Popular Inc
NASDAQ:BPOP
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
American Express Co
NYSE:AXP
|
Financial Services
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Target Corp
NYSE:TGT
|
Retail
|
|
US |
Walt Disney Co
NYSE:DIS
|
Media
|
|
US |
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
|
US |
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
67.98
104.28
|
Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Estee Lauder Companies Inc
NYSE:EL
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Church & Dwight Co Inc
NYSE:CHD
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
American Express Co
NYSE:AXP
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Target Corp
NYSE:TGT
|
US | |
Walt Disney Co
NYSE:DIS
|
US | |
Mueller Industries Inc
NYSE:MLI
|
US | |
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Good morning, everyone. And welcome to the Popular Inc Q2, 2018 Earnings Conference Call. [Operator Instructions] Please also today's event is being recorded.
At this time, I'd to turn the call over to the Investor Relations Officer at Popular Inc, Brett Scheiner.
Good morning and thank you for joining us on today’s call. Today, I’m joined by our CEO, Ignacio Alvarez; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano. They 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 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’ll now turn the call over to Mr. Ignacio Alvarez.
Good morning and thank you for joining the call. We are very pleased with the results for the second quarter. In addition to achieving a successful termination of our FDIC loss share agreements, we produced excellent financial results. These results were primarily driven by strong top line revenue growth in our Puerto Rico franchise, where the economy continues to recover from the impact of Hurricane Maria. Debit and credit card activity after the storm was severely impacted by power and telecom service interruption. However, for the second quarter, the dollar volume of our clients' transaction exceeded the second quarter 2017 by 17%, reflected in higher fee income.
Similar to last quarter, the consumer loan origination was approximately 96% of our second quarter 2017 pre hurricane level. The trends are encouraging with credit demand in some sectors like auto and personal loan continue to grow at a faster recovery compared to others such as mortgage. New car sales in Puerto Rico for 2018 through June are up 20% from the same period last year, while our auto loan production is up 29%. Cement sales show continued strength, up 24% year-to-date over 2017.
On the commercial side, we expect additional lending opportunity to arise as the economy continues to recover. The recovery of the Puerto Rico economy following the storm has been very encouraging. However, the sustainability increase and pace of this recovery will be heavily depended on the magnitude and timing of federal recovery in private insurance funds flowing into the island.
Insurance companies continue to make advances in the phase, while slower than many would like, has yielded over $3 billion out of an amount estimated by the Puerto Rico oversight board to exceed $8 billion. Regarding federal fund, approximately $6 billion has been dispersed in emergency relief assistance to individuals, other corporation and municipality. The Puerto Rico fiscal board anticipates an additional $8 billion of federal and insurance fund to be dispersed in the next 12 months and over $50 billion of federal recovery funds in the next six years.
This inflow will have a significant impact on the economy. The effect will be tampered somewhat by the government austerity contained with the recently approved fiscal plan. A plan contains a number of budgetary and structural reforms designed to improve fiscal stability on the island. The successful execution of this plan will require discipline and increased cooperation between the oversight board and the local government.
Recently released passenger data from the San Juan Airport reflects that the net number of people who left the island from September to March is approximately 1, 24,000, significantly lower than the figure that we provided in the first quarter. This is mostly due to the return of 71,000 people in the first three months of 2018. These statistics are consistent with recent publicized data regarding Puerto Rico cell phone usage by geographies. In line with these figures, at the end of June, employment has stabilized, down only2.2% or 19,000 jobs in September.
We expect additional hospitality jobs to boost these figures once larger tourist hotels reopen later in the year, and in the first quarter of 2019. Notwithstanding the impact of the hurricanes and the declining population, our deposits and number of customers have continued to increase.
Looking beyond the immediate similar impact of the recovery process, the island's long-term economic prospects will depend on the decisions regarding Puerto Rico's ability and the implementation of required structural reforms. We should take the unique opportunity provided by this short-term stimulus to implement those structural reforms that are essential to achieving long-term sustainable growth.
I'd like to address to highlight to the second quarter, but before I do I am pleased to report that this morning we announced our intention to execute $125 million common stock repurchase.
Please turn to Slide 3. In the second quarter, Popular reported net income of $280 million, excluding the impact of the termination of FDIC last year agreement, adjusted net income was $121 million compared to last quarter's net income of $91 million. While much of the discussion of last year's quarter has centered on the hurricane, we continue to execute on our growth strategy. We grew commercial loans in our US business by 4%, increase our total deposit base by over $2 billion in our combined markets, and we receive regulatory approval to purchase $1.8 billion of auto loan in Puerto Rico.
Our capital levels remain strong with Tier 1 capital and Tier 1 common ratio at 17.5% at quarter end. Regarding credit quality, during the quarter, we saw a normalization of the activity following the hurricane and the related moratorium. Total non-performing assets of $785 million were up slightly from $779 million last quarter. Non-performing loans increased to $643 million from $607 million as a result of three commercial loans, two of which are in Puerto Rico and one in the mainland US.
Non-performing loans were 2.6% of loans compared to 2.5% last quarter. Our second quarter sales of OREO exceeded pre-hurricane levels. Lidio will explain these results later in the call. The key takeaways from these quarters' results were strong revenue growth in our Puerto Rico operation with client activity and fee income now exceeding pre-hurricane levels in most lines.
Please turn to Slide 4 Carlos discusses our financial results in further detail.
Thank You, Ignacio, and good morning. Slide 4 presents our results for the second quarter. Additional information is provided on slide 5 and the appendix to the deck. Today's earnings press release detailed variances in the first quarter, it remind higher net interest income, higher fee income and a lower loan loss provision offsetting part by higher operating expenses. Net interest income for the second quarter was $414 million of $21 million from the first quarter on higher volumes and rates on loans and investments.
Our net interest margin was 3.81%, down eight basis points from last quarter. The reduction in margin continuously driven mostly by asset mix, as the largest increase in balances was concentrated in our lower yielding investment portfolio. Our overall loan yields were up 12 basis points. The cost of our interest bearing deposits was up 4 basis points to 61 basis points, mostly due to higher volume of Puerto Rico deposits and higher deposit cost in the US.
During the quarter, we terminated our FDIC loss share agreements related to the 2010 purchase of Westernbank, which resulted in a benefit of $159 million. Given the termination, we are now presenting the $1.7 billion Westernbank loan portfolio broken up into the applicable loan categories. Activity from these loans will no longer reflect an FDIC loss-share income or expense. On February 14th, we announced the agreement to purchase $1.8 billion of consumer auto and auto related commercial loans in Puerto Rico from Wells Fargo.
We continue to expect this acquisition to contribute approximately $34 million of net income for the first 12 months after the closing. Additional information is available in the 8-K we filed in connection with the announcement of this transaction. We are still targeting to close the transaction on August 1st. Excluding the Reliable acquisition for 2018, we anticipate slight growth in overall loan balances with continued growth in the US and stable balances in Puerto Rico.
Our US operations commercial portfolio grew 4% in the second quarter. For a second quarter, non-interest income excluding FDIC loss- share activity increased by $11 million. We saw fee income improve across nearly all categories other than mortgage banking. Our Puerto Rico mortgage business originated $169 million of loans in the second quarter, up from $145 million in the first quarter. Despite this improvement, origination seems to be leveling off at a pace below pre-storm levels.
Total operating expenses for the quarter were $338 million including an $8 million impact of cost related to the FDIC termination. Excluding this impact, operating expenses were up $8 million from last quarter. This was due mostly to higher professional fees and credit card related activity, including interchange, processing and reward programs. Excluding the impact of the Reliable acquisition and the expenses related to the FDIC loss- share termination, for the full year 2018, we expect operating expenses to average $331 million per quarter on slightly higher personnel and technology cost, as well as higher professional fees.
For the full year 2018, we expect our tax rate to be approximately 22%, incorporating the effects of US tax reform. Please remember that the US tax reform only affects Popular's US based income.
Please turn to Slide 6. We continue to have strong capital levels relative to peer bank, as well as with respect to well capitalized regulatory requirements. Tangible book value in the quarter was $44.78, up $2.17 from last quarter as book value contributions from the FDIC transaction and our operating earnings were slightly offset by the payment through our quarterly common stock dividend and rate driven unrealized losses in our securities portfolio.
Our common equity Tier 1 ratio was 17.5%, up 70 basis points on the quarter. Regarding our capital actions, as Ignacio mentioned, we intend to execute a $125 million stock repurchase as our regulatory discussions have been completed. As mentioned in the past, we will continue to pursue our target of double digit return on tangible equity, while keeping capital levels are appropriate for Popular's risk profile.
With that I turn the call over to Lidio.
Thank you, Carlos, and good morning. In Puerto Rico, we're seeing normalization in our credit quality metrics after Hurricane Maria. Generally, these results are within or better on the assumptions used to create our hurricane reserve in the third quarter of last year. In consumer lending, early delinquencies and non-performing loans are near or below to storm levels. Consumer charge-offs have been somewhat volatile post hurricane, impacted by the payment moratorium and the temporary suspension of collection activity.
The consumer net charge-off ratio for the second quarter of 2018 was 2.88% comparable to the second quarter of last year at 2.81%. In the mortgage portfolio, total delinquency is near the pre hurricane level, but there has been a shift from early delinquency to non-performing loan. As at the end of the second quarter, mortgage NPLs stood at $373 million, an increase of $66 million compared to the year ago period prior to the storm. However, 30 to 89 days delinquencies have decreased by approximately $60 million during the same timeframe.
Mortgage charge-off was relatively high during the moratorium when with the interruption of collection activity, the number of loans subject to credit loss increase. However, for the second quarter of 2018, mortgage net charge-off was below pre hurricane levels. In commercial lending, overall credit metrics during the quarter remain stable and near pre storm levels despite higher quarter-over-quarter NPL influence. The increasing NPL inflows were driven by two customers in Puerto Rico with an aggregate loan amount of $46 million.
Net charge-off in the second quarter is below pre hurricane levels. In the US, we recorded a provision for loan losses of $9.8 million and charge-off $10.4 million related to our taxi medallion portfolio impacting the US credit metrics for the quarter. The construction loan portfolio also experienced an NPL increase driven by a single borrower, excluding these, asset quality in the US remain strong.
Please lease turn to Slide 7. At quarter end, our outstanding direct exposure to the Puerto Rico government, municipalities and other instrumentalities is $481 million, flat from the prior quarter. At the end of the quarter, we have no direct exposure to the Puerto Rico central government or its public corporations. Our municipality exposure consists mainly of senior priority loans to a select group of municipalities whose revenues are largely independent of the central government. In most cases, the good faith credit, our limited taxing power of which municipality is pledged to repayment of the loans.
Our municipal borrowers typically make two payments annually, interest and principal on July 1st; and interest on January 1st. In the interim period prior to the next payment, property taxes for mortgage, residential and commercial properties are collected in escrow by the servicing bank and remitted to a central collection agent for the municipalities. Accordingly, on July 1st, we received the scheduled principal payments of $23 million for our municipal borrowers.
Our top exposures are to four large municipalities in the San Juan metro area. Carolina or the airport and several major tourist hotels are located, San Juan, the capital Puerto Rico, Maunabo, the municipality with the highest per capita income and by among the second most populous municipalities. These municipalities comprise 74% of our total exposure. We also have indirect lending facilities in which the government acts as a guarantor. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee similar to associate programs in the US.
Turn to Slide 8 to discuss credit metrics for the quarter. As discussing introduction, credit quality metrics in Puerto Rico continue to normalize after Hurricane Maria.
Non-performing assets increased by $6 million to $785 million this quarter, driven by a non-performing loan increase of $36 million, offset in part by an order decrease of $26 million. The increasing NPLs was driven by hired US construction NPLs of $18 million and Puerto Rico mortgage NPLs of $15 million. The US construction NPL increase was driven by a single borrower. We do not expect a loss given the collateral underlying the loan.
At the end of the second quarter, the ratio of NPL to total loans held in portfolio increased slightly to 2.6 % from 2.5% in the prior quarter. The decrease in OREO was mainly in Puerto Rico driven by the combined effect of the resumption and acceleration of sales efforts and lower inflows to the suspension of closure activity as a result of Hurricane Maria.
Please turn to Slide 9 to discuss NPL inflows. Compared to the previous quarter inclusive NPL held in portfolio increased by $51 million mainly driven by hiring inflows in the Puerto Rico commercial portfolio of $39 million due to two relationship totaling $46 million, coupled with higher inflows in the US construction portfolio prompted by the previously mentioned borrower. For P R mortgage inflows remains stable.
Turning to Slide 10. Net charge-offs amounted to $58 million or an annualized 95 basis point of average loans held in portfolio, compared to $53 million or 90 basis points in the first quarter of the year. The increase $5 million for the prior quarter was mainly driven by higher Puerto Rico commercial net charge-off mostly related to loans reserved in the prior quarter. In the US, net charge-offs increased by $2 million related to the taxi medallion portfolio.
The cooperation allowance for loan losses increased by $36 million from $607 million to $643 million mainly driven by increase of $33 million in Puerto Rico due to the reclassification of the allowance from loans previously classified as covered. The provision for loan losses decreased to $60 million from $69 million in the prior quarter. For the provision Puerto Rico decreasing by $12 million, which includes take downward adjustment of $9 million to the reserves associated with Hurricane Maria.
The provision for the US increased by $3 million driven by the taxi portfolio. At the end of the second quarter, our taxi medallion portfolio around paid principal balance of $222 million, net of reserve the carrying value of this portfolio is $56 million or approximately 25% of its unpaid principal balance, representing less than 1% of our total portfolio. 95% of the taxi portfolio is in New York City with an average carrying loan value of 162,000 per medallion. Excluding the impact of the US taxi medallion portfolio, the US operation continues to reflect strong growth and favorable credit quality metrics.
To summarize, credit matters in Puerto Rico continue to just show signs of recovery after the effects caused by Hurricanes Maria and Irma. The second quarter results reflect a normalization of credit quality with lower charge-off and stable delinquency compared to pre storm levels. We continue to monitor credit quality and macroeconomic trends are encouraged by recent figures.
As I mentioned in the beginning, the credit results are within or better from the assumptions used to create our hurricane reserve in the third quarter of last year.
With that I would like to turn the call over to Ignacio for his concluding remarks. Thank you.
Thank you, Lidio and Carlos for your updates. Please turn to Slide 11. Our second quarter results reflect strong margins, higher net interest income and fee income growth combined with relatively stable credit metrics. There are many factors that are driving value for our shareholders. Strong earnings, robust capital and executing on opportunities in our markets. Our franchise in Puerto Rico continues to demonstrate strength. It has proven its value in a wide variety of scenarios, many of them extremely difficult.
Looking ahead, there are many moving parts but we have no doubt that we will manage challenges and seize opportunities to deliver solid results. We look forward to closing the acquisition of Wells Fargo's auto loan business in Puerto Rico in the third quarter, which will contribute favorably to our earnings in the second half of the year. We are also encouraged by the growth in our US business and its strong pipeline. This year in October, we will celebrate our 125th anniversary. We are proud of our history and even more excited about our future.
While we are monitoring macroeconomic trends, we are focused on the future, ready to take advantage of the opportunities that lie ahead. We look forward to updating you on our progress. Thank you for your time and we're now ready to answer your questions.
[Operator Instructions]
Our first question today comes from Alex Twerdahl from Sandler O’Neill. Please go ahead with your question.
Hey, good morning, guys. First off, I was wondering if you could share with us what the pro forma Tier 1 common equity ratio will be after the Wells deal closes on August 1st?
The common equity Tier 1 will drop by 140 about basis points.
Okay, and then as we --obviously, great to see the buyback announcement this morning, very widely expected but as we kind of think about the timing of announcements and capital return in the future, are we --now that DFAST is no longer really a concern, are we still limited to kind of one announcement per year or do you think it can be more of a fluid thing going forward?
Yes with --we've been sort of in a January cycle for the last couple of years except this year. Obviously, because of the effect of the storm. What we're trying to make sure if we could conclude discussions this year in the summer, and we're trying to get back on cycle if we can while we do not have to publish our stress test anymore. We will conclude it shortly and we will start discussions again with our regulators after we do that. We are still hoping that again we can sort of get back on schedule and those discussions can be concluded by early next year, but time will tell. We're obviously hoping that there are no hurricanes this year too so.
Yes. We're all hoping for that. And then just in terms of the execution of the buyback last year you did an accelerated share repurchase. Is that the plan again this year? Do you think you'll do it in the open market?
We concluded our discussions literally like three hours ago. So we haven't even started to work on the execution yet, so nothing to comment on that.
Our next question comes from Brett Rabatin from Piper Jaffray. Please go with your question.
Hey, guys, good morning. Wanted to first ask just thinking about the deposit generation you had this quarter. Can you talk about maybe how much of that was related to inflows on sort of the insurance monies and what not maybe some HUD money and then just also wanted to get some commentary if possible around kind of managing the margin from here? And if you'll just stay really liquid or if you'll start to use more that possibly for defending the margins so to speak?
I think Carlos call it bit later, this is Ignacio but I think we haven't -- our deposit growth has been mostly from the private sector and public deposits. We haven't seen a large inflow of the insurance ones yet directly to insurance companies and the HUD money really the HUD money is going to begin in August. So we haven't really seen. If you're talking about the Community Development Block Grant, that's going to begin in August so obviously some of the insurance money runs to our clients when they collect, but I don't think that really explains the increase. I think it's mostly just the growth in our --on our retail, commercial, private clients and the public deposit. And in the margin, I mean we're going to be depending --liquidity soon --
On the margin, we are hoping to redeploy about $2 billion of cash shortly in the next weeks to much higher yielding auto related loans. So that'll use some of it. As far as the rest of the additional liquidity, it's at --we've been saying for a couple of years that we expect government deposits to have a hit top and start going down and we've been wrong for a couple years. So we will continue to monitor that and be a little bit conservative on how we really employ that, but there will be a couple of billion dollars of less cash sitting around hopefully in the next few days.
Okay and then if you look at auto sales here the past few months, they've been really strong. Do you have any visibility of that into maybe the current quarter and then just is that something that you're capitalizing on in terms of -- you mentioned you expect five balances and the P R loan portfolio. Is there any makeshift change in that or can you talk about maybe any incremental opportunities in the auto space?
Well, I mean beyond the Reliable transactional --
Only then $2 billion additional
As you saw the -- our loan production as we mentioned in the prepared remarks, we're up almost 30%, 29% for the quarter. So the market continued strong. We continuously -- new loan auto sales go up and the statistics that you see our new car sales, it's impossible to measure used car sales but they're also strong in Puerto Rico right now.
Okay and then just lastly the mortgage NPL inflows, we're down just a little bit linked quarter. Do you have any visibility into just kind of post a moratorium? I know there were three different options for people who were looking to catch up or make payments that hadn't. Can you talk maybe about if what you're seeing and suggest that those can continue to decline or any thoughts around the mortgage NPL inflows kind of post the moratorium and visibility into that number?
I think as we have stated before and we also discussed in the prepared remarks, when you look at the total delinquency, the reality is we're flat on compared to pre storm levels. We're --however, the mix had shift from early delinquency to late delinquency, we are increasing NPLs of about $66 million and they can commit on decrease in early delinquency of $60 million. Some of it is driven by the moratorium and the execution of the -- in the most cases [Indiscernible] is not being enough to bring all of our clients current and now we're working to those clients in which the [Indiscernible] was not sufficient to work through in terms of bringing them current. I expect that those will continue to normalize in the third and fourth quarter of this year.
Our next question comes from Arren Cyganovich from Citi. Please go ahead with your question.
Hi, thanks. Just sort of follow-up on the deposit growth. It's --so I think 7% quarter-over-quarter, 17% year-over-year. You mentioned that it's not really insurance or government aid. I'm just surprised by those numbers if it doesn't include a decent portion, can you just help me understand that?
No, it does include public deposits, yes. The public deposits in fact were up quite a bit in the second quarter. What I'm saying is the insurance, we don't --I don't tribute a lot of that to the insurance on, not yet anyway.
Okay
But you keep in mind as well that our absolute number of clients has gone up as well. So we actually have more clients too both in the retail and in the commercial space.
Right okay and then I think you put some number expectation around insurance claims on the island pretty much. Could you repeat those numbers?
That was actually provided by the fiscal oversight board. They're estimating $8 billion in private insurance. $3 billion have been paid to date.
Excellent and then also touching on the -- you had a couple of commercial NPL inflows for the quarter yet the reserves were actually somewhat lowered or there's just previously reserved for part of the original hurricane reserve, just trying to get understanding around the movements there?
I think as we also mention in our prepared remarks, the level supporting what we're seeing in terms of NPLs and charge-offs are within or better than the assumptions we use when we built up the reserved during the third quarter of last year. So it was included in those.
Okay. So now it's specific but the previously was included in more of a broader--
The broader, yes, broader sense, yes.
Our next question comes from Gerard Cassidy from RBC Capital Markets.
Hi, guys. This is actually Steven Duong in for Gerard, thanks for taking our call. Just going back to on capital, you guys just announced this buyback $125 million. That's about 25% of your earnings and you have a dividend of another 25, you're around 50 and you got this the Wells acquisition coming in which would take about another 140 basis points I think. So what is the run rate CET1 level that you guys want to reach? When would you want to reach that and how do you plan on doing that?
The level we want to reach is lower than where it is. When we are going to reach it, we are unclear and how to do that is we're going to have to do all of the above. We will have to hopefully continue our path to follow the trend of our peers as far as the level of distribution. They are making of earnings. We are going in the right path. We are following our peers although we're not quite peer level obviously. We will continue to look at capital deployment opportunities like the Reliable transaction, we hope to --hoping to close in the next few days, if there any assets are available we'll continue to look at those. But -- bottom line we're going to have to do all of the above to help our capital levels move lower and in the mean time we are blessed with making a lot of money, which doesn't go in favor that goal, but it's actually a good context and we try to achieve it.
It's always a good problem to have. And it's just to follow up on that then so far this year we've been seeing more accommodation from regulators for the CCAR banks. Are you guys getting a similar posture with your discussions with your regulators?
We got --we've got an answer. I don't know what --we're not --we're not, obviously, distributing capital at the level they are yes right and so obviously that reflects I think the regulators contain concern about Puerto Rico especially after the storm, but we continue to try to close the gap little by little.
Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead with your question.
Great, thanks. I guess just in terms of --you mentioned that you're going to deploy a lot of the $2 billion of extra funds or cash I guess into higher yielding assets like the auto portfolio but can you just help us understand so the need for liquidity? And because I'm just thinking about the additional disbursements that are coming due and presumably you're going to have more public funds that might coming in but deploying it into longer duration assets versus keeping it in cash, and how do you think about the need for liquidity versus like money coming out from deposit outflows?
Yes. I mean we're obviously a very liquid bank right now. If you add up our cash and investment portfolios and you look historically, it's probably it's a bit higher than it has been historically. So if you look our historical trend that will tell you so what we would like to be as far as it comes to the portion of our assets, our investments and cash. They have been fairly steady in the past; it's a bit higher now. So it is situational. We do have a lot of cash right now that bumps that up. If we get --if we can reach the conclusion that a significant amount of the additional cash we received will be around for a while then it will be redeployed into higher yielding investments. Do keep in mind that our investment portfolio is very conservative. As you know, we only have agencies and treasuries, not real portfolio, there's no municipal, there's no corporate, nothing like that. So our main portfolio is actually quite conservative. So we will and the best way to redeploy the cash will be if we can as part of the recovery in Puerto Rico, loan growth goes up then that will be the best use of the cash because that is the best yielding asset obviously.
It sounds like the presumption though is that of the two-ish billion dollars of additional deposits that came in; if you're going to redeploy it presumably you would expect all that to stay?
No. We don't know how much of that is going to stay.
Sure.
So the presumption is that it's here but we don't know how much it's going to stay. If we can reasonably conclude that a portion of that will stay then it will be redeployed.
I think to answer your question, we're not concerned I mean we could have a significant reduction in deposits and the $2 billion outlay would not be an issue. So we have plenty of space, plenty of liquidity so we would -- a significant reduction in our deposits will not affect.
Got you, understood. And sorry if you cover this in your prior comments but just in terms of the sort of -- have you seen acceleration in loan growth? I mean do you anticipate or seeing signs the loan growth could actually pick up more particularly on the island given some of the rebuilding?
I think as we've seen, we've seen the consumer comeback in the sense that with the exception of mortgage loan, obviously, auto loans are way up. We're starting to see credit card and personal loan activity pick up. In commercial loan growth, it has been slower but anecdotally our loan officers are telling us they're getting a lot of inquiries or a lot of proposals are coming in. So we do anticipate that as the recovery progresses and more money actually flows into the island because keep in mind a lot of the money you hear about has been has been approved and assigned, but has not been dispersed. For example of the HUD, almost HUD has approved almost $20 billion for Puerto Rico in original $1.5 billion assignment followed by $18 billion, not a penny of that has been spent yet. So we do expect if that -- as that money flows in the economy, the loan growth will --demand for loan growth will pick up, and we're -- anecdotally we're hearing a lot of customers coming in, floating proposals but we haven't seen the disbursement of any of those loans yet.
There are a lot of discussions going on, Ken, but we prefer to discuss book loans than propose loans. And those are not here yet.
Not yet.
Our next question comes from Scott Valentin from Compass Point. Please go ahead with your question.
Good morning. Thanks for taking my question. Just with regard to the two Puerto Rico borrowers or two commercial borrowers. Were they in the same industry by chance or is it just isolated?
No, they were not in the same industry.
And then in terms of non-interest income, you guys had a very strong quarter there. Is that kind of a good rate to use going forward as a baseline?
Well, we don't give forward-looking projections but there was nothing unusual in those numbers. They represent economic activity that's kicked off so, that's how I would answer that question.
Okay and just going back to your comment on the average expense, non-interest expense for the quarter. I think you said $331 million on average quarterly expense for the year excluding the FDIC and the Reliable transactions is that correct?
Correct.
Our next question comes from Joe Gladue from Marion Capital Group. Please go with your question.
Good morning. I guess I'm going to follow up on that expense side a little bit on the last question. Just I guess first off, let me just ask about the increase in employees during the quarter. The press release said a lot of it was summer internships programs, but also some loan modification supports. Just trying to --I guess get an idea how much of that might be the longer-term loans support kind of people?
Well as you said, it's broken up into three categories. In the summer interns, we made a philosophical decision that we wanted to help young people in Puerto Rico gaining employment experiences, we thought that was very important, so we made a commitment to increase that amount dramatically. The other is we've had to staff up; I mean the loan moratorium on hurricane has created a tremendous demand. Remember, a lot of the business in Puerto Rico is actually walk-in, people walk into our offices and that has been --has put a bit of a strain on existing resources.
The other area where we grew was at the retail sector, and again we've been growing quite a bit and increasing transactions. So that's the kind of growth that we felt we needed in terms of maintaining our customer service.
Okay, just wondering if again in the aftermath of the hurricane or just in the normal course of business, any thoughts on more cost reductions, whether it's branch closures or rationalization or anything along those lines?
We are --as those --as a result of the hurricane, I think we ended up ultimately closing two or three branches, and mostly because they suffered severe damage. And it wasn't really worth repairing them. We're constantly looking at our branch network and but --well I say that and we're always looking for cost savings. So I'll say that, we believe that our branch network has been a big strategic benefit for us as one of the reasons why even with the economy we had in Puerto Rico and decline in population, we continue to increase clients and continue to increase our deposits. So what we will always be looking for cost save. We're going to be very careful about not adversely impacting that strategic advantage. We think it is very important to us.
Our next question comes from Glen Manna from Keith, Brett and Woods. Please go ahead with your question.
Hi, good morning. Carlos, I don't know if this is just rounding what you've been saying deploying $2 billion of liquidity for the Reliable transaction. I think there was a $1.84 billion of loans when that deal was announced with all of the activity in the auto sector, can we assume that balances have increased there at Reliable?
It is rounding. There was couple hundred million between prints. We're just running it with a billion numbers. We are not changing our disclosure; we have not changed our disclosure in the deal.
Okay and on the government deposits which have really increased over the past two years of public sector since the government defaulted on the debt. Are there any events that we could see in the Puerto Rican government that would precede a drain-off in those deposits? Like agreement with a certain class of bond holders or something like that?
Well, I think you just hit the nail on the head. I mean the government has been able to build up a lot of liquidity because it's not paying its debt. As part of any debt restructuring deal, they're going to have to start paying the debt, whether they make a down payment on that or not or they fund a reserve fund that we would know, but obviously at some point the government will have to begin to these debt. Remember, the casino money isn't a separate, it's not in our deposit, it's held in the bank of New York in a separate escrow account. That's not with us, but once the government cut the deal, they'll have to start paying interest on the debt. So that's what's going to cause it to go down.
Our next question comes from Brett Rabatin as a follow up from Piper Jaffray. Please go ahead with your follow-up.
Hey. I guess I should have asked it differently earlier so just going back to the deposit question, the public or the government deposit I believe last quarter were $6.9 billion in total and that it grown a little bit over the past year. Do you have any idea what that number was at the end of 2Q?
Around $7.5 billion.
Okay. And then also just wanted to ask on the US growth that you guys had in the quarter, could you maybe give us a little more color around that? Was it more in Florida or New York and then just commercial-- what kind of stuff you're doing?
It was definitely commercial. I mean the book of business, we originally had hasn't changed much. We are trying to build up the mortgage. So the retail mortgage business slowly, but the longer definitely commercial real estate most of the loans. I think I don't have the exact breakdown between New York and Florida, but it's -- it follows the historical patterns, it hasn't shifted America.
Okay and then just lastly there's been a lot of noise lately about PREPA. And I was just curious for your viewpoint on what's going on there and what kind of challenges that may imply for the recovery in Puerto Rico?
Well. I -- let started by seeing obviously the reform of the electrical system in Puerto Rico is the key for a future economic recovery. It's key for our ability to withstand hurricanes in the future. So probably I would put it as one of the top priorities of the things we have to address. Obviously, PREPA is facing a myriad of the kind of operational administrative, every type of challenge that you can foresee in recent days, it was basically the corporate governance there; the system that was set up basically collapsed. They had to name a new executive director. But one thing is that -- that I bring --I get some optimism from is there seems to be a pretty firm consensus across government and private that the PREPA and the private initiative, PREPA has to be privatized. So that consensus is there, and I think that's the key to the long-term solution to the problem. I think it will be very difficult or impossible to reform as long as it stays a government agency. So and I think there's broad consensus that has to be done. Obviously, it's going to be a complex process. It will take longer than we wanted to take. And it has to be done correctly for us to get the full benefit of such a process.
Our next question comes from Brocker Vandervliet from UBS. Please go with your question.
Hi, good morning. Thanks for taking my question. I was wondering if you had any incremental color on that US construction credit. What the --any --what the situation was there? Any more information you have on that would be great.
Commercial property in New York and basically one of the issues is a disagreement among the partners, which has resulted in to construction delays and overruns, but we think that we very, very well collateralize there and don't expect it overall. So probably --part of it was internals, it's a discussion within the partnership and basically that's what we hadn't put it on performance. Lidio you want to add anything else?
Our next question is a follow up from Alex Twerdahl from Sandler O’Neill. Please go ahead with your question.
Hey, good morning. I just wanted to ask for a little bit more clarification on the capital return discussion. If we define capital return in 2018 is $227 million putting the buyback and the dividend together, you talk about the payout as a percentage of earnings and kind of wanting to get closer to where some of your peers are over time. How should we think about the earnings piece of that for you guys? Is it stated earnings for 2017? Is it the last four quarters? Is it core earnings? Obviously, there's a lot of moving parts that have caused a pretty big difference between what we might call core earnings and stated earnings and obviously the increased reserve from the hurricane and things like that. How should we be thinking about that ratio as it is today so we can kind of get a better sense for where it's going to be moving from here?
Well, we can come up with an answer. The most important question is how the Fed thinks about it and that is that we're not necessarily sure we know the answer to it, but I think that the bottom line is that we have some room to hopefully keep improving our distribution. Yes, it doesn't matter where you use backward-looking earnings or forward looking earnings. We are running behind our peer banks and therefore hopefully would have a little bit of runway to continue to improve that part of our capital management.
But it's safe to say that Fed usually looks backwards. That's the way they used to look at.
Okay and then just one other question. As we talk about earnings today, we obviously draw our comparisons to kind of post and pre-hurricane and there's still a pretty sizable reserve that's hurricane-related. How much time has to pass from the hurricane from taking that from the end of the moratoriums et cetera before we're not really talking about the post-hurricane reserve? I mean if you think about that reserve and maybe it's somewhere the ballpark of $100 million, correct me if I'm wrong, when would that be able to flow back through earnings?
I don't know. I think it's difficult to answer it in terms of when it will make the determination. There is no need for reserves associated with the storm. I think as we have said, we expect normalization in the coming quarters. Just to correct you, the hurricane reserve is down to about $75 million or less. Some of it has been picked up in the regular allowance while other has been released over the last three quarters.
Okay. So there's -- so it's just not like a one year since the end of the moratorium or any sort of milestone that would be sort of the drop-off of that point or any sort of anything on along those lines?
There's no bright line. It is very subjective.
Our next question comes from Bob Napoli from William Blair. Please go ahead with your question.
Thank you very much. You had mentioned I think at the outset fee income part of the drive and the growth of fee income is spending, consumer spending, and I thought you had given out a number at the front of the call that I may have missed, but what is the growth in spending in Puerto Rico? How does that trend versus last quarter? And is there a significant difference between consumer and commercial?
As you said, in the compare remarks we basically stated that the dollar value of our clients' transaction exceeded the same quarter of 2017 by 17%. In terms of transaction, I think it was 4%; the dollar amount was 17%, that's credit and debit together.
Okay and that's an acceleration from the first quarter?
Slightly higher than the first quarter. The first quarter we had transactions up by 3% and dollar amount up by 14%.
And do you have a feel for how much of that growth is driven by the economic activity responding to the hurricane?
Well, it's purely anecdotal. I think people are after the hurricane hit and everybody was very concerned. I think Puerto Rico has rebounded faster than most people thought. So I think consumer confidence is up. I think people are probably more stable about their employment prospects now. The economy is picking up. I think some people have got insurance money. They spent that. So I think it's a combination of different factors/
And then I think one of the concerns was at the out-migration would accelerate once school was out for the summer, but you're saying that you've not --you've seen a deceleration and not migration --
Our data is through March and our data is from the San Juan Airport numbers. So definitely, I can say that the worst predictions about out migration have not yet come to there, obviously the school has to start, yes, so we don't we what that impact is going to be. But I think that the worst has -- the worst possible outcomes that people were talking about and these probably the hurricane have not come true. More people came back then I think most people expect it.
Right, thank you very much, appreciates it.
A lot of people at Puerto Rico left. We are not trying to undercut.
And ladies and gentlemen, at this time I'm showing no additional questions. We'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.