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Popular, Inc. (NASDAQ:BPOP)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Popular, Inc. Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing "*0". After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*1" on your touchtone phone. To withdraw your question, please press "*2". Please note this event is being recorded. I would now like to turn the conference over to Camelia Pico for Popular. Please go ahead.

Camelia Pico-- Investor Relations

Good morning and thank you for joining us on today's call. With us today is our CEO, Ignacio Alvarez, our CFO, Carlos Vasquez, and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will 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, our financial quarterly release, and supplement. You may find today's press release and our SEC filing on our website 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 are happy to report another strong quarter, during which we achieved excellent financial results, closed the Reliable acquisition, and executed several important capital actions. Before I address the quarter's highlights in more detail, I would like to comment on the progress we are seeing in Puerto Rico.

We track different metrics, both internal and external, to get a sense of the level of economic activity on the island. While on previous calls we have been sharing variances from the same quarter of the prior year, September 2017 was an anomaly, as the island was literally in the dark and out of business for a significant part of the month. The month of July and August allow us to make a fair comparison and the trends are positive. If we were to include September, all the quarter and year-to-date variances would be significantly better than those that we are sharing here.

Debit and credit card activity reflected increased spending as compared to a year ago. The dollar volume of our customer's transactions for July and August was 18% higher than the same period in 2017. On a linked quarter basis, spending figures reflected a slight reduction due to seasonality. If you look at the consumer loan activity, the trends are also encouraging. While originations in the first half of the year were 4% below 2017 levels, July and August originations were 6% higher than those of the same period last year.

Within the consumer loan portfolio, there are important differences, with auto finance and mortgages at opposite ends of the spectrum. Our auto originations for July and August 2018, excluding Reliable, were 27% higher than in 2017. The industry as a whole is doing well. As of August, new car sales in Puerto Rico were 23% higher than in 2017. Mortgage originations, on the other hand, were 35% lower in the first six months as compared to the previous year. However, starting in July, mortgage originations have surpassed 2017 levels for the first time this year.

On the commercial loan side, we have not yet seen loan growth but we expect additional lending opportunities to arise as the economy continues to recover. There is a lot of liquidity in the system, which customers are using to finance their expansion in the short-term, as well as to pay down debt. We believe that continued economic growth and larger projects will generate demand for financing.

Cement sales, often considered a positive indicator of a healthy economy, showed continued strength, up 25% through August. As of the end of September, salary and employment had stabilized, down 2% with 17,000 jobs since September 2017. We expect additional hospitality jobs to bolster these figures once larger hotels reopen later in the year and during the first quarter of 2019. However, while employment is slightly down, average wage and salary income is up 7% according to a recent study published by the Federal Reserve Bank of New York.

With respect to migration trends, recently released passenger data from the San Juan airport reflects that the net number of people who left the island from September last year to July 2018 was approximately 128,000, a significant amount but much lower than initial estimates. The net outflow of 188,000 between September and December has been partially offset by a net inflow of 60,000 in the first seven months of this year.

Despite the decline in population, Popular's customers have continued to increase. Excluding approximately 30,000 new, unique customers brought in with the Reliable transaction, our customer base in Puerto Rico has increased by approximately 55,000 since the hurricanes.

In short, based on the metrics that we are seeing, the recovery of the Puerto Rico economy following the storm has been very steady. The sustainability and pace of this recovery will be heavily dependent on the magnitude and timing of federal recovery and private insurance funds flowing through the island.

Insurance companies continue to make advances and while the pace has been slower than many would like, approximately $4.5 billion has been dispersed out of an amount estimated for the Puerto Fiscal Oversight Board to reach $8 billion. Regarding federal funds, close to $9 billion was dispersed in fiscal year 2018 in emergency relief assistance to individuals, public corporations, and municipalities.

The current Puerto Rico governmental fiscal plan anticipates an additional $13 billion of federal and insurance funds to be dispersed in the fiscal year 2019 and over $50 billion in the next eight fiscal years. These inflows will undoubtedly have a stimulative impact on the economy. However, the effect will be tempered somewhat by the government austerity measures imposed by the recently revised fiscal plan certified yesterday by the Fiscal Oversight Board. The plan contains a number of budgetary and structural reforms designed to improve long-term fiscal stability on the island.

Looking beyond the immediate stimulative impact of the recovery process, the island's long-term economic prospects will depend on the decisions regarding Puerto Rico's rebuilding and the implementation of required structural reforms. It is imperative that we take this unique opportunity to implement those reforms that are essential to achieving long-term sustainable growth. This will require discipline and increased cooperation between the Fiscal Oversight Board and the local government.

Now, let me address the highlights of the third quarter. Please turn to Slide 3. In the third quarter, Popular reported net income of $141 million compared to adjusted net income of $121 million in the second quarter. Adjusted results for the second quarter exclude the impact of the termination of our FDIC loss year agreements.

Third quarter results include the contribution of Reliable, a transaction we announced in February and closed on August 1st, in which we acquired approximately $2 billion in auto and auto-related commercial loans. We are happy to have brought on board a seasoned and talented team as part of this transaction. The transition has been smooth and we are excited about the prospects of our combined auto business. For the quarter, Reliable contributed approximately $12 million of net income.

We have also continued to execute on our organic growth strategies. The corporation's total deposit base increased by approximately $270 million and we grew commercial loans in our U.S. business by 2%. I am pleased to report that credit quality remains stable. In Puerto Rico, most metrics are better than or close to pre-hurricane levels. In the U.S., credit quality is strong, except for our taxi medallion portfolio. Lidio will expand on these results later in the call.

Our capital levels remain robust, with our Tier 1 common ratio at 16.2% at quarter-end. During the quarter, we executed our previously announced capital actions, including the $125 million common stock repurchase. We acknowledge the importance of returning capital to our shareholders and we will continue working toward that end.

I will now turn the call over to Carlos, who will discuss the financial results in more detail and provide an update on this quarter's capital actions.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Thank you, Ignacio. Good morning. Please turn to Slide 4. Before going into the results for the quarter, let's revisit and update the Reliable transaction. As Ignacio mentioned, the results for the quarter include approximately $12 million in net income contribution from Reliable. Including the impact of deferred value discount, the yield of the acquired Reliable assets was 12% for the quarter, the main contributor to our quarter-over-quarter increase in NIM of 26 basis points. As the amortization of the deferred value discount is frontloaded, this portfolio's higher yield will gravitate toward pure contractual yields over the next couple of years.

We are pleased with the financial performance of the acquisition. For 2019, we expect Reliable to contribute approximately $55 million in net income, including servicing fee income, provision, and conversion costs. This acquisition was timely since the demand for the auto lending sector continues to be strong. The combined auto portfolio of Reliable and Popular auto grew by $130 million during the quarter.

Please turn to Slide 5 for the third quarter results. Note that additional information is provide on Slide 6 and the appendix to the deck. Today's earnings press release details variances in the second quarter, which were driven by higher net interest income, higher fee income, and lower loan loss provision, offset in part by higher operating expenses.

Net interest income for the quarter was $451 million, up $37 million from the second quarter. The increase was driven by higher volumes and rates on investments and loans plus a $31 million contribution of the Reliable portfolio, partially offset by higher cost of interest-bearing deposits.

Our net interest margin was 4.07%, up 26 basis points from last quarter, driven by the impact of the Reliable acquisition. We redeployed nearly $2 billion from cash to higher yielding consumer and commercial loans because our interest-bearing deposits was up 11 basis points to 72 basis points, mostly due to a higher volume and rate for Puerto Rico deposits and higher deposit costs in the U.S. The retail and corporate deposit sections in Puerto Rico saw minimal increase in costs.

Separate from the purchase of the Reliable loans, during the quarter, we also deployed additional cash for the purpose of investment securities. We purchased approximately $1 billion of intermediate term U.S. Treasury notes and close to $2 billion of short-term Treasury bills. These investments achieve more attractive after-tax yields than cash holdings without adding credit risk or materially changing the characteristics of the investment portfolio. The overall duration of the bond portfolio is approximately three years.

Excluding the Reliable acquisition, for 2018, we continue to anticipate slight growth in overall loan balances, driven by continued growth in the U.S. and stable balances in Puerto Rico.

In the third quarter, net interest income, excluding FDIC loss share activity, increased by $19 million, reflecting higher revenue in nearly all categories. The operating income for the quarter includes $9.5 million in hurricane-related insurance recoveries and $9 million in service loan modification fee income related to the Fannie Mae hurricane-related modifications.

Total operating expenses for the quarter were $365 million, up $28 million from the prior quarter. Third quarter expense numbers include a $19.6 million writedown of capitalized software costs for a product that was canceled and a reduction in occupancy expense of $3.6 million resulting from insurance reimbursement of hurricane-related costs. Approximately $9 million of expenses are related to the two-month operation of Reliable under Popular. The remaining increase in expenses is mostly related to increased personnel costs, in part resulting from higher expected incentive compensation due to Popular's improved performance.

During the fourth quarter, we will see a couple of significant expense items, each for approximately $13 million. The first is the cost related to the early termination of Popular's $450 million, 10% note due in 2019. Secondly, we will see the estimated cost of an early retirement window offered during the third quarter that will be closed in the fourth quarter. That window is expected to reduce salary expense by about $6 million next year.

Excluding the effect of the non-core expenses just described and the expenses related to the Reliable acquisition, quarterly expenses for 2018 will average $335 million, slightly higher than the $331 million mentioned last quarter, principally on higher personnel costs. Again, these numbers exclude Reliable for 2018, which added an additional $9 million of expenses in the third quarter and is expected to add about $12 million of expenses in the fourth quarter.

For 2019, the expected normalization of OREO expenses resulting from return-to-normal foreclosure activity and a full year of the Reliable operation are expected to add approximately $40 million to Popular's expenses. Higher pension, technology, regulatory, and personnel costs are expected to result in average quarterly expenses for the year 2019 of approximately $364 million.

For the fourth quarter, we expect our tax rate to be approximately 22%.

Please turn to Slide 7. As Ignacio mentioned, during the quarter, we took a series of actions related to our capital plan. Following last July's announced approval of a $125 million stock repurchase, we entered into an accelerated share repurchase agreement, recognizing a reduction in tangible value by a total of $125 million during the quarter. The ASR is expected to be completed during the fourth quarter. We also completed the redemption at par of $53 million of high-cost TruPS with a coupon of 8.33%.

Finally, we issued $300 million of 6 1/8% senior notes due 2023. The net proceeds of this offering plus available cash were used to redeem on October 15 Popular's $450 million of 10% notes due 2019. As mentioned earlier, this early redemption will result in a fourth quarter charge of approximately $13 million. The combined redemption of the TruPS and the 10% notes will result in annual decrease in interest expense of $18 million.

Having completed our capital actions for 2018, we are now engaged in discussions with our regulators for our 2019 capital plan. We are hopeful these discussions will conclude in the next few months, allowing for an announcement early next year.

Our capital levels remain strong relative to peer banks as well as with respect to world capitalized regulatory requirements. Annual book value for the quarter was $44.62 per share, down $0.16 per share on the effect of the stock buyback, common and preferred dividends, and an increase in unrealized losses in our investment portfolio, compensated in part by our earnings for the quarter.

Our common equity Tier 1 ratio was 16.2%, down from 17.4% on the effects of the Reliable acquisition, capital actions, dividends, and our quarterly results. As we have mentioned in past calls, we will continue to pursue our target of maintaining and improving our double-digit return on tangible equity while keeping capital levels that are appropriate for Popular's rich profile.

With that, I turn the call over to Lidio.

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer

Thank you, Carlos. Good morning to all. We are happy to report strong credit quality results for the third quarter in both our Puerto Rico and U.S. operations. Credit metrics in Puerto Rico continue to reflect positive trends, with most of the metrics trending at or better than previous-to-hurricane levels. In general, actual results are within or better than the assumptions used to create our hurricane reserve in the third quarter of last year.

In the consumer portfolio, early delinquencies and non-performing loans are near or below pre-storm levels. Results for this quarter reflect the acquisition of Reliable, which included $9 million in consumer NPLs.

Consumer charge-offs have been somewhat volatile post-hurricane, impacted by the payment moratorium and the temporary suspension of collection activities. The consumer net charge-off for the third quarter of 2018 was 3.02%, slightly higher than the second quarter of last year at 2.81%.

At the end of the third quarter, mortgage NPLs stood at $349 million, a decrease of $24 million compared to the last quarter. When compared to the second quarter of last year, prior to the storm, NPLs increased by $42 million. However, 3289 delinquencies have decreased by approximately $73 million during this same timeframe, reaching the lowest early delinquency levels in the last five years.

Mortgage net charge-offs for the third quarter were 1.38% compared to 1.43% in the second quarter of last year.

In commercial lending, all of our credit metrics during the quarter remain stable and near pre-storm levels. During the quarter, commercial NPLs increased by $8 million, many driven by a single borrower of $16 million. Commercial net charge-offs in the third quarter decreased by $6 million on a linked quarter basis.

In the case of the U.S., our operations continue to reflect favorable credit quality metrics except for the taxi medallion portfolio.

Please turn to Slide No. 8. At quarter-end, our outstanding direct exposure to the Puerto Rico public sector was $458 million, decreasing by $23 million from the prior quarter, due to principal payments received. No part of this direct exposure is with Puerto Rico central government or its public corporation. Our entire direct exposure is to municipalities and consists mainly of senior priority loans to a select group of municipalities whose revenues are largely independent of the central government. In most cases, credit and unlimited taxing power of each municipality is pledged to the repayment of the loans.

Our top exposure represents 75% of our total exposure and are to four large municipalities in the San Juan metro area. We also have indirect lending facilities in which the government acts as a guard door. The largest such exposure is in the form of residential mortgage loans to individual borrowers in which the government provides a guarantee similar to FHA programs in the U.S.

Turn to Slide No. 9 to discuss credit metrics for the quarter. Non-performing assets decreased by $19 million to $766 million this quarter, driven by a decrease of $8 million in OREO coupled with a decrease of $11 million in non-performing loans. Both declines were mainly driven by improvements in Puerto Rico. The OREO decrease in Puerto Rico was driven by the resumption and acceleration of sales efforts. Inflows have also been impacted by the foreclosure moratorium that recently ended.

The decrease in non-performing loans was mainly related to lower Puerto Rico mortgage NPLs of $24 million, primarily due to lower inflows for the quarter. This decrease was partially offset by higher Puerto Rico consumer NPLs of $8 million and higher Puerto Rico commercial NPLs of $9 million. The consumer increase was related to the acquired portfolio from Reliable, while the commercial increase, as previously mentioned, was driven by a single borrower.

At the end of the third quarter, the ratio of the NPLs to total loans held in portfolio decreased slightly to 2.4% from 2.6% in the prior quarter.

Please turn to Slide No. 10 to discuss NPL inflows. Compared to the previous quarter, inflows of NPLs held in portfolio decreased by $108 million, mainly driven by lower inflows in the Puerto Rico mortgage portfolio of $59 million coupled with lower inflows in the Puerto Rico commercial portfolio of $31 million. The decrease in Puerto Rico mortgage inflows reflects the lower early delinquencies discussed earlier in my remarks. The decrease in inflows in the Puerto Rico commercial portfolio were driven by the impact of two customers in the previous quarter with an aggregate amount of $46 million.

Inflows to NPLs in the U.S. decreased by $18 million, mainly due to lower inflows in the construction portfolio.

Turning to Slide No. 11, net charge-offs amounted to $64 million, or an annualized 1% of average loans held in portfolio, compared to $58 million, or 95 basis points, in the second quarter of the year. The corporation allowance for loan losses decreased by $9 million from the prior quarter, from $643 million to $634 million, mainly driven by downward adjustments of $23 million to the hurricane-related reserve. Our portfolio has performed better than the assumptions used to create this reserve a year ago. This decrease was offset by an increase in reserves for purchase credit-impaired loans.

The provision for loan losses totaled $54 million, down from $60 million in the prior quarter. The provision in Puerto Rico increased by $7 million due to higher charge-off, while the provision in the U.S. decreased by $13 million due to higher reserves for the taxi medallion portfolio in the previous quarter.

At the end of the third quarter, our taxi medallion portfolio had an unpaid principal balance of $218 million. Net of reserved, the current value of this portfolio is $56 million or approximately 26% of its unpaid principal balance, representing less than 1% of our total loan portfolio. 95% of this taxi portfolio is in New York City with an average current loan value of $168,000.00 per medallion. Excluding the impact of the U.S. taxi medallion, the U.S. operation continued to reflect positive credit quality metrics.

To summarize, credit quality results for the third quarter were favorable, with continued strength in the U.S. and metrics that were close to or better than pre-hurricane levels in Puerto Rico. 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. Please turn to Slide 12. Last month marked one year since the hurricanes devastated Puerto Rico and the Virgin Islands. At the time of our earnings call last October, approximately 70% of Puerto Rico was still without power, many schools and businesses remained closed, and we were all working tirelessly to stabilize the situation and regain some sense of normalcy.

While saddened by the loss of life and massive property damage that affected so many people, we are extremely proud of how we have recovered despite these many obstacles. In addition to strong financial results, we have accomplished important milestones, such as the termination of our loss share agreement, the acquisition of Reliable, and the execution of several important capital actions.

Our franchise in Puerto Rico is a unique position to take advantage of opportunities that we are seeing, as well as to effectively manage challenges that inevitably will arise. Our growth initiatives in the United States have good traction and we expect to see further progress.

Finally, we have additional sources of value, such as our investments in Evertec and BHD, which continue to contribute to earnings and represent unrecognized investment value.

On October 5th, we celebrated our 125th anniversary. We are energized and determined to make good use of the positive momentum that we have built up over the past month to continue to deliver solid results and to drive shareholder value. We are now ready to answer your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press "*1" on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press "*2". At this time, we will pause momentarily to assemble our roster.

The first question comes from Alex Twerdahl with 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

I was wondering if you could break out for us, Carlos, the deposit costs. I think you kind of alluded to them being lower in Puerto Rico but just the overall deposit costs in Puerto Rico versus the mainland this quarter versus last quarter.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Hold on for a second. Most of the increase was in Puerto Rico, Alex. And as we mentioned on the prepared remarks, it had to do with increasing costs for public sector clients in Puerto Rico. Hold on for a second. Yeah. Puerto Rico was 13 basis points and the whole thing was 11. Okay?

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Thirteen basis points higher this quarter versus last quarter?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yes.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay. And then can you just give us a little bit of color around sort of the seasonal flows or any expected flows in the public sector deposits? Obviously, you've had some pretty big inflows over the last couple of years. And just kind of how should we think about those balances just kind of as each quarter progresses?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Well, we have been saying for about a year and a half now that we expect those balances to come down. We have been perfectly wrong for a year and a half now. So, we're trying to be cautious in how we look at them forward. We continue to assume that as operations of the government move toward normalcy, as deals get reached and normal debt payments start, that those balances will come down. Exactly when that's going to happen is still unclear. Ignacio?

Ignacio Alvarez -- President and Chief Executive Officer

No. I think it's very hard to predict. Obviously, it will depend on, as Carlos said, as the deals get restructured, the debt deals get restructured and the government starts paying debt service and using other funds. Obviously, the revenues for the government have been better to-date than anticipated so that's one of the effects. But it's very hard for us to predict that.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay. Is there any way to kind of carve out and sort of quantify what you might consider to be more volatile deposits versus core average operating account deposits for the public sectors?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Alex, the format in which we compensate our public sector clients is a little bit complicated because it includes a number of floors, negotiated rates, it has offsets because of fees for other services that we provide the government entities. But given where rates are now and how those interplay with all the other components I mentioned, I think, moving forward, it is fair to assume that the delta or change in deposit costs for our public sector clients will be close to the change in reference rates or beta close to one. Okay?

In prior quarters, we had mentioned that, while the deposit cost beta has been close to zero for almost two and a half years, that it would be hard to keep that that way as rates continue to increase. So, you're seeing a little bit of that effect now. Now, the total cost of public deposit is still very attractive. It is lower than comparable wholesale funding and is then income-accretive. So, moving forward, if you assume that the composition of deposits stays static, moving forward, any future moves in rates, like the 25 basis points we saw this quarter, should result in quarter-to-quarter increase in deposit costs of similar to the one we saw this quarter, which is 7 basis points. Okay?

Now, the difference between those two, obviously, is the fact that we do have a significant amount of interest-bearing deposits and also the fact that the beta for retail and commercial deposits is a lot lower. Overall, we continue to be asset sensitive. So, if rates go up, it's good for our financial performance. So, assuming everything goes the way the market predicts, hopefully we'll benefit from that.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Okay. Great. That's great. And then just kind of a high-level question, Ignacio. In your prepared remarks, you quoted that your customer base is up about 55,000 accounts since the hurricane. I mean, obviously, that number doesn't quite jive with the population flows and one of your competitors has kind of cited similar magnitude relative to the size of their balance sheet. Where do you see these additional customers coming from? Is it new business formations? Is it people that just didn't have accounts before? Can you just kind of give us a sense for where they're coming from?

Ignacio Alvarez -- President and Chief Executive Officer

I can give you some of the explanations we think we have but it's all anecdotal. We don't have statistical information we can get. We've been trying to do more surveys. But there are a couple of things that are happening. Obviously, some of the -- in our case, I can say, some of our competitors have abandoned some of the markets that we're in. Closed some of the branches. And normally, when you close branches and we remain, we pick up customers.

Some people have opened up more than one bank account. I think you're seeing a tendency in Puerto Rico -- that we know for a fact -- that the number of people that have more than one bank has increased. So, you're not necessarily putting all your eggs in one basket. We may think some of these federal recovery funds may have -- although it wasn't required, the federal government tried to push people to accept the monies electronically through a bank account. So there's a number of factors going on.

I really would be hesitant to tell you we know the exact reason because we don't. But we do know for a fact that in certain regions where other competitors have closed branches, the increase in customers has been greater. So there is, obviously, some relation there.

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Great. Thanks for taking my questions.

Operator

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

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, guys. Good morning.

Ignacio Alvarez -- President and Chief Executive Officer

Good morning.

Brett Rabatin -- Piper Jaffray -- Analyst

I wanted to first ask on Reliable. I guess I had thought that the original accretion or additional income, net income of $34 million was low and now you're at $55 million. Can you talk about maybe the change there? And is that all on the income side or are you also, as you've gotten a little further into that deal, fine-tuned your expense assumptions as we go through '19?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

It's a combination of things, Brett. First of all, obviously, accreting the discount has a significant effect on that. So that's part of it. Second, our original estimate did not include servicing income because we did not have an agreement to service the loans when that estimate was put together. And, thirdly, the market is doing a lot better than we thought when we put the estimate together in June. So, a combination of all those three things, I think, add up to a forecast that is better and we're very happy about.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then just thinking about the margin. One, when did you do the purchases of the treasuries and the T-bills in the quarter? And then, by the way, it was great to see you guys use some liquidity in the balance sheet to put in higher earning assets. And then as we think about the margin going forward, it would seem like an additional month of the additional auto would continue to push the margin higher, absent even any changes in rates. Can you maybe give us some color around that?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yeah. I think the purchase of the treasuries happened in the early part of the quarter. So there is quite a bit of reflection of that effect in this quarter. As far as margin, I suspect you're right. The math works that way, right? We have higher yielding loans for a longer period of time, there will be an additional little benefit in the fourth quarter.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then just maybe if I can sneak one last one in on capital. I know you're not going to give me a specific number, Carlos, but if we think about buybacks and what we've seen from some other banks, it would seem like your ask next year could be a lot more aggressive than what you did this year. Is that a fair assumption?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

As Ignacio mentioned, we continue to try to follow the path of our peer banks and all of them have moved higher during this year in their return of capital to shareholders through dividends and buybacks. We moved higher as well, obviously. But we'll continue to follow that path. We would hope that leads us to a higher return on capital. Exactly in which component, we can't tell you because that is part of negotiations.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Fair enough. Thanks for all the color.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

The next question comes from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. Just following up on the capital question, we're seeing the nice benefit of the portfolio acquisition. Are there any other portfolio acquisitions or other types of acquisitions that you can do to use some of that excess capital beyond just the buybacks?

Ignacio Alvarez -- President and Chief Executive Officer

Historically, we've been very opportunistic buyers of portfolios. So, if they're available, we will take a look at them. Reliable, obviously, I would hesitate to say there's going to be anything close to Reliable out there in the short-term but we are always looking to deploy capital in the best means possible and we often get a look at portfolios. So, we will continue that trend. We will keep looking.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

It's unlikely there's chunks of $2 billion sitting out there but if they are, we'll take a look.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And then with respect to the Reliable deal, there's obviously a lot of benefit of the accretion of the discount. Can you put some numbers around what's remaining there and what, I guess, the maturity tenor will be of that as we go through the next couple of years?

Ignacio Alvarez -- President and Chief Executive Officer

So, the remaining discount at the end of the third quarter will be probably roughly around $110 million or so. You'll see more disclosures of that in our 10-Q filing. These are mostly auto loans that will run off quickly, probably three years, and there is a portion related to the commercial portfolio that has less than one year average life. So that part will be a little less. Of course, that's the smaller part of the discount.

Arren Cyganovich -- Citigroup -- Analyst

Okay. Thank you.

Operator

The next question comes from Gerard Cassidy with RBC Capital Markets. Please go ahead.

Steven Duong -- RBC Capital Markets -- Analyst

Hey, guys. This is actually Steve Duong in for Gerard. Thanks for taking our call.

Ignacio Alvarez -- President and Chief Executive Officer

Hi, Steve.

Steven Duong -- RBC Capital Markets -- Analyst

Hi. So, just going back on rates, assuming rates go up 100 basis points through the end of 2019 and the recent acquisition, Reliable acquisition, where do you see your NIM holding up toward the end of 2019?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

We don't give forward-looking views on NIM, Steve. I think that we're as far as we are going giving you the components we just mentioned. Again, we are asset sensitive so we will make more money. Exactly where the NIM comes out also depends on asset mix, which up to this quarter where we had Reliable, had been driving our change in NIM -- was asset mix. So, that will also have an important component to where it ends out next year.

Steven Duong -- RBC Capital Markets -- Analyst

Okay. Fair enough. And I think you guys spoke about your mortgage originations before. I think you said there was an uptick in July. Can you just give some more color on that?

Ignacio Alvarez -- President and Chief Executive Officer

Well, we're coming off a low base but we did see increased activity for the first time in a long time in both July and August. So, I think that we're hopeful but it's still coming off a low base.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yeah. The third quarter was better. One quarter doesn't make a trend. So we hope to see what happens in the fourth quarter.

Ignacio Alvarez -- President and Chief Executive Officer

It was actually positive that we saw it go up. I think the originations were $170 million for the quarter.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Slightly higher than the second quarter.

Ignacio Alvarez -- President and Chief Executive Officer

Than the second quarter. So that was a positive sign given the fact that the interest rates went up and they still went up. But, again, we've got a ways to go in that sector.

Steven Duong -- RBC Capital Markets -- Analyst

And where was that occurring? In Puerto Rico, is that right?

Ignacio Alvarez -- President and Chief Executive Officer

Yes. The $170 million is Puerto Rico originations.

Steven Duong -- RBC Capital Markets -- Analyst

Okay. Got it.

Ignacio Alvarez -- President and Chief Executive Officer

Yeah. We had an increase in the United States of --

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yeah, the U.S. went up a little bit as well.

Ignacio Alvarez -- President and Chief Executive Officer

Yeah. Yeah. But the $170 million I mentioned was all Puerto Rico.

Steven Duong -- RBC Capital Markets -- Analyst

Okay. Great. And if I could just get one more in. Just do you guys have an update on your unrealized gains for Evertec and BHD?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

No. Evertec is -- I'll calculate that number and get back to you offline. It's a couple hundred million dollars.

Steven Duong -- RBC Capital Markets -- Analyst

Okay. Fair enough. Appreciate it. Thanks, guys.

Ignacio Alvarez -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Joe Gladue with Merion Capital Group. Please go ahead.

Joseph Gladue -- Merion Capital Group -- Analyst

Good morning.

Ignacio Alvarez -- President and Chief Executive Officer

Good morning.

Joseph Gladue -- Merion Capital Group -- Analyst

I just wanted to touch on the U.S. operations a little bit. It's good to see the profitability continue to increase. Just wondering where you think you can get the profitability of the U.S. operations to. And in terms of growth, what can you do? Is deployment of capital on the mainland a possibility for growth there? Just wondering about growth as well.

Ignacio Alvarez -- President and Chief Executive Officer

Well, I think that we are concentrating heavily on, as you say, profitability. So, we have a number of initiatives. I think one that we're directed at is improving our deposit franchise. We have a number of initiatives, sort of a private bank initiative that we've launched. We have a transformation of our retail branch network. So we're really working hard on our deposit costs. Obviously, we're growing our loan book also but we're growing it prudently. We're not doing anything crazy. So, we'd rather grow slower but prudently. So, we're putting a lot of emphasis on profitability.

In terms of inorganic growth in the United States, we always look at it. The prices have been very high, as you know, lately. And we're at an interesting time in the economic cycle. So, we'll look at opportunities that are presented to us but we're going to be very careful.

Joseph Gladue -- Merion Capital Group -- Analyst

Thank you.

Operator

The next question comes from Glen Manna with Keefe, Bruyette, and Woods. Please go ahead.

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

Hi. Good morning, guys.

Ignacio Alvarez -- President and Chief Executive Officer

Morning.

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

Just a quick question on some landscape here. The two months of servicing income on the auto loan portfolio, was that in other income or was that in other service fees on the P&L?

Ignacio Alvarez -- President and Chief Executive Officer

It was in other income.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Other income.

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

Other income. Okay. And, Carlos, the $12 million in expenses that you gave for Reliable next quarter, does that include any acquisition-related expenses that might be non-recurring? Because I think when you announced the deal, you said $13 million and you have about $4 booked so there's $9 million left.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yeah. There is some. There is some expense noise obviously in the third quarter as well. Glen, probably the best way to think about that is to annualize the third and the fourth and divide by two and you will come up with a number that looks like $10 million a quarter or something like that.

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

Okay. And just on capital, and not so much on the buyback but on the dividend, where are you inclined to go to kind of a normalized payout ratio and would increasing your dividend be dependent on regulatory approval as well as the buyback plan? Just what's your thinking on that?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

I mean, there are things we can do in capital return that don't necessarily require Fed approval, Glen, but most of the things are contained in the same conversation that we have with our regulators. Okay. So, while technically, some things might not require approval, we basically discuss all the things together. Whether we end up with a slightly higher dividend payout versus slightly higher buyback, it sort of depends on those discussions. It would be fair to assume, by our investors, that the Fed should be agnostic to one or the other. And sometimes they are, sometimes they're not. And I cannot even try to explain to you why they would or wouldn't be but, again, it's part of our negotiations. It's the art part of our business.

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

Well, do those negotiations all come to a conclusion at the same time or do they have different termination?

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

They tend to, yes.

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

Okay. Thank you.

Operator

The next question is a follow-up from Brett Rabatin with Piper Jaffray. Please go ahead.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey. Thanks. I wanted just to follow up on two things. One is, Carlos, you said you still expect Puerto Rico -- you're looking for a little growth, slight growth in the U.S., stable in Puerto Rico. Are you seeing your clients be more optimistic about what they're seeing? And when you say flat in Puerto Rico, is that a function of new originations and maybe some payoffs of some existing stuff or can you give us a little more color on what you're seeing versus your guidance?

Ignacio Alvarez -- President and Chief Executive Officer

Yeah. This is Ignacio. We're definitely seeing more optimism. When you go around and you talk to clients, most of the clients have seen their performance improve during the year with the influx of the funds. And there's a general greater level of optimism. Some of this takes time. As I mentioned in my prepared remarks, there's a lot of liquidity in the system so, in fact, people are adjusting to the greater consumer demand with their own liquidity. And in many instances, they are paying down the debt. So we're working hard to keep our balances because people are paying down debt. But, in general, I would say, undoubtedly, there is a greater sense of optimism among the business community in terms of the near- and medium-term prospects.

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Yeah. As far as flow, if you assume that 15% or 20% of our loan portfolio will normally come due in a given year, I mean, to keep the balances flat, we still have to originate $4 billion a year, which is what our bankers are doing. But there is a lot of activity. Again, as Ignacio mentioned, that activity has not turned into net loan growth yet. When we see it, we'll be happy to comment about it.

By the way, the answer on the Evertec gain at present rates is about $220 million. Unrealized gain on Evertec debts, not in the numbers.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then I guess the other thing I want to follow up on was just you mentioned the fiscal plan and I was looking at the draft on Monday. $82 billion total. Are you feeling more optimistic about the fiscal plan and what you're seeing around some of the initiatives with PREPA and kind of the other things that need to be taken care of?

Ignacio Alvarez -- President and Chief Executive Officer

I think it's a mixed bag. I think, obviously, if you look at the fiscal plan, in the near- to medium-term, they have increased the estimated federal funds that are going to flow into the island, which, in effect, has resulted in an increase in the estimate of GDP growth for the next four years. So, definitely, I think that if you look at the plan, it sort of backs what we're feeling. The near- and medium-term in Puerto Rico, you're going to see a stimulative impact. I'm very optimistic about PREPA.

So, let me put it this way. What worries us about the fiscal plan is that we're not seeing the level of collaboration between the government and the Board that requires Puerto Rico to achieve really long-term growth. In the short-term, I am very optimistic that PREPA is going to have a major difference. There are some reforms being carried out in the government, in terms of minor reforms in terms of permitting and right-sizing the government. They will have a big impact. I think PREPA will have the biggest impact. Unfortunately, the level of cooperation that's required to have the more difficult structural reforms isn't there. But in the short-, medium-term, the prospects are going to be good.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then -- sorry. Maybe one or two others. The enterprise zone lending was kind of quiet for a while and now it's starting to heat up. I guess I'm just curious of, locally, what you're hearing about those opportunities that could be pretty meaningful.

Ignacio Alvarez -- President and Chief Executive Officer

A lot of people come through the office, a lot of inquiries, a lot of people. I think they published the initial regs last week. A lot of people were waiting for that. I think it's definitely important. I think to get -- we're talking about long-term economic growth in Puerto Rico. It requires an additional investment in our capital stock. So, that's going to come partly from the public recovery funds, hopefully partly from private and public partnerships. And hopefully these opportunities then will be another source of investment in the capital stock, which is really the essential ingredient to long-term economic growth.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then the government deposits from a regulatory perspective. I had a little under $8 billion total at the end of 2Q. If you gave it, I missed it, but the number in 3Q, if you had it?

Ignacio Alvarez -- President and Chief Executive Officer

Quarter-to-quarter, it grew about $1 billion. It's about $8.6 billion at the end of the third quarter.

Brett Rabatin -- Piper Jaffray -- Analyst

$8.6 billion. Okay. Okay. Great. Thanks for all the additional color.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ignacio Alvarez for any closing remarks.

Ignacio Alvarez -- President and Chief Executive Officer

Thank you for your questions and thanks for joining us today. The third quarter was another strong one for us and we are pleased with our results. We will build on that momentum and update you on our progress in our next call. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 53 minutes

Call participants:

Camelia Pico-- Investor Relations

Ignacio Alvarez -- President and Chief Executive Officer

Carlos J. Vasquez -- Executive Vice President and Chief Financial Officer

Lidio V. Soriano -- Executive Vice President and Chief Risk Officer

Alexander Twerdahl -- Sandler O'Neill -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Steven Duong -- RBC Capital Markets -- Analyst

Joseph Gladue -- Merion Capital Group -- Analyst

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

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