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Popular Inc (BPOP) Q2 2019 Earnings Call Transcript

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Popular Inc (NASDAQ: BPOP)
Q2 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Popular Inc Q2 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Mr. Paul Cardillo , Investor Relations Manager of popular. Please go ahead, sir.

Mr. Paul Cardillo -- Investor Relations Manager of popular

Good morning and thank you for joining us on today's call with us today is our CEO, Ignacio Alvarez our CFO Carlos Vazquez and our CRO Lidio Soriano. They will review our results for the Second Quarter and then answer your questions. Other members of our management team will also be available during the Q&A 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.com.

I will now turn the call over to our CEO, Ignacio Alvarez.

Ignacio Alvarez -- President And Chief Executive Officer

Good morning and thank you for joining the call. We had a very strong second quarter and continue to build upon the success achieved in the first quarter. I will address key events for the quarter then give an update on our business and provide some thoughts around the environment in Puerto Rico, Carlos will comment on the quarter's financial results and Lidio will provide an update on credit trends and metrics.

Please turn to Slide 3. 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 noninterest income and lower income taxes, partially offset by higher expenses and lower revenues for mortgage banking activities. Net interest income was $5 million higher than in the previous quarter. While 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 4. With respect to migration trend, the most recently released passenger data from the San Juan airport reflected 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 a significant reduction compared to the first quarters of 2015, 16 and 17 which average outmigration of approximately 18,000. In June, total employment, which include self-employed individuals was flat both year-to-date and year-over-year. The unemployment rate remains stable in June at 8.4% and is the lowest unemployment rate in Puerto Rico going back at least 55 years. [Indecipherable] 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 jobs, offset by 5% decline in public employment. The auto industry continued to perform well, 52,000 new units have been sold year-to-date through June, up 4% compared to 2018.

Net sales were down 8% when compared to the first 6 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 period in both 2016 and 2017. Internal metrics we track to monitor economic and client activity are also showing encouraging trends. Our customers 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 in the auto sector. Mortgage generation 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 customers in Puerto Rico have increased by 24,000 since December 2018 and by 71,000 over the past 12 months, including the 30,000 customers that were acquired with the 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 Funds flowing to the Island. The disbursements 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 iments [Phonetic] on the island, there would likely be even greater federal oversight and this will probably cause further delays. However, we do not believe that the total amount of recovery front that ultimately come to Puerto Rico will be reduced.

I will now turn the call over to Carlos, who will discuss the financial results in greater detail.

Carlos J. Vazquez -- Executive Vice President And Chief Financial Officer

Thank, you Ignacio. Good morning. Please turn to Slide 5 for second quarter results. Note that the additional-- the additional information is provided in the appendix to our slide deck. Today's earnings press release detailed variances in the first quarter, primarily higher net interest income, higher net interest income, lower taxes offsetting part by higher operating expenses.

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. In Q2, our net interest income benefited from higher commercial loan volumes in the US and consumer loan volumes in Puerto Rico. It also 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 US and in public deposits in Puerto Rico.

We continue to be asset sensitive. So the recent expectation of lower interest 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 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, it will expand on credit-related matters, shortly. The $2 million increase in our non-interest 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 [Indecipherable] claims for previously sold loans. This was somewhat offset by lower income from our mortgage banking activities driven by an unfavorable fair value adjustment on MSRs of $13.4 million in the second quarter, resulting from the expectation of lower rates and higher repayments. 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 in regulatory accounting technology and legal fees. Business promotion costs were also higher, reflecting higher seasonal advertising cost and higher consumer reward program expenses, the latter is a result of increased client activity.

Historically expenses of Popular have exhibited some seasonality and should increase as we progress through the year. We reiterate our expectation that average quarterly expenses in 2019 will be approximately $364 million, driven mostly by higher technology regulatory and personnel costs. Obviously, we will strive to be this number. Our effective tax rate for the quarter was 19% but this included a benefit of $6.3 million from prior year adjustment. Excluding these adjustments, our effective tax rate was 22% within our 22% to 24% guidance for the full year.

Please turn to Slide 6. Our net interest margin was 4.11%, --down 9 basis points from last quarter. Asset yields were down 5 basis points in the quarter primarily due to asset mix. Increased 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 overall as a deal. Loan yields were down just 2 basis points. Total deposit cost in the quarter increased 4 basis points to 75 basis points because of our interest bearing deposits was up 5 basis points with 96 basis points, mostly due to higher volume and raise for Puerto Rico public sector deposits and higher deposit costs in the US because 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--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 $159 [Phonetic]million in the second quarter of 2018 and skewed in favor of existing home purchases. Summarizing the outlook for Popular's 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 US. Please turn to Slide 7. Our capital levels remained strong relative to mainland peer banks as well as with respect to well capitalized well-capitalized regulatory requirements. [Indecipherable] to one ratio was 16.8% up from 16.4% and tangible book value in the quarter increased by $2.86 per share from $48.58 [Phonetic]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 simplified certain regulatory capital required. Among other things this rule that will be effective April 1, 2020. will relax the limitations on the amount of mortgage servicing assets and certain deferred tax assets allowed at CET1. It will also increase the risk weighting of certain deferred tax assets on a pro forma basis as of June 30 2019. The impact of the final rule would have been a reduction of approximately 55 basis points to popular CET1.

Finally, regarding feasible, we are still no in a position to share an estimated effect on our allowance and capital but still hope to share some estimates in the 3rd quarter.

With that I turn the call over to Lidio.

Lidio V. Soriano -- Chief Risk Officer

Thank you, Carlos and Good morning. Credit quality results for the second quarter of the year were strong in both our operating markets. In Puerto Rico, credit quality reflects lower non-performing loans, lower non-performing assets, lower NPL inflows and lower net charge-off. We are encouraged by the trends in our Puerto Rico loan portfolio. In the US credit metrics reflects stable NPLs. They will NPL inflows and stable net charge-off. Please turn to Slide number 8. At Quarter-end, our outstanding direct exposure to the Puerto Rico government municipalities and weather instrumentalities was 455[Phonetic] million. Flat from the prior quarter. The another quarter. We have no direct exposure to the Puerto Rico central government or it's public corporation. Our municipality exposure consists mainly our 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 and unlimited taxing power of each municipality is pledged to the repayment of the loans.

75% of our exposure is to the forth large municipalities in the someone metro area. Our municipal borrowers typically make two payments annually interest and principal on July 1 and interest on January 1. On July 1, we received the scheduled principal payments of $22 million. 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 energy programs in the US.

Turn to Slide number 9, so this cost credit metrics for the quarter. Non-performing assets decreased by $28 million on a linked quarter basis from $712 million in the previous quarter. Secondarily $3 million this quarter. The decrease in non-performing assets was the combination of a decrease of $22 million in non-performing loans and a decrease of $7 million in other real estate loan. Non-performing loans in Puerto Rico decreased by $22 million from the first quarter driven mainly by lower commercial and mortgage NPLs of $17 million and $9 million respectively. The decrease in commercial NPLs was mostly due to collection received while the decrease in mortgage was mostly due to a continued improvement in the portfolio after the hurricanes. In the US, non-performing loans remained flat at $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 orders 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 loans decreased by $3 million mostly in the Puerto Rico commercial portfolio Puerto Rico mortgage inflows for the quarter are at 60% of the level seen prior to the hurricanes and remained stable, mainly driven by lower early delinquency post monitoring. In the US NPL inflows were 6 million.

Turning to Slide number 11. Net charge-offs for the quarter amounted to $47 million were annualized 71 basis points 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 US. In Puerto Rico, the decrease is primarily driven by lower commercial net charge-off of $16 million as the prior quarter included a charge-off from a single large relationship. In addition, Puerto Rico mortgage net charge-off decreased by 2 million from the prior quarter and now stands at 56 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 results[Phonetic]. The allowance for loan losses decreased by 7 million from the previous quarter to 544 million, mainly due to a decrease of 8 million in Puerto Rico, offset in part by an increase of $1 million in the US.

The Puerto Rico decrease was primarily attributed to improvement in the loss trends in the mortgage portfolio. The ratio of allowance for loan losses to loans helping 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 helping 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, while in the US, 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 US.

With that, I would like to turn the call over to Ignacio for his concluding remarks. Thank you.

Ignacio Alvarez -- President And Chief Executive Officer

Thank you. Lidio 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 credit[Phonetic] 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 873,000 of our clients are active online and 78% of these clients use mobile devices to interact with us. In June of this year 51% of our deposit transactions in Puerto Rico were processed to smart ATMs and mobile devices, a 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 in the mainland United States, while more focused, provides a diversification to our footprint. We have a strong commercial lending unit that is comforted by two specialized national lending businesses, Condo association banking and healthcare.Our investments in EVERTEC and BHD Leon continue to contribute to earnings and represent unrecognized investment value. We are energized by our results and we remain focused on enhancing shareholder value.

We are now ready to answer your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Today's first question comes from Brett Rabatin of Piper Jaffray. Please go ahead.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Hey, Good morning everyone.

Ignacio Alvarez -- President And Chief Executive Officer

Good morning, [Inadecipherable].

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Wanted to first ask the narrative was kind of supposed to be that the commercial book was growing more in Puerto Rico versus maybe a pullback in the US. Just given relative pricing and what you were seeing this quarter. The growth was actually in the US on the commercial side and I'm curious if that was in the [Indecipherable] health-care sectors that you mentioned, and then maybe just some color around the commercial book in Puerto Rico linked quarter -- what affected the linked-quarter change in the balances?

Ignacio Alvarez -- President And Chief Executive Officer

Yes, the, narrative of as you described it of growth in Puerto Rico, we expect it to actually be in different sectors. But it's not going to be in every sector every quarter [Indecipherable]. We've had very consistent contribution for the auto sector almost every quarter. Last quarter our commercial grew, this quarter was sort of flattish. That in a given quarter may be simply a reflection of prepayments and payments like clients than anything else, on there is really a reflection on or origination, but the important point is that we are seeing in the portfolio, Puerto Rico growth overall and the contributions [Indecipherable] From quarter to quarter between different, different segments. In the US, we commented in the last quarter that commercial growth has been slower, there was a little bit of catch up in the second quarter. So it's a strong second quarter, but for the year in full, we are still running the slight [Indecipherable] slower pace than we were, if you look at the prior quarters last year on the average for the last couple of years. So that's what we're trying to say, well, we mentioned slightly lower growth in the, in the US, but if you look at the pace we have where it had been running 17 and 18 or 6%, 7% per quarter, we're are still growing healthily, but as slower pace of that.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. I appreciate the color there. And then just on the margin, Carlos, you gave the guidance $4 to $5 million for 25 basis points, but you've also got continued elevated government deposits, and you've obviously taken some action in the securities portfolio. One, 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, how are you going to try and manage that to flattish with balance sheet actions, are you more trying to grow NII [Phonetic] what's, what's your thoughts on how you're going to manage the balance sheet, relative to what we're seeing with rates.

Carlos Vazquez -- Chief Financial Officer

Yes, you can see this quarter, there was a shift from cash to investments that is 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, then 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 [Indecipherable] is still in shorter term -- term, term instruments, so it was, it was a shift that more than anything responded to our tax position as opposed to a change in change in view. We have since that perception of future rates change the few months back, how we actually started last year as the perception of rates -- sorry, 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 moving to closer to a neutral position. But we tend to do that through our business, right instead of as you know, we are not a big [Indecipherable] with this house, we don't have a big trading portfolio, so we just manage that through our business And that means that it may take a bit more time

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay, and then maybe just lastly if macro perspective. It looks like the [Indecipherable] resigned this week and maybe the secretary as well which would make the education secretary Governor, can you just talk about what you're seeing 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.?

Ignacio Alvarez -- President And Chief Executive Officer

Yes, this is Ignacio, I mean obviously we've lived through a lot of political uncertainty in the last two weeks in Puerto Rico, we do not believe that it should have a permanent impact on the macro come a [Indecipherable] Puerto Rico. We haven't seen it yet obviously remains short-term disruptions especially in old and one where some of the cruise [Phonetic]ships have not been able to dock and obviously the people have not gone to [Indecipherable] as they a normally go because of the disruption.

I think that as long -- there is a lot of rumors circulating, I think we are in the beginning of a transition period. I think what's important is the debt transition be orderly it'd be done in according with our constitutional norms and that we co-operate to make sure that in an uncertain. This is a new playground for all of us. This is new, ground [Indecipherable] that we try to stick to the constitutional norms and doing it as 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 US and the Congress in the US government did not want to punish the Puerto Rico people. So, notwithstanding that perhaps the efficiencies of our, some of our leadership. I don't believe there is a will in Congress or too hurt the Puerto Rico people. We will see more oversight that I would say may cause some delays, but at least I have not heard anyone saying we're going to cut off recovery [Indecipherable] to Puerto Rico.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay, great solid quarter. Thanks for all the commentary.

Operator

And our next question today comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Hey, Good morning guys.

Ignacio Alvarez -- President And Chief Executive Officer

Good morning.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

First off,want to ask about capital and capital return and a couple of sort of notable events that happened during the quarter one is the [Indecipherable] banks released the results and it seems like the ask and granting of capital return is bigger this year than in past years. And the other being the big merger of two other banks on the island that it's going to bring I guess pro forma the common equity Tier one ratio of the bank. That will be ongoing entity down to around 11.5%. So I'm just wondering if those two items, either taken together or separately change your [Indecipherable] outlook on on your capital return ask or the thought process or methodology in anyway?

Carlos Vazquez -- Chief Financial Officer

Yes. Alex, hi, good morning, this Carlos. A couple of things, first of all, we have described before, 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 of that and as you recall, is that we are ramping up our stress testing a model, we will then engage with our regulators in the next few weeks and we would hope that as it has been in the past, in the last couple of years, we'll take out 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 to change at this point in time, we are sitting at a healthy capital position 61 and 60.8 as we discussed in the call. Our view also has not changed that we have heard those before. It would be our goal over time for a capital 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 are 11 or 12, whatever you think that number is, we're probably always operate [Indecipherable] on over that. So we still hope to over time move in the direction of our Mainland peers. We do suffer a little bit of a rich man's problem, that we keep adding a lot of capital to our capital every quarter, so is actually not easy for us to move our capital in that direction. But that would be our intent. To achieve that, we will have to use all levers. We will have to hopefully keep and increase our capital return both dividends on buybacks over time, we hopefully can get 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 positive opportunities as well.

So all the levers will need to be put to work for us to achieve our goal to move in the direction of Mainland peers.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay. And then a question for Lidio. Just, as it kind of relates to all 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 the pieces tied to the economy. When does that get updated and it has there been enough improvement in the outlook to potentially reduce the component associated with the economy at some point in the near future.

Lidio V. Soriano -- Chief Risk Officer

Is it gets updated on a quarterly basis. If you see the trend, I mean we are to certain extent looking at the provision that is residual the allowance to certain extent, we are back to the levels that we have prior to the hurricane. We had, there was a dislocation during the year, again which there was a significant increase of reserved given by what we thought was going to be some of the other aftermath of the hurricane. We grow down that the most of the reserve into 2018 and you've seen in the first quarter of 2019. The provision that is similar to the provision, we have to, here again the allowance was drawn down as a result of the process. This quarter we see -- we saw a slight decrease in allowance driven by continued improvements in the loss trends of the mortgage portfolio. So I think on a going forward basis. [Technical Issues]

Operator

Hello, this is the operator. . Can you hear us?

Alexander Twerdahl -- Sandler O'Neill -- Analyst

I can hear you, can you hear me. I mean I can hear you...

Operator

I'm checking with the other speakers.

All right everyone looks like we are having some technical issues. Here I would replace everyone on hold until we get everything going back again please standby. [Technical Issues] Okay. Thank you for waiting everyone. We have reconnected the speaker location, Mr. Twerdahl if you can continue with your question, sir.

Mr. Paul Cardillo -- Investor Relations Manager of popular

I hope you got a little bit [Indecipherable] Alex. It must be something you said, Alex. [Indecipherable].

Alexander Twerdahl -- Sandler O'Neill -- Analyst

I have to but, Lidio 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 with the levels today are back to where they were pre-hurricane.

Lidio V. Soriano -- Chief Risk Officer

Sorry[Phonetic]. I think I said that we're looking at this quarter specifically, there was a small decrease in the provision related to continued improvement in the loss trends in the mortgage portfolio in the Puerto Rico, I think on a going forward basis that is going to -- what's going to drive or they need in the performance of our portfolio. Although the future is rather short, because then we have the beautiful [Indecipherable] to account for in early 2020.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

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 total Puerto Rico government deposits that are currently on the balance sheet? And while we've been on this call headline has come across, saying that the Puerto Rico and judge imposes 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.

Ignacio Alvarez -- President And Chief Executive Officer

Well, may be I think, I think the uncertainty in Puerto Rico and the fact that we're going to have a transition may result in some delay in some of these proceedings it's hard process for us to predict it, It's certainly not going to accelerate the process. Yes, I think I think I'm getting here some some information for our General Counsel. They have basically said in the hub is a call for the judge to try to mediate for the party to voluntarily immediate some of the disputes, which is not -- which is normally something judges to and then answering the other part of your question, Alex. The second quarter is, tends to be the peak level of the buses for Puerto Rico government, but that is when the vast majority of tax receipts occur and that was true, there seems to be true this year as well. So our balances went up slightly. I think they were about $9 billion at the end of the first quarter. They probably of ten now. At this, we would expect, as we've mentioned before that through this year, those balances will come down exactly the radar, we say come down it's hard to figure out, but that continues to be our expectation.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Thanks for taking my questions.

Operator

And our next question today comes from Scott Valentin from Compass Pt [Phonetic] Please go ahead.

Scott Valentin -- Compass Pt Rch & Trading LLC -- Analyst

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 of the economy. I think the numbers you guys provided earlier showed pretty good growth in year-over-year originations. I mean do you think we finally turned the corner in terms of the mortgage loan growth for Puerto Rico.

Ignacio Alvarez -- President And Chief Executive Officer

Yes. And I mean, I think, I'm not sure I would [Indecipherable] in on the mortgage organizations alone as an indicator, because that's a complex --[Indecipherable] system and the on mortgage rates and home prices and employment and a bunch of other things. I think, I would term step backwards a little bit. I look at the overall portfolio.

As I mentioned earlier, we are seeing nice healthy demand and increase in our portfolio. It will not necessarily be in any given segment any given quarter there seasonality in the mortgage demand and tends to be a slow in some quarters and better in others. So I will probably look at the making all the pieces as opposed to any one piece as an indicator.

Scott Valentin -- Compass Pt Rch & Trading LLC -- Analyst

Yes, OK. And then regarding the two commercial verticals you called out the healthcare in the [Indecipherable]. Can you go into more detail about exactly where in healthcare, you guys are finding opportunities is if commercial real estate or is it C&I and then the [Indecipherable] maybe the geography maybe types of credits you guys are doing?

Ignacio Alvarez -- President And Chief Executive Officer

Well, I think in the [Indecipherable] we are basically in our biggest state is Florida obviously and that's why our kind of and business is located our team, but we operate in over 22 or 23 states. So we have business across the US and most of these are loans to the associations to make repairs. So they usually have a term and in the business is a very good business, because it's self funded. We have, more deposits than I think we, last time I checked, we are close to [Indecipherable] deposits in our loans were like 600,-- $600 million I think around there, $700 million. So it's a very good business and basically our healthcare business is basically. I guess what we call assistance the facilities where you come out of rehab, you go to the hospital and you get you knee operated, you have to spend some time in between, so that's mostly we do, those are classified as commercial real estate loans, because normally the operator in the other property at different, but really the risk is very different and that business is a national business mostly in New York, I would say, but we do have national facility [Phonetic].

Scott Valentin -- Compass Pt Rch & Trading LLC -- Analyst

Alright. Thanks for that color.

Operator

And our next question today comes from Glen Manna of Keefe, Bruyette & Woods. Please go ahead.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Hi, good morning.

Carlos Vazquez -- Chief Financial Officer

How are you?

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

I know, late in the cycle, the public deposit the betas had reached the point where they were 100% you were passing through all the rate hikes. If we're on the cusp of an easing cycle, what can we expect for the beta on the downside. In the first couple of cuts?

Ignacio Alvarez -- President And Chief Executive Officer

Yes, I mean, I think the beta and in public deposits continues to be close to 1, so those will move very close to moving rates. We have other deposits mostly in our US operation that also have reasonably high betas, but I push I you expect probably those to move with some lag. So, the movement in the rest of our higher beta the bus it booked will probably be less obvious because those will move with with like lags as rates come down.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

And given the reliable acquisition and accretable yield, you have the number of what was in accretable yields for the second quarter?

Carlos Vazquez -- Chief Financial Officer

You mean, the amortization of a discount in the second quarter?

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Yes, the accretion into NII.

Carlos Vazquez -- Chief Financial Officer

Around $10 million.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

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, their lending files. When you talk to your commercial lenders, what do they say the commercial customers balance sheets look like? We're a year after the storm and presumably there is some kind of stimulus going on. What are they saying about the condition of those customers ?

Carlos J. Vazquez -- Executive Vice President And Chief Financial Officer

I'll let Lidio put more color, but obviously it depends on the sector. Many -- I think you save here in the building in the construction sector there doing better. I think the tourism sector in general is doing better, mainly the service industry is doing better been via retail, it's probably although retail sales have picked up retail like everywhere in the world is tough. So I think it really depends on the sector. I mean in general the macroeconomic situation is better, people have better balance sheet, but it really depends on the sector and a particular client.

And I hope, Lidio want to add some color

Lidio V. Soriano -- Chief Risk Officer

Would you say that on general terms the classification of our commercial portfolio has improved over time and that reflects the improvement in the financials of our clients. So, generally it will show improvement.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay, thank you for taking my questions.

Operator

And our next question today comes from Joe Gladue with MCG Securities please go ahead.

Joe Gladue -- MCG Securities LLC -- Analyst

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 significant opportunities in any particular areas. And does it change some of the --any of the competitive pricing environment on the island.

Carlos Vazquez -- Chief Financial Officer

No, Puerto Rico is a competitive market. And I think that you know the Oriental was a very competitive player. Before I do, I think there continue to be competitive, obviously consolidate has always bring opportunities as as two institutions, there may be reasons why by clients, we're at one institution that don't want to stay at the other institutions, so we are always looking to pick up new clients, new business, but we think Puerto Rico will remain a very competitive market.

I think the consolidation is good for Puerto Rico is good to have graphs less banks but stronger banks that are committed to the market and so I think it will be good. We'll be looking out for the opportunities they consolidated any you may want to shed [Phonetic] some assets, there's. So it's always these kind of things. Always bring opportunities and we'll be looking to see what they bring, but I think in general, be good for the market.

Joe Gladue -- MCG Securities LLC -- Analyst

Okay, All right, thank you.

Operator

And our next question is a follow-up from Brett Rabatin of Piper Jaffray. Please go ahead.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

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 the outlook for those in the back half of the year. I know insurance is somewhat seasonal, but just give us some thoughts on fee income and, but is also thinking mortgage Mike perform better. Obviously, the results were negative were impacted by the MSR but just wanted to talk about the income, a little bit and how you think about the outlook for the back half year.

Carlos Vazquez -- Chief Financial Officer

If you look at the different mortgage line in our press release and you skip for a moment the MSR one, you will see there are quite consistent. Most of the mortgage life actually very consistent as we go along. So that would probably continue to be the case. The MSR is going to be whatever it is, [Indecipherable] tougher once to manage, obviously. A lot of the, of the fee income will be transaction also transactions keep growing those lines will continue to have positive variances. On the insurance, but basically, 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 that specific one and nothing else changes, we're probably going to be a bit lower in the third quarter and there is a result chance, I mean the insurance portfolios are performing well, the 4th quarter, maybe a little better again.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. And then Carlos absent finding pools of loans or things to purchase, if your payout ratio, I think going to approach a 100%. How do you think about capital as it builds over the next year what levers [Indecipherable] you Paul to deploy the capital, while the balance sheet or other?

Carlos Vazquez -- Chief Financial Officer

Yes, I think we're going to try to use all of them as I mentioned earlier, from a capital distribution to asset purchase, hopefully, the one that we are most hopeful on is we're going to growth, we can get organic growth especially in Puerto Rico that is by far the best deployment of capital because it's our highest margin business. But it's going to have to be all of the above. Again we have a little bit of Richemont's problem that we keep adding to the, to the total capital healthily [Phonetic] be every quarter, so it makes our challenge to to more within the rest of our Mainland peers [Indecipherable].

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay. And then maybe just one other one. I think last quarter we ask Lidio about provisioning and how we thought about it? And if there was anything that you saw that might change the path that we've seen 4Q, 1Q and it didn't happen in 2Q, Like you, like you said it wouldn't, is there anything in the back half of the year that might change the provisioning a little?

Lidio V. Soriano -- Chief Risk Officer

It's tough to predict, what will happen in the future, but given what we see in terms of NPL formation early delinquency, we don't, we don't see anything as I could change the recent trends.

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Okay, great, thanks for the additional color.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Ignacio Alvarez -- President And Chief Executive Officer

Thank you for joining us today and for your questions. The second quarter was another strong one for us and we are 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.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Mr. Paul Cardillo -- Investor Relations Manager of popular

Ignacio Alvarez -- President And Chief Executive Officer

Carlos J. Vazquez -- Executive Vice President And Chief Financial Officer

Lidio V. Soriano -- Chief Risk Officer

Carlos Vazquez -- Chief Financial Officer

Brett Rabatin -- Piper Jaffray Companies -- Analyst

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Scott Valentin -- Compass Pt Rch & Trading LLC -- Analyst

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Joe Gladue -- MCG Securities LLC -- Analyst

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