Popular, Inc.

Brett Scheiner - Investor Relations Officer Richard L. Carrión - Chairman, Chief Executive Officer, President, Member of Funding Committee, Member of Pricing Committee, Chairman of Banco Popular De Puerto Rico and Chief Executive Officer of Banco Popular De Puerto Rico Carlos J.

Vázquez - Chief Financial Officer, Senior Executive Vice President and President of Banco Popular North America Lidio V. Soriano - Chief Risk Officer and Executive Vice President of Corporate Risk Management Group

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Ken A.

Zerbe - Morgan Stanley, Research Division Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division Taylor Brodarick - Guggenheim Securities, LLC, Research Division Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Good morning, and thank you for joining us on today's call. Today, I am joined by our Chairman and CEO, Richard Carrión; our CFO, Carlos Vázquez; and our CRO, Lidio Soriano, who will review our second 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 at popular.com.

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

Good morning, and thank you all for joining the call. I'd like to first address the highlights and key events of the second quarter, give an update of our U.S.

reorganization plan and provide our latest thoughts regarding the fiscal and 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 please turn to the second slide. In the second quarter, Popular earned adjusted net income of $86 million, in line with results for last quarter and well ahead of last year's second quarter.

Our reported GAAP results reflect the impact of 2 significant accomplishments: Our repayment of TARP, which includes a $414 million accelerated amortization expense; and our BPNA restructuring, which includes a $187 million goodwill write-down, both noncash charges. We continue to generate strong revenues, with capital levels above peer averages.

Tangible book value was $35.84, down from $38.71 last quarter, driven by the previously disclosed accelerated amortization expense related to our TARP repayment, partially offset by our operating earnings for the quarter. The goodwill write-down from our U.S.

restructuring had, of course, no impact on tangible book value or regulatory capital. Our adjusted margin of 4.68% declined slightly from last quarter's 4.70%, as continued improvements in funding costs and loan yields were offset by last quarter's additional recovery income from resolutions in our loan portfolio.

Our spreads remain strong relative to peers, with our Puerto Rico net interest margin up to 5.50%. Total NPAs this quarter of $956 million, including covered loans, were flat to last quarter.

Non-covered NPLs were $640 million or 3.3% of non-covered loans, up slightly from $635 million or 2.9% last quarter. Excluding the pending sales of the U.S.

regions, this ratio would have been flat. NPL inflows declined $54 million when compared to the previous quarter, mainly the result of last quarter's inflow of a $52 million Puerto Rico commercial credit relationship.

Puerto Rico mortgage inflows of $105 million were up $16 million from last quarter's $89 million. Our net charge-offs were $46 million or 94 basis points, up from last quarter's $43 million or 80 basis points from stable gross charge-offs with slightly lower recoveries.

While we continue to see steady early delinquency and NPL inflow trends, we have also seen some weakening in the financial condition of some of our borrowers, particularly in our public corporation exposure and have, therefore, adjusted our internal risk ratings accordingly. We believe our Puerto Rico public sector exposures are manageable as a percent of capital and in proportion to the rest of our loan book.

We are monitoring developments in this portfolio closely. Keep in mind that the vast majority of our direct Puerto Rico government exposure is in loans and not publicly traded securities.

On the capital management front, we reached a milestone for the company with the repayment of our $935 million in outstanding TARP funds last July 2. Please turn to Slide 3.

Last month, we announced our approval for the full repayment of TARP without a requirement that we issue additional equity. Subsequently, we completed a $450 million note offering with substantial investor interest.

These funds, along with available holding company liquidity, were used for the repayment. In addition, earlier this week, we completed the repurchase of the warrants associated with our TARP financing from the U.S.

Treasury for $3 million. Pro forma for these transactions, holding company liquidity stood at approximately $175 million.

Our liquidity position provides in excess of 2 years debt service with no maturities until 2019. Slide 3 includes pro forma capital ratios for the second quarter, excluding all $935 million of TARP funds.

Our pro forma Tier 1 capital and Tier 1 common ratios are 15.8% and 13.8%, both up 50 basis points over last quarter's comparable ratios, leaving us with a robust capital position. In addition, the market value of our remaining stake in EVERTEC is approximately $270 million and significantly exceeds our position's current book value of $22 million.

As investors, we will continue to participate in a proportionate share of the company's income. EVERTEC remains an important business partner and a valuable asset and also represents an additional source of capital flexibility and potential holding company liquidity.

The repayment of TARP better positions us for more active capital management. We expect discussions around capital return to be part of our next capital plan, which we expect to submit in the first quarter of 2015, along with our annual stress test.

Please turn to Slide 4. As we announced last quarter, we have decided to focus Popular's U.S.

mainland strategy on our New York metro and South Florida regions and have signed definitive agreements for the sale of our operations in California, Illinois and Central Florida in 3 distinct transactions. These sales are on track to close by the end of the year.

The transactions resulted in the previously mentioned goodwill write-down of $187 million in the second quarter. In addition to the sales, we have also announced plans to consolidate our Roseland, Illinois and Orlando, Florida operation center, transferring most of these support functions to Puerto Rico and New York.

This will rightsize our back office to that of the resulting bank's asset base, providing greater operational efficiency. These strategies are intended to simplify our operations, provide capital release and improve the return on capital of our U.S.

operation. We will continue to look at all components of BPNA's balance sheet to manage credit quality and capital.

As such, we expect a mix of improved profitability and capital relief to yield improved returns on capital for our U.S. business once the full restructuring is completed.

Before I turn it over to Carlos, let me comment on the Puerto Rico economy. Government actions, including pension reform, the large DO [ph] deal funded earlier this year, as well as the recently passed balanced budget, should continue to improve the fiscal outlook.

In the short term, however, measures taken to improve the government's fiscal health may decelerate the pace of Puerto Rico's economic development, though we continue to believe they are positive reforms for the long-term strength of the economy. We've operated in a weak economy for most of the past 8 years, though the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years.

While sustained economic weakness is not an ideal business condition, it does not represent an environment that is foreign to us. We're confident that our significant liquidity, excess capital levels and strong 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 demonstrated by the reduction of our exposures this quarter. It is this underwriting process and our balanced portfolio mix that gives us relative comfort in times of increased volatility.

We continue to believe the risk-reward of our Puerto Rico government position is in our favor, given the cash flow position of our exposure. While our exposure is down from the previous quarter, we will continue to selectively participate in funding the Puerto Rico government's capital needs.

This may increase our exposure to levels similar to the first quarter. 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 financial summary for the second quarter.

Please note that this quarterly data is reconciled to GAAP figures in the appendix of the slide deck, with supporting information included in today's earnings press release. As has been the case in recent quarters, our underlying performance continues to be driven by: first, stability in net interest income; and second, stable credit trends.

Variances from the first quarter result mainly from the FDIC loss share expense, covered loan provision, operating expense and income tax lines. Details of these variations can be found in our press release.

Please note that prior quarters have been restated to reflect the impact of our expected sale of 3 U.S. regions.

The results for these regions are now reported in the discontinued operations line item. On an adjusted basis, net interest income for the second quarter was $355 million, up $3 million from the last quarter, mostly as a result of additional spread for the $19 million consumer loan purchase completed last quarter, as well as slightly lower funding costs.

While the continued run-off of the covered loans negatively affect net interest income, starting in the third quarter, the repayment of TARP will reduce quarterly interest expense by approximately $13 million. Our loan portfolio was down slightly from the prior quarter on lower Puerto Rico government outstandings and covered loan run-off.

We remain hopeful that we can maintain flat non-covered loan balances through the end of 2014, excluding the effect of the BPNA region sales. 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 in our $2.7 billion covered loan portfolio increased 65 basis points to 11.83% on continued better-than-expected cash flows and resolution income.

Our funding cost also improved. Total deposit cost in the period fell 3 basis points to 54 basis points.

Noninterest income decreased by $2 million compared to last quarter as higher gains on sales of loans and other service fees were offset by lower other operating income, resulting from the fact that -- mostly from the fact that in the first quarter of last -- of this year include the previously disclosed gain from BHD's acquisition. Our Puerto Rico mortgage business originated $327 million in loans in the second quarter, up from $319 million last quarter but down from last year's $557 million.

We continue to expect an average quarterly pace of originations similar to this quarter through 2014. The second quarter's increase in the FDIC loss share expense stems mainly from additional amortization due to the effects of better experience and forecasted cash flows from the Westernbank portfolio.

With fourth quarter's potential amortization remaining on the commercial portion of our loss share agreement, the effect of any future changes on expected cash flows or losses will be magnified prior to the LSA's expiration in the second quarter of 2015. Keep in mind that any additional amortization expense, as seen this quarter, should be exceeded over time by better-than-expected cash flows through the remaining life of the covered loan portfolio.

Managing the expense out of our operations is a top priority, and we are committed to capturing every opportunity for improvement. This quarter's operating expense level reflects these efforts, although as in the first quarter, we benefited from some seasonal effects.

Total operating expenses for the quarter were down $7 million to $271 million, as expenses were lower in nearly every line item, the largest being OREO and personal expense, partly offset by higher business promotion. Our previously discussed expense range of $305 million to $310 million per quarter is no longer relevant, given the discontinued operations treatment and eventual sale of 3 of our U.S.

regions. By continuing to be subject to a degree of variability and seasonality, we now expect quarterly operating expenses to average between $285 million and $290 million.

We disclosed last quarter that our expectation of $54 million in restructuring charges is related to the BPNA reorganization. We recognized approximately $5 million this quarter.

The remaining charges of approximately $49 million will be spread over the next 4 quarters. In BPNA, the decrease in expenses from branch sales and the consolidation of the support functions in Puerto Rico will offset a comparable reduction in revenues resulting from the asset sales, but only once these initiatives are completed at the end of the first quarter of 2015.

Our adjusted tax rate for the quarter was approximately 12%, due mostly to a larger contribution to earnings from BPNA and additional excess income in Puerto Rico. While the tax jurisdiction of our sources of income and tax law changes continue to impact our overall tax rate, we reiterate our estimate of an effective tax rate of approximately 31% for 2014.

Please turn to Slide #6. 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 13.8%, excluding TARP. 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, as previously mentioned by Richard. Improvements in operating efficiency and these potential capital actions will help us move towards our target of a double-digit return on tangible equity.

With that, I turn the call over to Lidio.

Thank you, Carlos. While continuing to operate in a challenging economic environment in our main market, we are pleased to report that asset quality remains stable during the second quarter, driven by strong credit performance in the U.S.

region. In the U.S., we continue to benefit from an improving economy and the results of our derisking strategies.

During the second quarter, the BPNA segment continued to reflect strong credit quality, led by lower NPLs, lower inflows and lower early delinquency. During the quarter, the Puerto Rico region experienced an increasing NPLs, mostly mortgages, stable net charge-offs and decreases in both NPL inflows and early delinquency.

Let us turn to Slide #7 to review the details. Nonperforming assets remained flat at $956 million or 2.6% of total assets on a linked-quarter basis, primarily driven by a decrease in NPLs in the U.S.

region, offset by an increase in NPLs in Puerto Rico. In the U.S., NPLs decreased by $37 million or 36% from the first quarter of 2014, primarily driven by a $28 million reduction in commercial NPLs, reflecting the resolution of a number of nonperforming relationships and $9.5 million attributed to the reclassification of loans from the California, Illinois and Central regions to discontinued operations.

In Puerto Rico, NPLs increased by $41 million, mainly due to a $33 million increase in mortgage NPLs and an $8 million increase in commercial NPLs. As discussed in our previous earnings webcast, the increase in mortgage NPLs is mostly driven by a reduced level of outflows resulting from the bulk sale completed during the second quarter of 2013.

Our Puerto Rico mortgage exposure is marginal and losses continue to be low at less than 1% of loans. We continue to realize approximately 80% of the unpaid principal balance of default upon disposition of the property.

This is significantly better than peers in the U.S. and is one of the key reasons we feel comfortable with the exposure on risk, notwithstanding the increase in mortgage NPLs.

Please turn to Slide 8 for a summary of the trends in NPL inflows. NPL inflows, excluding consumer loans, decreased by $54 million from the previous quarter, principally driven by a $63 million in Puerto Rico commercial and construction loans, coupled with a decrease of $8 million in U.S.

commercial loans, offset in part by an increase of $16 million in Puerto Rico mortgage loans. In Puerto Rico, the decrease in commercial NPL inflows is principally the result of the classification to nonperforming in the first quarter of a $52 million relationship.

Excluding this relationship, total NPL inflows for the Puerto Rico region increased by $5 million, driven by Puerto Rico mortgage loans. In the U.S., inflows of nonperforming loans decreased by $7 million or 32%, driven by improvement in the U.S.

commercial portfolio. Please turn to the next slide to discuss net charge-off provision and allowance for loan losses.

Net charge-off for the second quarter of 2014 amounted to $46 million or an annualized 94 basis point of average loans compared to $43 million or 80 basis points in the first quarter of 2014. The increase in the quarter is primarily driven by lower levels of recoveries in the U.S.

region. In Puerto Rico, net charge-offs were $43 million or 1.09% on an annualized basis, a decrease of $3 million from the previous quarter.

The decrease is principally driven by lower losses in the commercial portfolio, offset in part by increases in the mortgage portfolio. The net charge-offs ratio decreased 7 basis points from 1.16% in the previous quarter.

In the U.S., net charge-offs were $2.9 million or 30 basis points compared to a net recovery of $2.7 million or 19 basis points in the previous quarter, reflecting the effect of significant recoveries in the commercial and legacy portfolios in the first quarter of 2014. The provision to net charge-off ratio remains stable at 108% quarter-over-quarter.

The results for the quarter are driven by the divergence in economic conditions and credit performance in Puerto Rico and the U.S. In Puerto Rico, the provision to net charge-off ratio was 173% compared to 117% in the previous quarter.

The increase reflects continued weakness in some of Puerto Rico's economic indicators, and that has impacted internal risk rating of the commercial portfolio, particularly our public operational exposure. In the U.S., continued improvement in economic conditions and credit metrics led to a credit operation of $25 million for the quarter.

The allowance for loan losses decreased by $16 million from the first quarter of 2014, mainly driven by a reserve release in the U.S., offset in part by a reserve increase in Puerto Rico. In the U.S., the $48 million reserve decline is principally driven by continued improvement in credit quality trends and the reclassification of $20 million of allowance for loan losses, attributable to the discontinued operations.

The overall ratio of allowance for loan losses to nonperforming loans decreased slightly to 82% from 85% in the previous quarter, principally driven by a decrease in the U.S. region.

The Puerto Rico region remained flat at 81% quarter-over-quarter. To summarize, during the second quarter, the U.S.

continued to reflect strong credit quality, led by lower NPLs, lower inflows and lower early delinquency. In Puerto Rico, we experienced an increase in NPL, mostly mortgages, stable net charge-offs and decreases in both NPL inflows and early delinquency.

However, in light of challenging economic and fiscal conditions, which we continue to monitor closely, we have increased our reserves. To discuss our exposure to the public operations on the Puerto Rico government, please turn to the next slide.

Our current direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $833 million, of which approximately $709 million is outstanding, a decrease of $235 million compared to the previous quarter. The decrease is mainly driven by payments received from our central government exposure, particularly from tax revenue anticipation loans and loans collateralized by property taxes.

While our exposure is down from the previous quarter, we will continue to selectively participate in funding the Puerto Rico government's capital needs. Our direct exposure can be divided in 2 main categories: Loan to the central government and public corporations and loans to municipalities.

As stated in previous webcasts, this exposure is a carefully underwritten book of business, with senior interest in the borrowing entities' identifiable revenues and cash flows. Our largest direct exposures are loans to the Electric Power Authority for $75 million and to the Aqueduct and Sewer Authority for $101 million, both are short-term facilities used to fund working capital needs.

We believe our total exposure to the central government and public corporation is manageable, representing only 6% of total Tier 1 capital. 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.

In addition to this direct exposure to the government, we also have indirect lending facilities in which the government acts as a guarantor. In the case of these loans, our primary exposure is to the nongovernment borrowers; and secondarily, to underlying collateral.

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 U.S. 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're taking to drive shareholder value. Recently implemented fiscal measures continued to be significant with a balanced budget passed for the current year after many years of large deficits.

We continue to work closely with other business leaders to offer cooperation and guidance to the government wherever appropriate. We remain optimistic about the prospects of Puerto Rico emerging from the current situation with a stronger and more vibrant economy.

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 unique 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've reached a milestone in both our TARP repayment and our ongoing U.S.

restructuring, as we are refocusing our business to improve returns, as well as operational and capital efficiency. In summary, we're driving shareholder value as we remain focused on creating revenue opportunities, while effectively managing credit, our capital and our overhead cost.

We have robust capital under existing Basel I capital requirements, which we expect to continue under the Basel III rules. 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 U.S.

operations. We look forward to reporting to you on our continuing progress.

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

I guess, first question is just around some of the noise. I know there's a lot with the discontinued operations this quarter.

And I think a lot of investors may be looking at the $11 million impact that was in bottom line earnings from the discontinued operations. Is the right way to think about that is when the branches -- when a branch sale closes in the fourth quarter, that the restructuring that you guys are doing in the mainland operations, beginning in 2015, should generate savings of $45 million?

So you're not going to see that lost income hit the bottom line as you've guided to before. Is that the correct way to think about that?

That's the correct way to think about it. Brian, our idea is once it's all done and while we think we'll get the sales done before the end of the year, there will be a little overlap while we adjust the centralized -- the functions that we're moving around.

But when the dust settles, we should have a bank that's half the size, and the net income should be roughly the same.

Right. So overall, we have return on assets, return on equity, all those metrics will be even more...

We believe there'll be some room for capital release as well.

And then that's my follow question, again, a significant amount of excess capital. I guess, is there any way that you think -- I don't know, if I can put the cart before the horse here, but the capital return in next year's stress plans is maybe something you could think about next year?

Yes. Excess capital is not a phrase we hear much from regulators these days.

But that is definitely what we'd like to do and we think we're very much in the position to do that. But as with everything, it depends on the regulators.

Wanted to, I guess, first, make sure I heard the numbers right on the guidance on the tax rate going forward. What was that number?

And then I also -- not sure I quite caught the expense go-forward as well.

The guidance on tax is consistent with last quarter. We stated that we expected the tax rate for the full year to be around 31%.

And our comment on the expenses is that, obviously, we had indicated a range of $305 million to $310 million before. But now with the effect of discontinued operations, that range has been adjusted to $285 million to $290 million.

Okay, great. And then, I guess, the other thing I was just wondering about was you're -- you obviously had a reduction in exposure to Puerto Rico government during the quarter.

But you may move -- or it sounds like you do intend to move that exposure back up. Can you talk about, I guess, what that would involve and then just any thoughts around kind of how you view the exposure you have presently in terms of -- I know it's all well-collateralized, but just how you see that -- your exposure evolving over the next quarter or 2?

Well, again, it will depend on the opportunities we see. As we said, we will selectively participate in financings when we think the risk-reward is in our favor.

So far, we think it's been that way. And the fact that it's down owes more to the short-term nature of most of our exposure, and a lot of those short-term lines got paid in the second quarter.

So we're leaving ourselves some room to increase our exposure, but nothing too far from where we were in the first quarter. Is that clear enough?

Or -- I mean, we're just going to -- we're comfortable with where we are. We think we are in a very good position, particularly in relation to our capital, and we will continue to try to participate in some of these financings.

Okay, great. And then just last follow back up on the capital plan that you'll submit next first quarter.

With your capital ratios being where they are, I guess, the assumption would be is you would have both a cash dividend and potential share repurchase request. I know Puerto Rico is still kind of healing and not growing, so there's going to be a buffer.

I guess, if you could provide any color around like how the regulators think about maybe capital ratios for a Puerto Rican bank versus a U.S. bank given the stress and the economy.

And then just kind of maybe what you'd hope to achieve from a capital ratio perspective over time?

I think -- well, first of all, I've given up on trying to figure out how regulators are going to react. But certainly, we agree that we have very solid capital ratios, and that it is our hope that we can start returning some capital soon.

But with that said, we are in the hands of regulators. It will depend on how they see the landscape at that point in time and what are the risks they see associated with Puerto Rico.

But we are comfortable with the buildup we've had. We're comfortable that we got the approval to pay TARP without additional equity.

And we're very heartened by the response to our recent issuance of the 5-year notes. So I guess, that puts us in as good a position as we'd like to be at this point.

Just had 3 questions. I guess, first, in terms of expenses, if I back out the restructuring charge, I think you're around $271 million.

That obviously is well below your guidance going forward of the $285 million to $290 million. Why was the expenses so low this quarter?

Well, almost every line had a good performance this quarter, Ken. But as you know, our expenses are not...

Linear.

Are nonlinear. They're not consistent quarter-on-quarter.

They tend to be fairly volatile. So even though this quarter is lower than our guidance, we believe we've guided to the appropriate level to think of our expenses.

Okay, great. Second question, just on the tax rate, it looks like -- if I calculated my numbers right, it looks like the tax benefit on a net basis added about $0.14 to your core EPS.

How should we think about the tax rate for the second half of the year, given that your full year guidance is 31%? Because just trying to make sure I get the numbers to match and we're backing out the right things because -- are you guiding for second half at 31%?

Or are there some other adjustments we need to may make?

What we mentioned this for the full year, so there should be some -- the numbers will be different in the second half of the year than the first half. Again, there's all the changes that have happened results from the mix of our revenues, which depend on many things.

Part of it depends on provision as well. So it is our best guess right now on where it's going to be, what we described is what we expect the rate to be for the full year.

Okay, all right. I'll follow up on that one offline.

And then my third question, just in terms of the provision expense. Obviously, the recoveries in the U.S.

have been very helpful to help offset the higher provision expense in Puerto Rico. But just given the sale of the U.S.

regions, do you guys have any thoughts in terms of what a more normalized U.S. provision expense might be, given now that sort of half your business is going away?

Well, we...

It's not half -- half our U.S. business, but...

Yes, half your U.S., Yes, of course.

No. We'll -- as you know, Ken, we try not to give forward-looking guidance on provision, and we're not going to start now, much less as our business is going into restructuring.

So we've had very good performance in the U.S, partly because in the present restructuring, we've accelerated some of the resolutions on some loans. But the bad loans do run out eventually.

First off, can you just remind us how much of that loss share is commercial in nature and thus will expire next April?

I think it's -- north of 2/3 of it is -- probably around 70% of it is commercial at this point in time.

Okay. So the loss share income, even though it jumps around...

Not the -- I'm talking about the assets that are covered. Yes, the -- so most of it is commercial.

Okay. So I mean, I guess, if you're looking at it from a modeling perspective, that loss share income that obviously would jump around a lot should be reduced and kind of trend towards 0 towards the second half of next year.

Is that correct in thinking?

Absolutely, absolutely. It should definitely trend towards 0 by the end of the second quarter, yes.

Okay, great. And then secondly, not to harp on this tax rate issue, but does the tax rate change next year after the U.S.

operations are completely -- or I guess, after that -- after the branch sale closes?

No, that should not change, no.

That 31% is good for 2015 as well?

Yes, so far. I mean, we'll try our best to lower it.

But, yes.

And then just finally, in terms of the loans that you have to PREPA and PRASA, you talked about some additional reserves based on some weakness in the economy, et cetera. Have you had to put up any additional reserves against those loans or take any sort of mark down on them?

We don't comment specifically on -- this is Lidio. We don't comment specifically to...

General reserves.

But we have -- I mean, I think our reserve cover -- adequately covers the risk that we have in our portfolio today.

I think we've hit on most of my questions. But Lidio, I guess, any commentary about, obviously, better performance on the commercial NPL inflows versus what you're seeing with the Puerto Rican consumer?

Just any other detail about the health of the consumer, how that's changing your outlook going forward for mortgage NPLs.

Could you repeat the question? Sorry...

Yes. I was just looking at the difference between the improvement in sort of the commercial NPL inflows and mortgage NPL inflows.

And it seemed like -- looking at what happened in Q2, I was just curious if anything notable happened that we're not seeing in the economic data with the Puerto Rican consumer and how you changed your outlook -- if you changed your outlook for sort of mortgage NPLs going forward as a result of that.

Nothing significantly occurred during the quarter. We -- I don't think we have changed our outlook in terms of mortgages.

It is an asset class, as we have stated, that we feel very comfortable with. Losses are low, continue to be below 1% of total loans, and nothing has significantly changed.

The question I had was regarding the process of returning excess capital. Clearly, you're not a CCAR bank where those banks supply their information to the regulators once a year and they get approval for the following 12 months.

Is it as structured for you being a non-CCAR bank, where you're only permitted to ask once a year? Or what's the process for banks your size versus the CCAR banks?

The short answer is no, it's not as structured. But the practical answer is you still are going to have to do the stress test and all of that to support whatever your doing with the capital plan.

So as a practical matter, you do it together with your new stress test. So that's really what drives it, Gerard.

It's not that, that it's as structured as the CCAR bank.

And to your knowledge, and I know this is news since, obviously, you guys just exited TARP and you haven't done this yet. But is the turnaround time reasonable?

I mean, obviously, with -- the CCAR process it is about 3 months. But is it faster for a bank your size, whereas if you submit it in 1 month, you'll get an answer within 30 days or so?

That's a good question, Gerard.

Yes. you'd have to ask them down in the -- down at the Fed.

I don't know.

Okay. And then the second question is are you guys seeing any opportunities -- and I apologize if you said this on the call, I was a little late to the call.

But are you seeing any opportunities to buy portfolios of assets, whether it's of other Puerto Rican banks or U.S. banks in markets that you want to stay in, like Florida or New York?

Well, we've been actively looking at that for, I would say, the last 18 months. And we've reported on several purchases that we've made.

And frankly, it's helped to maintain our portfolio levels. But nothing -- we just -- it's something we do on an ongoing basis, and we're very active looking at different things.

Just 2 quick questions for Carlos. One, Carlos, have you updated us, I guess, lately on what the sort of pro forma Basel III Tier 1 common ratio would be?

No. We will post this one...

In the 10-Q for the second quarter.

In the Q for second quarter, we'll have some disclosure on that.

Okay. And is it fair to think that it still might be in that 100 to 150 basis point reduction from the Basel I levels?

It'll be in the 10-Q.

And then my follow-up, I guess, in the tables -- Table O in the supplement, it looks like with some of the covered -- the Western portfolio asset quality trend is improving, you had a reclass into the accretable yield of about $142 million. So should we expect there to be -- that accretion that's going into interest income in the quarter, it had to be higher than the 79.9 that was in the second quarter?

As you know, Brian, we'll have to do the reclass of the portfolio this quarter, as we do every quarter. And as a result of that reclass, we're going to get a new number.

We would love to be able to provide a better look at what that number is. But the truth of the matter is that it changes quite a bit, and it's very, very hard to forecast what the number is going to be.

I think the good news is we've got 4 quarters to go, and our estimates will get increasingly better.

Great. Thank you, all, for being on the call, and we look forward to talking to you again in a few months.

Thanks.