous quarter. The increase is mainly driven by a $100 million participation in the short-term tax revenue anticipation notes issued by the Puerto Rico government during the fourth quarter.

We divide our direct government exposure in two main categories: loans to the central government public corporations and municipalities. Our largest direct exposures are the previously mentioned $100 million exposure to tax revenue anticipation notes and loans to the (inaudible) authority of $100 million and to the electric public authority of $75 million, all are short-term facilities.

We believe our total exposure to the central government and public operation is manageable, representing only 8.7% of total Tier 1 capital. Our municipality exposure is mostly diversified portfolio of senior priority loans to a select group of municipalities whose revenues are independent of the central government.

In addition to this direct exposure to the government we also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee similar to FHA programs in the US.

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

Thank you, Lidio, and please turn to slide 12. Before we open the lines to questions let me conclude today's remarks by reviewing the actions we are taking to drive shareholder value. Our healthy revenue generation uniquely positions us to benefit from an eventual economic recovery and yields reasonable returns while the leading market position of our Puerto Rico franchise continues to allow us to sustain above average margins.

Notwithstanding ongoing stability in our main credit quality indicators in Puerto Rico, we remain attentive to fiscal and macroeconomic trends. Popular's credit risk profile is meaningfully different from the one with which we entered this credit cycle which, together with our strong capital position, improves our outlook.

We continue to benefit from our EVERTEC ownership; our stake in BHD, the second largest bank in the Dominican Republic; and the improved performance of our US operations. This year we achieved significant milestones in our continuing efforts to strengthen our operations and our outlook for future profitability as evidenced by our TARP repayment, the listing of the credit MOU and substantial progress towards the completion of our US restructuring.

In summary, we are driving shareholder value as we remain focused on creating revenue opportunities while effectively managing credit, our capital and our overhead costs. We look forward to reporting to you on our continuing progress. And with that we would like to open the call for questions.

(Operator Instructions). Gerard Cassidy, RBC.

Richard, can you share with us -- you mentioned about sending in your results for a stress test and potentially asking for capital to return to shareholders this year in the form of maybe a higher dividend in share repurchase.

We know of the process for the companies that have their results announced publicly through the CCAR. Can you share with us, and I know you haven't done it yet because you haven't asked for returning capital. But is it more give and take behind the scenes? What is the process that you are expecting to go through to give back some capital this year?

Well, I think you are right on it. It's a little less clear for banks -- for banks our size. We've been following a process that is similar to what the CCAR banks do. And last year we had a dry run in that we also submitted our stress test and with it our application for the repayment of TARP as part of our capital plan.

So we think it will be an analogous process towards that and by the end of the quarter we will submit our stress test with our capital plan.

And do you know, for example, as we all know in the CCAR, if they don't accept it for qualitative reasons, similar to what happened to Citigroup last year, they were prevented from raising a dividend or increasing their buyback. If they initially say no, the number is too high, do you get a sense that you could then just resubmit and not have to wait 12 months to resubmit?

Yes, I hope -- yes, I hope we can have a dialogue and before we make the final submission. But as you say, it is not clear what the process will be. We will try to have a dialogue, but sometimes it's more of a one-sided conversation.

Sure. Second question is, with the recent announcement from the US government about opening up relations with Cuba, have you guys given some thought of expansion? Is that a market that offers potential for Popular?

We would love to get in Cuba. I think there has been quite a lot more hubbub in the press than reality. The treasury under OFAC put out some OFAC modifications just last week and we are pouring over that.

I hope to open an office in Cuba before I retire, but at this time I don't think it's a very real possibility until some more meaningful changes are achieved in the relationship.

So I think that may be a while off but we are all over that and definitely interested. There is a lot of cultural affinity. I have visited Cuba a couple of times. We have a couple of Cubans in our top management team. So we are into it. But I think it will be a while.

And then finally, I know you touched on some of the economic issues and obviously the government issues in Puerto Rico. Is there any outside numbers that we can look at that can give us a flavor for the benefit Puerto Rico will see from these lower oil prices?

We know in the big picture it should help, but I know the Puerto Rico monthly economic indicator comes out every month, but are you aware of anything that we could keep close an eye on?

We put out a quarterly economic newsletter, but in general let me just give you the bottom line. The consumption of oil here is somewhere between 55 million and 60 million barrels a year. So you can do that math fairly easily assuming prices stay at this level, it is a significant decrease in the price of oil and it is all imported here.

I don't think of any negative impact of the decrease in the price of oil. So it is definitely helping at the pump and it will soon be reflected in your electricity prices. But what consumers do with that money, we hope they keep their loans up to date and whatever is left over they run out and buy something. But we will just have to see.

Thank you for the color. I appreciate it.

(Operator Instructions). Brett Rabatin, Sterne Agee.

I wanted to ask for a little color perhaps, if possible, on just thinking about 2015. And you gave some commentary in the prepared comments about market share and how you are sort of playing out in terms of the local economy and lending.

But as we think about 2015 and the opportunities to keep the loan portfolio flattish, are you guys any more optimistic if that is a possibility this year? Or does a couple percent shrinkage kind of feel like more of a realistic scenario for the loan portfolio?

I think our feeling is flat, but bear in mind that we have our covered loan portfolio that continues to shrink. So the shrinkage will come from the covered loan runoff. We think the rest of the commercial portfolio can remain flat to slightly increase. That is -- at least that is what we are shooting for.

Okay. And then can you give any additional color around the pension plan accounting that changed -- that resulted in the $100 million, I think it was, decrease? Was there a change in assumptions there? What kind of drove that?

Mainly two things. And I should let these guys do some work here, but I actually know the answer to this, so let me show off. One was the decrease in the rate we used to discount the liabilities, which, as you know, with long-term rates easing towards the end of the year that pulled that rate down so your liabilities go up.

And the other is the new mortality tables, which assumes we are all going to live longer, so that also increases the liability. My controller is nodding at me so I think I got it right. But that was it basically. It's -- and our plan, even based on market value, is about 85% funded right now, even with this thing.

Okay. And then everyone is waiting for the PREPA plan and the fiscal things to happen in Puerto Rico. Any color around the $75 billion credit moving to nonaccrual? How much of a reserve is set aside for that loan? And can you talk about the process of that moving to nonaccrual? Is that a function of some of the comments by the GDB recently or what led to moving that loan --?

I am going to let Lidio tackle that one, but we feel we are very adequately reserved there. But I will let Lidio go through his process.

I think it is a combination of information that we received through the quarter, the passage of time and expectations that the [public] are receiving -- all of the principal interest have diminished over the last -- since the last quarter.

Okay. And then just one last related question around that. Are you guys thinking about -- you talked a bit in the past about potentially increasing your exposure to some of these entities if the terms were right. Has that changed any?

No. I think the key word there, Brett, is selectively. I mean, if we like the credit, if we like the tenor and we like the terms we are going to come in. But we are very mindful of having a lien on revenue sources and making sure we get repaid. But we want to be helpful at this time, but definitely need to be mindful of the fiscal situation. But we will selectively participate, yes, as we have recently.

Okay. Great, thank you for all the color.

(Operator Instructions). Taylor Brodarick, Guggenheim Securities.

Firstly, I guess the restructuring in the United States, does that -- is there going to be -- allow you to deploy more resources to the New York Metro and South Florida markets that you were previously stuck with in Illinois and California? Or kind of I guess is it just more of kind of lower expenses from the consolidation of those operations? Just kind of wanted a refresh on your feeling.

Well, hopefully a little of both. I mean our intention is to focus on those two markets and hopefully we will grow organically and eventually there may be some opportunities there, as well as lowering the expense base. And we think we are almost home on that last point. By bringing a lot of those central office functions to Puerto Rico, we think we will lower that expense base substantially.

Okay, great. And then on the FDIC loss share asset, just maybe remind us sort of your thinking of that as you approach the five-year anniversary of that deal. Are we expecting the -- I know you can't forecast the cash flows, but what you are thinking of that expense in the next two quarters. Are we going to see a spike or what?

Really we can't tell you. I mean I should let Carlos tackle this one. But it really is something quarterly. We have to look at the cash flows, do the recasting, check our collections and see where we are with the idea being that EIA goes to zero as of June 30. But --.

Right. The commercial part of EIA will go to zero at the end of the second quarter. We are working (multiple speakers).

Whether we like it or not, hopefully (multiple speakers).

(Multiple speakers). We are working very diligently to management that portfolio to the best of our abilities and we think we are on track to do that. As you have seen [the IA] goes down every quarter, we see payments as well from the FDIC, they're bringing it down. So we believe we are on track to achieve successful management of that.

Great. Thank you both. Appreciate it.

(Operator Instructions). Brett Rabatin, Sterne Agee.

Just wanted to follow up maybe on the expense run rate as you guys go through this year. I mean the $290 million guidance, I guess the first thing I was curious about was from an ORE expense perspective would that assume that number kind of stays flattish going forward?

And then I guess secondly, are you guys going to have any leverage do you think going forward in the professional fees bucket, especially post the fourth quarter?

Well, yes, we had a bunch of special things in the quarter and that is definitely not our run rate going forward. But I will let Carlos get into it.

Yes, to the first part of your question whether it is going to be pretty flat, I can assure you it is not going to be flat. It will vary all around the number we have indicated, as has been if you look at our history of the last four quarters or even more, we do have a fairly volatile expense line.

We do -- we will continue to work to make that lower obviously, so we are hoping that it can be lower than that. But our best guess right now is in the ballpark that I mentioned of roughly $290 million on an average basis, quarterly average basis for the year as a whole.

So it may move up and down as it did this quarter. If you compare this quarter to the first quarter of this year, it's a big difference. Similar movements may happen, but we expect to be in that ballpark.

We had some higher legal expenses and some comp expenses this year in addition to the ORE. So I think our target is that, it is in that $290 million range is what we want to keep it to.

Okay. And again, I know the ORE is difficult to predict.

Lumpy, yes.

But would that number not seem poised to move down [SOI] over the next few quarters or --?

That number has been very sticky and hard to bring down. And part of it is because we still have a lot of work out activity going on with the Bank linked to the -- part of it linked to the covered loan portfolio. And also because we are still -- the biggest part of the Bank still operates in an economy that is fairly challenged.

So a number of our US peers have a tailwind that helps them in the ORE because the underlying market is improving. We don't have that tailwind. So that ORE expense number, number one, as Richard mentioned, is lumpy, but it is sticky on the way down.

Okay. Thank you.

Brian Klock, Keefe, Bruyette, Woods.

The guy actually asked most of my questions already on the expense side. I guess thinking about in BPNA -- and I'm sorry I had to jump on a little late on the call, so I am sorry if you guys talked about this already. What are you guys thinking about as far as seeing an inflection point I guess for loan growth coming out of the BPNA segment in 2015?

Well, we are focused on a couple of markets now and a couple of particular loan segments, but we do expect some growth in the US in the commercial inside, absolutely.

Okay. And I guess do you think that's something that maybe we will see that maybe the back half of the year, maybe as some --.

Hopefully you will see it in the first quarter. We are seeing good growth there.

There is a combination, Brian, of a lot of focus now on the two regions where we are operating and the fact that the anchor of we used to have a much larger portfolio that included Illinois, Central Florida and California that had a higher rate of pay offs.

So even when the originations were fairly good, if you didn't see it in balances because the payouts were fairly fast as well. And some of that has gone away with the sale of the regions. So the combination of the two things, as Richard said, we should start seeing some growth.

Okay. And I guess is there any -- and thinking about the quarter-to-quarter drop, the $136 million that you show on slide 18, now is that again just -- you have got -- you are out there making loans, you just -- right now you have got pay downs coming in that narrow it a little bit faster?

Yes.

Yes. Yes, absolutely.

We also had the sales this quarter.

That is right, thank you.

Non-performers.

Non-performers on the --.

Legacy stuff in the US.

Legacy stuff.

That is right, thank you. I forgot about it. Thanks, guys. Thanks for taking my questions.

Alex Twerdahl, Sandler O'Neill.

I was wondering if you guys could expand a little bit or talk a little bit about the proposed tax overhaul down in Puerto Rico, what it means to the island. And then also specifically if there is anything in there that would affect your tax rate in 2015 or beyond?

Well, again, we know what we hear in the press and what we pick up from the people we know. We think the overall thrust of the program is to increase consumption taxes and to decrease income taxes both at the individual and the corporate level.

However, the consumption tax is a value added tax, which is -- would be a whole new regime and it is not clear yet how that will impact us, which is why we were reluctant to give you any guidance on a tax rate where it is -- there's some gross profit tax that was put in place two years ago that is slated to go away and income tax rates should come down both again at the corporate and the individual level.

But how the value added tax will impact us is not clear. This has to go through a legislative process and it is a contact sport as it is in many places. So it is not at all clear. Hopefully it will be clear by the end of the quarter.

Okay, thanks. And then just can you remind us what kind of -- you talked about loan growth in North America. What kind of loan growth in the New York area are you putting on? Is it commercial or is it commercial like multi-family stuff that is pretty easy to grow rapidly should you have the desire?

It is commercial. There is some multi-family there, but frankly not much. The rates are not really to our liking, but that is as far as I can go. But it is mostly commercial, yes.

I mean the rates are pretty low for the multi-family I know --

Yes.

-- but you must have maybe an advantage being that you don't really pay income taxes in North America. That doesn't make them more attractive to you?

Well, you know, again you have just got to look at the rate and see if it makes sense. Whether you pay tax or not I -- we will assume that this is a -- just look at that rate and see if you want to keep that paper for seven years and that is the way to look at it and not on a tax or tax-free basis.

Okay, great. Thanks for taking my questions.

(Operator Instructions). This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.