Good morning. And welcome to the Popular, Inc. First Quarter 2017 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, that this event is being recorded. I would now like to turn the call over to Investor Relations Officer at Popular, Inc., Brett Scheiner. Please go ahead.

Good morning. And thank you for joining us on today's call. Today I am joined by our Chairman and CEO, Richard Carrion; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano, who will review our first 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 webpage at popular.com. I will now turn the call over to Mr. Richard Carrion.

Good morning and thank you for joining the call. I'd like to address the highlights and key events of the first quarter, then, I will present an update on our business and our thoughts regarding the fiscal and economic situation in Puerto Rico. Carlos will comment on the quarter's financial result and Lidio will provide and update of credit trends and metrics. Before we delve in our financial results for the quarter, I'd like to make some comments regarding the announcement we made this morning about changes in our leadership structure. Effective July 1st, I will assume the position of Executive Chairman of the Board of Directors of Popular. Ignacio Alvarez who has been President and Chief Operating Officer since 2014 will become the new CEO and a member of the Board of Directors of the corporation. 26 years as CEO and with Popular in the strong position, the time is right to begin a transition in our leadership structure. I'm ready, Ignacio is ready and the organization is ready for both of us to assume the roles. As Executive Chairman, I will continue to work with Popular collaboration with Ignacio on strategic matters including mergers and acquisitions, innovation and technology, social responsibility initiative and government and client relations. As President and COO, Ignacio has demonstrated his strength as a leader delivering positive results in our Puerto Rico business despite challenging conditions and overseeing the repositioning of our operations in the United States, all while showing a deep understanding of our organization's culture and earning the respect of employees at all levels. He has proven he has the skills, the experience and the vision to lead this organization. Leading popular has been the greatest privilege of my life. I'm very proud of everything that we have accomplished. As we are…

Thank you, Richard and good morning. Slide 4 presents our GAAP financial results for the first quarter. Comparing quarter's adjusted net income can be found on Slide 5 and additional information is provided in the appendix. Today's earnings press release detailed variances from the fourth quarter driven by higher net interest income and lower operating expenses. Last quarter's reported results were meaningfully impacted by the resolution of the FDIC arbitration. Net interest income for the first quarter was $362 million, up $7 million from the fourth quarter, mostly due to higher revenue resulting from the higher volume of loans and investment securities, and higher net interest margin. Our NIM was 4.08%, off from 4.02% last quarter mostly due to higher asset yields and lower funding cost. The average yield of our $1.8 billion Westernbank portfolio decreased slightly to 8.53% from 8.56% last quarter. Run-off in this portfolio has slowed considerably in recent years. Over time, we expect the yield on this book to decline as a result of prepayment and loan resolutions. The cost of our interest bearing deposits was down 2 basis points to 56 basis points. We continue to deliver organic commercial loan growth in our U.S. operation with growth of 4% in the first quarter. For 2017, we anticipate slight growth in overall loan balances with the U.S. growth more than compensating for Westernbank run-off and limited growth in Puerto Rico. On the island, we have a fed limited organic growth with selective loan portfolio purchases in the last few years. We will continue to pursue this acquisition strategy if attractive transactions become available. Along those lines, after we view our portfolio and experience to-date, we resume the purchase of personal loans from Lending Club, acquiring $42 million in this quarter. Credit performance in this portfolio continues…

Thank you, Carlos, and good morning. Despite the continued challenging economic and fiscal conditions in our main market Puerto Rico, overall asset quality remains stable during the quarter. In Puerto Rico, we experienced a decrease in net charge-off, an increase in NPLs and inflows to NPLs, the last two driven by a single commercial relationship of $25 million. In the U.S. we experienced strong loan growth and stable credit quality metrics. Given the macroeconomic and fiscal conditions in Puerto Rico, we remain vigilant to change in current quality trends. As Richard covered on Slide number 3, our current outstanding, direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $516 million, decreasing by$13 million from the prior quarter. Our direct exposure to the central government and public corporations is minimal, representing only 40 basis point of total Tier 1 capital. Our municipality exposure consists mainly of senior priority loans to a select group of municipalities whose revenues are independent of the central government. In most cases, the good faith credit, our limited taxing power of rich municipality is pledge to the repayment of the loans. Our top four exposures are to Carolina where the airport and several major tourist hotels are located; San Juan, the capital of Puerto Rico, Guaynabo, the municipality with the highest per capita income and Bayamón, the second most populous municipality. These municipalities comprise 77% of our total exposure. As discussed by region, the oversight Board certified and amended fiscal plan for Puerto Rico last month. Among other things, the fiscal plan provides for reductions of generous on subsidies to Puerto Rico municipalities. Such subsidies constitute a material portion of the operating revenues of certain smaller municipality though only represent 7% of revenues for the larger municipalities, that makes up the majority of our…

Thank you, Lidio. And please turn to Slide 10. Before we open the lines to question, let me conclude today's remarks by reviewing the actions we've been taking to drive shareholder value. Our healthy revenue generation and our leading market position in Puerto Rico allow us to earn above average margins. We're encouraged by the progress in our U.S. operation and by the strength of our Puerto Rico franchise. In spite of the difficult macro environment, we continue to see stability in our main credit quality indicator, while remaining attentive to fiscal and economic trends. This improved credit profile together with our strong capital levels creates a solid foundation for our strategy. We also benefit from our EVERTEC ownership and our stake in Banco BHD Leon, the second largest bank in the Dominican Republic. In the past two years, we have purchased $2 billion of assets in Doral transaction, reinstated an increased our common stock dividend and completed our common stock buyback. Given the fiscal and economic challenges we face on the island, we're focused on the current situation while continuing to make long-term investment in new business initiatives. The actions taken by the oversight board and the new administration in the coming months will be a defining moment for Puerto Rico's future. We remain confident that Puerto Rico will emerge from the current challenges with the more vibrant and diversified economy and we will do everything in our power to ensure this outcome. Although our company is intrinsically linked to Puerto Rico, Popular is also a story of a solid organization that has navigated through a complex environment and has emerged as a stronger, better capitalized and a more diversified institution. We look forward to reporting on our progress in the next few months. And with that, I'd like to open the call for questions.

[Operator Instruction] The first question comes from Gerard Cassidy with RBC. Please go ahead.

Good morning.

Good morning, Gerard.

Can you guys share with us when you look at the return of capital that you've given shareholders over the last two years, when you made your proposals to the New York Fed? Did they tell you that they had to get it approved out of Washington or was it entirely a New York Fed decision?

I think everything gets approved out of Washington D.C., Gerard.

Okay. No, no, I agree, and hopefully there is change coming where that may work in your benefit if that's the case, going forward maybe returning more capital.

They haven't got that memo yet, I think.

And the second question. Richard, you talked about some of the near-term challenges that the island's economy may face due to the fiscal situation. Do you think that could have a near-term impact on credit quality though you've managed it very effectively? It's been stable on the island, but could that have some sort of negative impact?

Well, I don't think, depending on what you call near-term, but we don't think any of this will flow through until maybe at the very earliest, late third quarter or perhaps not too early next year. We'll see the budget in its entirety next week, but we do suspect there is going to be according to the 10-year plan. There is going to be a significant reduction in some of the government expenditures and that will naturally have an impact, although as we mentioned, we do see some near-term opportunities. There will be some outsourcing. There will be some privatizations and that hopefully will start putting capital back into the economy.

Great. And then just finally, you guys have always given us a good detail on the municipal exposure that it's obviously separated from the government exposure. When you guys looked at it, I know you mentioned, I think, Lidio mentioned that the subsidies may drop even though it was not material to the larger municipalities. When you look at the total number, can you give us what the top three or four municipalities represents of that total number?

Our top four municipalities is 77% of our total exposure. That's what you asked, Gerard?

Yeah. That's good. Then just finally on that, if you use the fiscal situation, you know what's going on in the economy as a comparison. Are any of those large municipalities in its dire shape as the total fiscal situation?

No, not at all.

Okay, good. Thank you. I appreciated. Richard congratulations on the retirement.

Thank you. I am going to hang around.

Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.

Hi. Good morning.

Good morning.

I wanted to first ask on the $25 million credit, was that directly avoided to the new budget or can you give us maybe any flavor on industry?

We usually don't give that type of details for reasons related to the government.

There's no relation to the government.

Direct relation to the government.

And then on the expense guidance of $320 million does that line item, professional fees move back higher from here, or can you give us any color around the increase going forward from 1Q levels?

As you know we tend to no go to granular line by line, because each line has to be volatile, that is why when we give you the guidance of $320 million, we go to on the aggregate level. What's driving the number is that there is some seasonality and some timing differences on this quarter's expense level, so there is some expected actually will happen. It didn't happen this quarter and they touch a bunch of different lines, technology, professional fees, a number of different expense levels. So, it's more a matter of timing and we want to make sure that is understood.

Okay. Fair enough, then on the increase in deposits, can you give us any more color around the $1.7 billion retail versus government deposits, and are those sticky numbers, the earning asset base kind of stay at the first quarter levels?

We'll provide more details on our deposits on the 10-Q, but on the call report, but the – all lines of deposit went up, but client deposit, government deposit, so all the performance of every line of deposit business was positive. With regards to other question of the stickiness of deposits, government deposit in particular, time will tell. We obviously have a significant amount of those and exactly how those will behave, I presume will impart depend on the budget that Richard mentioned. We'll see next week and a number of other things. So, time will tell.

Okay. Great. Thanks for the color.

Our next question comes from Scott Valentin with Compass Point. Please go ahead.

Good morning gentlemen, thanks for taking my question. With regard to Lending Club, I know as you guys, you mentioned you restarted the relationship just wondering, do you see that growing further going forward. I think back in early 2016, you are acquiring I think $80 million a quarter roughly, that was 1Q 2016, just wondering if you see the relationship ramping back up to that level?

I think I mean at this point in time, we purchase some more. When we discontinued the program, we had a couple of hundred million outstanding I think at the time, and overall, probably going to gravitate around 2.5, to some extent we're just replenishing run-off. It's probably going to be in that ballpark. It will depend on how quickly and who repays and how quickly they repay.

Okay. So, the goal is about $250 million?

That's around probably where it's going to end up. Yeah.

And then just on the securities portfolio, pretty significant growth this quarter. Just wondering, if that reflects obviously deposit growth, was there, but just wondering if that reflects maybe a lack of opportunity or lack of loan demand that you see or if it's you guys being somewhat conservative and then just terms of duration and maybe what you guys invest in during the quarter?

I think it's a little of all the above. But…

I mean, you recall in the last quarter call we had explained some of the things that affected our margin for the prior three quarters, probably the cash was building up and we have been cautious in putting that cash to work. But part of what you are seeing in the investment portfolio is just that we are trying to put some of that cash to work. So, some of that, the characteristics of our investment have not changed materially. They continue to be high-quality treasuries or agencies. They to a large extent, we have nothing else in there and the average life is…

Duration is around 3.4 years.

Duration about 3.4 years.

Okay. Alright thanks. And then just one follow-up question, because no good deed goes unpunished. Congratulations again on the buyback done and just wondering when did you guys...

I have no idea what you may want to ask now.

Just wondering, as you look forward, is the timeframe kind of similar you think what it was last year in terms of submission and getting the results back and then finally making the announcement?

Yes. Very much.

Okay. Thanks very much.

Our next question is from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Hey good morning guy. Just wondering Richard with your new role specifically mentioning a particular emphasis on mergers and acquisitions, if any of the criteria for M&A has changed or will change you know as you kind of look at various opportunities, you still think, New York and Florida primarily, or is there anything maybe now should be included as well?

Well, we're focused on those two markets as well as any assets that make sense to us that would either add a team in a new business line something that would increase our earning assets or decrease our funding cost is really what we're focused on.

Okay. So you won't be looking to acquire stakes in banks like this, the BHD Leon or owners something like that just kind of totally…

We've talked about topping up our stake there to 20%, but we have no specific plans on that.

Okay. And then just to circle back to the discussion about the cash levels on the balance sheet at almost $4 billion now. I mean, is how much of that is really directly tied to the government and sort of the uncertainty what the budget is going to look like over the next couple of quarter and what might flow out pretty immediately versus how much you actually feel like you need to have in cash and potentially it could go to work for the next quarter?

No. As I mentioned, it's a bit of all of the above. If anything we're going to err on the side of caution in terms of liquidity because there isn't uncertainty regarding how those balances could behave in the next few months. But there are mostly operating accounts, so we are keeping a very close cut. There is just some major events are about to unfold in the next few weeks, so we'll again err on the side of caution. Aside from that there is just few place where we can deploy the money where we'd like to. Loan demand is not as good as we like locally, so we are seeing a lot of that in the space.

Okay. And then just my final question, Carlos, I think you mentioned the expense guidance around 3 and average is about $320 million per quarter. Does that include the first quarter, so maybe we are going relying a little bit above $320 million for the next couple of quarters?

That is for the next three quarters.

Okay. Great. Thanks for taking my questions.

Thank you.

[Operator Instruction] Our next question comes from Joe Gladue with Merion Capital Group. Please go ahead.

Good morning.

Hi, Joe, how are you?

I think I just have one question left. Just one of you could give us a down of what you are seeing in regards to deposit rates in the various markets you operate in?

Well, I think, locally we managed to hold a line so far. We've seen a little pressure in the U.S. operation, but not much until – we'll see how the next few months, but right now it's not a concern on either market left so in the U.S., but it's not been a concern.

Okay. All right. Thank you.

Okay.

This concludes our question-and-answer session and also our conference. Thank you for attending today's presentation. You may now disconnect.