Popular Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 11 speakers on the call.

Operator

Hello, and welcome to today's Popular Inc. 3Q Earnings Call. My name is Jordan, and I'll be coordinating your call today. I'm now going to hand over to Paul Cardillo, Investor Relations Officer of Popular to begin. Paul, please go ahead.

Speaker 1

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez Our CFO, Carlos Vasquez and our CRO, Livio Soriano. They will review our results for the Q3 and then answer your questions. Other members of our management team will also be available during the Q and A session. Before we begin, I would

Speaker 2

like to remind you that

Speaker 1

on today's call, we may make forward looking statements that are based on and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements and 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 web page atpopulart.com.

Speaker 3

I will now turn the call over

Speaker 1

to our CEO, Ignacio Alvarez.

Speaker 4

Good morning, and thank you for joining the call. We are pleased to report another strong quarter. Net income totaled $137,000,000 which includes the effect of an after tax goodwill impairment of $16,000,000 in our U. S.-based equipment leasing subsidiary. Excluding this impact, net income would have been 153,000,000 to $2,000,000 more than the previous quarter.

Speaker 4

The increase in net income was driven by lower operating expenses and higher net interest income, offset in part by a higher provision for credit losses and higher income taxes. We grew loan balances by $1,000,000,000 during the quarter. BPPR generated loan growth across almost all business segments, reflecting the continued strength of the local economy. Popular Bank achieved growth in commercial and construction loans. Year to date, loan balances have grown by $2,000,000,000 Our net interest margin decreased 7 basis points to 3.07% in the quarter, primarily due to a 27 basis points increase in deposit costs.

Speaker 4

This was partially offset by higher loan balances and the repricing of loans in a higher interest rate environment. Non interest income remains solid and continues to benefit from steady customer transactional activity. Excluding the goodwill charge, operating expenses decreased $17,000,000 driven by lower professional fees and customer activity related fees. Credit quality trends generally remain positive. Nonperforming loans decreased once again, and net charge offs remain well below pre pandemic levels.

Speaker 4

While we are beginning to see some credit normalization in the Puerto Rico unsecured consumer segments, We are attentive to the evolving credit landscape and have taken action to address these developments. Deposit balances at quarter end increased by approximately $700,000,000 primarily due to a lower level of Puerto Rico public deposits. However, average deposits for the period Increased by $1,400,000,000 also driven by public deposit activities. Borrowings decreased by approximately $300,000,000 due to the redemption of senior notes during the quarter. Tangible book value per share ended the quarter at $60.20 a decrease of $1.17 per share as net income for the period was offset by an increase in the unrealized losses in our investment portfolio.

Speaker 4

Regulatory capital levels remain strong. Our common equity Tier 1 ratio in the 3rd quarter was 16.8%. Please turn to Slide 4. I'm very pleased to highlight that during the Q3, we crossed a significant milestone in Puerto Rico and now serve more than 2,000,000 unique customers. Utilization of digital channels among our retail customers also remains strong.

Speaker 4

Active users on our Mibanco platform exceeded 1,100,000 or 54% of our customer base. In addition, we continue to capture more than 60% of our deposits through digital channel. In the 3rd quarter, Consumer spending remained healthy with combined credit and debit card sales up 6% compared to the Q3 of 2022. Our auto and lease loan balances increased by $104,000,000 compared to the 2nd quarter as demand for cars has continued to be strong in Puerto Rico And available inventories have improved. Mortgage loan balances at PPBR increased by $121,000,000 sequentially in the 3rd quarter, driven primarily by home purchase activity.

Speaker 4

The Puerto Rico economy performed well during the Q3. Business activity is solid and remains in good shape as reflected in the continued positive trends in total employment and other economic data. The tourism and hospitality sector continues to be a source of strength for the local economy. There are roughly $51,000,000,000 of hurricane disaster recovery, infrastructure and pandemic related funds that have yet to be dispersed. The pace of disbursement of these funds has accelerated, and we anticipate that these funds will support future economic activity for several years.

Speaker 4

As this infrastructure investment in the economy expands, we are well positioned to serve the needs of our customers and to benefit from such activity. In short, we are pleased with our results for the quarter, particularly our strong loan growth in both Puerto Rico and in the U. S. As well as the continued strength of our deposit base. We are also encouraged by the strong performance of the Puerto Rico economy.

Speaker 4

We remain optimistic about the future of our primary market and our ability to manage and serve the needs of our growing customer base. I'll now turn the call over to Carlos for more details on our financial results.

Speaker 3

Thank you, Ignacio. Please turn to Slide 5. We reported net income of $137,000,000 compared to $151,000,000 in Q2. Quarterly net income includes the effect of a goodwill charge. Excluding the charge, net income Was $153,000,000 $2,000,000 higher than the prior quarter.

Speaker 3

Net interest income was $534,000,000 $2,000,000 higher than Q2. On a taxable accrual basis, net interest income was 564,000,000 An increase of $5,000,000 from Q2 due to higher volume of tax exempt investment securities, offsetting part by higher disallowed interest expenses in Puerto Rico taxes. Non interest income was $160,000,000 essentially flat with Q2. The provision for credit losses was $45,000,000 compared to $37,000,000 in the 2nd quarter. Total operating expenses were $466,000,000 in Q3, an increase of $6,000,000 from the prior quarter.

Speaker 3

This expense number includes a $23,000,000 pretax and non cash goodwill impairment in our U. S.-based equipment leasing subsidiary. The goodwill impairment results roughly from 2 equal effects. 1st, a higher discount rate for the projected cash flows, resulting from higher rates and equity premiums and second, a lower projection of future income. Presently, the subsidiary has leased balances of about $113,000,000 and remaining goodwill of 17,000,000 Excluding this non cash expense, Q3 expenses decreased by $17,000,000 from the prior quarter.

Speaker 3

The variance in operating expenses was driven by lower professional fees by $12,000,000 in advisory expenses from corporate initiatives, primarily related to regulatory compliance and transformation efforts and an €8,000,000 reversal of an accrual related to regulatory examination fees in BPPR. During Q3, we incurred $4,000,000 transformation related expenses compared to $7,000,000 last quarter. Our transformation effort is progressing as planned, but due to the stage of execution of various major projects, The timing of some of the expenses will be somewhat delayed. Also, the decision to use in house resources to repurpose Previously planned consulting fees into longer term investment or capitalizable initiatives has resulted in a lower than forecasted expense. As a result, we now expect transformation expenses for 2023 to be approximately 30,000,000 down from our prior guidance of $50,000,000 We expect Q4 expenses to be approximately 475,000,000 Normalizing for the $23,000,000 non cash goodwill impairment, total expenses for 2023 Will be around $1,820,000,000 or $50,000,000 better than our original guidance, driven by lower transformation expenses and cost control initiatives undertaken during the year.

Speaker 3

If the proposed FDIC special assessment is implemented as presently drafted, We estimate Popular will incur an additional expense of roughly $66,000,000 We will provide 2024 expense guidance, including transformation efforts in our January webcast, once next year's budget is completed. Our expected tax rate effective tax rate for the quarter was 25.1%. The higher Q3 tax rate was attributable to certain tax benefits recorded in the Q2 offset by lower income before tax. For the full year 2023, we continue to expect the effective tax rate to be between 22% 25%. Please turn to Slide 6.

Speaker 3

Net interest margin decreased by 7 basis points to 3.07% in Q3. On a taxable equivalent basis, NIM was 3.24%, a decrease of 5 basis points versus Q2. The decrease is driven by higher interest expense on deposits due to increased cost of public deposits and growth in high cost deposit accounts at Popular Bank. This was partially offset by higher loan yields and balances across all major lending categories and higher yields in our cash balances and investments. At the end of the third quarter, Puerto Rico deposit deposits were roughly $17,800,000,000 a decrease of roughly $700,000,000 compared to Q2.

Speaker 3

Decrease in Q3 was consistent with historical trends. However, public deposit balances have remained higher than we had anticipated. As such, by the end of 2023, we now expect total deposits to be in a range of $16,000,000,000 to $18,000,000,000 compared to our prior expectation of $14,000,000,000 to $16,000,000,000 Excluding Puerto Rico public deposits, customer deposit balances grew were up by 46,000,000 primarily driven by increases in time and savings deposits at Poplar Bank, offset somewhat by retail outflows at BBBR. Approximately $300,000,000 of client deposit balances at BPPR were transferred to our broker dealer during the quarter, Searching for higher yields. Ending loan balances increased by $1,000,000,000 compared to Q2, driven by growth in almost all loan segments at PBPR and non commercial and construction loans at PB.

Speaker 3

Year to date, loan balances have increased by $2,000,000,000 versus $2,300,000,000 for the same period a year ago. We are encouraged by the demand for credit at BPPR and PV. We will continue to take advantage of prudent opportunities to extend credit and improve the use and yield of our existing liquidity. Our interest rate sensitivity is relatively neutral. We continue to expect the margin to resume an upward trajectory in Q4.

Speaker 3

The timing results from our forecasted loan and deposit growth and mix, investment portfolio strategy and the pace of repricing of public and incrementally retail and commercial deposits. Please turn to Slide 7. Deposit betas in the current tightening cycle are now above the prior cycle. We have seen a total cumulative deposit beta of 34% to date, But the rate of increase of deposit costs continues to slow down. In BPPR, Total deposit costs increased by 24 basis points compared to an increase of 26 basis points in Q2, led by public deposits.

Speaker 3

Excluding the public deposit balances, total deposit costs were 55 basis points compared to 50 basis points the prior quarter for a cumulative beta of 7%. In the Q3, the cost of public deposits increased by 47 basis points compared to our July estimate of 50 basis points. We expect the cost of deposits to increase by approximately 10 basis points in Q4. The deposit pricing agreement with the Puerto Rico public sector is market linked with a lag. This source of funding results in an attractive spread under market rates.

Speaker 3

At Popular Bank, the deposit cost increased by 29 basis points compared to an increase of 54 basis points in Q2, led by retail deposits gathered primarily through our online channel. Please turn to Slide 8. Our investment portfolio is almost entirely comprised of treasury and agency mortgage backed securities, which carry minimal credit risk. Including our cash position, this portfolio has an average duration of approximately 2.2 years. In Q3, the unrealized loss of the AFS portfolio increased by 231,000,000 driven by an increase of $274,000,000 in the Agency MBS portfolio, offset in part by a reduction of $44,000,000 in the U.

Speaker 3

S. Treasury portfolio. At the end of the third quarter, The balance of unrealized loss in AOCI of our HTN portfolio stood at 702,000,000 with a reduction of $44,000,000 from Q2. We expect this loss will be amortized back into capital throughout the remaining life of that portfolio at a rate of approximately 5% per quarter through 2026. Please turn to Slide 9.

Speaker 3

Our return on annual equity was 9.4% in the quarter. We continue to target a sustainable 14% RoTCE by the end of 2025, driven primarily by higher net income. Regulatory capital levels remain strong. Our common equity Tier 1 ratio in Q3 of 16.8 percent decreased by 6 basis points from Q2. Tangible book value per share at quarter end was $50.20 an increase of 1 point $0.17 per share, mostly resulting from increased AOCI sorry, a decrease of $1.17 per share.

Speaker 3

Given the continued uncertainty on the outlook for rates, the economy and the proposed regulatory response to events in the banking sector, We will not engage in share repurchase during 2023. We do plan, however, to consider a dividend increase this year. We will review future capital actions as market conditions evolve. Our long term outlook on capital return has not changed, anchored on our strong regulatory capital ratios. Over time, we expect our regulatory capital ratios to gravitate towards the levels of our mainland peers plus a buffer.

Speaker 3

With that, I turn the call over to Lidio.

Speaker 5

Thank you, Carlos, and good morning. Overall, Popular continues to exhibit stable credit quality trends with low levels of net charge off and decreasing nonperforming loans. Consumer portfolio, however, reflected increased delinquencies and net charge offs, primarily due to the expected credit normalization. We continue to closely monitor changes in the macroeconomic environment and on borrower performance, given higher interest rate and inflationary pressures. We believe that the improvements over recent years in risk management practices And the risk profile of the corporation's loan portfolios positions Popular to continue to operate successfully under the current environment.

Speaker 5

Before discussing the credit metrics for the quarter, I would like to address the risk profile of our office commercial real estate exposure and consumer portfolios. We have included additional information for these segments in the appendix to today's presentation. Popular Consolidated Office CRE Exposure is limited, representing only 1.9% for $634,000,000 of our total loan portfolio. It is mainly comprised of low to mid rise properties located in suburban areas and is well diversified across tenant type with an average loan size of 2,100,000 The portfolio has a favorable credit risk profile with low levels of NPLs and classified loans. In terms of our consumer portfolios, these have begun to normalize as expected, reflecting increased delinquencies and net charge offs.

Speaker 5

The credit card, auto loan and lease portfolios Continue to exhibit delinquencies and net charge offs that are below pre pandemic levels, although gradually increasing. In the case of unsecured personal loans, however, the year to date net charge off ratio is 3.4%, which is above the 2.5 percent average for the 20 11, 2019 period. We're closely monitoring the performance of our consumer portfolio I have made changes to our underwriting criteria to decrease exposure to higher risk segments. Turning to slide number 10. Nonperforming assets and nonperforming loans continue to decrease, driven by the commercial and mortgage portfolios.

Speaker 5

The decrease in the Puerto Rico commercial portfolio was aided by the payoff of an $11,000,000 relationship. NPL inflows also decreased, driven by lower contractual inflows in Puerto Rico And lower commercial inflows in the U. S, offset in part by higher mortgage inflows in Puerto Rico. At the end of the quarter, the ratio of NPLs to total loans held in portfolio decreased to 1.1% from 1.2% in the previous quarter. Turning to Slide number 11.

Speaker 5

Net charge offs increased from the prior quarter to $33,000,000 or annualized 39 basis points of average loans held in portfolio. The increase was driven by higher consumer net charge off in Puerto Rico, mainly in the auto and personal loans portfolio. This increase was in part offset by $11,000,000 recovery from a commercial loan payoff. Please turn to slide number 12. The allowance for credit losses increased by 11,000,000 $211,000,000 driven by results built up in the Puerto Rico auto and personal loans portfolio, Changes in macroeconomic scenarios and loan growth.

Speaker 5

In the U. S, the allowance for credit losses decreased by 18,000,000 due to the implementation of a more granular model for the U. S. Commercial real estate portfolio. The provision for credit losses was $44,000,000 compared to $36,000,000 in the prior quarter.

Speaker 5

The corporation ratios of allowance of credit losses to total loans Remain flat at 2.1%, while the ratio of ACL to NPL stood at 197%, up 15 percentage points from the previous quarter. To summarize, our loan portfolio continued to exhibit strong credit quality trends in the 3rd quarter with low net charge offs and decreasing nonperforming loans. Consumer portfolios, however, reflected increased delinquencies and net charge offs due to credit normalization. We remain attentive to the holding environment, but remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks.

Speaker 5

Thank you.

Speaker 4

Thank you, Lidio and Carlos, for your updates. Our results for the quarter year to date have been strong, driven by solid earnings, robust loan growth, Stable credit quality and continued customer growth. It is an honor to serve over 2,000,000 customers in Puerto Rico, providing a wide variety of products, services and channels, and we value immensely the trust that they place in us. Earlier this month, we celebrated Popular's 130th anniversary. Since 18/93, we have successfully adapted and led throughout changing conditions.

Speaker 4

And we are proud of our history and the legacy that has made Popular what it is today, A strong, vibrant organization with deep rooted values. I had the privilege of visiting many of our colleagues during the anniversary and was inspired by their passion and dedication. We are encouraged with the progress of our transformation that position us well for the future. We are optimistic about the opportunities that lie ahead. Economic trends in Puerto Rico continue to be positive, and a considerable amount of recovery funds yet to be dispersed are expected to support increased economic activity for the coming years.

Speaker 4

Our diversified business model, Robust levels of capital and most importantly, the talent and dedication of our people position us well to support and meet the evolving needs of our growing customer base. We're now ready to answer your questions.

Operator

Thank Our first question comes from Timur Braziler of Wells Fargo Securities. Timur, the line is yours.

Speaker 6

Hi, good morning. Good morning, Jordan. Hi. I'm wondering how much of the delayed transformation And I guess the total amount of transformation cost, is that now lower or is that expenses pushed out?

Speaker 4

Yes. I

Speaker 3

mean, some of the expenses have been recharacterized at HIMARS. So for example, As we mentioned, some expenses that we expected to be external consultants were actually brought in house And some of those may end up being capitalized as part of the project. Others have been delayed because The projects have taken a bit longer to get going or whatever the case may be. So it will be a combination of some Pushed into 2024 and others that will not happen anymore. We will That what that combination might be will be clear when we complete our project plan for 2024 and we complete our budget for 2024 And we will provide the guidance on expenses in January as we normally do, including both overall expenses and transformation expenses.

Speaker 6

Okay. And then I guess looking at funding costs, To what extent are interest rates now done pressuring deposits and the pressure now comes from mix shift?

Speaker 3

Well, I mean, to the extent that you think the Fed is done, we will continue to have an effect because of the 1 quarter lag of the effect of public sector deposit cost in Puerto Rico. But most of the rest It will probably be a result of shift as opposed to base rates changing. With the sole exception of the Puerto Rico public sector, we again will have the lag of the 3rd quarter increases into the 4th quarter.

Speaker 6

Okay. Those balances just looking at period end over average And then seasonal expected outflows in the Q4, those balances of public fund deposits should be materially lower on an average standpoint in 4Q, is that correct?

Speaker 3

Well, it depends. We've updated our range for year end as you heard From 2014 to 2016 to 2016 to 2018, if the balances end up at the high end of that range, Then the average for the Q4 will be not very different. They'll be a bit lower than the average for the Q3, but not too much different. So it all depends on where we end up in Q4.

Speaker 6

Great. And then just last for me on the credit normalization, the unsecured PR consumer book, The comment about limiting exposure to higher risk segments. Can you just maybe talk through what's been the greatest source of stress in that portfolio and Which segment you're referring to in that comment?

Speaker 5

I would say lower FICO's And the auto portfolio used car lower FICO segments.

Speaker 6

Great. Thanks for the question.

Operator

Our next question comes from Brett Mr. Rabatin of Hovde Group. Brett, please go ahead.

Speaker 6

Good morning, everyone.

Speaker 3

Good morning,

Speaker 7

Wanted to start on the back on the expenses in the 3rd quarter and see if And get a little more color if I could on I didn't quite understand the noise around lower regulatory costs, most are having higher. Can you maybe Talk a little bit more about the items that reduced expenses in 3Q and then how that might change you think in the 4th quarter relative to the $475,000,000 guidance.

Speaker 3

Yes. I mean, it's mostly professional fees, Brad, now this is our professional fees that We hired consultants to assist us in a whole bunch of different things and The reduction in the quarter was mostly related to some assistance we get on regulatory matters or or transformation and things of that sort. But this would normally this number goes up and down. It's just that The professional fees number tends to be a lot more stable as opposed to coming down. So you'll notice the change, but in any given quarter, The expense in those professional fees can gravitate from advice and regulation to advice on transformation to advice on something else.

Speaker 3

So it's just a bit more notable this quarter, but it is mostly professional fees. The other thing is we do have a reversal of an accrual for regulatory exam expenses that we had accrued over accrued in that and that's an $8,000,000 in this quarter, which obviously Also help the expense number.

Speaker 4

I think it's also fair to say that we are challenging our teams to make sure to not do as much as possible in house versus consulting or using our consultants more intelligently. So it's not that regular Card costs are necessarily going down. The professional fees and consulting fees are going down.

Speaker 7

Okay. That's helpful. And then on the margin, as we think about 2024, assuming the Fed has stopped, Would seem like the margin would start moving higher with the government deposits not repricing every leg 3 months. Any thoughts on your willingness or ability to invest Maybe some

Speaker 2

of the cash flow in

Speaker 7

the securities portfolio into higher rates and just how you see the NII dollars playing out over the coming year?

Speaker 3

Yes. The probably the colloquial answer to your question is we have we We hope we will have to have the decision on the investment portfolio extension because we have enough loan demand that we can put The maturities into loans that will be our preferred outcome. That obviously is the best use of our liquidity In terms of margin, you're correct. I mean to the extent that the Fed is done, then the pressure on the funding side should be less. We are still originating loans at a higher rate level, so that should be helpful to margin.

Speaker 3

And the same is true of the investment portfolio. Whatever is coming due tends to be old Treasuries, all their investments were at lower rates, so this should be helpful as well. So those are The variables there, and the math will be whatever the math is.

Speaker 7

Okay. And then just lastly for me, the 14% ROTCE target by 2025, Seems like it's possible that that might be achieved a little bit earlier if things line up relative to rates and loan growth. Any thoughts on Timing of that target?

Speaker 3

Well, the timing, we were very specific on our timing. It was about the end of 2025. And this target is not an easy target. So we're working very hard to make sure we get there. God bless you.

Speaker 3

I hope you're right that we can get there earlier. But At this point in time, for us, it looks like the end of 2025.

Speaker 7

Okay. Fair enough. Thanks for all the color.

Speaker 3

Thanks.

Operator

Our next question comes from Alex Twerdahl of Piper Sandler. Alex, please go ahead.

Speaker 8

Hey, good morning.

Speaker 3

Hi, Alex. Good morning.

Speaker 8

Just to expand upon that last question on the ROTCE target, when you guys initially set that out, I think it was back in January and One could have assumed or maybe you guys assumed that buybacks would be part of the story this year, which they're not. I'm just curious, when you say it's unchanged, Is it just basically saying that you're reiterating what you said back in January? Or Is there an update to the assumptions on capital levels incorporated in the reiterated guidance as well?

Speaker 3

It's unchanged.

Speaker 8

Okay. So you're not making any changes to your thought around capital levels. You're just from when you initially set the target out in January.

Speaker 3

There are always there are assumptions in that number, And we the assumptions were not made public. We're not making them public now. Okay.

Speaker 4

But they're in shape.

Speaker 3

They are in shape.

Speaker 8

I want to ask the government deposit question Slightly different differently. Obviously, we're very focused on the impact to your guys' balance sheet. But looking at them a different way, It seems like there's almost $18,000,000,000 of government deposits now that is basically cash that the Puerto Rican government has to eventually put to work Into the economy, into various programs, into things that should continue to help the Puerto Rico picture. Is that accurate thinking?

Speaker 4

It is, but keep in mind that it's a very diverse group of depositors. I think we estimate over 140 Different deposit clients that have clients ranging from the Puerto Rico Treasury Department to small municipalities. Most of the agencies have much more money available now than they did. Now some of this money is specifically earmarked for programs, so they can't use it any they want. But definitely, things are happening.

Speaker 4

Not only the Puerto Rico central government, but the municipalities are deleveraging, which should not only means that they have money to spend, which means in the future, if the economy comes, they'll have more room to borrow and to do other capital projects if they are good projects. So Yes, that should be a similar effect, but again it's 140 agencies with many different programs, some that are specifically earmarked. So we definitely it's obviously good for the economy. It's good for the economy that the government is across the board is deleveraging, which is I think is important.

Speaker 8

Yes. When you talk about the earmarks, are there any like big ones out there that you kind of have line of sight on hitting in the next couple of months or years? I guess, years are too far, but next couple of quarters that would make that number change dramatically one way or another?

Speaker 4

No. But as we said in the prepared remarks, we have seen the pace of disbursement of federal funds Increase during the year. So at this point in the year, I think it was through August, the late summer, as I saw, it was about $2,800,000,000 had been dispersed. That compares to $1,700,000,000 last year. So the pace is picking up.

Speaker 4

We do see a lot of the infrastructure projects will continue to pick up pace. There's a lot of projects in the energy sectors, a lot of them on the water sectors, a lot of projects There's a lot of highway projects going on. A lot of that is still been in the planning and the permitting, the planning, that process. We do expect one area to pick up next year will be the CDBG Doctor Funds for housing. There's a number of projects that have been awarded and those are projects where private developers build a series of houses and the government will buy those houses from the developer and then later give it to people with vouchers for up to like $230,000 There's a number of those projects that's been awarded this year.

Speaker 4

We're involved in 11 of those. So we should see that activity pick up next year. Again, it takes permitting, whatever, but those projects have now been awarded. So I think you're going to continue to see the basic infrastructure, energy, highway, Water and I think you're going to be beginning to see housing pickup next year.

Speaker 3

Keep in mind, Alex, that Probably more than half of this balance is the actual operating accounts of those 100 plus or almost 200 clients. So there's always going to be a given balance there that in normal course of business will never go away. So there is that which is what we'll always be there. There's the amounts that are earmarked for different projects. There are a whole bunch of different things in different Accounts for different purposes.

Speaker 3

So it is positive that the government has more cash on hand, but it would probably be an understatement To think it's anywhere close to $80,000,000,000 It's a fraction of that.

Speaker 8

Okay. Yes, That's great. And then just expanding on the 11 projects and some of the other things that Nacho you're just mentioning, does that result in a larger level Of construction disbursements for Popular next year that could help to drive loan balances higher?

Speaker 4

Yes, Definitely, I think there should be the residential construction, which has been kind of limited, that should there should be a pickup in that from those projects. Again, it begins It depends when they actually break ground and they start disbursement. Again, those projects unfortunately or fortunately for We'll not last very long on our balance sheet because the way it happens is the developer builds the homes and the government takes them out. So instead of the takeout coming from individual buyers, The government takes them out. But yes, in the short run, there should be an increase, especially in the residential construction.

Speaker 4

Again, apart from the government, Doctor, we're seeing Low income tax credits also stimulate certain developments for elderly, especially in Puerto Rico and for So it's not only BR, there's a number of projects that are gaining momentum. I think we should see some of that next year.

Speaker 8

Great. And then is it fair to assume that mortgage that's been growing for a couple of quarters, is that expected to continue just given that obviously where rates are?

Speaker 4

Yes. Well, that's a question I ask, obviously. We've seen some pickup in the purchase activity, but you're right. I mean, I think we've got to expect that the higher interest rates will have some impact on that. I mean, that's just basic logic.

Speaker 4

So A lot of the activity as we said in the prepared remarks is purchase activity. So that's going to have to be impacted.

Speaker 8

And final question on loan growth. Are you guys willing to disclose how much of the highway loan you guys will take down?

Speaker 4

Yes, I think we are because it's been said out there. We are I can tell you this, the highway deal is very important deal to look at from various perspectives. 1, I think it shows a lot of confidence in Puerto Rico in the sense that you're talking about a 40 year concession. And you had a this is the Largest project that Albertus, the Spanish company, has done in the last 15 years and the 2nd largest project they've done in the history of the company. The syndicated banks that came in was a syndicated international banks, including major Japanese banks who haven't invested in Puerto Rico projects, I think, in a while.

Speaker 4

We took the we shared the top lead bank role with 1 of those large Japanese banks and we will be dispersing at closing approximately $240,000,000 and there's another commitment for $60,000,000 going forward for capital improvement working capital in the future. Sorry. Our total commitment is around $300,000,000 but at closing, we'll be dispersion $240,000,000

Speaker 8

Great. Thanks for taking my questions.

Operator

Our next question comes from Brody Preston of UBS. Brody, please go ahead.

Speaker 9

Hey, good morning everyone.

Speaker 3

Good morning. Good morning.

Speaker 9

I wanted to ask just a follow-up on the government deposits. Did I hear you right Carlos? Did you say you expect the cost of those to increase by 10 basis points in the 4th quarter?

Speaker 3

You heard me right. That's our estimate, yes.

Speaker 9

Okay, great. And so what is the extra $2,000,000,000 of balances Sticking around due in terms of NII enhancements relative to if that if the $2,000,000,000 was not If the additional $2,000,000,000 is not going to be sticking around, like what's the extra NII dollars you get from that?

Speaker 3

Well, we will disclose the formula broadly. You're going to have to go with your estimate of what the margin on that business is Multiply by $2,000,000,000 because we as you know, we never disclose a specific formula of the margin of that business. But it should be You caught me Carlos. If in fact the balances end up At the high end of our updated range, it should contribute to NII, yes.

Speaker 9

You're too quick. I was trying to catch you on your feet. I did notice that the commercial beta ticked down on the chart that you disclosed and it looked like it was driven by the U. S. Business with that beta ticking down from 45% cycle to date to 36% Cycle to date as of 3Q.

Speaker 9

And I wanted to ask if there was something specific that drove that like a higher balance kind of Account leaving that was maybe costly, just looking for some color there.

Speaker 2

I mean there was some balance distortion of an account that had larger high cost account that left, but that wasn't in this particular quarter. This quarter, what you just had you just saw cost being relatively flat. And then therefore, the kind of the last bump in rates that we saw was not kind of pass through. So you Got a little inching down in cumulative beta due to that.

Speaker 9

Got it. So do you think about commercial beta?

Speaker 3

Do you think that it

Speaker 9

can continue to kind of level off? Or do you think that that can Whatever happens with rates going forward, do you think you've kind of peaked on the rate offering there and that beta can continue to head lower?

Operator

Yes. I mean, I think

Speaker 2

what we call is more a stabilization. I think that intense pressure that was In deposit costs, especially following kind of the mini banking crisis that we saw at the beginning of the year, some of those pressures have leveled off and the fact that the rate of increase In Fed funds rates again has slowed down. So I think all of these things help reduce the pressure on that and specifically on the commercial. The area we're continuing to be a bit more sensitive is kind of like the higher cost retail deposits. There's still a fair amount of competition both in our branches and our national online gathering platform.

Speaker 9

Got it. Okay. I I also wanted to ask on the non owner occupied CRE growth that you had this quarter. Was that a result of Prior commitments kind of funding up or was that kind of new originations? And if so, can you kind of speak to The geographic location of it, was it on the island?

Speaker 9

Was it on the mainland? Just wanted some more color there.

Speaker 5

I would say it's a combination of both. I mean, we had some growth in terms of our construction portfolio in New York. We also have growth, not only occupied growth both in Puerto Rico and the U. S. Puerto Rico More in the retail space in the U.

Speaker 5

S, more in the shelter, health care sectors.

Speaker 9

Got it. Okay. And then, just my last one. So I guess I understand that you guys are being cautious around uses of capital, but when I step back and kind of Do the math on securities restructures. For you guys in particular, it's pretty attractive.

Speaker 9

And it's a pretty you kind of quickly accrete CET1 on the back end of And so within a couple of years, you're kind of back to an extremely robust B:one ratio, but you've juiced earnings meaningfully, which could be beneficial to the stock price.

Speaker 3

How do you kind of think

Speaker 9

about securities restructuring and using capital at this point?

Speaker 3

We are aware. We've done the numbers. It's something that we review Periodically, one of the non immaterial considerations When we're thinking about these things is the fact that if nothing changes and we do nothing, we get roughly a third of AUCI by the end of next year. So that starts when you start comparing, not taking execution Not taking market risk, not taking a number of other things and having that outcome, it gets difficult to sometimes Do alternative things, but we have looked at it. We continue to look at it.

Speaker 3

We have not decided that it makes sense for us for the moment.

Speaker 9

Got it. Thank you very much for taking my questions. I appreciate it.

Speaker 3

Thank you. Our

Operator

next Next question comes from Kelly Motta of KBW. Kelly, the line is yours.

Speaker 10

Hi, good morning. Thanks for the question. Carlos, on that last point, I want to make sure I got that right. So one third of AOCI comes back by the end of next year if No change in

Speaker 3

rates? Yes. That's what we that's our best estimate. Yes. That number is consistent with what we've been Discussing for the last quarter or so when we did the calculation, it's roughly what I think it's going to be.

Speaker 10

Pretty fast tangible book value accretion. Can you remind us what the cash flows are off the securities And where you're prioritizing that money, whether it's just sticky and cash, you're Yielding higher rates versus loan growth versus paying down some of the higher cost borrowings that you have?

Speaker 3

Yes. It's about $1,000,000,000 a quarter still that matures in the bond portfolio. And I think This quarter is a nice example where we did everything you mentioned essentially because we mostly funded Loan growth, which is our preference. And then some of the cash also went to repayment of the senior notes. Now We don't have an immense amount of high cost debt in our balance sheet, so that option is not huge.

Speaker 3

But the preference would be to fund client activity to the extent we can, and hopefully, the demand will be there for that to occur.

Speaker 2

No, in addition to that, this is Juan Pablo again, and you could see it on the presentation on Page We have around $1,000,000,000 worth of like treasury notes and MBS that prepay any given quarter. That's being then reinvested at market rates and T Bills. So you kind of see about $1,000,000,000 going off of the term portfolio And going into short term T bills, which currently have very attractive yields and especially that are exempt for Puerto Rico tax So you get that incremental push every quarter.

Speaker 10

Got it. That's super helpful. I was hoping, I know portfolio loan portfolio purchases are something you've discussed in the past as Things that you're looking at, just wondering if there's any update there, any appetite or Potentially potential changes in what you're seeing in opportunities to add through some of those strategic purchases?

Speaker 4

There's nothing to update. I mean, our appetite remains the same. If we get shown Portfolios of assets that are within our wheelhouse, in other geographies and segments that we like. And we think the opportunity will take a very close look at them, but We don't have anything to report. We are looking and people bring us opportunities all the time.

Speaker 4

Sometimes they're outside our credit box or outside our geographies. Yes, we're open and we will continue to be opportunistic if the right opportunity comes our way.

Speaker 10

Got it. Last question for me and then I'll step back. I think on prior calls you had said on the fee income side about 150 $5,000,000 to $160,000,000 a quarter was a good run rate and this quarter was really strong if you backed out the MSR gain, you're Right in the middle of that. Just wondering, if you could provide an update on what you're seeing on the fee side, any give or take there?

Speaker 3

Yes. I mean, we still think that's the right range, Kelly, $155,000,000 to $160,000,000 As you know, the One of the reasons we like to talk about that range is that any given line in our fees will be up and down every quarter, But the summation is actually a lot less volatile than the individual lines. So I think that range is still the right range. In any given quarter, the fees in credit cards may come down, with the fees in something else will go up and that may be the opposite the following quarter. So they move around a lot, but the summation actually is a pretty steady stream of business.

Speaker 3

So $155,000,000 to $160,000,000 still looks like the right range for us.

Speaker 10

Thank you so much. I'll step back.

Speaker 3

Thanks.

Operator

Our next question comes from Gerard Cassidy of RBC. Gerard, the line is yours.

Speaker 3

Hello?

Speaker 6

Gerard? Gerard, are you there?

Operator

Gerard, your line is open. Our next question comes is a follow-up from Alex Twerdahl of Piper Sandler. Alex, please go ahead.

Speaker 8

Thanks. Just a couple of follow ups. Just back on the fee comment there. Are you able to disclose The level or your level of interchange fees in any given quarter?

Speaker 3

Yes, we do. If the reason for your question is the newly announced proposed changes on interchange debit fees, The proposal if implemented as it stands would probably mean something in the neighborhood of $3,000,000 acquired to us in reduced income.

Speaker 8

You nailed it. That's exactly what I was asking. And then I I wanted to ask a follow-up on the loan purchase question as well. I think a lot of us are paying attention to these FDIC, or the loans that the FDIC is selling And a number of them come in kind of unique structures, these JV structures. Is that something that you'd be willing to take a look at or would you only really consider cash purchases?

Speaker 4

No, we look at everything. I mean the JV structures might produce fee income if it makes sense. So we'll look at everything. We're a little bit shy about the sharing losses with the FDIC given our prior experiences, but we'll look at everything. I mean, if the deal is right and it's priced right, we'll take a look at it.

Speaker 8

Got it. All right. Thanks for taking my follow ups.

Speaker 3

Thank you.

Operator

We have no further questions on the phone lines. So I'll hand back to Ignacio Alvarez.

Speaker 4

Thanks again for joining us today and for your questions. We look forward to updating you on our full year results in January, and happy weekend to all of you. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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