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Popular Inc
Earnings Call Analysis
Q3-2023 Analysis
Popular Inc
In recent quarters, the company has experienced a noteworthy increase in loan balances, signaling strong credit demand and management's willingness to leverage this to improve liquidity yields. Specifically, loan balances escalated by $1 billion from Q2 and have seen a year-to-date surge of $2 billion. This implies a healthy uptake of the company's credit facilities across a majority of its loan segments, particularly at BPPR and PB in commercial and construction loans.
Despite the challenges posed by the current interest rate environment, the company has maintained a relatively neutral interest rate sensitivity and anticipates a resumed upward trajectory for margins in Q4. Management's forecasting leans on expected loan and deposit growth, with a strategic approach to the investment portfolio. Notably, deposit betas have surpassed those of the previous cycle, reflecting a slowing trend in the rise of deposit costs, which could bode well for future margins. There is also an acknowledgement of the impact of the market-linked deposit pricing agreement with the Puerto Rico public sector, implying a savvy use of this source to widen spreads.
The company's investment strategy appears conservative with a significant allocation in low-credit-risk treasury and agency mortgage-backed securities. However, Q3 faced an uptick in unrealized losses, predominantly from agency MBS, partly counterbalanced by a reduction in the U.S. Treasury portfolio. Interestingly, management anticipates amortizing the loss in available-for-sale (AFS) and held-to-maturity (HTM) portfolios back into capital, set to occur gradually until 2026.
Return on tangible equity (ROTCE) stood at 9.4% for the quarter, with aspirations to reach 14% by the end of 2025. This ambition is predominantly dependent on elevating net income. While the common equity Tier 1 ratio dipped slightly to 16.8%, tangible book value per share saw a marginal decrease caused mainly by variations in AOCI. In the milieu of prevailing economic uncertainty, the company opts to suspend share repurchases for 2023 but considers increasing dividends. A long-term vision for capital return remains in place, seemingly favoring a gradual alignment with capital ratios of mainland peers plus a buffer.
The company continues to showcase stable credit quality, evidenced by low net charge-offs and a decline in nonperforming loans. Contrarily, the consumer portfolio is undergoing a phase of 'credit normalization,' revealing upticks in delinquencies and net charge-offs, especially within auto and personal loans. Amidst rising interest rates and inflationary forces, the firm has adjusted underwriting criteria, aiming to mitigate risks in higher-risk segments. They stress their vigilance over these evolving conditions and express confidence in their loan portfolio's resilience based on past improvements in risk management and loan portfolio risk profiling.
The culmination of solid earnings, robust loan growth, and consistent credit quality paves a positive path forward for the company. Symbolically marking its 130th anniversary, the firm illuminates a legacy of resilience and adaptability. With economic trends in Puerto Rico remaining upbeat and substantial recovery funds pending disbursement, optimism prevails. The blend of a diversified business model, strong capital base, and dedicated workforce positions the company to effectively cater to its expanding customer base and seize forthcoming opportunities.
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Hello, and welcome to today's Popular Inc. 3Q Earnings call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Paul Cardillo, Investor Relations Officer of Popular, to begin. Paul, please go ahead.
Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our CFO, Carlos Vazquez; 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 also be available during the Q&A session.
Before we begin, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings.
You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.
Good morning, and thank you for joining the call. We are pleased to report another strong quarter. Net income totaled $137 million, which includes the effect of an after-tax goodwill impairment of $16 million in our U.S.-based equipment leasing subsidiaries. Excluding this impact, net income would have been $153 million, $2 million more than the previous quarter.
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 billion 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 billion. Our net interest margin decreased 7 basis points to 3.07% in the quarter, primarily due to a 27 basis point increase in deposit costs. This was partially offset by higher loan balances and the repricing of loans in a higher interest rate environment. Noninterest income remains solid and continues to benefit from steady customer transactional activity.
Excluding the goodwill charge, operating expenses decreased $17 million 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 prepandemic levels. 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 decreased by approximately $700 million, primarily due to a lower level of Puerto Rico public deposits. However, average deposits for the period increased by $1.4 billion, also driven by public deposit activities. Borrowings decreased by approximately $300 million due to the redemption of senior notes during the quarter. Tangible book value per share ended the quarter at $50.20 and 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.
Regulatory capital levels remained strong. Our common equity Tier 1 ratio in the third quarter was 16.8%. Please turn to Slide 4. I'm very pleased to highlight that during the third quarter, we crossed a significant milestone in Puerto Rico and now serve more than 2 million unique customers. Utilization of digital channels among our retail customers also remain strong. Active users on our Mi Banco platform exceeded $1.1 million or 54% of our customer base.
In addition, we continue to capture more than 60% of our deposits through digital channel. In the third quarter, consumer spending remained healthy with combined credit and debit card sales up 6% compared to the third quarter of 2022. Our auto and lease loan balances increased by $104 million compared to the second quarter as demand for cars has continued to be strong in Puerto Rico and available inventories have improved.
Mortgage loan balances at BBR increased by $121 million sequentially in the third quarter, driven primarily by home purchase activity. The Puerto Rico economy performed well during the third quarter. 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 billion of hurricane disaster recovery, infrastructure and pandemic rate 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.
As this infrastructure investment and 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. 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.
Thank you, Ignacio. Please turn to Slide 5. We reported net income of $137 million compared to $151 million in Q2. Quarterly net income includes the effect of a goodwill charge. Excluding the charge, net income was $153 million, $2 million higher than the prior quarter. Net interest income was $534 million, $2 million higher than Q2.
On a taxable equivalent basis, net interest income was $564 million, an increase of $5 million from Q2 due to higher volume of tax extent investment securities, offset in part by higher disallowed interest expenses in Puerto Rico taxes. Noninterest income was $160 million, essentially flat with Q2. The provision for current losses was $45 million compared to $37 million in the second quarter.
Total operating expenses were $466 million in Q3, an increase of $6 million from the prior quarter. This expense number includes a $23 million pretax and noncash goodwill impairment in our U.S.-based equipment leasing subsidiary. The goodwill impairment results roughly from 2 equal effects. First, 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, this subsidiary has lease balances of about $113 million and remaining goodwill of $17 million. Excluding this noncash expense, Q3 expenses decreased by $17 million from the prior quarter. The variance in operating expenses was driven by lower professional fees by $12 million in advisory expenses from corporate initiatives, primarily related to regulatory compliance and transformation efforts and an $8 million reversal of an accrual related to regulatory termination fees in BPPR.
During Q3, we incurred $4 million transformation-related expenses compared to $7 million 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 capitalize all our initiatives has resulted in a lower-than-forecasted expense.
As a result, we now expect transformation expenses for 2023 to be approximately $30 million, down from our prior guidance of $50 million. We expect Q4 expenses to be approximately $475 million. Normalizing for the $23 million noncash goodwill impairment, total expenses for 2023 would be around [ $1.82 ] billion or $50 million better than our original guidance, driven by lower transformation expenses and cost control initiatives undertaken during the year.
If the proposed FDIC special assessment is implemented as presently drafted, we estimate Popular would incur an additional expense of roughly $66 million. 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 second quarter offset by lower income before tax.
For the full year 2023, we continue to expect the effective tax rate to be between 22% and 25%. Please turn to Slide 6. 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 public deposits were roughly $17.8 billion, a decrease of roughly $700 million compared to Q2. 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 public deposits to be in a range of $16 billion to $18 billion compared to our prior expectation of $14 billion to $16 billion.
Excluding Puerto Rico public deposits, customer deposit balances group were up by $46 million, primarily driven by increases in time and savings deposits at Popular Bank, offset somewhat by retail outflows at BPPR . Approximately $300 million 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 billion compared to Q2, driven by growth in almost all loan segments at BPPR and on commercial and construction loans at PV.
Year-to-date, loan minuses have increased by $2 billion versus $2.3 billion 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. 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 on 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. 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 third quarter, the cost of public deposits increased by 47 basis points compared to our July estimate of 50 basis points. We expect the cost of pork 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. At Popular Bank, the deposit cost increased by 29 basis points compared to an increase of 54 basis points in Q2. Led that by retail deposits gathered primarily to 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 million, driven by an increase of $274 million in the Agency MBS portfolio, offset in part by a reduction of $44 million in the U.S. treasury portfolio.
At the end of the third quarter, the balance of unrealized loss in AOCI of our HTM portfolio stood at $702 million, a reduction of $44 million 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.
Our return on tangible 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% decreased by 6 basis points from Q2. Tangible book value per share at quarter end was $50.20, an increase of $1.17 per share, mostly resulting from increased AOCI. Sorry, a decrease of $1.17 per share.
Given the continued uncertainty on the outlook for rates, the economy and the proposed regulatory response to advance 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. With that, I turn the call over to Lidio.
Thank you, Carlos, and good morning. Overall, Popular continue to exhibit stable credit quality trends with low levels of net charge-offs 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 environment performance even higher interest rates and inflationary pressures.
We believe that the improvements over recent years in risk management practices and the risk profile of the corporation's loan portfolio positions Popular to continue to operate successfully under the current environment. 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 exposures limited representing only 1.9% or $634 million 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 $2.1 million. 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.
The credit card, auto loan and lease portfolios continue to exhibit delinquencies and net charge-offs that are below pre-dynamic 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% average for the 2011-2019 period. We're closely monitoring the performance of our consumer portfolio and made changes to -- our underwriting criteria to decrease exposure to higher-risk segments. Turning to Slide #10.
Nonperforming assets and nonperforming loans continued to decrease, driven by the commercial and mortgage portfolios. The decrease in the Puerto Rico commercial portfolio was aided by the payoff of an $11 million relationship. NPL inflows also decreased, driven by lower construction 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 #11.
Net charge-offs increased from the prior quarter to $33 million 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 million recovery from a commercial loan payoff. Please turn to Slide #12.
The allowance for credit losses increased by $11 million to $711 million driven by reserve build up in the Puerto Rico auto and personal loans portfolio, changes in macroeconomic scenarios and loan growth. In the U.S., the [ Lamont ] for credit losses decreased by $18 million due to the implementation of a more granular model for the U.S. commercial real estate portfolio. The provision for credit losses was $44 million compared to $36 million in the prior quarter.
The corporation ratios of allowance for credit losses to total loans remained 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 continues to exhibit strong credit quality trends in the third 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 evolving 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. Thank you.
Thank you, Lidio and Carlos, for your updates. Our results for the quarter and 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 million customers in Puerto Rico, providing a wide variety of products, services and channels and we value immensely the trust that take place in us.
Earlier this month, we celebrated Popular's 130th anniversary. Since 1893, we have successfully adapted and led throughout changing conditions, 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 have 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 disbursed are expected to support increased economic activity for the coming years. 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 Instructions] Our first question comes from Timur Braziler of Wells Fargo Securities.
Good morning. I'm wondering how much of the delayed transformation expenses occur in '24. And I guess the total amount of transformation costs, is that now lower? Or is that expense just pushed out?
Yes. I mean some of the expenses have been recharacterized, Timur. So for example, as we mentioned, some expenses that we expected to be external consultants were [ altered ] brought in-house. And some of those may end up being capitalized out of all, 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 '24 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 '24, and we complete our budget for '24, and we will provide the guidance on expenses in January, as we normally do, including both overall expenses and transformation expenses.
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?
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 costs in Puerto Rico. But most of the rest will probably be a result of shift as opposed to base rates changing. With the sole exception of the Puerto Rico public sector, again, will have the lag of the third quarter increases into the fourth quarter.
Okay. But those balances, just looking at period end, over average and then seasonal expected outflows in the fourth quarter. Those balances of public fund deposits should be materially lower on an average standpoint in 4Q. Is that correct?
Well, it depends. We've updated our range for year-end, as you heard from 14 to 16 to 16 to 18, if the balances end up at the high end of that range, then the average for the fourth quarter will be not very different. They will be a bit lower than the average for the third quarter, but not too much difference. So it will depend on where we end up in Q4.
Great. And then just last for me on the credit normalization, the 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?
I would say, lower FICOs and the auto portfolio of used card lower FICO segments.
Our next question comes from Brett Rabatin of Hovde Group.
Good morning, everyone. I wanted to start on the -- back on the expenses in the third quarter 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 fourth quarter? Relative to the $475 million guidance.
Yes. I mean it's mostly professional fees, Brett. Now these are 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 our transformation and things of that sort. But this was 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 noticed 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. 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 expenses that we had accrued over accrued in that, and that's an $8 million this quarter, which obviously also helped the expense number.
I think it's also fair to say that we are challenging our teams to make sure -- to that as much as possible in-house versus consulting or using our consultants more intelligently. So it's not that regulatory card costs are necessarily going down, but the professional fees and consulting fees are going down.
Okay. That's helpful. And then on the margin, as we think about '24, assuming the Fed has stopped, would seem like the margin would start moving higher with the government deposits not repricing every lag 3 months. Any thoughts on your willingness or ability to invest maybe some of the cash flow in the securities portfolio into higher rates and just how you see the NII dollars playing out over the coming year?
Yes. The -- probably the colloquial answer to your question is we have -- we hope we will have to have the decision on the investor portfolio extension because we have enough loan demand that we can put the maturities into loans. That will be our preferred outcome that are obviously the best use of our liquidity in terms of margin. You're correct. I mean to the extent that it is abundant, 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. And the same is true of the investment portfolio. Whatever is coming due tends to be old treasuries or older investments that were at lower rates, so this should be helpful as well. So the -- those are the variables there. And the math will be whatever the math is.
Okay. And then just lastly for me, the 14% ROTCE target by 2025. It seems like it's possible that, that might be shaped a little bit earlier if things line up relative to rates and loan growth. Any thoughts on timing of that target?
Well, the timing, we were very specific in our timing. It was not 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, 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.
Our next question comes from Alex Twerdahl of Piper Sandler.
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 assume that buybacks to 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 -- back in January? Or is there an update to the assumptions on capital levels incorporated into the reiterated guidance as well?
It's unchanged.
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?
There always are assumptions in that number, and we -- the assumptions were not made public. Well, we're not making them public now. There -- they are unchanged.
I want to ask the government deposit question slightly 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 billion of government deposits now that is basically cash that the Puerto Rico government has to eventually put to work into the economy into various programs and to things that should continue to help the Puerto Rico picture. Is that accurate thinking?
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 that they did. Now some of this money is specifically earmarked for program so they can't use it as they want.
But definitely, things are happening, not only the Puerto Rico central government, but the municipalities are deleveraging, which not only means that they have money to spend, which means in the future, in the economy as they 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 because on the government across the board is deleveraging, which is I think is important.
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 is too far. But next couple of quarters that would make that number change dramatically one way or another?
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 through -- I think through August the way that some of them saw about 2.8 billion had been dispersed. That compares to $1.7 billion last year. So the pace is picking up.
We do see a lot of the infrastructure projects will continue to pick up pace. There's a lot of products in the energy sector, a lot on the water sectors, there's a lot of projects -- has a lot of highway projects going on. A lot of that is still not in the planning and the permitting declining, that process. We do expect one area will pick up next year will be the CDBG-DR 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 like $230,000.
But there's a number of those projects that has been awarded this year. 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 not 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 begin to see housing pickup next year.
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 a normal course of business will never go away. So there is that, which is what we'll always see there there's the amounts that are earmarked to different projects. There are a whole bunch of different things in different accounts for different purposes. So it is positive that the government has more cash on hand. But we will probably be had understatement to think it's anywhere close to $18 billion. It's a fraction of that.
That's great. And then just expanding on the 11 projects and some of the other things that Ignacio, you're just mentioning, does that result in a larger level of construction disbursements for Popular next year that could help to drive loan ounces higher?
Yes. definitely, I think there should be the residential construction, which has been kind of limited that should -- there should be a pickup on that from those projects. Again, it begins. It depends when actually great ground and they start disbursement, again, those products unfortunately, for -- will not last for 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. Again, apart from the government VR, we're seeing low income tax credits also stimulating certain developments for elderly, especially in Puerto Rico and for [ Olo ] income housing. So it's not only VR. There's a number of projects that are gaining momentum. And I think we should see some of that next year.
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?
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. 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.
And then final question on loan growth. Are you guys willing to disclose how much of the highway loan you guys will take down?
Yes, I think we are good. It's been -- saying out there. We are -- I can tell you this, the highway deal is a very important deal to look at from various perspectives. One, 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 [ British ], Spanish company has done in the last 15 years, and the second largest project they've done in the history of the company.
The syndicated banks that came in was a syndicate international banks, including major Japanese banks will have invested in Puerto Rico projects, I think, in a while. We took the we shared the top lead bank role with one of those large Japanese banks. And we will be disbursing -- at closing approximately $240 million and there's another commitment for $60 million going forward for capital improvement and working capital in the future. So our total commitment is around $300 million, but at closing, we'll be discussing $240 million.
Our next question comes from Brody Preston of UBS.
Good morning, everyone. I wanted to ask, just a follow-up on the government deposits. Did I hear you right, Carlos, do you say you expect those -- the cost of those to increase by 10 basis points in the fourth quarter?
You heard me right. That's our estimate, yes. Okay.
Great. And so what is the extra $2 billion of balances sticking around do in terms of NII enhancements relative to -- if that -- if the $2 billion was not -- if the additional $2 billion is not going to be sticking around? Like what's the extra NII dollars you get from that?
Well, [indiscernible] disclosed the [indiscernible], you got to have to go with your estimate of what the margin on that business is. I'm on to buy like $2 billion because as you know, we never disclose a specific [indiscernible] of the margin in that business. But it should be [indiscernible]. If in fact, the balances end up at the high end of our updated range it should contribute to NII yes.
All right. You're too quick. I was trying to catch on your feet. I did notice that the commercial beta ticked down on the chart that you disclosed, and it looks like it was driven by the U.S. business with that beta taking down from 45% cycle to date to 36% cycle to date as of 3Q. 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?
I mean there was some balanced distortion of an account that had larger high-cost accounts that left, but that wasn't in this particular quarter. This quarter, what you just said, you just saw costs 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 and cumulative beta due to that.
So on that commercial beta... Do you think that it 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 peaks on the rate offering there and that beta can continue to add lower?
Yes. I mean I think what we call is more of a stabilization. I think that intense pressure that was in deposit costs, especially following kind of the many 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 where it continues 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.
Got it. Okay. I also wanted to ask on the nonowner-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? Or is it on the mainland? I just wanted some more color there.
I would say it's a combination of both. I mean, we had some growth in terms of our construction portfolio in New York. And we also have growth, [ not by ] growth both in Puerto Rico and the U.S., Puerto Rico, more in the retail space in the U.S., more in the shelter, health care sectors.
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, you guys, in particular, it's pretty attractive. And it's a pretty -- you kind of quickly accrete on the back end of it. And so within a couple of years, you're kind of back to an extremely robust [ CET1 ] ratio. But you've reduced earnings meaningfully, which could be beneficial to the stock price. How do you kind of think about securities restructuring and using capital at this point?
We are aware. We've done the numbers. We -- it's something that we review periodically one of the -- one of the non-immaterial considerations when we're thinking of these things is the fact that if nothing changes and we do nothing we get roughly 1/3 of AOCI by the end of next year. So that starts -- when you start comparing, not taking execution risk, not taking a market rate and 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. We have not decided that it makes sense for us for the moment.
Next question comes from Kelly Motta of KBW.
Carlos, from the last point, I want to -- I want to make sure I got that right. So 1/3 of AOCI comes back by the end of next year, if no change in rates?
Yes. That's what -- 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 -- probably what I think it's going to be.
Pretty fast tangible book value accretion. Can you remind us what the cash flows are of the securities portfolio? And where you're prioritizing that money, whether it's just sticky and in cash yielding higher rates versus loan growth versus paying down some of the higher cost borrowings that you have?
Yes. It's about $1 billion 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. 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.
No, in addition to that, this is Juan Pablo again. And you could see it on the presentation on Page 8. We have around $1 billion worth of like treasury notes and MDS that prepay any given quarter. that's being then reinvested at market rates in T-bills. So you kind of see about $1 billion 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 purposes as well. So you get that incremental push every quarter.
Got it. That's super helpful. I was hoping I know portfolio -- loan portfolio purchases or something you've [ cut ] 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 opportunity to add through some of those strategic purchases?
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 do have anything to report. We are looking and people bring us opportunities all the time. Sometimes they're outside our credit box or outside our geographies. But yes, we're open and we will continue to be opportunistic if the right opportunity comes our way.
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 $155 million to $160 million a quarter was a good run rate. And this quarter was really strong if you back 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?
Yes. I mean we still think that's the right range, Kelly, $155 million to $160 million. 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 less volatile than the individual lines. So I think that range is still the right range in any given quarter. The fees and credit cards may come down when they're facing something else will go up, and that may be the opposite in the following quarter. So they move around a lot, but the summation actually is a pretty steady stream of business. So $155 million to $160 million still looks like the right range for us.
[Operator Instructions] Our next question comes from Gerard Cassidy of RBC.
Hello? Gerard, are you there?
Our next question comes -- it's a follow-up from Alex Twerdahl of Piper Sandler.
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?
Yes, we do. If the reason for your question is the newly announced proposed changes on interchange debit fees. The proposal is implemented as it stands, would probably mean something in the neighborhood of $3 million a quarter to us in reduced income.
You nailed it. That's exactly what I was asking. And then 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, the sort of the loans of the FDIC 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?
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 experience. But we'll look at everything. I mean if the deal is right, it's priced right, we'll take a look.
We have no further questions on the phone line. So I'll hand back to Ignacio Alvarez.
Thanks again for joining us today and for your questions. We look forward to updating you on our full year results in January, and a happy weekend to all of you. Thank you very much.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.