Q2 2019 Earnings Call
Good.
Welcome to the <unk> Q2, 2014 earnings conference call and work.
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Oh, no, let's turn the conference over to Mr., Paul Corridor Investor Relations manager a popular. Please go ahead Sir.
Good morning, and thank you for joining us on todays call with US today is our CEO Ignacio Oakland.
Yeah, Bill Crow Lisnaskea NRC around video Serrano, They will review our results for the second quarter and then answer your question.
Other members of our management team will also be available during the <unk> session.
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.
You may find today's press release, and our SEC filings on our webpage at popular Dot com.
I will now turn the call over to our CEO Ignacio <unk>. Good morning, and thank you for joining the call. We had a very strong second quarter and continued to build upon the success achieved in the first quarter.
I will address.
Key events for the quarter and give an update on our business and provide some thoughts around the environment in Puerto Rico Cargos will comment on the quarter's financial results and Lydia will provide an update on credit trends and metrics.
Please turn to slide three.
We reported quarterly net income of $171 million, which is $3 million higher than last quarter's net income.
This quarter's results were driven by higher net interest and non interest income and lower income taxes, partially offset by higher expenses and lower revenues from mortgage banking activities.
Net interest income was $5 million higher than the previous quarter well. This variance was mainly driven by the impact of one more day in the second quarter, our deposit business and lending operation continued to show strength. This was particularly evident in auto and commercial loans.
Additionally, we saw higher volume and yield on our investment portfolio.
Credit quality results were solid continuing their positive trend, we saw lower NPL inflows and charge offs compared to the first quarter.
Tangible book value per share increased by $2.86.
The $51.44.
Now I'd like to give an update on some of the metrics, we track and comment on the business environment in Puerto Rico.
Please turn to slide four.
With respect to migration trend.
Most recently released passion data from the San Juan Airport reflects that the net number of people who left the island in the first quarter was approximately 2000.
Excluding the first quarter of 2018, which was substantially impacted by the inflow people coming back to Puerto Rico following the hurricane.
This figure reflects it significant reduction compared to the first quarter of 2015.
16 and 17.
Which averaged out migration of approximately 18000.
In June .
Total employment, which includes self employed individuals was flat both year to date and year over year.
The unemployment rate remains stable than June at 8.4% and is the lowest unemployment rate in Puerto Rico going back at least 55 years.
Salary employment grew increasing by 0.8% year over year.
Once again this quarter the improvement was driven by an increase of 3% in private sector job.
Offset by 5% decline in public employment.
The auto industry continued to perform well 52000, new units have been sold year to date through June up 4% compared to 2018.
Cement sales were down 8% when compared to the first six months of 2018.
Though there was a considerable surge in activity in early 2018, following the hurricane however.
Sales have improved sequentially and were 14% higher than the comparable periods in both 2016 and 2017.
Internal metrics, we track to monitor economic and Craig and client activity are also showing encouraging trends.
Our customers the debit and credit card purchases in the second quarter increased by 2% compared to the same period in 2018 and grew 10% sequentially.
Consumer loan trends in Puerto Rico have also been favorable, especially on the auto sector.
Mortgage origination trends improved significantly compared to last quarter, driven by higher home purchase activity.
On the commercial loan side balances were flat and we expect that incremental lending activities will be tied to the performance of the local economy.
Popular as customers in Puerto Rico have increased by 24000 since December 2018.
And by 71000 over the past 12 months, including the 30000 customers that were acquired with a reliable transaction.
As we have commented before the sustainability and pace of further progress in the Puerto Rico economy will be heavily dependent on the magnitude in timing of federal funds flowing to the island.
But as Fred Smith has been of these funds have been slower than many had hoped.
And the local political environment as you know is complicated and uncertain.
Given recent events on the island.
There will likely be even greater federal oversight and this will probably caused further delays. However, we do not believe that the total amount of recovery fund that ultimately come to Puerto Rico will be reduced.
I will now turn the call over Carlos who will discuss the financial results in greater detail.
Thank you Ignacio good morning.
Please turn to slide five core said second quarter results.
Note that the additional and from that additional information is provided in the appendix to our slide.
Todays earnings press release.
Detailed variances from the first quarter, primarily higher net interest income higher non interest income.
Lower taxes.
Offset in part by higher operating expense.
Net interest income for the quarter was 476 million.
An increase of 5.4 million, mostly as a result of having one more day in the second quarter, which added 3.7 million.
Arc in Q2, our net interest income benefited from higher commercial loan volumes in the U.S. and consumer loan volumes in Puerto Rico.
You would also benefit benefited from a higher contribution from a larger investment portfolio driven by an increase in Puerto Rico deposits.
This was offset in part by higher cost of deposits in the U.S. and public deposit in Puerto Rico.
We continue to be asset sensitive.
So the recent expectation of lower insurance rates will negatively impact our results.
We anticipate that each 25 basis point drop in interest rates will negatively impact our quarterly net interest income by $4 million to $5 million.
Other factors like asset mix and the shape of the yield curve will also impact this number.
Our provision for the second quarter was essentially flat.
Video will expand on credit related martyr matters shortly.
The $2 million, increasing our noninterest income was primarily driven by a fairly broad based increase in fees, including higher credit card interchange fees insurance fees account service charges and trust services.
Additionally, we recorded a positive adjustment of 4.4 million, resulting from the resolution of necessity claims for previously sold loans.
This was somewhat offset by lower income from our mortgage banking activities.
Driven by by an unfavorable fair value adjustment on MSR of $13.4 million in the second quarter, resulting from the expectation of lower rates and higher prepayments.
Total operating expenses were 363 million, an increase of 15.6 million from the prior quarter.
Oreo expenses were down 1.5 million sequentially, reflecting higher gain on sale of properties.
Our previously guided level of 10 million per quarter for this expense line has not materialized.
However, other expenses have increased slightly to offset that difference.
Professional fees were 7.8 million higher in the quarter, primarily driven by increased expenditures and regulatory accounting technology and legal fees.
Business promotion costs were also higher reflecting higher seasonal advertising costs and higher consumer reward program expense.
The latter is the result of increased client activity.
Historically expensive aquilar have exhibited some seasonality and should increase as we progress through the year.
We reiterate our expectation that average rate average corporate expenses in 2019 will be approximately 364 million.
Driven mostly by higher technology regulatory and personnel costs.
Obviously, we will strive to beat this number.
Our effective tax rate for the quarter was 19%.
But this included a benefit of 6.3 million from prior year adjustments.
Excluding this adjustment our effective tax rate was 22% within our 22% to 24% guidance for the full year.
Please turn to slide six.
Our net interest margin was four point, 11%.
Nine down nine basis points from last quarter.
Asset yields were down five basis points in the quarter, primarily due to asset mix.
Increase deposits led to an increase in lower yielding money market and investment balances.
These higher investment volumes added to our net income, but reduce our our overall asset yields.
Loan yields were down just two basis points.
Total deposit costs in the quarter increased four basis points to 75 basis points. The cost of our interest bearing deposits was up five basis points to 96 basis points, mostly due to higher volume and raised for Puerto Rico public sector deposits and higher deposit cost in the U.S.
The cost of retail and corporate deposits in Puerto Rico was unchanged from the first quarter.
I think Nancy Ignacio mentioned earlier.
Second quarter auto sales in Puerto Rico were strong.
Our auto portfolio grew by $83 million in the second into in the second quarter.
The Puerto Rico mortgage business originated 183 million of loans in the second quarter.
Increasing by $48 million versus the first quarter.
This origination volume is also up from $169 million in the second quarter of 2018 and skewed in favor of existing home purchases.
Summarizing the outlook for probably large loan portfolios, we continue to anticipate slight growth in overall loan balances for popular in 2019 with incremental growth in Puerto Rico and positive, but slower growth in the U.S.
Please turn to slide seven.
Our capital levels remain strong relative to mainland peer banks as well with respect to well capitalized for regulatory requirements. Our comedically tier one ratio was 16.8% up from 16.4% and tangible book value in the quarter increased by $2.86 per share from 40 858 to 51 44.
The increase was driven by our quarterly net income and higher realized gains on the investment portfolio.
Which more than offset the impact of our common and preferred dividends.
We will continue to pursue our target of maintaining and improving our double digit return on tangible equity.
Earlier this month, the federal banking regulatory agency issued a final rule that simplifies certain regulatory capital requirement.
Among other things this rule.
That will be effective April 1st 920 20.
Will relax the limitations on the amount of mortgage servicing asset and certain deferred tax assets allow FCC one.
It will also increase the risk weighting of certain deferred tax assets.
On a pro forma basis as of June 32019, the impact of the final rule would have been a reduction of approximately 55 basis points to Popularise CPT one.
Finally regarding Cecil we are still knowing that position to share an estimated effect on our allowance and capital, but still hope to share some estimates in the third quarter.
With that I'll turn the call over to you.
Thank you Carlos and good morning.
Credit quality results for the second quarter of the year, we're strong in both our operating markets.
In Puerto Rico critic market reflects.
Lower nonperforming loans.
Lower nonperforming assets.
Lower NPL inflows and lower net charge offs.
We are encouraged by the trends in our Puerto Rico loan portfolio.
In the U.S. credit metrics reflect stable NPL.
Stable NPL inflows and stable net charge offs.
Please turn to slide number eight.
At quarter end, our outstanding direct exposure to the Puerto Rico government municipalities.
My mother, Instrumentalities was 455 million.
Flat from the prior quarter.
I'd be another quarter, we have no direct exposure to the Puerto Rico Central government or its public Corporation.
Our municipality exposure consists mainly of senior priority loans through a salute select group of municipalities.
Whose revenues are largely independent of the central government.
In most cases, the good faith credit.
On a limited pricing power of wish monetary policy. This pledge to the repayment of the loan.
75% of our exposure is to the four large municipalities and is among metro area.
Our municipal borrowers to briefly typically make two payments annually.
Interest and principal on July 1st.
On interest on January Onest.
On July 1st we received the scheduled principal payments of 22 million.
We also have indirect lending facilities.
And with the government and other garage door.
The largest such exposure is in the form of residential mortgage loans.
To individual borrowers in which the government provides a guarantee.
Similar to energy programs in the us.
Turning to slide number nine through these costs credit metrics for the quarter.
Nonperforming assets decreased by 28 million.
On a linked quarter basis.
From 712 million in the previous quarter.
Two 683 million this quarter.
The decrease in nonperforming assets was the combination of a decrease of 22 million in nonperforming loans.
On a decrease of 7 million.
In other real estate owned.
Nonperforming loans in Puerto Rico decreased by $22 million from the first quarter.
Driven mainly by lower commercial our motors NPL.
Ill 70 million a $9 million respectively.
The decrease in commercial Npls.
Was mostly due to collection received.
While the decrease in mortgage was mostly due to the continued improvement in the portfolio.
After the hearing.
In the U.S. nonperforming loans remained flat.
42 million.
Or 60 basis points of total loans.
At the end of the second quarter.
The ratio of Npls to total loans decreased slightly to 2.1%.
From 2.2%.
In the previous quarter.
The decreasing oreos was mainly driven by the Puerto Rico mortgage portfolio due to an increase in sales activity.
Please turn to slide number 10 for a summary of the trends in NPL inflows.
Compared to the first quarter.
NPL inflows, excluding consumer loan decreased by 3 million, mostly in the Puerto Rico commercial portfolio.
For total mortgage inflow inflows for the quarter, our 60% of the levels seen prior to the hearings on remains stable.
Mainly driven by lower early delinquency post monitoring.
In the U.S. NPL inflows were 6 million.
Turning to slide number 11.
Net charge offs for the quarter amounted to 47 million.
Where our annualized 71 basis point of average loans held in portfolio.
Compared to 61 million.
Or 92 basis points in the prior quarter.
The decrease in net charge off was driven by a decrease of 70 million, Puerto Rico offset in part by an increase of $4 million in the U.S.
In Puerto Rico.
The decrease is primarily driven by lower commercial net charge offs of $60 million.
As the prior quarter included a charge off from a single large relationship.
In addition.
Puerto Rico mortgage net charge offs decreased by 2 million from the prior quarter.
And now stand at 66 basis points.
The lowest level in years.
In the US the increase is primarily driven by charge off from our taxi medallion portfolio.
Which has a carrying value of 32.5 million net of resorts.
The allowance for loan losses decreased by 7 million.
From the previous quarter too.
Two $544 million.
Mainly due to a decrease of <unk> million in Puerto Rico offset in part by an increase of 1 million in the U.S.
The Puerto Rico decrease was primarily attributed to improvement in the loss trends in the mortgage portfolio.
The ratio of allowance for loan losses for loans held in portfolio was 2.01% in the second quarter compared to 2.07% in the previous quarter.
The ratio of the allowance for loan losses to Npls held in portfolio stood at 96.3%.
Compared to 93.9% in the previous quarter.
The provision for loan losses remained essentially flat at $40 million.
Compared to the prior quarter.
In Puerto Rico, the provision decreased by 2 million wanting the use the provision increased by 1 million.
To summarize credit quality results for the second quarter were strong.
With improvements across all metrics in Puerto Rico and continued stability in the U.S.
With that I would like to turn the call over to Ignacio.
For his concluding remarks, thank you.
Thank you Leo and Carlos for your updates our robust second quarter results give us momentum as we enter the second half of the year.
Our Puerto Rico franchise is extraordinary.
We've consistently grown our retail and commercial customer base.
And serve nearly 1.8 million customers.
However, we do not take our leadership position for granted and we remain focused on enhancing our customers' experience across all channels.
Our unmatched branch network is enhanced by our innovative digital solutions.
Approximately 873000 of our clients are active online.
And 78% of these clients use mobile devices to interact.
In June this year, 51% of our deposit transactions in Puerto Rico, where process to smart ATM and mobile devices.
They figure that has been growing consistently.
The breadth and depth of our retail and commercial product offerings in Puerto Rico allow us to meet the evolving banking needs of our customers.
Our operation the mainly United States, while more focused.
Provides diversification to our footprint.
We have a strong commercial lending unit.
It is complicated by two specialized national lending businesses.
Condo Association banking and healthcare.
Our investments in Evertec and BHD now continue to contribute to earnings and represent unrecognized investment value.
We are energized by our results and remain focused on enhancing shareholder value.
We are now ready to answer your questions.
Thank you.
We will now begin the question and answer session.
To ask a question in your press Star then one on your Touchtone phone.
You are using a speaker phone we ask you. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Today's first question comes from Brett Rabatin of Piper Jaffray. Please go ahead.
Hey, good morning, everyone.
Good morning.
[noise] Oh I wanted to first ask you know the narrative was was kinda supposed to be that's a commercial.
Book was growing more in Puerto Rico versus maybe a pullback in the in the U.S., just given relative pricing and what you are saying, but this quarter you know the growth was actually the U.S. on the commercial side and I'm curious if that was in.
The Cano health care sectors that you mentioned and then maybe just some color around the commercial book in Puerto Rico linked quarter, you know what affected the linked quarter change in the balance.
Yes.
No the the.
The narrative of subscriber growth in Puerto Rico.
No we expect it to actually be in different sectors.
It's not going to be in every sector every quarter brick we've had very consistent contribution for the auto sector. Almost every every quarter last quarter, our commercial growth this quarter was sort of flattish.
That.
In a given quarter may be simply a reflection on our prepayments on payments by client or anything else on that it's really a reflection or are you or your nation.
But the important point is that we are seeing that portfolio, Puerto Rico growth overall, and the other contributions will shift from quarter to quarter between different different segments.
In the us.
We comment that in the last quarter that commercial growth has been slower there was a little bit of catch up in the second quarter is always a strong second quarter before the year end full we're still running at a slightly slower pace than we were if you look at the prior quarters last year on the average for the last couple of years.
So thats what were trying to say when we mention slightly lower growth in the in the U.S. ones could you. If you look at the pace, we're right where it had been running 17, a payments for six 7% per quarter, we're still growing healthily bought us slower pay for that.
Okay. Appreciate the color there and then just around the margin Carlos you gave the guidance four to 5 million for 25 basis points.
But you know you you've also got continued elevated [laughter] government deposits and you've obviously taken some action in the securities portfolio.
One can you can you walk through what you did in the Securities book This quarter and then just maybe give us some thoughts on the margin itself like are you going to try and manage that supply to [laughter] with balance sheet actions are you more trying to grow and I will what's what's your thoughts on how you're going to manage.
The balance sheet relative to what we're seeing with rates.
Yes, you can see this quarter there was a shift from from cash to investments.
That is.
Yeah in big part driven by the by our tax strategy. It is actually a lot more tax effective for us to hold Treasury securities.
And government security than it is to hold cash so.
We did move some cash to investments it should not be assumed that that move implies a significant expansion in our investment portfolio because it doesn't not all of that is still in a shorter time term.
A term instruments. So it was it was a shift that more than anything responded to two our tax position as opposed to change and change in view, we have seen the perception of future rate change a few months back we actually started last year as the perception of rate target.
Changing last year, we have been reducing our asset sensitivity over time slowly, but we tend not to not to make big bets in either direction. So it is our path. We're we're moving to.
Closer to a neutral position, but we tend to do that through our business bread. Instead of as you know we are not a big barrier with this house, we don't have a big trading portfolio. So we just manage that through our business and that means I may take a bit more time.
Okay, and then maybe just lastly, you from macro perspective, it looks like the governor Mike or sign this weekend.
Maybe just a secretary as well, which would make the education Secretary Governor can you just talk about what you're seeing.
You know in terms of the macro environment and then you mentioned that.
You had confidence there wouldn't be any reduction in the flows to the island can you just walk us through that.
Well, yes isn't Ignacio up I mean, obviously, we've lived through a lot of.
Political uncertainty in the last two weeks in Puerto Rico.
We we do not believe that it should have a permanent impact on the macro government apartment Perrigo, we haven't seen it yet obviously easier in many short term disruptions, especially in old San Juan where some of the cruise ships have not been able to dock and obviously the people have not gone to the old saying one is a normally go because the of the of the disruption.
No I think that as long as there is a lot of rumors circulating I think you know we are in the beginning of a transition period.
I think what's important is that that transition be orderly it'd be done in according with our constitutional norms.
And that.
We cooperate to make sure.
That you know and.
And uncertain you know this is a new new playground for all of US is new and new ground for us that we try to stick to the constitutional norms and do it in an orderly process as possible I believe if we do so the economy will not suffer permanent damage.
I believe that most people in the U.S. and the Congress in the U.S. government I do not want to punish the Puerto Rico people. So notwithstanding that the perhaps the efficiencies of our some of our leadership I don't believe there is a will in congress or to hurt the Puerto Rico people.
We will see more oversight.
That oversight may cause some delays, but at least I have not heard anyone saying, we're going to cut off recovery for to put rigs.
Okay, great solid quarter, thanks for all the commentary.
And our next question today comes from Alex Twerdahl of Sandler O'neill. Please go ahead.
Hey, good morning, guys.
Hi, good morning, how are you.
Just first off I want to ask about capital and capital return and a couple of sort of notable events that happened during the quarter. One is the C car banks are released their results and it seems like the asking granting of a of capital return is bigger this year than in past years and the other being the big merger two other banks in the island that that Brian is going to bring I guess pro forma that common equity tier one ratio of the bank that will be the ongoing entity down to around 11.5%. So im just wondering if if if those two items you know.
Taken together or separately change your guys' outlook on on your capital return ask or that thought process or methodology in anyway.
Yeah, Alex Hi, Good morning, Carlos a couple of things first of all.
Well, we have described before what what we think is going to be our timing with regards to capital return and at this point in time, we have no reason to change our expectation on that.
And as you recall is that we are wrapping up our stressed that thing.
Models, we will then engage with our regulators.
In the next few weeks.
And we will we would hope that as has been the past in the last couple of years take LDR. The hurricane of course that we can be in a position to announce something in the first part of next year.
So we don't expect the timetable or to change at this point in time.
Yeah, we are sitting here at a healthy capital position on CP one of 60.8 as we've discussed in the call.
Our view.
Also has that changed.
Do hurdles before he would be our goal over time for a couple of ratios to move in the direction of our mainland peer bank.
But that will happen over time.
We will probably always operate at a cushion above our mainland peer banks, because we do have unique characteristics to our business, including geographic concentration.
So if you think our peer banks, our 11 or CLO. Whatever you think that number is were probably always operate on equipment over that.
So we still hope to overtime move in the direction of our mainland peers.
Now, we do sell for over a little bit over a rich man's problem that we keep adding a lot of capital to our capital every quarter. So it's actually not easy for us to.
To to move our capital in that direction, but that will be our intent.
To achieve that we will have to use all levers we will have to hopefully keep.
And and increase our capital return, both dividends and buybacks over time.
We hopefully can get some some organic growth that will be the best deployment of capital possible. We will hopefully continue to get opportunities to purchase assets and at some point in time, we may actually also look at the opportunities as well. So all the levels will levers will need to be put to work.
For us to achieve our goal to move into the rights for our mainland peers.
Okay, and then a question for Lydia just you know as it kind of relates to all the the macro commentary and Puerto Rico. It seems like a lot of the metrics that you guys are citing are moving in the right direction and improving can you just talk about the general reserve.
For the methodology and sort of that piece is tied to the economy when does that get updated.
And it hasn't been enough improvement in the outlook to potentially reduce that component associated with the the economy at some point in the near future.
Thank you. So if you get some data on a quarterly basis and if you see the trend I mean, we are to a certain extent looking on the provision that is.
Procedure, all the allowance to total tax then.
We're back to a level that we have prior to the Hurricanes. We had there was a dislocation through into your game, which there was significant increase of reserves or give him by what we thought was going to be some of the author aftermath of the hero game, we draw down that most of our resources into 2018.
Hey, I'm using the first quarter of 219, the provision that is.
Similar to the provision.
We have further here again, the allowance was drawn down as a result, our process. This quarter, we see it we saw a slight decrease in allowance driven by continued improvement in the loss trends of and the mortgage portfolio. So I think on a going forward basis.
So do you.
Hello. This is the operator.
Hello, Hello, Sir can you hear us I can I can hear you can can you hear me I mean I guess.
I can hear you sorry, I'm talking with your speakers.
Uh huh.
All right or wrong. It looks like we are having some technical or some technical issues you wouldn't please everyone on <unk>.
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Oh African American to me, what's your question Sir.
Yes.
Got all that Alex.
It must be something you said on looking out [laughter].
[noise] they have to but Lydia you're in the middle of talking about the reserve methodology, and what you're seeing and I think you kind of left off with.
But the levels today are back to where they were pre hurricane.
I'm, sorry, I I think I said that we're looking at.
Yeah. This quarter, specifically there was a small decrease in the provision related to continue improving the loss trends in the mortgage purporting to Puerto Rico, I think when they going forward bases that he's going to what's going to drive more than anything the performance of.
And our portfolio well into the future is rather short because then we have the beautiful Cecil to account for nearly 2020.
Okay. Thanks for that and then just one final for me can you guys estimate or give us some sort of ballpark in terms of the size of the the total Puerto Rico government deposits that are currently on the balance sheet.
And.
Well, we down this called headliners come across and that the Puerto Rico and judge imposed a 120 day halt to the bankruptcy litigation is that going to do you think extend the time in which those deposits would therefore be on your balance sheet.
Well, maybe I think I think the the the uncertainty in Puerto Rico, and the fact that we're going to have a transition.
They may result in some delay in some of these proceedings, it's hard for us to predict it certainly not going to accelerate the process.
Yeah, I think I think I mean, I'm getting here some some information for our general counsel. They basically said is the the hall is a call for the judge to try to mediate for the party to voluntarily mediate some of the dispute.
Which is not that we just normally something judges do.
Okay, and then I turn the other the other part of your question I like the second quarter. It tends to be the peak level of the buses for Puerto Rico government, but that is one of the vast majority of tax receipts occur and that was true that seems to be true. This year as well. So our balances went up slightly they I think they were about 9 billion at the end of the first quarter that they're probably about 10 now.
This we would expect as we've mentioned before that all through this year. Those bonds. This will come down you know exactly the rate at which they come down it is it's hard to.
Have to figure out, but that continues to be our expectation.
Thanks for taking my questions.
Our next question today comes from Scott Valentin.
<unk>. Please go ahead.
Good morning, everyone. Thanks for taking my question just wondering.
In terms of loan growth I think in the past you've started.
Puerto Rico mortgage demand or originations as being kind of a key indicator for the health and economy I think the numbers you guys provided earlier shown pretty good growth and year over year originations.
I mean do you think we finally turned the corner in terms of the mortgage loan growth for Puerto Rico.
Yeah, I, Yeah, I mean I think.
I'm not sure I would I would hone in on the mortgage originations alone.
That's an indicator because that the DSIC complex complex ecosystem and depends on mortgage rates and home prices unemployment a bunch of other things I I think I would sort of step backwards, a little bit I look at the overall portfolio as I mentioned earlier, no. We're seeing nice healthy demand and increase in our portfolio. It will not necessarily be in any given segment any given quarter doesn't even see seasonality in the mortgage demand tends to be a slowing some quarters and better and others. So I would probably look at this it makes all the pieces as opposed to any one piece that's an indicator.
Yeah Okay.
And then regarding the the two commercial verticals you called out the health care in the condo can you go into more detail about exactly where on health care. You guys are finding opportunities is it commercial real estate or is it seemed I.
And then the condo maybe that the geography, maybe types of credit you guys are doing.
Well I think in the end the condo we are.
Basically in our biggest state is Florida, obviously, and that's where our kind of sits in business is located our team, but we operate in over 22 or 23 states that we have business across the U.S.
And most of these are loans to the association to make repairs.
So they usually have a term and the business is a very good business because it's self funded we have we have more deposits than we I think we were last time I checked we are close to a billion in deposits in our loans were like 600 to 600 million I think around their 600 700 million. So it's a very good business.
And and basically our health care business is basically I guess, what we call a assisted facilities, where you know you come out of rehab you go to the hospital and you get your knee operating you have to spend some time in between so that's mostly we do those are classified as as as commercial real estate loans because normally the operate in the all other property are different but really that risk is very different and that business is a national business, mostly in New York, a I would say, but we do have Nashville facility.
All right thanks for that color.
And our next question today comes from Glenn Mattson with Keefe Bruyette <unk> Woods. Please go ahead.
Hi, good morning.
Hey, good morning.
I I know late in the cycle the public deposit the betas had reached the point, where they were 100% you are passing through all the rate hikes. If we're on the cusp of.
Easing cycle, what can we expect for the bait on the downside in the first couple of cuts.
Yeah, I mean, I think the Baylor College in public deposits continues to be close to one or so so those will move very close to moving rates. We have although the path is mostly in our U.S operations also have recently high beta, but I prefer I expect probably those to move with some lag so the movement in the breadth of our.
Higher based on the bus it books will probably be less obvious because those will move with with like accessories come down.
Okay, and you know given the reliable acquisition and an Accretable yield you have the number of what was in Accretable yields for.
The second quarter.
You mean, the amortization of the discount in the second quarter.
Yeah, the accretion into an <unk>.
Around $10 million.
Okay.
And just last question I guess, it's kind of bigger picture, we're past the point, where I guess some of your commercial customers probably had to send in their financial statements. The paper, they're lending files. When you talk to your commercial lenders what do they say the commercial customers balance sheets look like you know we're a year after the storm and presumably there's there's some kind of stimulus going on.
What are they saying about the condition of those customers.
Well, you know I I, let Lydia put more color, but obviously it depends on the on the sector.
Many of you know I think you save your in the building or the construction sector, they're doing better.
I think the tourism sector in general is doing better made a service industry is doing better given your it'd be a retail it's probably although you know retail sales have picked up retail like everywhere in the world. This is tough.
So I think it really depends on the sector I mean in general the macroeconomic Ah.
Situation is better people better balance sheet, but it really depends on the sector and that particular client I know, who do you want to add some color I would just say that on on general terms. The classification of our commercial portfolio has improved.
Overtime, but that reflects the improvement in the financials of our work line. So generally it will show improvement.
Okay. Thank you for taking my questions.
And our next question today comes from Joe Gladue of own Securities. Please go ahead.
Good morning.
I just wondered if you could comment on the pending.
Further consolidation in the banking market in Puerto Rico.
Does it bring any yeah.
Significant opportunities in any particular areas and does it change some of the any of the competitive pricing environment on the island.
No I didn't know if wondering if it's a competitive market and I think that you know the.
The.
Oriental or was a very competitive player before I think they'll continue to be competitive obviously consolidation has always bring opportunities you know us as.
As to institutions meat, you know there may be reasons, why why clients. We're at one institution that they'll want to stay at the other institution. So you know we're always looking to pick up new clients new business, but we think put it will remain a very competitive market I I think the consolidation is good for whether it was good to have.
Perhaps the most banks, but you know stronger banks that are committed to the market and so I think it'll be goodwill will we'll be looking out for the opportunities are they you know the consolidated Andy may want to shed. Some assets you know there's there's always these kind of things always bring opportunities and will be will be you know, we'll be we'll be looking to see what they bring but I think in general would be good for the market.
Okay all right. Thank you.
And our next question is a follow up from Brett Rabatin of Piper Jaffray. Please go ahead.
Hi, I just wanted to follow up on the fee income and particularly insurance and card were strong. This quarter can you give us some thoughts on on the outlook for those in the back half the year no insurance are somewhat seasonal but just give us some thoughts on [noise].
On fee income and and you know I'm just also thinking mortgage might perform better obviously the results were negatively impacted by me.
The MSR, but just wanted to talk about fee income a little bit and how you think about the outlook for the back half the year.
If you look at the different mortgage flying or in our press release and you get for a moment. The MSR one you'll see there are quite consistent most of the mortgage line, it's actually very consistent as we go along.
So that will probably.
Article appeared to be the case, the MSR is gonna be whatever it is or not is a tougher one to manage obviously a lot of the of the fee income will be transactional soy transactions keep growing those lines will continue to have positive variances or on the insurance, but typically as you mentioned there is some seasonality there because we received contingent commissions a couple of times a year and those tend to happen in the second and the fourth quarter. So Uh huh.
That's specific one.
If nothing else changes, we're probably going to be a bit lower than the third quarter and there's a reasonable chance or I mean do you trust portfolios are performing well the fourth quarter, maybe a little better again.
Okay, and then Carlos I have sense.
You know finding pools of loans or things to to purchase.
If you're if your payout ratio yeah, I wasn't going to approach, 100%, how do you think about capital as it builds.
Over the next year or what what.
What levers might you pull to deploy the capital or their balance sheet or other.
Yeah, I think you know, we're going to try to to use all of it but as I mentioned earlier from from.
A couple of distribution to.
Lots of purchase a hopefully the one that we are most hopeful on is we're going to grow.
We can get organic growth, especially in Puerto Rico that is by far the best deployment of capital because its our highest margin business.
But it's going to have to be all the above but again, we are we have a little bit of a rich man's problem that oh, we keep adding to the to the pool of capital health will be every quarter. So it makes our challenge to do more with the direct for all of our mainland feared a tough job.
Okay.
And then maybe just one other one I think last quarter, we ask where do you go about provisioning and how we thought about it and it's terrible.
Was there anything that you saw that might change the past what we've seen for Q1 Q on it it didn't happen in Twoq you like you like you said it wasn't is there anything in the back half of the year that might change the provisioning level.
It's tough to predict.
What will happen in the future board.
Given what we've seen them. So NPL formation early delinquency, we don't we don't see anything.
If I could change the recent trends.
Okay, great. Thanks, a lot different color.
And ladies and gentlemen. This concludes your question answer session I like to turn the conference back over to the management team for any final remarks.
Thank you for joining us today and for your question. The second quarter was another strong one for us and we're very pleased with our results.
We will build on that momentum and update you on our progress in October . Thank you for joining the call again. Thank you Sir we thank everyone for their attendance today you may now disconnect your lines and have a wonderful day.