Brett Scheiner - Investor Relations Officer Richard Carrión - Chairman and Chief Executive Officer Ignacio Alvarez - President, Chief Operating Officer and Director of the Corporation and Bank Carlos Vázquez - Executive Vice President and Chief Financial Officer and President, Popular Community Bank Lidio Soriano - Executive Vice President and Corporate Risk Officer, Corporate Risk Management.

Brian Klock - Keefe Bruyette & Woods Brett Rabatin - Sterne, Agee Jordan Hymowitz - Philadelphia Financial Gerard Cassidy - RBC Ken Zerbe - Morgan Stanley Daniel Hung - Knighthead Capital Alex Twerdahl - Sandler O'Neill Dan Oxman - Jacobs Asset Management.

Good morning, and welcome to the Popular, Inc. third quarter 2014 financial results conference call. (Operator Instructions) I would now like to turn the conference 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 Carrión; our President and COO, Ignacio Alvarez, our CFO, Carlos Vázquez; and our CRO, Lidio Soriano, who will review our third quarter results and then answer your questions.

They will be joined in the Q&A session by other members of our management team. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings, our financial quarterly release and supplements. You may find today's press release and our SEC filings on our 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 third quarter, give an update of our U.S. reorganization plan and provide our thoughts regarding the fiscal and economic situation in Puerto Rico.

Carlos will comment on the quarter's financial results, and Lidio will provide an update of credit trends and metrics. Before we start, I'd like acknowledge our recently appointed President, Ignacio Alvarez. Ignacio joined the Popular's General Counsel in 2010, and has made important contributions to our strategic initiatives in these past few years.

As President and COO, he will continue to provide strategic and operational guidance to our senior management team. Ignacio passes the baton to Javier Ferrer, who we welcome as our General Counsel.

Javier joins us with 30-years of experience as a corporate law and banking attorney, in addition to being the former President of a Government Development Bank of Puerto Rico. We're confident that his contributions will be meaningful as a member of our team. So with that, please turn to the Slide 2.

This quarter 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 closed the sales of our Illinois and Central Florida regions. Since then, we have refinanced a meaningful amount of high cost funding in our U.S.

region, and sold a majority of the remaining U.S. legacy and classified assets. We have also reached an agreement with the FDIC over our previously disclosed arbitration, regarding our Westernbank loss sharing agreement, resolving our dispute with no meaningful financial impact to Popular.

In addition, as evidenced of the progress we have made on the credit front, we are pleased to announce that as of today the credit related MOU, which we had agreed to with our regulators in 2011, has been lifted. These accomplishments come in concert with another stable quarter for the company.

In the third quarter, Popular earned adjusted net income of $91 million, up $4 million from last quarter and well ahead of last year's third quarter. We continue to generate strong revenues with capital levels above peer averages. Tangible book value was $36.24, up from $35.84 last quarter, driven by our operating earnings for the quarter.

Our adjusted net interest margin of 4.64% declined slightly from last quarter's adjusted 4.68% on lower spread income from our covered portfolio. Our spreads remain strong relative to peers, with our Puerto Rico net interest margin at 5.25%. Total NPAs this quarter of $943 million, including covered loans, were down from last quarter's $956 million.

Non-covered NPLs were $622 million or 3.2% of non-covered loans, down from $640 million or 3.3% last quarter. NPL inflows declined $24 million when compared to the previous quarter, with improvements in both Puerto Rico and the U.S. Puerto Rico mortgage inflows of $95 million were down $10 million from last quarter.

Our adjusted net charge-offs were $40 million or 83 basis points, down from last quarter's $46 million or 94 basis points, mostly from recoveries. As previously announced, we have decided to focus Popular's U.S. mainland strategy on our New York Metro and south Florida regions.

In addition to the sales of our operations in Illinois and Central Florida, we made progress on our previously announced plans to consolidate our Roseland, Illinois and Orlando, Florida operation center and to transfer most of the support functions to Puerto Rico and New York. These efforts will be concluded in the first half of 2015.

In looking to actively manage our U.S. balance sheet, we also refinanced a large balance of high-cost wholesale funding, and contracted to sell the majority of the remaining U.S. legacy and classified assets. These actions have simplified our operations, providing an opportunity for capital release and improving the return on capital of our U.S. region.

As previously announced, we repaid our $935 million in outstanding TARP funds on July 2, without raising additional equity. The transaction was funded with existing holding company liquidity and the proceeds from a $450 million senior note off. At quarter end, holding company liquidity stood at approximately $225 million.

Our liquidity position provides in excess of two years debt service coverage with no maturities until 2019.

Our Tier 1 capital and Tier 1 common ratios are 16.9% and 14.8%, respectively, both up 100 basis points over last quarter's comparable ratio, leaving us with a robust capital position under Basel I, which we expect to continue under the Basel III framework.

In addition, the market value of our remaining stake in EVERTEC is approximately $250 million, and significantly exceeds our position's current book value of $24 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.

The repayment of TARP better positions us for more active capital management, and we expect discussions around capital return to be part of our next capital plan, which we 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 reforms and the ongoing restructuring of the Puerto Rico Electric Power Authority will be critical events, impacting the fiscal and economic outlook.

We have operated in a weak economy for most of the past eight years, thought the strong revenues generated by our Puerto Rico Bank have produced positive earning 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've seen so far this year.

It is this underwriting process and the size of our exposure relative to our capital base that gives us comfort in times of increased volatility. Our reported exposure is up $18 million from the previous quarter, but down $217 million from the first quarter.

Additionally, after quarter end, we participated in the recently announced tax revenue anticipation loan financing by the Puerto Rico government, extending $100 million of principal in the transaction.

We continue to believe the risk-reward of our Puerto Rico government exposure is in our favor, and as such we will continue to selectively participate in funding the Puerto Rico government's capital needs and may increase our exposure opportunistically. 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, not publicly-traded securities. 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.

Please turn to Slide 3, as our CFO, Carlos Vázquez, discusses our financial results in further detail..

slightly lower net interest income; a smaller reserve release in the U.S.; a significantly lower FDIC loss share expense; better mortgage banking results; higher OREO expenses; and lower taxes. Please note that the results of the sales of the U.S. regions are reported in the discontinued operations line item.

On an adjusted basis, net interest income for the third quarter was $347 million, down $8 million, as lower covered loan spreads offset the benefit from our TARP redemption. Our loan portfolio was down slightly from the prior quarter on covered loan runoff and the sale of legacy and classified assets in the U.S.

We remain hopeful that we can maintain flat non-covered loan balances through the end of 2014. While it's still preliminary, our estimates for 2015 are consistent with our 2014 experience of stable loan balances for the year, excluding covered loans.

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 on our $2.7 billion covered loan portfolio declined to 9.95% from 11.83% last quarter.

This decline is due mostly to the extension of the average expected life of some commercial loan pools. This means that for the affected loans, we expect to collect more income over a longer period of time. These changes in cash flows partly explain the increase in accretable yield for future periods shown on Table O of our press release.

Our funding costs were stable. Total deposit costs in the period were up 1 basis point to 55 basis points. Net interest income increased by $46 million compared to last quarter on lower FDIC loss share expense and increased income from mortgage banking.

Our Puerto Rico mortgage banking business originated $314 million in loans in Q3, down from $227 million last quarter. We continue to expect the average quarterly pace of originations similar to Q3 through 2014. This quarter's mortgage banking line benefited from lower loss on hedging activities and a lower valuation adjustment to our MSRs.

The third quarter's large decrease in the FDIC loss share expense, that's mainly from the elevated amortization expense present in the second quarter, which resulted from lower loss estimate in that period.

Please keep in mind that with three quarters of potential amortization remaining in the commercial portion of our loss share agreement, the effect of any future changes on expected cash flows or expected losses will be magnified prior to LSAs expiration in the second quarter of 2015.

Total operating expenses for the quarter were up $31 million to $302 million. This increase was mainly due to higher OREO expenses stemming from our ongoing workout activities. In addition, unfunded commitment reserves increased by $6 million, and personnel-related expenses reverted to the levels experienced in the first quarter.

While subject to a degree of variability and seasonality, we continue to expect quarterly operating expenses to average between $285 million and $290 million. We plan to update this range, once the consolidation of our U.S. operation is completed in the second quarter of 2015.

Our adjusted tax rate for the quarter was approximately 4% due mostly to a larger contribution to our earnings from BPNA, additional exempt income in Puerto Rico, and the release of prior year's tax reserves. Please turn to Slide number 4. As previously announced, we have decided to focus our Popular's U.S.

mainland strategy on our New York metro and South Florida regions. The sales of our operations in Illinois and Central Florida generated a gain of $26 million, reflected into discontinued operations line, and in line with previously disclosed estimates. We continue to expect the sale of our California operations before yearend.

As Richard mentioned, we have also announced plans to consolidate our Rosemont, Illinois and Orlando, Florida operation centers, transferring most of these support functions to Puerto Rico and New York in early 2015.

We expensed $8 million of restructuring cost this quarter, and expect the remaining $41 million of estimated restructuring expenses to be spread over the next three quarters. As part of this restructuring effort, we have completed additional transactions this quarter.

First, we have contracted to sell nearly all the remaining legacy and classified assets at BPNA, representing $225 million in book value for a loss of $12 million. This leaves our U.S. region with total NPLs of $30 million or less than 1% of loans at quarter end. Second, this quarter we refinanced $638 million of high-cost repo funding.

While incurring a total refinancing penalty of $40 million, we expect meaningful savings starting this quarter given that the average cost of this refinance funding exceeded 4%. $41 million of the refinancing penalty was expensed this quarter with the remainder coming in the fourth quarter.

When completed, the BPNA strategic realignment will right size our operation and will adjust the back office to appropriately reflect the bank's new size and regional presence.

These transactions clean out remaining legacy credit and high-cost liabilities, and are intended to simplify our operations provide capital release and improve the return of our U.S. operation. 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 14.8%. We expect our capital levels to continue to exceed well-capitalized requirements under the 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 and distribution strategies through the process in the timetable previously mentioned by Richard.

Improvements in our 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'll turn the call over to Lidio..

loan to the central government and public corporations; and loans to municipalities. Our largest direct exposures by loans to the Aqueduct and Sewer Authority of $100 million and to the Electric Power Authority of $75 million, both are short-term facilities, used to fund working capital needs.

During the quarter, as far as the banks indicate, we extend that until March 31, 2015, with a positive revolving line of credit used to paid for the purchase of power, fuel and other expenses. We believe our total exposure to the central government and public corporations is manageable, representing only 6.8% 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 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 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 the last Slide. Before we open the lines to questions, let me conclude today's remarks by reviewing the actions we're 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 U.S. operations.

This quarter, 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, the resolution of the FDIC arbitration and substantial progress towards the completion of our U.S restructuring.

In summary, we're 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, let's open the call for questions..

(Operator Instructions) Our first question will come from Brian Klock of Keefe Bruyette & Woods..

My first question is around capital. And thinking about just overall, this year you guys have been pretty busy, but I think when you talk about from the crisis, I think you've done a great job in derisking the balance sheet, building core capital, looking to profitability and returns.

You guys have improvement in both Puerto Rico and the streamlined U.S. operation, the 2% pre-tax pre-provision. I guess thinking about that core earnings power, the generation of internal capital that you have and almost 15% Tier 1 common ratio.

I guess, how should we think about maybe magnitude or what kind of level of Tier 1 common do you think you could operate with this stronger and more profitable franchise going forward?.

We will be submitting, as I mentioned, our plan toward the end of the first quarter together with our stress test. We think our operating targets are well below what we have now, and wait until we submit it and get some feedback from the regulators before we get into specifics.

But we certainly think we have a much better balance sheet, a very, very strong capital position that we did a few years ago, and hopefully that will put us in the good position to start returning some capital..

And then, really, so the plan then would be to talk about capital return as part of that DFAST stress test?.

Absolutely..

And just a follow-up question. The actions in the U.S. franchise, again, the streamline that make that more profitable.

My question is for Carlos, can you give us an idea on the funding, the structured repos that we're refinanced, what did the replacement funding cost approximately?.

Most of them were refinanced short-term, Brian. But we are in the middle of adjusting our balance sheet, as we strengthen in the U.S. So the fact that those specific liabilities will refinance short-term, does not mean that's where they're going to end up.

But the specific answer to your question, they will refinance short-term, but we will continue to tinker with the balance sheet as the bank strengths, and we end up closer to what we think is going to be steady state late this year or early next year..

Bear in mind, Brian, we still have to close on the California sale. We were hoping to do that in the fourth quarter, so we're keeping our options open there..

So I guess, Carlos, just on that borrowings, we should probably see something that's whatever those replacement costs. In the near-term it's definitely a lot cheaper than the [ph] 441 cost that was costing you before..

Absolutely..

And that may go up maybe into later in the fourth and first quarter, as you replace that with something that's more permanent financing?.

Correct. But it is very short-term, right now..

And maybe long-term the reality is there is still going to be something that's going to be a benefit to the margin or the bottomline even with the long-term permanent financing?.

Yes..

And the next question will come from Brett Rabatin of Sterne, Agee..

I wanted to, I guess, first just talk about the economy and a lot is being made in the U.S. about energy prices and what that affect that might have on energy lenders.

But I'm curious, you guys didn't really talk about, you mentioned PREPA, but didn't really talk much about if you kind of foresee any benefit from lower oil prices potentially easing that situation any? And then you gave some economic color, but I was just kind of hoping for any incremental data that you guys might provide that would give us some insight into potential positives over the next six months or so?.

You mentioned the old price, and clearly those decreases will have a positive impact. We think a very important event over the next six months will be that restructure of PREPA and how that plays out.

They still have a very high reliance on oil, so we do expect it to have a positive impact on the price of energy, but the PREPA restructure is one of the big events. The only additional color, I guess, we can give you, we see some areas of improvement, nothing dramatic yet, but you've seen our credit trends. We just need to get more investment here.

All these measures that the government takes to balance the budget has a dampening affect in the short-term, although we think longer-term they will prove to be significant. What we hear on tax reform is more of a shift towards consumption of taxes and away from the income side, and hopefully that will be positive from a business point of view.

But we just have the outlines of that, nothing definitive yet, but their plan is to make it effective January 1, 2015..

And I wanted to ask about the loan and purchases, just what you did in the quarter, and then just kind of discuss a little bit about your appetite for that going forward, and kind of how you think about what you might be looking at from that perspective?.

We didn't have any loan purchases this quarter. We did in the first quarter acquire a couple of loans. But I guess our view is we have this platform and if we find the right credit metrics, we can add them to our platform with very little additional cost, and it makes a lot of sense to us if we're comfortable with the credit.

We've done that primarily in the mortgage area and quite a few in the consumer loan area, where we're very happy with the credits. And again, we know we have the scale economies to make that work..

And then I guess just coming back to the capital question, with the lifting of the MOU, can you maybe discuss your appetite for M&A whether U.S.

or Puerto Rico based, and maybe your optimism on that as well?.

Well, we are always on the lookout for opportunities. Naturally, there is nothing right now, and if there was -- I've got two lawyers now staring down at me. But as we say, we would focus on the New York and south Florida regions, and if anything shows up in Puerto Rico we'll deal with that too..

Our next question will come from Jordan Hymowitz of Philadelphia Financial..

Two questions. One, my understanding is there is no state or commonwealth more reliant on imported energy than Puerto Rico.

So the falling oil price would have a dramatic positive impact in the economy down there, wouldn't it?.

It should have a positive impact. So a lot of the energy is still oil-based. So it should absolutely have a positive impact, both on the cost of energy and the price of gas for driving around. So yes, it should be positive..

I would think so because, for most of the past year, I've been getting calls, short Puerto Rico because oil is going through the moon, but now that it's going the opposite, I haven't gotten a single call on what the benefit is to Puerto Rico. And you guys did a great job even when oil was going up..

I haven't looked at these numbers recently, so don't hold me to them, but it is in the range of 60 million to 70 million barrels a year in oil consumptions. So you can do the math..

60 million to 70 million?.

Yes..

My second question is do you think there's any limit on concentration within Puerto Rico of the banks?.

Yes. They have something call the HHI, Herfindahl-Hirschman Indices. And yes, there is that, but we're still in two digits. So I think we're okay..

My question is, is there anything preventing you, should you be the successful winner do you think of acquiring the Scotiabank franchise in terms of limits on concentration?.

Well, Scotia has vehemently denied that they are selling the Puerto Rico operation. So I don't think that one is in the cards..

But if they decided to, because some times people do things they say they're not going to do.

Would there be any reason concentration-wise you couldn't acquire?.

It would be difficult for us by ourselves on the deposit side, without a doubt, unless somebody else were an acquirer, it'd be difficult for us on the depositor side..

The next question will come from Gerard Cassidy of RBC..

Regarding the capital return process, clearly the top-30 banks in the United States go through a very formal process with CCAR. They submit their plans first week of January. We hear the third week of March, if they're approved or not.

Do you know what your process is? Is it that formal? And when should we hear?.

That's a good question. So I'll let Carlos answer the hard part. But the short answer is that there really is no very clear process, so we do it in conjunction with the stress test..

We are required to file the stress test in the first quarter. For a bank our size, there is no official requirement that we simultaneously file the capital plan.

But it is our belief that any intelligent discussion with the regulators regarding capital will need to be anchored on the stress test, and that is why we are planning to pursue it in conjunction with that..

And do you have a sense that whatever amount you ask for, that you would prefer more of the return of capital to shareholders to come in a share repurchase plan due to the fact your stock is trading where it is relative to the tangible book and the stated book versus a giant dividend increase?.

We don't have a view on that right now. That view will come in conjunction with our discussions with the regulators..

We talk about it quite a bit internally though..

I just wanted to go back to the financing, the long-term financing going to short-term financing that you guys discussed. It wasn't clear to me.

Is that a temporary, until the California franchise is sold, that you will then after it's finished, it closes, you'll go back to a long-term financing solution at a lower rate or will you keep the short-term financing repo on your books?.

Gerard, the repos we -- they were long-term repos, when they were contracted, that does not mean that the term left on the repos that we refinance was very long. It was a couple of years. It was not very long. But when they were contracted, they were long-term repos.

So we did not significantly change the liability profile of the bank, we just adjusted the liability profile a little bit. In part together with the whole restructuring of the bank, not only will we sell liabilities and assets, we'll also be rightsizing the rest of the balance sheet including things like the investment portfolio.

So what we are doing is taking steps to have the right alpha position for the bank in the U.S. given what its going to look like, when it ends. As you know historically, we have not taken very significant views on our balance sheet on interest rates, and that continues to be the way we manage our business..

And my final question is on EVERTEC clearly in monitorizing that position during the restructuring it helps you get through the restructuring, paying back TARP, having the MOU listed.

What would prompt you to decide to sell the remaining portion of that?.

Again, strategically we think it's a good asset for us to own. We like their prospects. If we think there is a need for additional capital, there is something there that we have that we can monetize in one day, so we're comfortable with that.

We still are their largest client as well as their largest shareholder, so it does have a strategic element to it, but we do have that, it also gives us the flexibility. I don't know do you guys want to add something? I want Ignacio to have a speaking part here..

Nothing to add..

Actually, one final one. On your credit ratings, clearly, you executed your turnaround plan very successfully and Fitch and S&P have you on stable outlook. Moody's is still negative.

Do you know when Moody's will come back to you for another review to maybe reassess their outlook?.

Probably in the beginning of next year, and I suspect the Puerto Rico is weighing on their minds, hopefully this listing of the credit MOU will give them some comfort. But I still think that it's the sovereign that's weighing on their mind..

The next question will come from Ken Zerbe of Morgan Stanley..

Just two questions for you. First, in terms of OREO expense, it looks like it was just under $20 million this quarter. I think $6 million of that was related to the covered portfolio, if I'm not mistaken or $6 million of the increase.

Could you give a little color on what drove the rest of the increase and what that was related to? And do you expect that to actually decline to get back to your sub $300 million expense guidance?.

This is Lidio. I think the increase was a combination of having unusually low number in the second quarter, that was driven by gains on some of the properties that we sold during the quarter combined with a higher number this quarter downtrend that were driven by losses on some of the sales that we completed during the quarter.

The change in gains during the quarter from the third to the second was related to gains were $10 million. A lot of that's driven by, we sold certain of our properties through auction process during the third quarter. We think as we continue to move forward, they should move back subsequently..

So to get back down to the $285 million to $290 million, it's reduction in OREO or something else in expenses?.

No, that guideline is not directed to any one line on the expense lines, Ken. It's a summation of the effect on different lines. Obviously, if this number goes down, it will help get closer to that range, but it's not this numbers specifically..

There will be noise in it. And as Carlos mentioned earlier in the call, once we do the restructuring, we'll recalibrate that and market down some more..

And then the other question I had, just in terms of loan growth, I thought I heard you guys saying that you expect stable loan balances for the year, where I'm just looking at the numbers, and maybe I am missing some of it, so it looks like loans are down over a percent, now x covered, of course, just quarter-over-quarter and down 9% year-over-year.

What part of this is going to be stable and am I comparing it, whatever you comparing that too?.

I think we're talking stability from here on in that we expect the non-covered portfolio to remain at this level. And although preliminarily, I think Carlos stuck his neck out a bit and said we expected to remain stable for 2015..

But keep in mind that some of the recent -- it's a bit dangerous to annualize this quarter, some of the recent loans came down is because of the sales we discussed in the U.S. And then there is also flipside things that are happening as both Richard and Lidio mentioned.

We participated for $100 million in transaction for the government, so some loan balances will be up as well. So just be a touch careful in just annualizing minus $200 million or something because that might not be the right point of doing..

And then outlook for stable in 2015, also assume that includes purchases?.

Yes..

The next question will come from Daniel Hung of Knighthead Capital..

I just had a quick one on the tax rate. It looks like effective tax rate has been fairly low over the last couple quarters.

Do you expect that to continue or normalize over the ensuing few quarters?.

We were betting when this one would come up. Well, let Carlos take it..

I mean the tax rate is, as we look forward and we estimate what's going to happen in the quarters moving forward, our best estimate continues to come up with the tax rate that is something in the ballpark around 30%. The reality is that that is when we estimate forward, just the way it looks, and then in any given quarter, a lot of things happened.

In this quarter, for example, we had a change in tax rate relations that affected the rate. We had to closeout for prior periods. Sometimes that affected the expense up, this time it happened to affect it down. We have the creation and release of tax reserves. This quarter it happened to be a release.

The mix of our income changes when we have more income in the U.S. versus Puerto Rico, obviously the U.S. doesn't pay taxes. So to answer your question when we look forward and we do our best estimate, we still come up with something that looks around 30%, but the actual outcome actually changes, because all the things occur on the path there..

I guess the short answer is we budget for 30% and then spend the rest of our time figuring out how to knock it down, but that's the number we use..

The next question will come from Alex Twerdahl of Sandler O'Neill..

Just going back, Lidio, to some of the big picture credit outlook on the island, can you talk some more about the qualitative factors that go into the reserve? And given that the credit metrics seem to be moving in the right direction, NPLs down, inflows down, net charge-offs down, is it really necessary to provide well in excess of net charge-offs still?.

The allowance is a function of credit quality, it's a function of losses, it's a function of the loan portfolio and it's a function of the environment in which we operate. So when we do an analysis and we make determinations, we take all of that into account.

We are hopeful, as we continue to have stability in some of our credit indicators, that there wouldn't be a need in the future, to be providing so much in excess of net charge-offs..

And then just can you talk anecdotally, when you have OREO loans that you send to auction, can you talk about the pricing today versus maybe a year ago? And also how many more buyers there might be today for some of these properties and who some of those buyers might be?.

I will say, I mean generally in Puerto Rico prices have trended down slightly over the last two or three years and that has continued to be the process. I think in terms of whatever we're obtaining in the auction that would be main information that we can follow-up and provide you with additional details through Brett..

The next question will come from Dan Oxman of Jacobs Asset Management..

So I have a follow-up question, maybe ask it a little different on credit. So I noticed that the reserve ratio over the last year has increased despite lower overall NPAs and classified.

So could we possibly see perhaps a BPPR NPA liftout in the near term?.

Could you repeat the question again, I'm sorry..

What do you mean list out?.

Well, NPA sale in the Puerto Rico segment..

I mean, we evaluate every alternative available for us as organization, and we have not come up with a decision to embark in such actions. When we have the transactions to come in, we will, but so far we haven't..

Yes, we're not working on it..

And then a follow-up on the tax question.

What was the income contribution before taxes, excluding the restructuring costs for both BPNA and BP Puerto Rico segment? It looks like your adjusted result was $85 million, so how do we split that given that the US portion is not taxed, but the Puerto Rico is I believe at 35%?.

We have our controller shuffling papers here..

From the continuing operation the benefit for the U.S. operation was about $41 million and that will be the adjustment that you will make. I think the GAAP loss from continued operations was the $12 million loss for the U.S. segments, so you would add $40 million to that. And obviously that's going to have a tax impact given the DTA.

And as far as Puerto Rico, you actually have a reduction in the contribution of $12 million on a pre-tax basis..

So what was a contribution from Puerto Rico on a pre-tax basis?.

Pre-tax, it was an $93 million of pretax..

And then so the lower expenses when the $285 million to $290 million will that increase Puerto Rico's portion?.

It will increase Puerto Rico's portion in the sense that we'll have around two-thirds of the centralized FTEs will be located in Puerto Rico for the U.S. operations, but overall it should come down..

And they will be charged?.

Yes, they will be charged for the U.S..

And the next question will be a follow-up from Brian Klock of Keefe Bruyette & Woods..

My follow-up questions for Carlos. I mean, I guess probably try not to get into the nitty-gritties of this, but can you talk about the adjustments made on the covered loan net interest income? It did sound like that the estimated cash flows are increasing, but you made some adjustments with a one-time settlement..

We're going to have to charge you extra for multiple questions, Brian, but I'll let [indiscernible] comment on that..

We look at the estimated cash flows of particularly commercial loans in this case and extended the life of those cash flows by about six months. So there is a lot of current and paying loans, so we're just eventually collecting more interest income over a longer period of time..

So conceptually you move some of the expected income from this quarter to the next two or three quarters, Brian. [Multiple Speakers] The future quarters..

And I guess, when I look at Table O in that row forward of the accretable yield, there was another $97.8 million that was actually reclass, looks like kind of the non-accretable difference into the accretable yield.

So should I be thinking about the accretion that went through the non-interest income this quarter of $66 million, should that number go higher, because you've get more accretable yield to accrete over the next couple of years?.

Yes. This will be different as we go through the reclass in the quarter..

It will depend on this quarter's reclass, Brian, is the answer..

But the nominal dollars, you would expect, again, the yield gets applied to a balance that is decreasing. So you're seeing a change in expected cash flow, that cash flow is over a longer period of time, so it wouldn't necessarily mean that you see an increase dollar-wise in the fourth quarter or going forward..

What's the sort of average life that we've got left or the duration in that?.

For the entire portfolio, including the mortgage, it's about six-and-a-half years..

Six-and-a-half years..

And that includes consumer mortgages..

And the next question will be a follow-up from Jordan Hymowitz from Philadelphia Financial..

Just going on Brian's excellent question, before me. I mean, if credit continues to improve, your reserve is substantially higher than the average reserve, and the average reserve is somewhere around 1.5% today or slightly below that.

Is there any reason if we were two to three years hence that you guys could have same reserve level if the economy improved or stabilized somewhat?.

You're asking a lot of us. You're asking us to look into the future. Just make sure [Multiple Speakers], given the environment in which we are operating is difficult, but I think if we forecast stability and improvement in some of the microeconomic condition, which we operate, that numbers will come down..

So I mean just thinking about, you have a tangible book value today of a little under $36, and if you reserve one to the average reserve --.

Over $36..

Well, you've got to add EVERTEC on top of that of $2, plus -- I'm sorry; you're correct. I'm sorry. EVERTEC on top of that, plus $2 for your average reserves and if consensus is right, you're going to make a little over $4 in the next five quarters.

You could be sitting here with like a $43 tangible book in a year and a half from now or two years from now. You had a bigger discount to tangible book than almost any bank I know of in the states..

Well, keep repeating that please. We agree..

(Operator Instructions) And in showing no additional questions at this time, this will conclude the question-and-answer session. Ladies and gentleman, the Popular conference call has now concluded. We thank you for attending today's presentation. You may now disconnect..