Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Popular Earnings Conference Call. My name is Philip, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Brett Scheiner, Head of Investor Relations. Please proceed, sir.

Good afternoon, and thank you for joining us on today's call. I'm honored to be here and eager to get started. Today, I'm joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our second quarter results, and then answer your questions. They will be joined in the Q&A session by other members of our management team. Before we start, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause 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.

Good afternoon, and thank you, all, for joining the call. I'd like to first address the highlights and key events of the quarter, and then discuss our progress in priority areas. Carlos will then go into greater detail on the quarter's financial results, and Lidio will provide an overview of credit trends and metrics. So please turn to the second slide. Popular reported $328 million in net income for the second quarter. To say there's a little noise in these numbers would be the understatement of the century. There are 3 large pieces affecting our results, 2 of which we previously announced, and we will discuss them in greater detail. These are the EVERTEC IPO and the sale of residential NPLs. So to this, we add the impact of changes in the Puerto Rico tax code, and we'd come up with an adjusted net income figure of $68 million in a quarter that reflects our 2 greatest sources of strength: revenue-generating capacity and capital levels. Our margin of 4.46% remains strong relative to peers, while our robust capital position allowed us to aggressively address the level of non-performing loans, which we have reduced by 42% in the second quarter. After completing 2 bulk sales in the first 2 quarters, we have now reduced NPLs by more than $800 million in the first half of 2013. The sale of mortgage NPLs this quarter marked the end of major loan portfolio de-risking transactions. However, we'll continue our workout efforts through individual resolution of problem credits, and continue to actively manage our portfolios within enhanced risk management structures. The underlying credit trends continue to move in the right direction. Excluding the bulk sale, NPLs reached their lowest level since 2006, and net charge-offs decreased to their lowest levels in 5 years. In addition,…

Thank you, Richard, and good afternoon. With the NPL sale, EVERTEC IPO and Puerto Rico Tax Reform, this quarter had many moving parts. On Slide 6, we present the financial summary excluding the impact of these events. Please note that it is reconciled to GAAP figures in the appendix to the slide deck with supporting information disclosed in today's earnings press release. While the impact of recent events is significant, our underlying performance is driven by: number one, stability in net interest income; and two, improving credit trends. Net interest income for the quarter was $354 million, up $8 million from Q1, mostly due to the impact of the Q1 mortgage purchases in both Puerto Rico and the U.S. Our Puerto Rico mortgage business originated $439 million in Q2, up from $397 million in the same quarter last year and $82 million higher than in Q1 of this year. We continue to work on reducing our funding cost. Puerto Rico deposit cost fell 4 basis points on a linked quarter basis to 64 basis points. This marks our 17th consecutive quarterly deposit cost decrease in Puerto Rico. While a few alternatives remain to potentially achieve incremental savings, many of the opportunities to lower cost have already been captured. Noninterest income was up slightly on higher deposit service charges and other service fees, offset by a lowered net gain on the sale of mortgage securitizations. The average yield in our $3.2 billion covered loan portfolio increased to 8.6% from 8.31% last quarter due to greater projected cash flows. While the covered loan loss provision is up $8 million over the last quarter, keep in mind that 80% of this expense is absorbed by the FDIC loss-sharing agreement. This offset, in addition to the FDIC's 80% reimbursement of the expenses related to…

Thank you, Carlos. Please turn to Slide #9. Before discussing the credit metrics for the quarter, I think it is useful, given the bulk sale is completed, to compare current credit indicators with the ratios we had prior to the start of the financial crisis in late 2007. The bulk sales have driven the reduction of our NPA, NPL and net charge-off ratios to levels prior to the financial crisis. The NPA ratio of 2.7% in this quarter is slightly above the 2.4% ratio we averaged for the third quarter of 2007. The current non-covered NPL ratio of 2.9% is slightly below the precrisis level of 3.1% for the third quarter of 2007. Excluding the effect of the NPL sales, the net charge-off ratio of 1.47% in this quarter is 8 basis points above the 1.39% charge-off ratio for the third quarter of 2007. As discussed by Richard, the sale of mortgage NPLs this quarter marked the end of major loan portfolio divesting transaction. It is important to note that coupled with the accelerated improvements seen through the completion of NPA sales, we continue to see positive trends that are being driven by stabilizing credit conditions, internal workouts and resolutions of problem credits. The underlying credit performance continue to move in the right direction. Excluding the bulk sale, NPLs were stable. Total NPL inflows remained at the record low levels for this credit cycle reached during the first quarter of 2013. Non-performing loans decreased by $437 million or 42% from the first quarter of 2013, and are down 74% from the peak levels in the third quarter of 2010. This reduction was driven by the impact of the sale of mortgage NPLs. Excluding the sale, the slight increase in NPLs was driven by improvements in the U.S., offset in part…

Thank you, Lidio. Please turn to Slide 13. Before we open the lines to questions, let me conclude today's remarks by reviewing the actions we're taking to drive shareholder value. 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, on top of the improvements resulting from the residential NPL sale. With the major NPA transactions now behind us, Popular's credit metrics are close to precrisis historical levels. In summary, we're driving value for our shareholders with a significant portfolio de-risking transactions, which we have completed and our ongoing efforts to build capital. We have robust capital under existing Basel I capital requirements, which we expect to continue under the proposed 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 stories in our EVERTEC ownership; our stake in BHD, the second-largest bank in the Dominican Republic; and in determining the best path to value creation for our U.S. operations. We look forward to reporting to you on our continuing progress. With that, let me open the call for questions.

[Operator Instructions] And your first question comes from the line of Ken Zerbe from Morgan Stanley.

I guess my first question just in terms of TARP, you made a comment earlier at the beginning of the call that there really was no change, or you had no sort of update on the timing of TARP repayment, but I would have thought that the 2 big NPA sales would have materially improved the likelihood of a TARP repayment somewhat sooner rather than later. Are we wrong in that assumption? I thought that we'd be a little bit closer to getting out of TARP at this point.

Well, I think you're right. We're certainly closer. But as you can imagine, this is an ongoing dialogue we have with the regulatory authorities as to when is the right moment. It's not exactly a symmetrical conversation there, but I think we're making good progress. Our aim is to get out as quickly as possible, but to get out in the best way for our shareholders. So we'll continue fighting that battle.

Okay. I guess, the next question just in terms of EVERTEC, I think you mentioned there was -- your expenses increased, I forget how much it was, in the high teens, I believe. But then you made a comment that there is a corresponding increase in the revenue line, but I thought, I guess, EVERTEC is profitable at this point. Can you maybe tell us what the net positive benefit of EVERTEC was in the quarter? And that would be helpful.

Okay. I'll let Carlos take that. That was an accounting change. So it really doesn't change the net income line. We're expecting the EVERTEC to report earnings in a few days. So you have some information there. Go ahead.

I think your question actually can -- refers a lot more to the EVERTEC income as opposed to the accounting changes. We report our proportionate share of EVERTEC income in our results, and that is included in other income. But we will not comment on the exact magnitude of that number because that's a nonmaterial nonpublic information until EVERTEC reports their results. So our proportionate share of their income is included in our results. The actual number, you can back it out when they report in a few days.

Understood. Okay, so in a few days at least we can call back or whatever and get the exact numbers afterwards. Okay, perfect. And then just last question. What was that?

It's 32.4% of whatever their income.

Understood, perfect. And then just the last question on the tax rate, with the increase in the Puerto Rican tax rate with the 35% that you mentioned, was that essentially the number for the entire organization or is that just for the BPPR earnings?

No, that's for the entire organization. As Carlos mentioned obviously, we'll be working to bring that down over time. But at first blush, that's what it comes out to be.

Your next question comes from the line of Alex Twerdahl from Sandler O’Neill. Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division: Just a couple of questions here. First, could you quantify the amount of cash that you had at the holding company at the end of the quarter? And also the cash that you had at the bank level that could potentially be dividended up to the holding company?

Sure. We'll tell you the holding company figure, Carlos, is what? 400?

Yes, it's just north of $400 million.

At the bank level, I mean, I guess we could dividend up, but that's again subject to negotiations.

The bank level can change pretty quickly. We just change deposit rates. So. Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division: Okay. Can you help me understand also the math behind that tax benefit? I saw in the Q that you had the DTA in Puerto Rico at about $622 million at the end of the first quarter. How does that translate to that $216 million tax benefit number? Just the math behind that.

You basically have the tax benefit, which you are dividing by a 30% rate. You now divide by the 39% rate, and you gross it up that way. If you recall a couple of years ago when rates were lowered, it was the other way around. I mean, we took a hit. So I guess we get whipped up by GAAP and these fiscal policy changes, but it's really fairly, arithmetical just dividing by the different rate. Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then that normalized earnings projection that you gave at the end of, or I guess, during your Investor Day, that was a 25% tax rate? Is that correct?

That was -- yes.

I believe it was. I'll have to check on that, okay? Alexander Twerdahl - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then just one last question. What was the level of accruing TDRs at 6/30?

The total TDRs -- this is Lidio. The total TDRs at the end of the second quarter was $195 million. That is down from -- by $154 million from the first quarter. A lot of it was driven by the sale. And accruing TDRs at about 80%, 81% of the TDRs are on accruing status.

Your next question comes from the line of Todd Hagerman from Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Richard, I just wanted to follow up on your comments regarding EVERTEC and the interest in retaining a significant share of the company, which is certainly understandable. What I was curious about is obviously, EVERTEC is a component of the eventual TARP repayment presumably, and now that you're at 32.4%, is it something -- should we think about a benchmark in terms of ownership that maybe in excess or around 25%? And how should we think about kind of monetizing that unrealized gain that you referred to? I'm just trying to get a sense of how you're thinking about that residual investment and the different dynamics that you're thinking about in terms of exiting the regulatory orders and TARP and so forth?

That's a fair question, Todd, and I'll be a little vague in the sense that yes, we do want to maintain an investment in EVERTEC. Hopefully, that investment will be north of 20%. But this is a moving part, that probably in -- when we get down to brass tacks in TARP, it is entirely possible that we monetize and sell down to a different level. So without a doubt, that is one of the arrows in our quiver, and we do want to maintain a long-term ownership stake in EVERTEC. But we'll see how the conversation goes. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: That's very helpful, and then if I could just -- a question for Lidio. In terms of the credit metrics, excluding the impact of the sale this quarter, as you mentioned, inflows are relatively flat, you had a couple of large credits on the commercial side that came in. What I'm curious about is if we step back prior to the bulk sales and the progresses the company was making on the credit side, we have a different dynamic today in terms of the economy in Puerto Rico being relatively stable, if you will. So what I'm curious about is kind of your outlook for that residual portfolio as you talked about kind of it's now shifted towards kind of a workout strategy as opposed to any material loan sales. So I'm trying to think about with a stabilizing economy and switching gears to workout, how should we think about the pace of improvement going forward based on what you see today and the level of classified asset and so forth?

The level of NPAs that we will have or NPLs that we will have in Puerto Rico is significantly lower than the one that we had a year ago. So certainly that's going to have an impact. When I look at our portfolio, I tend to look at this way. I -- when I look at the commercial exposures, our -- most of our clients are now used to operating on a low growth environment, and those who has been successful after 5 to 6 years of recession will continue to be successful as we continue to move forward. We have -- we made -- early in the cycle, we've made a lot of adjustments to our retail exposures. And those have -- I mean, the numbers and the credit metrics for those portfolio has actually improved through the recession. Our short-term expectation, if nothing significantly changes, is for them to continue to behave in the same manner. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay. But again as I think about the stabilization granted, is it more -- and if I think back to the asset sales typically in the first quarter with the commercial construction focus, is that something that you're more optimistic about now relative to the mortgage? Or how do you think about the 2 portfolios at this stage relative to a no growth economy? Where do you see the potential upside post the sales right now given where we are with the economy?

In Puerto Rico or the U.S. or both? Because these are different stories. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Both. I mean, I'm more focused on Puerto Rico for the most part, but I'm just trying to tell that -- or understand that knowing that there's been some incremental improvement in the lower end of the housing market, whereas on the commercial side, it's definitely more problematic. So I'm just wondering at this stage of the game, where you see kind of the momentum in terms of further reductions from workout standpoint.

I mean, I will say I will reiterate what I said. We -- our commercial exposure after 6 years of recession, I think that people have been able to operate and the people that are continuing to -- our commercial exposures are now stronger names and therefore, my expectations, if things remain the same, is for the portfolio to behave as they have behaved with steady improvements on a quarter-to-quarter basis. I'm not sure if I answered your question. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: No, that's helpful. I appreciate that, and then lastly, Richard, just kind of a bigger picture question on the economy. With the passage of the budget and how the differentiation between the corporate side versus the consumer, do you have any early impressions in terms of talking with various customers, particularly at the -- in terms of small business in particular, how they're thinking about the residual impact on them, and how it may affect their opportunities or rebound going forward?

Well, look, obviously, I'm not happy. Nobody's happy with the tax increase, and we can argue about how that whole reform should have been done. But as Lidio mentioned, these guys, if they're still around, they've been hanging out tough for 5, 6 years. So they're used to operating in this environment. They'll adjust -- obviously, there could be some flow back into lower income for them. But I think in general, I think they will adjust.

One commentary with regards to the earlier question, the tax rate that was embedded in the presentation that we had earlier in the year, Investor Day, was 22%.

[Operator Instructions] And your next question comes from the line of Taylor Brodarick from Guggenheim Securities.

Actually all my questions have been answered.

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

Yes, follow-up. So actually, my -- the follow-up question I have was on expenses. The -- now given the inclusion of EVERTEC in the expense line and the revenue line, when we think about your previous guidance or for normalized expense number of roughly $1.1 billion, how does that change going forward? What's the new normalized earnings number?

Well, you can do it either way. But the -- you would have to adjust the expense number up by roughly 18 [ph] a quarter and you'll have to adjust your revenue number up by the same amount.

Okay. So there is also, I think, a $10 million increase in your FDIC deposit insurance cost this quarter, which presumably if we multiply that, that would be another $40 million. I just want to make sure that there's no -- either that reverses or...

We discussed that in the first quarter. The first quarter benefited from a credit on the FDIC assessment of $11 million. That is not something that does not happen on an ongoing basis.

Got it. Okay.

The second quarter is the better number to use going forward.

Understood, okay. And sorry to harp on the tax issue. You mentioned just now that it was 22% before, now it's 35%. If I do my math correctly, essentially, are you saying that your pretax earnings are now going down by roughly 12 percentage points versus where we expected them to previously just simply based on this tax change? That is a big number. I just want to make sure that we're right on that.

No. It's a valid question. What we said was the tax rate that was embedded in the normalized example used in our Investor Day was 22%. Then we said that our current estimate of what the tax rate will become given the changes as we understand them now is closer to 35%. Now we actually tried to address our tax expense. But mostly relations of the new tax laws in Puerto Rico are just coming out now. So at this point in time, it's not clear to us how we could address the new effective rate, but we are hoping that we can actually do things to lower it.

[Operator Instructions] And your next question comes from the line of Dan Bandy [ph] from Integrity Asset Management.

Just a follow-up on one of your earlier comments. You guys had mentioned regarding TARP exit, and talking to the regulators that I think you said something like it's not always a symmetrical conversation or something like that. I'm just curious, I mean, have you guys floated ideas that either isn't getting a response or is being shut down or is there something in particular they're pushing you to do that you don't want to do? Can you give any more color on that?

Well, I mean, I just -- it was moderately sarcastic, but it's like arguing balls and strikes, what can I tell you? We do have this ongoing conversation. They are -- they take their time before they want to release us from a few things here. So I just think it's going to be an ongoing dialogue until we're happy with the results of the conversation. But yes, there is an ongoing dialogue, and they are naturally a little more conservative than probably we'd like them to be.

So is it fair to say then that you have floated plans to them that perhaps they did not like up to this point?

Well, really can't discuss on what the conversations have been. Okay?

Ladies and gentlemen, this will conclude the question-and-answer portion, as well as today's conference. Thank you, all, for your participation, and you may now disconnect. Have a good day.