Popular Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Popular, Inc. (BPOP)

Popular (NASDAQ:BPOP)

Q4 2013 Earnings Call

January 23, 2014 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

Jorge J. Garcia - Principal Accounting Officer, Corporate Comptroller, Senior Vice President of Banco Popular North America and Director of Finance & Accounting - Banco Popular North America

Analysts

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

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

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

Ken A. Zerbe - Morgan Stanley, Research Division

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

Taylor Brodarick - Guggenheim Securities, LLC, Research Division

Operator

Welcome to the Fourth Quarter 2013 Earnings Call for Popular, Inc. And now I will turn the call over to the Investor Relations Officer, Mr. Brett Scheiner.

Brett Scheiner

Thank you. Good morning, and thank you for joining us on today's call. Today, I am joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our full year and fourth quarter results and then answer your questions. They will be joined in the Q&A session by other members of our management team.

Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause the 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 2013, then I will discuss the fourth quarter, share our progress and focus areas and provide some updates regarding the economic situation in Puerto Rico. Carlos will then go into greater detail on the quarter's financial results, and Lidio will provide an update of credit trends and metrics. So with that, please turn to the second slide.

In 2013, Popular produced $1.9 billion in gross adjusted revenues, in line with the prior year. For the year, we earned net income of $599 million and adjusted net income of $256 million, both improving on the prior year's results. We made clear and consistent progress on a key objective, improving credit quality. Total NPAs including covered loans of $922 million were down from $2 billion at year-end 2012. Non-covered NPLs declined $827 million to $598 million or 2.8% of non-covered loans, the lowest level since 2007. These reductions were the result of aggressive loss mitigation efforts, resolutions, restructurings and NPL sales.

Early in the year, our former processing subsidiary, EVERTEC, completed its IPO. This transaction, in addition to 2 subsequent share sales, generated after-tax gain sales to Popular of $424 million. Our adjusted net income, in addition to the EVERTEC gains, drove tangible book value to $37.56, up from $32.55 last year.

Our Tier 1 capital and Tier 1 common ratios are 19.4% and 15%, up 206 and 185 basis points, respectively, year-over-year.

Turning to Slide 3, you can see that these income and credit results are due in part to our leading market share in Puerto Rico. Based on the latest data, we increased our share in most of the 8 banking categories on the island, maintaining our leadership position in 6 of them. This leading franchise value positions us well for an eventual economic recovery on the island but also provides meaningful earnings power in the interim.

On Slide 4, we show a solid performance to close the year. Total reported net income for the fourth quarter was $163 million. Excluding the impact of the sale of the EVERTEC shares, the adjusted net income figure for the quarter was $74.6 million. We continue to generate strong revenues with capital levels above peer averages. Our Tier 1 common equity ratio of 15.1% exceeds the CCAR 5% target by $2.3 billion.

As previously announced, on December 13, we sold 5.8 million shares of EVERTEC, reducing our stake to 14.9%. The sale provided $118 million in cash and resulted in an after-tax gain of $99 million. EVERTEC remains an important business partner and a valuable asset that represents an additional source of capital flexibility. The market value of our remaining stake is approximately $300 million and significantly exceeds the position's current book value of $20 million. As investors, we will continue to participate in a proportionate share of the company's income.

Our margin of 4.74% remains strong relative to peers, with our Puerto Rico net interest margin over 5.5%. Our NPL-to-loan ratio continues to improve through its low point in the cycle and, at quarter end, was 2.8%, down from 2.9% last quarter and down 75% from the Q3 2010 peak of 11%. NPL inflows were down $21 million when compared to the previous quarter, the lowest level in 3 years, and early delinquencies in Puerto Rico were stable. Non-covered NPLs were down $20 million as continued improvements in the U.S. and Puerto Rico commercial portfolios were offset by slightly higher nonperforming Puerto Rico mortgage loans. Puerto Rico mortgage inflows of $95 million were essentially flat to last quarter's $94 million. Our net charge-offs were $35 million or 66 basis points, reaching the lowest level since 2006. Please turn to Slide 5.

Last quarter, we announced our application to repay our outstanding TARP funds. We continue in active dialogue with our regulator, but our application has not yet been approved. As we said last quarter, we cannot speculate on the timing or the conditionality, if any, of an approval. As our dialogue with our regulator is confidential, we're also not in a position to expand on the details of our application or the specific funding plan for our repayment at this time.

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

Before I turn it over to Carlos, let me comment on the Puerto Rico economy. We mentioned last quarter that despite the volatile environment, we were more confident in the island's fiscal outlook than we were 6 months prior, given recent government actions. Since that time, the Puerto Rico government has announced additional pension reform and provided data showing both revenues and expenses are ahead of budget for the first half of the island's fiscal year. We're encouraged by these additional government measures, though we recognize that the markets and financial press may not share our view.

In the short term, measures taken throughout 2013 to improve the government's fiscal health may decelerate the pace of Puerto Rico's economic improvement, though we continue to believe they are positive reforms for the long-term strength of the economy. While we have operated in a weak economy for most of the past 7 years, the strong revenues generated by our Puerto Rico bank have produced positive earnings in each of those years. And we continue to be particularly attentive to our portfolios and see no indications or signs that would lead us to anticipate a material change in the stability of our credit metrics in the coming quarters. While sustained economic weakness is not an ideal business condition, it would not represent an environment that is particularly foreign to us. We're confident that our significant liquidity, our excess capital levels and strong internal capital generation will be key to our future performance.

Lidio will expand on our Puerto Rico government exposure later in the call. I would note, though, that as we stated last quarter, this exposure does not represent a random sample of Puerto Rico municipalities or government entities, but a deliberate and carefully underwritten book of business, particularly with our senior interest in the borrowing entity's cash flows, identifiable revenue as sources of payment and specific collateral.

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

Carlos J. Vazquez

Thank you, Richard, and good morning. On Slide 6, we present our adjusted financial summary for the fourth quarter, excluding the impact of the sale of EVERTEC shares. Please note, this data is reconciled to GAAP figures in the appendix to the slide deck, with supporting information disclosed in today's earnings press release.

As was the case last quarter, our underlying performance continues to be driven by: first, stability in net interest income; and second, improving credit trends. Variance of the third quarter's results stem mainly from the net interest income, FDIC loss-share, provision and income tax lines. Details of these variations can be found in our press release.

Net interest income for the fourth quarter was $376 million, up $22 million from last quarter on continued strength in covered asset cash flows, the absence of the mortgage interest reversal reported in the third quarter and the benefits of last quarter's note prepayment. The prepayment of the $232 million note in Q3 with an average cost of 7.7% saved $4.5 million in the fourth quarter. This transaction will result in savings of more than $17 million in 2014, coming down thereafter.

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

We continue to work on reducing our funding cost. This quarter, total deposit cost fell 1 basis point to 60 basis points on slightly lower cost of time deposits. Puerto Rico deposit costs also fell 1 basis point from Q3 to 59 basis points. The rate of reduction of deposit cost has slowed as we run out of older, higher-priced deposits to reprice and our clients begin to expect interest rates to increase. Nevertheless, we still believe some incremental opportunities exist for cost savings.

The average yield in our $3 billion covered loan portfolio increased to 11.43% from 9.13% last quarter due to greater actual and projected cash flows. While we expect the majority of this increased yield to be maintained in the next few quarters, approximately 50 basis points of the increase was due to specific loan resolutions and adjustments in the quarter.

The net impact of the quarterly covered asset recast includes this additional spread income, but be mindful that the FDIC transaction affects our income statement through many lines. Some of the additional spread is offset by higher amortization expense for the indemnity asset, which is reflected in the FDIC loss-share expense line. Noninterest income declined compared to the prior quarter due to higher FDIC loss-share expense, a lower contribution from mortgage banking, resulting from negative MSR valuation adjustment, and the lack of record reserve releases that were present last quarter. As mentioned earlier, this quarter's increase in the FDIC loss-share expense of $22 million includes higher indemnity asset amortization, resulting from better-than-expected performance in the covered loan portfolio.

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

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

Trading account activities were $1.5 million higher than the prior quarter due to last quarter's marks taken on the inventory of Puerto Rico bonds and close-end funds held by our broker-dealer subsidiary, Popular Securities. This is only a $12 million portfolio, which is flat to last quarter.

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

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

Please turn to Slide 7. We continue to enjoy strong capital levels relative to mainland and Puerto Rico peers, as well as with respect to well-capitalized regulatory requirements. Our Tier 1 common equity ratio stands at 15% and represents an excess of $2.3 billion over the 5% CCAR target. Adjusting for the potential repayment of TARP, we expect our capital levels to continue to exceed well-capitalized regulatory requirements under the Basel III guidelines. We remain focused on continuing to increase our strategic and financial flexibility while maintaining strong capital levels. With that, I turn the call over to Lidio.

Lidio V. Soriano

Thank you, Carlos. Please turn to Slide #8. While continuing to operate in a challenging economic environment, we are pleased to report that asset quality continued to improve during the fourth quarter as nonperforming assets, NPL inflows and net charge-offs reached their lowest levels in more than 5 years. In addition to markedly improved credit metrics and stronger capital levels, we continue to feel confident with our exposure and risk profile.

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

In the U.S., we no longer have a national lending platform or a subprime consumer and mortgage business. In short, we are now a community and niche lender with a much lower risk profile. In Puerto Rico, our commercial exposure, including construction, have decreased from 55% of our total loan book to 42%. Construction lending has decreased 87% and now stands at $161 million.

On the bottom of the slide, we also segment the commercial portfolio and include net charge-off distribution by segment since 2008. The important message from the table is that our commercial mix has significantly improved by reducing exposure to asset classes with historically high losses. In the consumer portfolio, secure exposure are now 75%, up from 65% -- 66% in 2007. These changes are among the drivers behind the positive credit trends in our portfolio. The quarter marked new record lows in the credit cycle for nonperforming assets, net charge-offs and inflows into NPLs.

Let us turn to Slide #9 to go into the details. Nonperforming assets decreased $22 million on a linked-quarter basis, primarily driven by decreasing nonperforming loans in the U.S. region. At 2.57%, the nonperforming asset ratio is at the lowest level since 2008. Nonperforming loans held in portfolio also decreased by $20 million from the previous quarter, led by declines in the U.S., offset in part by a slight increase in Puerto Rico. At 2.77%, the nonperforming loan ratio is at the lowest level since 2007.

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

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

Please turn to Slide 10 for a brief recap of trends in NPL inflows.

NPL inflows, excluding consumer loans, reached a record low for this credit cycle for both Puerto Rico and the U.S. On a linked-quarter basis, NPL inflows decreased by $21 million, principally driven by improvements in the commercial inflows in both regions. Mortgage NPL inflows remained flat quarter-over-quarter.

Since peaking in the second quarter of 2009, NPL inflows have decreased approximately $801 million or 85%. Puerto Rico commercial NPL inflows, including construction, reached a new low in this cycle, decreasing $10 million to $32 million in the quarter. In the U.S., commercial NPL inflows were only $10 million, reflecting improving economic conditions.

Please turn to the next slide. Net charge-offs for this quarter reached their lowest level since 2006. Net charge-offs for the fourth quarter amounted to $35 million or 66 basis points on an annualized basis compared to $58 million or 1.08% in the previous quarter. The decrease of $23 million is mainly driven by high recoveries of $17 million, which includes a $9 million recovery associated with the sale of a portfolio of previously charged-off credit cards and personal loans in Puerto Rico. Excluding the effect of this sale, the net charge-off ratio was 83 basis points, a linked-quarter improvement of 25 basis points.

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

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

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

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

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

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

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

Our current direct exposure to the Puerto Rico central government, municipalities and other instrumentalities is $1.2 billion. Of this balance, $950 million is outstanding, consisting of $789 million in loans and $161 million in securities. We carefully monitor our government exposure. Like every entity to which we extend credit, our diligence process is extensive and revolves around available cash flow for debt service and repayment of principal. Given the cash flow and collateral position of our exposure, and based on current yields, we believe the risk/reward is favorable, and we'll continue to selectively participate in funding the government's capital needs. Please keep in mind that any participation in additional government financing will comply with all internal limits and risk controls.

Our direct exposures can be divided into 2 categories. The first includes the central government and public corporation, while the second group includes municipality. Our largest exposure among loans and securities to the central government and public corporation are approximately $200 million in tax and revenue anticipation notes. These are short-term notes issued to fund Puerto Rico cash requirements prior to expected reimbursement upon receipt of taxes and revenues. Our municipality exposure is mostly a diversified portfolio of senior priority loans to a select group of municipalities whose revenues are independent of the central government. Additionally, we have indirect exposures of $360 million, which are facilities in which the government is not the primary source of repayment. In the case of these loans, our primary credit exposure is to a nongovernment borrower and to the underlying collateral. In short, as stated by Richard, our exposure to Puerto Rico government represents a deliberate and carefully underwritten book of business.

Regarding the public deposit balance at BPPR, the vast majority of this approximately $1 billion in funding is held in transaction operating accounts, which we believe are highly unlikely to be meaningfully wound down. In addition, the majority of these deposits are collateralized with U.S. government securities. Correspondingly, it will be rolled to repos or brokered deposits that will be comparable to or inside of muni time deposit rates. As such, we see no meaningful risk to our earnings or liquidity position. Due to the chip in this funding source, I have seen no sizable drawdowns in these balances.

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 the last slide. Before we open the lines to questions, let me conclude today's remarks by reviewing the Puerto Rico government's financial situation and the actions we're taking to drive shareholder value.

While the economy remains weak, the recently implemented fiscal measures have been significant. As the Puerto Rico government announced earlier this month, both revenues and expenses have come in on target for the first half of the commonwealth's fiscal year, which began this past July 1. In addition, over the past 6 months, the government has passed legislation reforming the 2 largest pension funds. Given the current economic environment, we're working closely with other business leaders to offer cooperation and guidance to the government where appropriate.

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

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

In summary, we'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.

We continue to see additional value in our EVERTEC ownership and our stake in BHD, the second-largest bank in the Dominican Republic, and the improved performance of our U.S. operations, and we look forward to reporting to you on our continuing progress.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Alex Twerdahl of Sandler O'Neill.

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

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

Carlos J. Vazquez

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

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

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

Richard L. Carrion

Actually, I think it's partly that and partly we do have some tax strategies in place, so that we're targeting a 30% rate, as Carlos mentioned.

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

Okay. And would that include -- does that include the TARP repayment? Assume that we have favorable tax...

Richard L. Carrion

We're not including anything for TARP right now.

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

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

Richard L. Carrion

I would think on the -- in the short term, I think that would be minimal. You saw the size of the securities portfolio, so we don't see anything material there. I think our concern would be what would be the impact of any measures taken by the government, what the impact would be on the economy and how would that affect us. So that -- we don't see any immediate impact on the balance sheet. It's just how the economy would get -- work through that.

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

Okay. And then just lastly, Lidio, do you have the number of current TDRs handy?

Lidio V. Soriano

The number of our current TDRs for the quarter is 762 million out of 950.

Operator

The next question comes from the line of Brian Klock of Keefe, Bruyette, & Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

I think what was interesting to me is you guys continue to work down the high-risk, high-severity NPLs. And Lidio, I know you talked a little bit about the sort of macro factors you have to kind of think about. If you look at the NPL formation trends and what you've provisioned for new NPL formations at BPPR, the last 4 or 5 quarters, it's averaged between 35% to 40%. This quarter, it's about 50%. So I think what's interesting too is that there has been some positive economic trends with better revenues on the -- from the government's revenue side, expenses coming in a little bit lower. So do you think that maybe we should be thinking about NPL formations and the level of provisionings returning back to that maybe 40% level of provisioning at new NPL formations going forward? Or how should we think about that relationship of provisions to new NPL formation?

Lidio V. Soriano

I think provision is a function of internal and external factors, and certainly, some of them certainly related to the economic environment in which we operate is weighing into the numbers. But in terms of internal numbers that you have alluded to, they have been strong and trending down over the last 2 years. So I mean, therefore, I think as the external environment improves, I think you will see improvements in our provisioning.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And in the U.S., the BPNA franchise, again, the charge-off and NPA formation is down significantly. Still have a 195 basis point reserve-to-loan ratio. I mean, it just kind of feels like there's probably more room to actually release reserves in the U.S. Is that reasonable? Do you think that maybe we could see that, maybe more reserve releasing in the U.S. mainland?

Lidio V. Soriano

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

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

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

Lidio V. Soriano

We haven't provided that information. Let me -- maybe for the Q, we will go into that level of detail, but we have, on the [indiscernible].

Richard L. Carrion

I think it's roughly half. And to the central government, it's mostly in the trends, and that has very short-term maturities in that.

Lidio V. Soriano

That number, Richard, I mean, the bulk of the central government exposure is...

Richard L. Carrion

But probably, I'm right.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

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

Lidio V. Soriano

It was the public corporation and the use of an existing line by what is called claim [ph], which is the...

Richard L. Carrion

The authority that collects the property taxes for the municipalities. It's a revolving line and somewhat seasonal. So half was a new loan to one of the utilities and the other half was this centralized authority that collects the property tax using their line.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

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

Carlos J. Vazquez

Exactly right.

Operator

The next question comes from the line of Todd Hagerman from Sterne Agee.

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

A couple of questions for you. First, just in terms of, Carlos, the $1 billion of funding held on the balance sheet as it relates to the government, I'm just curious, and you mentioned there's really been no visible activity in terms of the balances, but I am curious in terms of, over the course of 12 months and thinking about seasonality, how those balances may change over the course of the year, if much at all on an average basis.

Carlos J. Vazquez

They move up and down. The -- our view is, since we have a high concentration of operational accounts, and with those accounts that provide a lot of services to the different entities and the government, that allowed a lot of those accounts, and the corresponding balances will remain. So actually, at this point in time, first, as we mentioned and Lidio mentioned, we haven't seen any material changes on our balances, and at this point in time, we're not expecting very material changes either.

Richard L. Carrion

Yes, I'd say about 80% of those balances are transaction-type accounts, and as was mentioned, it was essentially flat year-over-year. So...

Carlos J. Vazquez

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

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

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

Richard L. Carrion

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

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

Okay. And then to that end, as you mentioned, the government has actually done everything, if not exceeded the plan that was passed last year, hitting every target if not exceeding. The last piece of the puzzle, so to speak, remains returning to the long-term capital markets, if you will, which has been -- obviously been the discussion of a lot of speculation in the press over the last couple of weeks. That being said, do you think there's -- based on what you see and what you're aware of in terms of the government's fiscal situation, is that something that is a risk, near term or longer term? In other words, presumably, the plan was kind of laid out over kind of a 12-month time period. Now it seems that the market is getting a little impatient in terms of Puerto Rico's ability to go back to the capital markets. The way you see things now, and kind of a diminished concern, if you will, is that something that you think is becoming a bigger factor as it relates to the fiscal situation in Puerto Rico?

Carlos J. Vazquez

Well, clearly, there have to be some transactions, and I think they have a liquidity position that should take them forward. I think they are looking at different possibilities of -- some have been mentioned in the financial press. I don't know how accurate or not those are, but they do have to, at some point, come to the market. They cannot indefinitely stay out of the market, and we're looking at different possibilities, as I'm sure other financial institutions are as well. So yes, you're right in that the market is getting antsy to see what they will finally do in the short term.

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

Okay. And then just finally, Richard, I'm going to ask you a TARP question anyway.

Richard L. Carrion

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

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

Exactly. I know he's wielding that big bat, but if I go back in time to thinking where the Puerto Rican banks were a couple years ago and the credit issues, for example, each of the banks now has lowered their credit measures, for the most part within kind of the acceptable band or to a more manageable level that presumably is acceptable to the regulators. The other piece of the puzzle has always been the regulators' comfort with the economic situation in Puerto Rico. And obviously, as I mentioned before, all the marks have been hit to date. Is that something that, at this point in time, relative to when you initially requested the exit of TARP, is that something you think that is potentially a delay or a potential issue as it relates to your repayment? Or do you think, on a stand-alone basis, Popular is in a position, regardless of the external forces or speculation, that they're on track to repay TARP?

Richard L. Carrion

Listen. All of us around this table would like to pay it as soon as we get off the call, and we're ready to do it. Unfortunately, it's not up to us. So yes, we think we can -- we're in a position to pay it, but it's a decision that is in the regulators' hands, and we keep having that dialogue with them. We understand that they have to feel satisfied. We try to answer all their questions. And when they're ready to go ahead, we will immediately go ahead. We've learned whining doesn't help, but other than that, we're ready to go.

Operator

The next call comes from the line of Ken Zerbe of Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Lidio, I was actually hoping you could just provide a little more clarity. I've got 2 conflicting things that I just want to make sure I reconcile. On the call, you mentioned that, on a lagging indicator basis and on a forward indicator basis, in terms of credit, you're not seeing any deterioration and things continue to get better. But at the same time, you guys did increase your provision expense in Puerto Rico. And in the press release, you did mention that you're increasing the allowance because of environmental factors given the economic conditions. What is it that you're actually seeing in the economy that's leading you to increase your allowance and increase your provision, but at the same time, no indicators would suggest credit's getting worse?

Lidio V. Soriano

Ken, on certain things, certain economic indicators, the same ones that you see, those are leading. And we think the actions that we have taken are prudent. But I think more importantly, the key message from today that I want all investors to take is that, notwithstanding all of that, the -- our internal metrics have continued to be strong and stable. So we haven't seen any type of stress in our portfolio. But we have been -- in terms of our provision, we're being proven given the uncertainty of the economic environment.

Ken A. Zerbe - Morgan Stanley, Research Division

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

Lidio V. Soriano

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

Ken A. Zerbe - Morgan Stanley, Research Division

Understood. And do you guys put much faith in the GDP's economic activity index that they're reporting? I think it was down 5.7% year-over-year.

Lidio V. Soriano

That's one of the elements that goes into our analysis of the external factors that impact operation.

Operator

The next question comes from the line of Gerard Cassidy from RBC Capital Markets.

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

A question on the deposit rates that you guys indicated were down, I think, 1 basis point possibly -- if I heard you correctly, in Puerto Rico. With your strong market share in Puerto Rico, do you envision or can you see those deposit rates falling in 2014? Or should we just assume they're going to just stabilize at these levels?

Richard L. Carrion

I think the -- our market share is always a plus. But the other -- the counterbalance to that is that we have to also take care of our clients. I mean, Michael [ph] are our clients. So it's a combination of effort that we have. I think the market in Puerto Rico has been very constructive with regards to deposit costs for all the banking industry. But what you're seeing in the slowdown now, it's just a matter of time. We have been in a low-rate environment for so long that continued improvements in deposit costs get increasingly more difficult. So is there a potential for additional improvement? Yes, we said so. Some of that may be particular products. Some of that may be deposit mix. There may be a number of things that contributes to that, and we will continue to work to lower the cost. But it's just been too long with too low rates for it to continue to pay the rates [ph].

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

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

Richard L. Carrion

We like the investment, and we will keep it unless we think there's a better use for the funds. I mean, it's just -- it'll depend on the circumstances. Right now, we're very happy with the investment. It's done quite well, as you heard in the talk. We made $424 million after tax just this year alone, so on the sales plus our share of the equity there. So we're very happy with it. If there are some circumstances that come along, we will look at it when the time comes. Is that good enough for you, Gerard?

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

No, that's very good. And then finally, and this is obviously philosophical and it's putting the cart before the horse, and we all recognize the challenge that the island is going through economically speaking, but I'd be interested in your views. Your capital ratios are obviously so strong. And so when TARP is eventually paid off and you're going to have the decisions, I would assume, to start returning capital to shareholders, clearly, under the new capital regulations, the banks are required to keep 7% tier 1 common, and again, you guys are well above that. So again, I know this is philosophical, it's cart before the horse, but if we look beyond the period of -- you pay off TARP at some point, what are you guys comfortable with in terms of capital levels and then return of capital to shareholders at some point in your future? Is a 50%, 60% combined payout ratio, which includes a dividend and a buyback, something you're comfortable with? Or no, it would be lower or higher?

Richard L. Carrion

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

Carlos J. Vazquez

Yes, conceptually, we obviously would look to manage our capital and return capital to the shareholders, if that made sense. I think the banks in general -- or depending on the bank, averaging payouts between 30% and 60% or 70% of earnings, and we'd seek to be in line with the rest of the banking industry. So conceptually, we'll be moving to look like most of our peer banks look. When the time comes, as Richard said, we're quite keen to be in a position to have that discussion to the level of basis points with you, but it's not the time yet.

Operator

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

Taylor Brodarick - Guggenheim Securities, LLC, Research Division

I think most have been -- my questions have been answered. I just had one on the competitive landscape, just looking at Slide 3 and sort of the recovery and market share dominance since 2012. Are you seeing less competition from the multinationals? Or is there any interesting data points on why that's occurred?

Carlos J. Vazquez

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

Richard L. Carrion

But we will have to work hard to get our clients.

Carlos J. Vazquez

That's right. Just a few digits of market share, so.

Operator

The next question comes from the line of Brian Klock of Keefe, Bruyette, & Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Carlos, I guess, thinking about the FDIC transaction, the covered loans with Westernbank and Table O, you guys actually have a lot of detail there. What I'm interested in, it seems like the accretable yield -- there was obviously the increased accretion this quarter. You guys did move -- you increased the accretable yield balance. So should we expect there to be some more -- I guess a higher level of accretion coming into the next few quarters, probably not as high as it was in that $83.7 million this quarter, but probably higher than what it was in the third and second quarter? Does that make sense?

Carlos J. Vazquez

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

Richard L. Carrion

Yes, I mean, I think we -- the nominal dollars, I think you would expect a -- just by the level yield basis, you would expect the nominal dollars to come down, but we are comfortable with the yield. We did provide 50 basis points this quarter on the yield that were for items that were loan resolutions, readjustments, but we're comfortable with the adjusted number for the next -- in the short term.

Carlos J. Vazquez

Yes, if we -- that sort of commentary we gave on the yield, Brian, is a lot better soon and it gets a bit more -- the range gets wider as we move on in time. So -- but for the moment, I think that's a reasonable indication.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

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

Richard L. Carrion

Right.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Should we be thinking about going back to a level that's closer to amortizing at about $38 million going forward for the next, what, 5 and 2/3 quarters?

Jorge J. Garcia

This is Jorge Garcia. I think, again, the amortization of the indemnity asset was the negative amortization that's going to depend on the recast and the changes on expected cash flows going forward. That one's a little bit harder to identify. I would say that the closer that we get to the end of that LSA loss-sharing agreement, the more impact those reduced losses will have or that we need to amortize -- be able to amortize that indemnity asset through the life of the LSA, which is shorter than the average life of some of the loans, which will take -- yes. It will take...

Carlos J. Vazquez

That is slightly a counterbalance of the fact that the NPS [ph] is going down. So it will be 2 contrary effects, and really hard to forecast which one wins out, Brian. This is a pickup [ph].

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Right, but I mean, really, we know that the amortization drag that's going through the negative fee income item, that's going to be gone by May of 2015, right?

Richard L. Carrion

June 2015...

Carlos J. Vazquez

By June 2015, it will be over.

Jorge J. Garcia

For the non-single family portion.

Richard L. Carrion

Which is wonderful [ph].

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, yes, yes. In other words, they're going to have the accretable yield going through because the loans are still going to have a longer life than the loss-share...

Carlos J. Vazquez

That's exactly correct.

Operator

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

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