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Popular (NASDAQ:BPOP)

Q3 2013 Earnings Call

October 23, 2013 10:00 am ET

Executives

Brett Scheiner - Investor Relations Officer

Richard L. Carrion - 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. Vazquez - 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

Analysts

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

Herman Chan - Wells Fargo Securities, LLC, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Taylor Brodarick - Guggenheim Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Popular, Inc. Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Mr. Brett Scheiner, Head of Investor Relations. Please proceed.

Brett Scheiner

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 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, which you may visit by going to www.popular.com.

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

Richard L. Carrion

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

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

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

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

EVERTEC remains an important business partner and a valuable asset. The market value of our remaining stake is $406 million and significantly exceeds the position's current book value of $42 million. As investors, we will continue to participate in a proportionate share of the company's income. While we hope to maintain our current stake in the company, this investment represents a potential source of additional capital.

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

NPL inflows were down $24 million when compared to the previous quarter, the lowest level in 3 years. Although NPLs are up slightly by $4 million, driven by the Puerto Rico mortgage portfolio, we note that Puerto Rico mortgage inflows were down by $5 million compared to last quarter, and early delinquencies were stable. Our net charge-offs were 1.08%, reaching the lowest level since 2007.

So please turn to Slide 3. Robust levels of excess capital, continued credit quality improvements and improved financial performance have paved the way toward our objective of the most shareholder-friendly exit from TARP, and I'm happy to report that we have submitted our application to repay TARP. While we are hopeful our application will be approved, we cannot speculate on the timing or the conditionality, if any, of an approval.

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

Slide 3 includes pro forma capital ratios for the third quarter, excluding all $935 million of TARP funds. These ratios include the impact of the reversal of the approximately $411 million of unamortized discount related to TARP funds.

Before I turn it over to Carlos, let me comment on the Puerto Rican economy. As you'll surely notice, the local economy has received more than its fair share of press in the last few weeks. Yet despite the volatile environment, today, we are more confident in the island's fiscal outlook than we were 6 months ago, given recent government actions.

Last quarter, we mentioned that recent actions by the government, including pension reform and deficit reduction, were necessary to address the island's difficult fiscal situation. As a sign of progress on these initiatives, last week, the government released first quarter fiscal 2014 revenue numbers, which were better than the prior year and above the government's forecast as well.

We recognize that in the short term, measures to improve the government's fiscal health may decelerate the pace of Puerto Rico's economic improvement, though we continue to believe they are positive reforms for the long-term strength of the economy. While we have operated in a weak economy for most of the past 7 years, the strong revenues generated by our Puerto Rico banks have produced positive earnings in each of those years.

We are being particularly attentive to our portfolios, and so far, we see no indications or signs that would lead us to anticipate a material change in the stability of our credit metrics in the coming quarters. While sustained economic weakness is not an ideal business condition, it would not represent an environment that is particularly foreign to us. We're confident that our significant liquidity, excess capital levels and strong internal capital generation will be key to our future performance.

As Lidio will expand on a little later, our Puerto Rico government exposure ended the quarter at $1.4 billion, of which $1.2 billion is outstanding, and this includes $359 million of indirect exposure to the government in mortgage-backed securities, residential mortgage loans and industrial development loans payable by private parties. We know that our government exposure does not represent a random sampling of Puerto Rican municipalities or government entities, but rather a deliberate and carefully underwritten book of business, particularly with our senior interest in the borrowing entities cash flows, identifiable revenue as sources of payment and specific collateral. Given the cash flow and collateral positions of our exposure, and based on current yields, we believe the risk-reward of these positions is in our favor, and we will continue to selectively participate in funding the Puerto Rican government's capital needs.

Please turn to Slide 4, as Carlos Vazquez will discuss our financial results in further detail.

Carlos J. Vazquez

Thank you, Richard, and good morning. On Slide 4, we present our adjusted financial summary for the quarter, excluding the impact of the EVERTEC sale. Please note that data is reconciled to GAAP figures in the appendix to the slide deck with supporting information disclosed in today's earnings press release.

As was the case last quarter, our underlying performance continues to be driven by: one, stability in net interest income; and two, improving credit trends. There are a number of variances to last quarter's results, which impact pretax income by approximately $28 million. The main contribution to this variance are related to our covered portfolio, and are reflected in the FDIC loss-share expense, the covered provision and the covered OREO expense lines. Details of these arrangements can be found in the appendix to this deck and in Table O of our earnings press release.

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

While economic weakness and the covered asset runoff are headwinds, we are hopeful that we can maintain flat noncovered loan balances through next year. We continue to work on reducing our funding costs. Total deposits costs fell to 61 basis points this quarter from 68 basis points last quarter. Puerto Rico deposit costs fell 4 basis points on a linked-quarter basis to 60 basis points, continuing our trend of the last 18 quarters.

The rate at which deposit costs have fallen is slowing as we run out of older, higher-priced deposits to reprice and our clients beginning to expect interest rates to increase, but we still believe some incremental saving opportunities exist. This quarter, we were also able to reduce our overall funding cost by prepaying a $233 million note with an average cost of 7.7%. This transaction includes a $3.4 million debt-extinguishment charge but will result in savings in excess of the extinguishment charge for the remainder of this year and more than $17 million in savings next year.

We believe that these efforts, in addition to lower financing costs resulting for our eventual TARP repayment, will contribute to our continued stability in net interest income. Average yield for our $3.1 billion covered loan portfolio increased to 9.13% from 8.6% last quarter due to greater ALCO and projected cash flows. Noninterest income declined slightly compared to the prior quarter, mostly related to a lower net gain on sale of loans stemming from higher asset resolution gains in the prior quarter.

The FDIC loss-share expense increased by $11 million this quarter, including higher covered OREO recoveries and other income reimbursable to FDIC as detailed in Table O of the press release. This quarter, we have added disclosure around our mortgage banking business. These mortgage-related line items are broken down in Table F of the press release.

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

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

While trading is not a principal activity for Popular Securities, the brokerage business holds a $12 million portfolio on these securities to support the activities of our clients. Nonpersonnel costs include a onetime reclassification of tax expense, which added $3 million to this quarter's operating expenses. It also includes the previously mentioned $3.4 million debt-extinguishment charge, plus an $11 million increase through higher covered OREO expense, which is mostly offset in the FDIC loss-share line.

Slightly higher professional fees were related to increased regulatory requirements, offset by lower FDIC insurance expense. Our income tax line benefited from $19 million of favorable tax adjustments related to prior periods. Excluding these unusual events in the quarter, we estimate the adjusted tax rate would have been around 40%. We continue our tax mitigation efforts and are targeting an annual effective rate of 30% for 2014.

Please turn to Slide 5. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to well-capitalized regulatory requirements. Our Tier 1 common equity ratio stands at 14.2%, and represent an excess of $2.1 billion over the CCAR target requirement of 5%.

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

With that, I turn the call over to Lidio.

Lidio V. Soriano

Thank you, Carlos. While we continue to operate in a challenging economic environment, we are pleased to report that asset quality continue to improve during the third quarter as nonperforming assets, NPL inflows and net charge-offs have reached their lowest levels in more than 5 years.

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

Before going further into the details, I want to take a step back and compare our portfolio mix today versus the mix prior to the start of the financial crisis. Please turn to Slide #6. First, in the U.S., we no longer have a national lending platform, a sub-prime consumer and mortgage business, and for the most part, we exited construction lending. In short, in the U.S., we are now a community and niche lender with a much lower risk profile.

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

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

In the consumer portfolio, secure loans are now 69%, up from 56% in 2007. Within our unsecured portfolio, we have increased the proportion of FICO score over 660 by 6% from 70% to 76%, and the average FICO has increased by 18 points from 693 to 711. The changes in our portfolio mix, along with investments in technology, changes in overriding parameters and improvements in credit administration practices make us still comfortable with our exposure and risk profile. These changes are among the drivers behind the positive credit trends in our portfolio. In this quarter, we have new record lows in the credit cycle for nonperforming assets, net charge-offs and inflows into NPLs with improvements across both regions.

Let us turn to Slide #7 to go into the details. Nonperforming assets decreased $49 million on a linked-quarter basis, primarily driven by continued OREO dispositions in both Puerto Rico and the U.S. At 2.6%, the nonperforming asset ratio is at the lowest level since 2008. Nonperforming loans held in portfolio increased slightly by $3.7 million from the previous quarter.

While the inflows were lower, the small increase in NPLs was mainly caused by lower outflows. The Puerto Rico commercial portfolio, including construction, experienced an $11 million sequential reduction in NPLs, mainly due to the resolution of a significant borrowing relationship in the construction portfolio.

In the U.S., we experienced improvements across all portfolio. The $18 million decrease in NPLs marks the 15th consecutive quarterly decrease of nonperforming loans in the U.S.

Please turn to Slide 8 for a brief recap of NPL inflow trends. NPL inflows, excluding consumer loans, reached a record low for this credit cycle. On a linked-quarter basis, NPL inflows declined by approximately $24 million or 13%. Since peaking in the second quarter of 2009, NPL inflows had decreased approximately $800 million or 82% (sic) [83%], driven by improvements in the Puerto Rico mortgage, Puerto Rico commercial and U.S. commercial portfolios.

Commercial and mortgage NPL inflows in Puerto Rico reached a new lows in this cycle. Commercial decreased by $20 million while mortgage decreased by $5 million. In the U.S., NPL inflows decreased slightly, also reaching a new low.

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

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

Excluding the impact of the bulk sale completed in the second quarter, the provision for the third quarter remained relatively flat at $55 million. An increase in the U.S. provision reflected lower reserve releases and was offset by a decrease in Puerto Rico.

The provisions to net charge-off ratio increased from 69% to 95%, excluding the effect of the bulk sale. Notwithstanding the positive credit trends in Puerto Rico, we increased reserves slightly by providing 113 of net charge-offs during the quarter.

Our allowance for loan losses methodologies incorporates macroeconomic environmental factors such as unemployment rate and other economic indicators to account for current market conditions that may cause estimated credit losses to differ from historical losses.

Given the recent weakness in some of Puerto Rico economic indicators, our methodology led to the previously discussed increasing reserves in Puerto Rico. I should note, however, that we are not seeing any significant stress in our portfolio with improving lagging indicator such as NPLs, inflows and net charge-offs, as well as stable leading indicators. The coverage ratio remains relatively flat at 85%, which is a significant improvement from the low of 40% reached in the third quarter of 2011.

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

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

Before turning the presentation over to Richard for his concluding remarks, let me provide you details on our Puerto Rico government exposure. Please turn to Slide #10. As Richard mentioned, there have been a number of reports regarding the condition of the Puerto Rico economy and the volatility in Puerto Rico municipal securities.

Our current outstanding exposure to the Puerto Rico Government municipalities and other instrumentalities is $1.2 billion, consisting of $951 million in loans and $204 million in securities. Our facilities to the government can be divided in 3 main categories: direct exposures, municipal exposures and indirect exposures.

Direct exposures are loans or securities to the central government or public corporation. Our largest exposure is $200 million are in tax and revenue anticipation notes, which are short-term notes issued to fund Puerto Rico cash requirement prior to expected repayment upon receipt of taxes and revenues.

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

Indirect exposures are facility in which the government is not the primary source of repayment. It includes $272 million of residential mortgage loans; $52 million of Ginnie Mae, Fannie Mae and residential loan-backed CMO; and $35 million of industrial loans to nongovernment tenants. In the case of these loans, our primary credit exposure is to a specific nongovernment borrower and secondarily, to the underlying collateral. Excluding these, our exposure to the Puerto Rico government is $796 million.

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

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

Richard L. Carrion

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.

While the Puerto Rico economy remains weak, the recently implemented fiscal measures have been significant. Additional fiscal measures should further improve the budget deficit and pave the way for an eventual economic recovery.

As I mentioned earlier, we are more comfortable with the Puerto Rico fiscal situation today than we were 6 months ago. The leading market position of our unique Puerto Rico franchise is allowing us to sustain above-average margins. Our covered portfolio continues to produce better-than-expected results. We are operating with both greater speed and efficiency in addressing NPLs as demonstrated by the continuing improvement in the credit quality of our portfolios in both the U.S. and Puerto Rico.

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

In summary, we're driving value for our shareholders as credit improves alongside our ongoing internal capital generation. We have robust capital under existing Basel I capital requirements, which we expect to continue under the Basel III rules. On these merits, we're moving toward the exit from TARP in the most shareholder-friendly fashion. We continue to see additional value in our EVERTEC ownership; our stake in BHD, the second largest bank in the Dominican Republic; and the improved performance of our U.S. operation. And we look forward to reporting to you on our continuing progress.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will be coming from the line of Gerard Cassidy, RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Richard, you mentioned about extending maybe more credit to the Puerto Rican government if it's needed. Do you have a sense of how much more you'd be willing to extend to the government?

Richard L. Carrion

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

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

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

Richard L. Carrion

My general counsel just picked up a baseball bat. So I have to be careful here, Gerard. But the unamortized discount, what we're referring to the unamortized discount, that's roughly $411 million.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Great. Okay.

Richard L. Carrion

Yes.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

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

Richard L. Carrion

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

Lidio V. Soriano

Not significant.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Not -- it's not a significant amount.

Richard L. Carrion

Not significant, says my risk manager here.

Operator

Your next question is from the line of Ken Zerbe, Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

First question I have for you was just on credit, and I know Lidio said that you're not seeing any deterioration in the credit quality or portfolio currently. But if we look at your core provision, which is about $55 million this quarter, and it's been pretty consistent for the full year, puts you at about $220 million run rate. If I remember right, I think your normalized provision expense is about $250 million. My question is if you look out over the next 12 months, given what's happening with the Puerto Rican economy, do you expect your provision expense in the future to remain below your normalized level of $250 million?

Richard L. Carrion

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

Lidio V. Soriano

Because I also have the lawyer here with the bat looking at me. I don't think -- I mean, we don't intend to provide forward-looking statements. But I will go back to the comments that I made to the presentation. We have a much more different portfolio than we had at that time. So we are much less concentrated on middle market, which was where you would see most of the losses in construction, and we have a much stronger consumer business compared to the one we had prior. So I think I'll stick to that. That will be my answer.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, fair enough. My follow-up question on a pretax earnings basis, and I'm looking at Slide 4, it looks like you're at $71 million, and we can even add in the extra $3 million from the debt-extinguishment cost should put you -- just call it $74 million. When you look ahead -- so I think the $74 million was considerably below my estimates at least. Is $74 million the right run rate going forward? Because it looks like you had both lower fee income, including the FDIC stuff, plus higher expenses. I'm just trying to get a sense of what to expect going forward.

Richard L. Carrion

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

Carlos J. Vazquez

The -- sorry, give me a second.

Richard L. Carrion

[indiscernible] pretax, the pretax line.

Ken A. Zerbe - Morgan Stanley, Research Division

Yes, I'm assuming the tax, the tax goes back up as you had mentioned. So I was looking at pretax basis trying to figure out if expenses stay as -- basically expenses stay high and income stays lower.

Carlos J. Vazquez

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

Ken A. Zerbe - Morgan Stanley, Research Division

Due to the elevated OREO?

Carlos J. Vazquez

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

Operator

The next question is from the line of Alex Twerdahl, Sandler O’Neill.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

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

Carlos J. Vazquez

$410 million.

Richard L. Carrion

$410 million according to our Treasurer here.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

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

Richard L. Carrion

Your called [ph] question to -- how much cash we have available?

Carlos J. Vazquez

Yes.

Richard L. Carrion

We're not going to -- I have to tell you that we have a policy that we need to keep cash at the holding company to take care of 1 year worth of forward-looking needs, and we're way beyond that policy.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

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

Lidio V. Soriano

I mean, obviously, I mean, last year, when we had this discussion, there was -- the portfolio was -- there was a lot of nonperforming loans. And the tactics were different than were today, but we haven't seen any significant change in terms of the loss content a year ago versus today.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

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

Carlos J. Vazquez

Yes, the -- I mean, our tax rate gets affected by a number of things. One of them, for example, is the mix of our income tax expense versus taxable income. Another thing that affects our effective tax rate is the location of our income, whether it sits in an entity that has tax rotation or not. We do have some capacity to move some of our revenues and our income within the organization. So we have some capacity. It's not limited to affect our tax rate, and we're trying to pursue those opportunities under the different levels of complexity in achieving that.

Richard L. Carrion

Timing as well.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division

And is that -- so there's a -- is the 30% going to be for the whole year or is it -- is that something that's going to sort of you feel like the first quarter be 35%.

Carlos J. Vazquez

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

Operator

Your next question is from the line of Herman Chan, Wells Fargo Securities.

Herman Chan - Wells Fargo Securities, LLC, Research Division

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

Richard L. Carrion

Well, we very much like the business, and we very much like the ability to like their prospects, and we prefer to continue booking the equity portion of their income moving forward. But it is -- we just wanted to highlight that there's some hidden value there, but the market value of our holding is significantly above what we hold it in our books at. So that is -- we've already raised after-tax close to $325 million in the 2 sales that we did in the last 2 quarters. So it's there. Our intention right now is to keep holding that stake.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Understood. And on the forecast for flat, noncovered loan balances looking ahead, can you talk about your expectations for different loan buckets and also expectations for a further resident mortgage loan purchases as well?

Richard L. Carrion

Well, it -- again, we're trying to keep a flat, noncovered loan book. We've surely seen a slowdown in mortgage activity in the past compared to last year. But we -- so it's about a 25% decrease in originations. We're still targeting about $300 million a quarter in new loan originations, and that should not be a problem. We're looking at some selected loan books that we want to grow in the consumer area where we've had very good experience and where we have the machinery in place, the infrastructure in place so the marginal cost of adding that, and the loss content will be low. But that's about it. We are seeing a slowdown, particularly in Puerto Rico, but it applies to the U.S. as well in middle and small commercial loan demand has been very, very sluggish. That has also been one of the areas where we've had historically high losses or higher losses.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Right, understood. Yes, that's great. Lastly, with loan growth a challenge, credit still a potential issue, how do you think about the expense base from here? Are there opportunities to rationalize expenses a little bit lower given the extent of low-growth environment and the issues in Puerto Rico?

Richard L. Carrion

Absolutely, and I think as we mentioned in the call, I think one shouldn't take this quarter's level of expenses as normal. I think they were higher than we think. We'd like to see that quarterly number in the range of 3 05 [ph] to 3 10 [ph] moving forward, and we'll drive to that. There's obviously less costs in handling some of the legacy portfolio. We've seen already in some of those come in. We expect we'll see more of that. At the same time, there -- we still have quite a bit of cost handling the covered loan portfolio albeit those are 80% reimbursable. We also have a lot of pressure on the regulatory side for compliance with just the new rules that come into play. So we'll probably move some people around. But yes, the answer is that we do feel there are opportunities for cost savings, and we're going to try and drive towards that 3 05 [ph] to 3 10 [ph] event.

Operator

[Operator Instructions] Our next question comes from the line of Todd Hagerman, Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Richard, I just want to follow up on your comments related to TARP. They've been very consistent for some time now in terms of doing what's best in terms of -- for the shareholders, if you will. You also referenced a number or the optionality, if you will, in terms of your balance sheet. You have more than $2 billion in excess capital relative to the requirements EVERTEC cash to parent and so forth. Should we think about the potential for any common equity rates as being part of that optionality in the equation? Or is that something that's just not on the table right now in terms of the repayment?

Richard L. Carrion

I'll tell you my General Counsel is swinging that bat right now in the air. So I just -- I don't want -- so far, he's missed. He's getting closer. He's like Carlos Beltrán right now. But we're not going to -- you mentioned -- we call it excess capital. Our regulators think that's an oxymoron, but at any rate, we -- as I said, we've raised $325 million in profits on EVERTEC sales this year. We think we can -- we do have the capital. So let's -- I just don't want to speculate on what the funding fund's going to be.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, fair enough. And then in terms of the government exposure, if you could help me reconcile. The way I'm thinking about it, I'm thinking about tangible book value and again kind of how the regulators are looking at your capital position today, which as you -- again is quite strong relatively speaking. But the thing that I'm thinking about is the accounting for the banks and the underlying cash flows relative to those exposures in comparison to the marks that were taken at the broker dealer in terms of the bond and obviously trading-related assets. So the way I'm thinking -- so how do they -- if I were to think about mark-to-market on the bank's portfolio and capital, is that something that is very much a consideration, either for yourself or for the regulators? Or just because of the way it's carefully underwritten, it's a completely different ballgame between the broker dealer and the banks?

Richard L. Carrion

Well, I guess the short answer is no. But -- and this is why we tried to give you the full detail of this. There's only -- I think there's roughly less than $200 million that we would call as bonds. Some of that, a very small amount of that is held in the trading portfolio. I think it was $12 million, and some, about $54 million, is held in the available-for-sale portfolio. So the bulk of our exposure is in the form of loans to the government, and those have very specific revenue sources. They have very specific collateral and a duration that we're comfortable with. So other than the general reserve, the FAS 5 reserve, we have no specific reserves for this, and we don't think there's any need to do that.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

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

Carlos J. Vazquez

Well, I mean, we have a privileged position in the housing market in Puerto Rico that allows us to be a little bit of a price leader. But we have to be very careful and to serve our clients properly and fairly as well. We've been very susceptible for the last few years in reducing funding costs, but part of that success is the fact that we are repricing rollovers of higher-priced deposits. We've been in this very low-rate environment for a long time. So there's very few of those left. So that's the reason the advantage is slowing down. So we still look forward and think there's opportunities in different types of accounts where we can -- and in the mix of our deposits that we could end up lowering deposit costs, but that opportunity is getting smaller as we go.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Yes, that's fair. I mean, I don't know if you can do this, but I don't want the bat to come up again, but if you think about -- if you think about again the opportunities you have within that deposit base and your market share, if you will, as I think about '14 and the potential funding opportunities, are we talking -- in order of magnitude, are we talking 10 to 15 basis points? Or is it something perhaps a little bit less than that? I'm just trying to get my arms around order of magnitude in terms of how much leverage we may potentially see, all else being equal.

Richard L. Carrion

It's a good question, but I don't think we're going to go there. We're trying again not to provide guidance. I think the conceptual guidance is your best guide. We expect to continue to get some benefits. But those will probably not be smaller than the ones we've seen.

Carlos J. Vazquez

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

Operator

Your next question comes from the line of Taylor Brodarick, Guggenheim Securities.

Taylor Brodarick - Guggenheim Securities, LLC, Research Division

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

Lidio V. Soriano

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

Operator

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

Carlos J. Vazquez

Thank you.

Richard L. Carrion

Thanks.

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