Q3 2023 Popular Inc Earnings Call

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Hello, and welcome to todays popular Inc. <unk> earnings call. My name is Jordan and I'll be coordinating your call today, if you'd like to register an audio question you may do so by pressing star followed by one on your telephone keypad now.

Going to handover to Paul Cardillo Investor Relations officer of popular to begin pool. Please go ahead.

Good morning, Thank you for joining us with us on the call today is our CEO Ignacio Alvarez, our CFO Carlos Vazquez, and our CRO video 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.

You may find today's press release, and our SEC filings on our website at.

Popular dot com.

I'll 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 effects of an after tax goodwill impairment of $16 million in our U S based equipment leasing subsidiary.

Excluding this impact net income would have been $153 million 2 million more than the previous quarter. The.

The increase in net income was driven by lower operating expenses and higher net interest income.

Set in part by a higher provision for credit losses, and higher income taxes.

We grew loan balances by $1 billion during the quarter, the PBR generated loan growth across almost all business segments, reflecting the continued strength.

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 seven basis points to three 7% in the quarter.

Similarly, due to a 27 basis points increase in deposit cost.

This was partially offset by higher loan balances and the repricing on the loans and a higher interest rate environment non.

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 pre pandemic levels.

While we are beginning to see some credit normalization in the Puerto Rico unsecured consumer segments.

Attentive to the evolving credit landscape and have taken action to address these developments.

Deposit balances at quarter end increased 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 activity.

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 in 'twenty.

A decrease of $1 17 per share.

Net income for the period was offset by an increase in the unrealized losses in our investment portfolio.

Regulatory capital levels remain strong our common equity tier one ratio in the third quarter was 16, 8%.

Please turn to slide four.

I am very pleased to highlight that during the third quarter, we crossed a significant milestone in Puerto Rico and now serves more than 2 million unique customers.

Utilization of digital channels, among our retail customers also remained strong.

Active users an army medical 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.

Unknown Executive: Hello and welcome to today's Popular Inc. 3Q Earnings Call. My name is Jordan and I'll be coordinating your call today. If you'd like to register an audio question, you may do so by pressing star followed by one on your telephone keypad.

Mortgage loan balances at <unk> increased by $121 million sequentially in the third quarter, driven primarily by home purchase activity.

Paul Cardillo: I'm now going to hand over to Paul Cardillo, investor relations officer, a popular to begin. Paul, please go ahead. Good morning. Thank you for joining us. With us on the call today is our CEO Ignacio Alvarez, our CFO, Carlos Vzquez, 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.

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.

Paul Cardillo: 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 risk and uncertainty. Factors that can cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed within our SEC filing. You may find today's press release and our SEC filing on our website at popular.com.

There are roughly $51 billion of hurricane disaster recovery infrastructure and pandemic related funds that have yet to be dispersed.

The pace of this first one of these funds has accelerated and we anticipate that these funds will support future economic activity for several years.

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.

Ignacio Alvarez: 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.

In short we are pleased with our results for the quarter, particularly our strong loan growth in both Puerto Rico and the U S as well as the continued strength of our deposit base.

Ignacio Alvarez: 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 $133 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 bounces by $1 billion during the quarter.

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.

Ill now turn the call over to Carlos for more details on our financial results.

Matthew Please turn to slide five.

We reported net income of $137 million compared to $151 million in Q2.

Ignacio Alvarez: 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, primary due to a 27 basis points increase in deposit costs. This was partially offset by higher loan balances and the repricing on loans in a higher interest rate environment.

Quarterly net income includes the effects of a goodwill charge.

Excluding this 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 exempt investment securities.

<unk> part by higher disallowed interest expenses in Puerto Rico taxes.

Ignacio Alvarez: Non-interest income remains solid and continues to benefit from steady customer transactional activities. Excluding the goodwill charge, operating expenses decreased $17 million during by lower professional fees and customer activity related fees. Credit quality trends generally remain positive. Non-performing loans decrease once again and net charge drops remain well below pre-fendemic 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 increased by approximately 700 million, primary due to a lower level of Puerto Rico public deposits.

Noninterest income was $160 million essentially flat with Q2.

The provision for credit 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 two equal effects first a higher discount rate for the projected cash flows, resulting from higher rates and equity premiums.

A lower projection of future income.

Ignacio Alvarez: However, average deposits for the period increased by $1.4 billion, also driven by public deposit Varings Decreased by Approximately 300 million due to the redemption of senior notes during the quarter, tangible value for share ended the quarter at $60.20, a decrease of $1.17 per share. As that 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%.

Recently, the subsidiary has lease balances or about of about $113 million and the remaining goodwill of $17 million.

Excluding this non cash 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.

Then 8 million reversal of an accrual related to regulatory examination fees.

In <unk>.

During Q3, we incurred 4 million of transformation related expenses compared to $7 million last quarter.

Ignacio Alvarez: Please turn to slide 4. I am very pleased to highlight that during the third quarter we crossed a significant milestone in Puerto Rico and now served more than 2 million unique customers. Utilization of digital channels among our retail customers also remained strong. Active users on our medical 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 channels. 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 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 capitalized stabilization. This has resulted in a lower than forecasted expense as.

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.

Ignacio Alvarez: 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 in the stories have improved. Mortar's loan balances at BPPR 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.

Normalizing for the 23 million noncash goodwill impairment total expenses for 2023 will be around 182 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 that we will incur an additional expense of roughly $66 million.

Ignacio Alvarez: 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 of 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. At this infrastructure investment and the economy expands, we are well positioned to serve the needs of our customers and to benefit from such activity.

We will provide 2024 expense guidance, including the 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 20% to 25% plus.

Ignacio Alvarez: In short, we are pleased with our results for the quarter particularly our strong loan growth in both Puerto Rico and in the US 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.

Please turn to slide six.

Net interest margin decreased by seven basis points to 32, three point <unk>, 7% in Q3.

On a taxable equivalent basis NIM was 324%.

Increase of five 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.

Carlos Vzquez: I now turn the call over to Carlos for more details on our financial results. Thank you Ignacio.

Carlos Vzquez: Please turn to slide five. We reported net income of 137 million compared to 151 million in Q2. Quartering net income includes the effect of a goodwill charge. Exploring the charge net income was 153 million to million higher than the prior court. Net Interest Income was 534 million, 2 million higher than Q2. On a taxable equal basis, Net Interest Income was 564 million, an increase of 5 million from Q2, due to higher volume of tax extent investment securities, offsetting part by higher disallowed interest expenses in Puerto Rico taxes.

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, probably the buses were roughly $17 8 billion, a decrease of roughly $700 million compared to Q2.

The 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 to 18 billion compared to our prior expectation of 2000 $14 billion to $16 billion.

Carlos Vzquez: Non-interest income was 160 million, essentially flat with Q2. The probation for credit 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 pre-tax and non-cash goodwill impairment in our US-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.

Excluding Puerto Rico public deposits customer deposit balances were up by $46 million, primarily driven by increases in time and savings deposits at popular bank offset somewhat by retail outflows at <unk>.

Approximately $300 million of client deposit bonds that PPR 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 BV, PR, and when commercial and construction loans at PV.

Year to date LOE minuses have increased by 2 billion versus $2 3 billion for the same period a year ago.

Carlos Vzquez: Presently, this subsidiary has three balances of about 113 million and a remaining goodwill of 17 million. Excluding this non-cash expense, Q3 expenses decreased by 17 million from the prior quarter. The variance inoperating 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 examination fees in BPPR. To bring Q3, we incurred 4 million transformation related expenses compared to 7 million last quarter.

We are encouraged by the demand for credit at <unk> NPV.

We will continue to take advantage of opportunities to extend credit and improve their use and yield of our existing liquidity.

Our interest rates 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 seven.

Deposit betas in the current tightening cycle are now above the prior cycle.

Carlos Vzquez: 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 capitalized-able 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 have seen a total cumulative deposit beta of 34% to date.

But the rate of increase of deposit cost continues to slow down.

In BP PR total deposit costs increased by 24 basis points compared to an increase of 26 basis points in Q2 led.

By far like 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%.

Carlos Vzquez: We expect Q4 expenses to be approximately 475 million. Normalizing for the 23 million non-cash goodwill impairment, total expenses for 2023 would be around 1.82 billion or 50 million better than our original guidance. During my lower transformation expenses and cost control initiatives undertaken during the year. If the proposed FBIC Special Assessment is implemented as presently drafted, we estimate popular would incur an additional expense of roughly $66 million.

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 that cost a part of the process 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.

Costs increased by 29 basis points compared to an increase of 54 basis points in Q2.

Carlos Vzquez: 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 a trivial to certain tax benefits recorded in the second quarter of set by lower income before tax. For the full year 2023, we continue to expect the effective tax rate to be between 22 and 25%.

Led by retail deposits gathered primarily through our online channel.

Please turn to slide eight.

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 two two years.

In Q3, the unrealized loss.

Oss portfolio increased by $231 million, driven by an increase of 274 million.

Carlos Vzquez: Please turn to slide 6. Ninjas margin decreased by seven basis points to set to 3.07% in Q3. On a taxable equivalent basis, name was 3.24%, a decrease of five basis points versus Q2. The decrease is driven by higher interest expense on deposits due to increased cost of probably deposits and growth in high cost deposit accounts at popular banks. This is partially upset by higher loan yields and balances across all major lending categories and higher yields in our cash balances and investments.

<unk> MBS portfolio offsetting part by a reduction of $44 million in the U S Treasury portfolio.

At the end of the third quarter.

Balance of unrealized loss in <unk>.

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 nine.

Our return on tangible equity was nine 4% in the quarter, we continue to target a sustainable 14% RPC by the end of 2025, driven primarily by higher net income.

Carlos Vzquez: At the end of the third quarter, for the record point deposits were roughly 17.8 billion, a decrease of roughly 700 million compared to Q2. The decrease in Q3 was consistent with historical trends. However, public deposit deposits have remained higher than we anticipated.

Regulatory capital levels remained strong.

Our covenant equity tier one ratio in Q3 of 16, 8%.

Carlos Vzquez: As such, by the end of 2023, we now expect public deposits to be in a range of 16 to 18 billion compared to our prior expectation of 14 to 16 billion. Excluding the Puerto Rico public deposits, customer deposit balances group were up by 46 million, primarily driven by increases in time and savings deposits at popular banks, offset somewhat by retail outflows at BVPR. Approximately 300 million applying deposit balances at BVPR were transferred to our broker dealer during the quarter, searching for higher yields.

Kris by six basis points from Q2.

Tangible book value per share at quarter end was $50 20.

An increase of $1.

<unk> 17 per share, mostly resulting from increased <unk>.

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 events in the banking sector.

We will not engage in share repurchases during 2023.

We do plan, however to consider a dividend increase this year.

We will review of future capital actions as market conditions evolve.

Carlos Vzquez: Ending loan balances increased by 1 billion compared to Q2 during by growth in almost all loan segments at BVPR and one commercial and construction loans at PV. Year to date, loan managers 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 BVPR and PV. We will continue to take advantage of putting opportunities to extend credit and improve the use and yield of our existing liquidity.

Our long term outlook on capital return has not changed.

From our strong regulatory capital ratios.

Overtime.

We expect our regulatory capital ratios to gravitate towards the levels of our mainland peers plus a buffer.

I turn the call over to Lydia.

Thank you Carlos and good morning.

Yeah.

Overall <unk> continues to exhibit stable credit quality trends with low levels of net charge offs and decreasing nonperforming loans.

Consumer portfolio. However.

Carlos Vzquez: Our interest rate sensitivity is relatively neutral. We continue to expect the margin to resummon upward trajectory in Q4. The timing results from our forecasted loan and deposit growth and mix investment for fullest strategy and the pace of repricing of public and incrementally retail and commercial deposits.

Reflected increased delinquencies and net charge off primarily due to the expected credit normalization.

We continue to closely monitor changes in the macroeconomic environment.

Borrower performance, even higher interest rate and inflationary pressures.

We believe that the improvements of our recent years and risk management practices and the risk profile of the corporation's loan portfolio as well. So just popular to continue to operate successfully under the current environment.

Carlos Vzquez: Please turn to slide 7. The deposit betas in the current tightening cycle are now above the prior cycle. We have seen a total cumulative deposit beta of 34% today, but the rate of increase of the positive cost continues to slow down. In BPPR, total of the positive cost increased by 24 basis points compared to an increase of 26 basis points in Q2.

Before discussing the credit metrics for the quarter I would like to address the risk profile of our office commercial real estate exposure.

Some of our portfolios. We have included additional information for this segment in the appendix to today's presentation.

Popular consolidated office CRE exposure is limited representing only one 9% or.

Carlos Vzquez: Led by public deposits. Excluding the public deposit balances, total of the positive 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 positive deposits increased by 47 basis points compared to our July estimate of 50 basis points. We expect the cost of positive deposits to increase by a approximately 10 basis points in Q4.

Or $634 million of our total loan portfolio it.

It is mainly comprise of low to mid rise properties located in suburban areas and is well diversified across genotypes.

On 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.

Carlos Vzquez: The deposit pricing agreement with the Puerto Rico public sector is marked linked with a lag. This source of funding results in an attractive spread under market rates. At Popular Bank, the deposit costs increased by 29 basis points compared to an increase of 54 basis points in Q2. Led by retail deposits gathered primarily to our online channel.

This has begun to normalize I suspected reflecting increased delinquencies and net charge offs.

The credit card.

Our loan and lease portfolios continue to exceed the delinquencies and net charge offs.

Below pre pandemic levels, although gradually increasing.

In the case of unsecured personal loans. However, the year to date net charge off ratio is three 4%, which is above the 2.5% average for the 2011% to 19 period.

Carlos Vzquez: Please turn to slide 8. Our investment portfolio is almost an 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.

We're closely monitoring the performance of our consumer portfolio.

Made changes to our underwriting criteria to.

So the increased exposure to higher risk segments.

Carlos Vzquez: In Q3, the unrealized loss of the ASS portfolio increased by 231 million, driven by an increase of 274 million in the agency NBS portfolio of setting part by a reduction of 44 million in the U.S. Treasury portfolio.

Turning to slide number 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 pay off of an $11 million relationship.

Carlos Vzquez: At the end of the third quarter, the balance of unrealized loss in AOCI of our HDM 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.

NPL inflows also decrease 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 other quarter the ratio of Npls to total loans held in portfolio.

Decreased to one 1%.

From one 2% in the previous quarter.

Carlos Vzquez: Please turn to slide 9. Our return to annual equity was 9.4% in the quarter. We continue to target a sustainable 14% ROTCE by the end of 2025, during primarily by higher net income.

Turning to slide number 11.

Net charge offs increased from the prior quarter to $33 million or annualized 39 basis point 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.

Carlos Vzquez: Regulatory capital levels remain strong. Our common equity tier 1 ratio in Q3 of 16.8% decreased by six basic points from Q2. Time doable 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.

This increase was in part offset by $11 million recovery from a commercial loan payoffs.

Please turn to slide number 12.

Yeah.

The allowance for credit losses increased by $11 million.

$711 million driven by result will stop in the Puerto Rico auto and personal loans portfolio.

Changes in macroeconomic scenarios.

And loan growth.

In the U S. The allowance for credit losses decreased by $18 million.

Carlos Vzquez: 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 shared repurchase during 2023. We do plan however to consider a dividend increase this, here. 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.

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 two 1%, while the ratio of ACL to MPL stood at 197% up 15 percentage points from the previous quarter.

To summarize our loan portfolio continue to exhibit strong credit quality trends in the third quarter with low net charge off.

Lidio Soriano: With that, I turn the call over to Lidio.

Decreasing nonperforming loans.

Lidio Soriano: Thank you Carlos and good morning. Overall, popular continues to exhibit stable credit quality trends with low levels of net charge-off and decreasing non-performing loans. Consumer portfolio, however, reflected in crystalline quencies and net charge-off, primarily due to the expected credit normalization. We continue to closely monitor changes in the macroeconomic environment and on higher interest rate and inflationary pressures. We believe that the improvements of our 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.

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.

I would like to turn the call over to Ignacio.

For his concluding remarks, thank you.

Thank you Lydia 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 they place in us.

Earlier this month, we celebrated popularize 130 <unk> anniversary.

Lidio Soriano: 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 this segment in the appendix to today's presentation. Popular consolidated office area exposure is limited representing only 1.9% or 634 million of our total loan portfolio. It is mainly comprised of low to net rise properties located in suburban areas and is well diversified across tenant type with an average loan size of 2.1 million.

Since 18 93, we have successfully adapted and led throughout changing conditions.

And we are proud of our history and the legacy that is made up of or what it is today a strong.

Vibrant organization with deep needed values I.

I had the privilege of visiting many of our colleagues during the anniversary.

Inspired by their passion and dedication.

We are encouraged with the progress of our transformation.

That position us well for the future.

We're optimistic about the opportunities that lie ahead.

Economic trends in Puerto Rico continued to be positive.

Lidio Soriano: 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 linkancies and net charge off. The credit card, all along and linked portfolios continue to exhibit the linkancies and net charge off that are below pre-vendemic levels although gradually increasing. In the case of on secure personal loans, however, the year-to-date net charge of ratio is 3.4%, which is above the 2.5% average for the 2011-2019 period. We are closely monitoring the performance of our consumer portfolio and have made changes to our underwriting criteria to decrease exposure to higher risk segments.

Can a considerable amount of recovery funds yet to be dispersed.

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 are now ready to answer your questions.

Thank you as a reminder, if you'd like to register an audio question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two.

Please ensure you're on mute when speaking.

Our first question comes from Timur <unk> of Wells Fargo Securities CMO. The line is yours.

Hi, good morning.

Lidio Soriano: Turning to slide number 10, non-performing assets and non-performing loans continue to decrease during 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 includes also decrease during by lower contractual influence in Puerto Rico and lower commercial influence in the U.S. Offsetting Park by higher mortgage inflows in Puerto Rico. At the end of the quarter, the ratio of MPLs to total loans helped in portfolio decreased to 1.1% from 1.2% in the previous quarter.

Good morning monitoring how much.

Hi, I'm wondering how much of the delayed transformation expenses occur in 'twenty, four and I guess, the total amount of transformation costs is that now lower or is that expansion is pushed out.

Yes.

Some.

Some of the expenses have been.

We characterize similar so for example, as we.

As we mentioned.

Some expenses that we expect it to be external consultants were brought in house.

And.

Some of those may end up being capitalized as part of the project.

Others have been delayed because.

Lidio Soriano: Turning to slide number 11, net charge of increased from the prior quarter to 33 million were analyzed at a 9 basis point of average loans helped in portfolio. The increase was given by higher consumer net charge of importorico, mailing the auto and personal loans portfolio. This increase was in part offset by 11 million recovery from a commercial loan payoff.

I have taken a bit longer to get going or whatever the case may be so it will be a combination of some pushed into 'twenty four.

And others that.

It will not happen anymore.

We will.

Got what that combination might be it will be clear when we complete our project plan for 'twenty four we complete our budget for 'twenty four.

And we will provide the guidance on expenses in January as we normally do including both.

Lidio Soriano: Please turn to slide number 12. The allow for credit losses increased by 11 million to 111 million, driven by itself built up in the portorico auto and personal loans portfolio, changes in macro economic scenarios and long growth. In the US, the allow for credit losses decreased by 18 million due to the implementation of a more granular model for the US commercial real estate portfolio.

Overall expenses and transformation expenses.

Okay and then.

I guess looking at funding cost to what extent are interest rates now Don pressuring deposits and the pressure on outcomes from mix shift.

Well I mean to the extent that you think the fed is done.

Lidio Soriano: The provision for credit losses was 44 million compared to 36 million in the prior quarter. The corporation ratios of allow for credit losses to total loans remained flat at 2.1% while the ratio of ACL to MPL stood at 197% up 15% at point from the previous quarter.

We'll continue to have an affair.

Because of the one quarter lag.

The public sector deposit costs in Puerto Rico.

But most of the rest.

Probably.

Result of shift.

As opposed to base rates changing.

With the sole exception of Puerto Rico public sector.

Lidio Soriano: To summarize, a loan portfolio continued to exhibit strong credit quality trends in a third quarter with low net charge of and increasing non-performing loans. Consumer portfolios, however, reflected in pre-telling sequences and net charge of due to credit normalization. We remain attentive to the volume environment, but we remain encouraged by the performance of our loan do.

Again, we will we 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 than average standpoint, and <unk> is that correct.

Ignacio Alvarez: With that, I would like to turn the cover over to Ignacio for his concluding remarks. Thank you. Thank you, Lydia and Carlos, for your updates. Our results for the quarter and you today 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 they place in us.

Well it depends we've updated our range for year end as you heard from <unk>.

14% to 16% to 16 to 18.

If.

If if the bias is end up at the high end of that range than the average for the fourth quarter will be not not very different.

There'll be a bit lower than the average for the.

For the third quarter, but not too much different soil depends on where we end up in Q4.

Ignacio Alvarez: Earlier this month, we celebrated popular as 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 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 as well for the future.

Great and then just last for me on their credit normalization in the unsecured.

Our consumer book the comment about limiting exposure to higher risk segments can you just maybe talk through what's been the greatest source of discussing that portfolio in which segment, you're referring to in that comment.

I would say.

Lower FICO.

On the auto portfolio used car lower FICO segments.

Ignacio Alvarez: 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 year. Our diversified business model, robust levels of capital, and most importantly, the talent and dedication of our people, position as well to support and meet the evolving needs of our growing customer base.

Great. Thanks for the question.

Our next question comes from Brett Robinson Humphrey Group. Please go ahead.

Good morning, everyone.

Good morning Bryce.

I wanted to start.

I wanted to start on the on back on the expenses in the third quarter.

And get a little more color if I could on I didn't quite understand.

He is around lower regulatory costs, most are having higher can you maybe.

Unknown Executive: We're now ready to answer your questions. Thank you, as a reminder, if you'd like to register an audio question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two and please ensure you're unmuted when speaking.

Talk a little bit more about the.

Items that reduced expenses in <unk> and then how that might change you think in the fourth quarter relative to the 475 million guidance.

Yeah.

Yes.

It's mostly professional fees.

Timur Braziler: Our first question comes from Timur Braziler of Wells Fargo Securities. Timur the line is yours. Hi, good morning.

Right now.

Professional fees that.

We hired.

<unk> to assist us in a whole bunch of different things.

Timur Braziler: I'm wondering how much of the delayed transformation expenses occur in 24 and I guess the total amount of transformation costs is not now lower or is that expenses pushed out? Some of the expenses have been recharacterized, Timur. For example, as we mentioned, some expenses that we expected to be external consultants were 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 24 and others that will not happen anymore. We will get what that combination might be.

The reduction in the quarter was mostly related to some assistance, we get on regulatory matters or.

Sure.

Our transformation and things of that sort.

But as this is.

This would normally at this number goes up and down.

Just that the the professional fees number tends to be a lot more stable as opposed to coming down so.

You will notice that change, but any given quarter.

<unk> expense in those professional fees gravitate from from advisory and regulations to advice on transformation to advice on something else. So it's just a bit more notable this quarter.

It is.

Mostly professional fees. The other thing is we do have a reversal.

Of an accrual for a regulatory exam expenses that we had accrued over accrued in that and Thats, an $8 million this quarter.

Timur Braziler: It 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.

Obviously also also help the expense number I think it's also fair to say that we are challenging.

Our teams to make sure Nigel as much as possible in house versus consulting or using our consultants more intelligently. So its not the regulatory costs are necessarily going to downloads of the professional fees and consulting fees are going down.

Timur Braziler: 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 makeshift? Farming is to the extent that you will think the Fed is done, we will continue to have an effect because of the one quarter lag of the effect of polysector 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 Polysector, we will have the delay of the third quarter increases into the fourth quarter.

Okay.

That's helpful and then on the margin.

As we think about 'twenty four assuming the fed has stopped would seem like the margin would start moving higher with the government deposits not repricing every every lagged.

Three months any any thoughts on.

Your willingness or ability to to invest maybe you saw on 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.

Yes.

Timur Braziler: Okay, but those balances just looking at period end over average and then seasonal expected outcomes in the fourth quarter, those balances of public fund deposits should be materially lower on an average standpoint in 4K. Well, you know, depends. We have 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, for the third quarter, but not too much difference. So it will depend on where we end up in Q4.

Probably the colloquial answer to your question is we have we hope we will have to have.

The decision on the investment portfolio extension, because we have enough loan demand.

We can put the.

The maturities into loans that will be our preferred outcome.

Timur Braziler: Great.

That obviously is the best use of our of our liquidity in terms of potential in terms of <unk>.

Margin.

You're correct I mean to the extent they decided is done and the pressure on the funding on the funding side should be less.

We are still originating loans at a higher rate levels, so that should be helpful to margin.

And the same mix drove the investment portfolio.

Whatever's coming do tends to be cold cold.

Treasury.

All the investments that were at lower rates.

Be helpful as well so.

Timur Braziler: 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 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 cycles and the auto portfolio use card lower cycle segments. Great. Thanks for the questions.

Those are the.

The variables there.

The math will be whatever the method.

Yeah.

Okay.

Then just lastly for me the 14%.

Our TCE target by 2025, it seems like it's possible that that might be shaved 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.

Brett Rabatin: Our next question comes from Brett Rabatin of Holstie Group. Brett, please go ahead.

Of 2025.

And this.

Target is not.

Brett Rabatin: Morning, everyone. I wanted to start on 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, you know, most are having higher. You may 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 fourth one, 75 million guidance.

Initially target.

So we're working very hard to make sure we get there.

God Bless God Bless you and hope you are right.

The earlier, but.

At this point in time for us it looks like.

The end of 2025.

Okay fair enough. Thanks for all the color.

Thanks.

Our next question comes from Alex Tornado Sadler Alex. Please go ahead.

Hey, good morning.

Brett Rabatin: Yeah, I mean, it's mostly professional fees. Right. Now, this is our professional fee 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 transformation and things of that sort. But, you know, this will normally, this number goes up and down. It's just that the professional fee number tends to be a lot more stable as opposed to coming down.

Hi, good morning.

Just to expand upon that last question on the Aro TCE target. When you guys. Initially set that out I think it was back in January and one kind of assumed that maybe you guys assume that buybacks to be part of the story this year, which theyre not I'm just curious.

You say, it's unchanged is it just basically saying that.

Reiterating what you said back in 2000 and it back in January.

Larry or is there an update to the assumptions on capital levels incorporate into the reiterated guidance as well.

It is unchanged.

Okay.

Youre not youre, not making any changes to your thought around capital levels Youre just.

From when you initially set the target out in 2000 and January.

Brett Rabatin: So you'll notice the change, but any given quarter, the expense in those professional fees can gravitate from advice and regulations 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 exam expenses that we had accrued over accrued in that, and that's an 8 million dollar in this quarter, which obviously also helps the expense number.

Yes.

There are always say our assumptions in that number and we the assumptions were not made public.

Well, we're not making them public now.

Okay.

They are in China.

I wanted to I wanted to ask the government deposit question slightly different.

<unk>.

Obviously, we're very focused on the impact to you guys as balance sheet, but looking at them a different way. It seems like there is almost $18 billion of government deposits now that its basically cash at the Puerto Rican government has to eventually put to work into the economy into various programs into things that should.

Brett Rabatin: I think it's also fair to say that, you know, we are challenging our teams to make sure that as much as possible in health versus consulting or using our consultants more intelligently. So it's not that regular car costs are necessarily going down. It's that the professional fees and the consulting fees are going down. That's helpful.

We continue to help the Puerto Rico picture is that accurate or thinking.

It is but keep in mind.

It's a very diverse group of depositors, it's I think we estimate over 140 different deposit clients.

Brett Rabatin: And then on the margin, you know, as we think about 24, you know, assuming the Fed has stopped, would seem like the margin would start moving higher, you know, with the government deposit, it's not repricing every, every leg three months. Any, any thoughts on your willingness or ability to to invest maybe some of the cash flow and the security portfolio into higher rates and just how you see the NAI dollars playing out over the coming year.

Half clients ranging from that particular Treasury department to small municipalities. Most of the agencies have much more money available now than they did note. Some of this money specifically earmark for programs. So they can't he is at 81.

Definitely.

Definitely things are happening not only the political central government, but the municipalities are deleveraging, which should not only means that they have money to spend which means in the future in the economy.

More room to borrow to do capital projects. If they are good projects. So yes that should be a stimulative effect, but again, it's a 140 agencies with many different programs that are specifically earmarked so.

Brett Rabatin: Yeah, the probably the colloquial answer to your question is we hope we don't have to have the decision on the investor portfolio extension because we're having a loan demand that we can put the maturity into loans. That will be our preferred outcome that are obviously the best use of our liquidity in terms of in terms of margin. You correct, I mean to the extent that the Fed is done and the pressure on the funding on the funding side should be less.

We definitely it's obviously good for the economy, it's there'll be accommodated the Germany 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 are too far but next couple of quarters that would make that number change dramatically one way or another.

No as we said in the prepared remarks, we have seen the pace of disbursement of federal funds.

Brett Rabatin: 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, old and the same method. Okay, and then just lastly for me, the 14% ROTCE target by 2025 seems like it's possible that that might be shaped a little bit earlier things line up relative to rates and loan growth.

Increased during the year.

So.

At this point at this point in the year through I think through August of last numbers I saw was 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 progress in the energy sector.

A lot of them on the water sector is a lot of projects. There's a lot of highway projects going on a lot of that is still in the planning and the permitting the planning that process. We do expect one area will pick up next year will be the <unk> funds for housing there is a number of projects that had been award.

Brett Rabatin: Any thoughts on timing of that target? The timing we were very specific in our timing, it was at the end of 2025 and this target is not an issue target, so we're working very hard to make sure we get there. God bless you, God bless you and 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.

And those are projects where.

Private developers build in a series of houses and the government will buy those houses from the developer and then later gave it to people with vouchers for up to $230000 about there's a number of those projects has been awarded this year were involvement on 11.

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 continuing to see the basic infrastructure energy highway water and I think youre beginning to see.

Housing pickup next year.

Brett Rabatin: Okay, very enough, thanks for all the color. Thanks.

Alex.

Yes.

Probably more than half of this balance is.

Alexander Twerdahl: Our next question comes from Alex Twerdell or like a Sadler, Alex, please go ahead. Hey, good morning. 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?

Total operating accounts of those.

<unk> plus almost 200 clients.

So theres always going to be.

Given balance there.

Alexander Twerdahl: It's unchanged. Okay, so you're not making any changes to your thought around capital levels. You're just, you know, from when you initially stood the target out in January. They're always the our assumptions in that number and we the assumptions were not made public. Well, we're not making them public now. Okay, but they aren't changed.

In normal course of business, we will never go away.

So there is that which is low will always be there. There is the amount that are earmarked for different projects. There are a whole bunch of different things in different accounts for different purposes. So so it is positive that the government has more cash on hand.

But it will probably be an understatement to to think is anywhere close to $80 billion.

It's a fraction of that.

Okay.

That's great.

Just expanding on the 11 projects and some of the other things that naturally you're just mentioning does that result in.

And a larger level of construction disbursements for popular next year that can help to drive loan balances higher.

Yes, definitely I think they 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.

Great ground and they start disbursement again.

Those price unfortunately, or fortunately for.

Alexander Twerdahl: I want to I want to ask the government to pause a question slightly different differently. You know, obviously we're very focused on the impact for your guys' balance sheet, but you know, looking at them a different way, it seems like there's, you know, almost $18 billion of government deposits now that it's basically cash that the Puerto Rican government has to eventually put to work into the economy, into various programs, into things that that should continue to help the Puerto Rico picture.

Lastly, our balance sheet because the way it happens is the developer build 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. Dr. We're seeing low income tax credits also stimulate certain developments for elderly, especially in Puerto Rico and for outlook on income housing. So it is not only Dr. There's a number of projects that are again gaining.

Alexander Twerdahl: 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 treasure 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 way. But definitely, we, you know, definitely things are happening, you know, but not only the Puerto Rico central government, but the municipalities are be leveraging, which should not only mean that they have money to spend, which means in the future, if the economy comes, they'll have more room tomorrow and the two other capital projects if they are good projects.

Momentum I think we should see some of that next year.

Great and then is it fair to assume that mortgage.

It's been growing for a couple of quarters is that expected to continue just given obviously where rates are.

Okay.

That's a question I asked.

We've seen some pick up in the purchase activity, but you're right.

<unk>.

I think we've got to expect it to higher interest rates will have some impact on that I mean, that's just.

Basic logic.

A lot of the activity as we said in the prepared remarks as 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.

Alexander Twerdahl: So, yeah, that should be a similar effect, but again, it's 140 agencies with many different programs, some that are specifically earmarked. So, you know, we definitely, it's obviously good for the economy. It's good for the economy that the government across the board is leveraging, which is, I think, is important. Yeah. You know, we can talk about the earmarks. Are there any, like, big ones out there that you kind of have blinded sight on, you know, hitting in the next couple months or years, I guess, years or too far, but next couple of quarters that would make that number change dramatically one way or another.

Yes, I think we are goes it's been set out there.

I can tell you. This the highway deal as very important deal to that 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 it.

This is the.

Largest project down basis, the Spanish company has done in the last 15 years and the second largest projects they've done in the history of the company.

The syndicate of banks that came in was a syndicate international Macs include major Japanese banks, who haven't invested in political projects and I think in a while.

Alexander Twerdahl: I know, but as we said in the preferred remarks, we have seen the pace of disbursement of federal funds increase during the year. I, you know, so at this point, at this point, in the year through, I think you're through August, the latest numbers I saw with about 2.8 billion had been disperse. That compares to 1.7 billion last year. So, the pace is picking up. We do see, you know, a lot of the infrastructure projects will continue to pick up pace.

We took.

We shared the top lead bank role with one of those large Japanese banks.

We will be disbursing at closing approximately $240 million and there is another commitment for 60 million going forward for capital improvement in working capital in the future. So our total commitment is around $300 million at closing will be disbursed $240 million.

Great. Thanks for taking my questions.

Alexander Twerdahl: There's a lot of projects in the energy sectors, a lot of on the water sectors, a lot of projects. There's a lot of highway projects going on. A lot of that has still been in the planning and the, and the, and the permitting, the planning, the, you know, that process. We do expect one area to pick up next year will be the CDBGDR funds for housing. There's a number of projects that have been awarded, and those are projects where private developers build that 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.

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

Hey, good morning, everyone.

Good morning, Good morning, I wanted to add.

I wanted to ask.

Just a follow up on the government deposits because I hear you right. Carlos you said you expect the cost of those increased by 10 basis points in the fourth quarter.

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

Alexander Twerdahl: About, there's a number of those projects has been awarded this year. We're involving 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 be beginning to see housing pick up next year. I keep it, keep it running.

Okay great.

So what is the extra $2 billion of balances sticking around do.

In terms of.

NII enhancements relative to 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'd get from that.

Alexander Twerdahl: I like that probably more than half of this balance is the act of operating accounts of those 100 plus almost 200 clients. So, there's always going to be a given balance there that a normal course of visits will never go away. So, so the, there, there is that, which is what we'll always see there. There's the amount that are earmarked for different projects. There are a bunch of different things in different accounts for different purposes.

Well.

Disclosed forming a broader you're going to have to go with your estimate of what the margin on that business.

Multiplying by 2 billion because.

We never disclose the specific quarter.

On the margin in that business.

But it should be.

Thank you Carlos.

If in fact.

<unk> the balances end up at the high end of our updated range.

It should contribute to NII, yes.

Alexander Twerdahl: So, so it is positive that the government has more cash on hand, but, but it will probably be an understatement to, to think it's anywhere close to $18,000. It's a price, of that. Okay. Yeah, that's great. You know, and then just expanding on the 11 projects, and you know, some of the other things that, not sure you're just mentioning, does that result in a larger level of construction disbursements for popular next year that could help to drive low amounts of tire?

Alright, you too.

Quick I was trying to catch you on your feet.

Sure.

And then I did notice that the commercial data checked down.

On the chart that you disclose and it looked like it was driven by the U S business with that data.

Taking down from 45% cycle to date to 36% cycle to date as of as of <unk> and I wanted to ask if there was something specific that drove that.

Higher balance kind of.

Alexander Twerdahl: 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, you know, great ground, and they start disbursements. Again, those projects unfortunately, unfortunately for, 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.

Account, leaving that was maybe costly just looking for some color there.

I mean, there was some some balanced distortion.

An account that had larger high cost accounts that left but that wasn't in this particular quarter. This quarter of what you. Just said you just soft costs being relatively flat and then.

Therefore, the kind of the last bump in rates that we saw was not kind of pass throughs.

Alexander Twerdahl: So instead of the takeout coming from individual buyers, the, the government takes them out. But yes, in a short run, there should be an increase, especially in the residential construction. Again, apart from, from the government, DR, we're seeing low income tax credits, also stimulating certain developments for elderly, especially in Puerto Rico, and for Oloca income housing. So it's not only DR, there's a number of projects that are gaining, gaining momentum that, I think we should see some of that next year.

Inching down accumulative beta due to that.

Got it.

Commercial beta.

Sorry go ahead Bravo.

<unk>.

Do you think that can continue to kind of level off or do you think that can.

Whatever happens with rates going forward do you think you've kind of.

Peaks on on the right offering there and that beta can continue to head lower.

Alexander Twerdahl: Great, and then is it fair in the future, the mortgage that's been growing for a couple of quarters, is that expected to continue, just given that obviously where rates are? Yeah, well, that, that's a question I ask, obviously. You know, we, we've seen some pickup of the purchase activity, but you're right, I mean, I, I, I think we've got to expect that the higher interest rates will have some impact on that. I mean, that's just, you know, basic logic. So, a lot of the activities we've done in the report marks is purchase activity, so, you know, that's, that's going to have to be impacted, you know.

Yes, I mean, I think what really causes more of stabilization.

Alexander Twerdahl: And then final question on loan growth.

I think that intense pressure that was in deposit cost, especially following 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 area, where continues to be a bit more sensitive as kind of like the higher cost retail.

Alexander Twerdahl: Are you guys willing to disclose how much of the highway loan you guys will take down? Yes, I think we are because it's been set out there. We are, I can tell you this, the highway deal is very important deal to prove that from various perspectives.

There's still a fair amount of competition.

And our branches in our national online gathering platform.

Got it okay.

I also wanted to ask on the non owner occupied.

Alexander Twerdahl: 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 I've purchased. The Spanish company has done it in the last 16 years, and the second largest project they've done in the history of the company. The syndicate of banks that came in was a syndicate of international banks, including major Japanese banks, who have invested in, in Puerto Rico projects in, I think, in a while.

CRE growth that you had this quarter or was that a result of.

Prior commitments kind of funding up or was that kind of new originations.

So can you kind of speak to.

The geographic location of it wasn't on the island was it on the mainland just wanted some more color there.

I would say, it's a combination of both I mean, we had some growth in terms of.

Alexander Twerdahl: We took the, we shared the top lead bank role with one of those large Japanese banks, and we will be dispersing 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 will be dispersing 240 million.

Our construction portfolio in New York.

We also have growth.

By growth, both in Puerto Rico, and the U.

Yes.

So on.

The regional space in the U S.

Yeah.

Shelter healthcare sectors.

Alexander Twerdahl: Great, thanks for bringing my questions.

Got it okay.

Broderick Preston: Our next question comes from Brody Preston of UBS. Brody, please go ahead. Hey, good morning, everyone. Good morning, buddy. I wanted to ask, just to follow up on the government deposits, did I hear you right, Carlos? Did you say you expect the, those, the cost of those things increased by 10 basis points and the fourth quarter? You learned me right, that's our estimate, yes. Okay, great. And so what is the extra two billion of balances sticking around do in terms of NII enhancements relative to if the two billion was not, if the additional two billion was not going to be sticking around, like what's extra NII dollars you get from that?

And then.

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 that's a pretty.

Quickly accrete CET one on the.

Back end of it and so within a couple of years you kind of factor.

Screamingly robust b to one ratio.

But you used to earnings.

<unk>.

It could be beneficial to the stock price I know you're trying to think about.

The securities restructuring and using capital at this point.

No.

We are aware we've done the numbers.

It's something that we review.

Exactly.

Broderick Preston: Well, this closed the formula, Broderick, you have to go with your estimate of what the margin on that business is. I'm multiplying by two billion because we, you know, we never disclose the specific formula of the margin on that business. But it should be, you caught me, Carlos. In fact, in fact, in fact, the balances end up at the high end of the, or updated range, it should contribute to NII. All right.

One of the.

One of the not immaterial considerations.

When we're thinking about those things.

That if nothing changes and we do nothing.

We get roughly a third of AUC I might be able to next year. So.

Thats starts.

When you start comparing not taking execution risk not taking market or is it taking a number of things.

And having that outcome.

It gets difficult to some things.

Dude 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.

Broderick Preston: You're too quick. I was trying to catch you on your feet. I did notice that commercial beta checked down on the chart that you disclosed. And it looked like it was driven by the US business with that beta taking down from 45% cycle to date to 36% cycle to date, as of, 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, you know, maybe costly, just looking for some color there.

Broderick Preston: I mean, there was some, some balanced distortion of an account that had a larger high cost account that left, but that wasn't this particular quarter. This quarter, what you just said, you just off cost being relatively flat. And then, therefore, the kind of the last bump in rate that we saw was not kind of pass through. So you got a little hinting down a cumulative beta due to that. Got it. Do you think that commercial beta?

Got it.

You very much for taking my questions I appreciate it.

Thank you.

Hi, Nick.

<unk> question comes from Kelly Motta of K B W. Kelly the line is yours.

Hi, good morning, Thanks for the question.

Carlin.

One point I wanted to.

I wanted to make sure I got that right. So one third of OCI comes back by the end of next year, if no change in 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 the last quarter or so and when we did the calculation is roughly probably before do you think is going to be.

Yeah.

Pretty pretty tough.

Tangible book value accretion can you remind us.

The cash flows are off the securities portfolio adds.

Where where you're prioritizing that that money, whether it's sticky and cashier, yielding higher rates versus loan growth versus paying down some of the higher cost borrowings that you have.

Broderick Preston: Do you think that it can continue to kind of level off, or do you think that that can, you know, with whatever happens with rates going forward, do you think you kind of peeks on the rate offering there? And, you know, that beta can continue to head lower. Yeah, I mean, I think what we call it is more stabilization. You know, I think that intense pressure that that was in the positive cost, especially following kind of the many banking crisis that we saw, you know, 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.

Yes, it's about $1 billion a quarter still matures in the bond portfolio.

And.

I think.

This quarter.

Broderick Preston: So I think all of these things, you know, 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, you know, there's still fair amount of competition, both in our branches and our national online gathering platform. Got it.

A nice example, where we did.

Everything you mentioned essentially because we mostly fund that loan growth, which is our preference.

And then some other cash also went to the repayment of the senior notes.

Broderick Preston: Okay.

Now, we don't have an immense amount of high cost debt.

And our balance sheet, so that option is not huge.

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

In addition to that this is Juan Pablo again, and you could see it.

The presentation on page eight.

Broderick Preston: I also wanted to ask on the non-owner occupied CRE growth that you had this quarter, was that a result of, you know, prior commitments kind of funding up, or was that kind of new originations? And if so, you know, can you kind of speak to the geographic location of it? Was it on the island? Was it on the mainland? Just wanted some more color there. I would say it's a combination of both. I mean, we had some growth in terms of a construction portfolio in New York. We also have growth, not only by growth, both in Puerto Rico and the US, Puerto and we got it.

We have around $1 billion worth of sleep Treasury notes and MBS that prepay any given quarter.

And thats been and reinvest it 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 in especially the exempt for Puerto Rico tax purposes as well.

You get that incremental push every quarter.

Got it that's super helpful.

I know portfolio loan portfolio purchases or something you've discussed in the past.

Things that you're looking at just wondering if there was any update there any any.

Appetite for.

Potential changes in what Youre, seeing and an opportunity to add through some of the strategic purchases.

Broderick Preston: 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, you know, securities restructures, you guys in particular, it's pretty attractive. And you know, it's a pretty, you kind of quickly accrete CET1 on the back end of it. And so, you know, within a couple of years, you're kind of back to an extremely robust CET1 ratio, but you've used earnings meaningfully, which could be beneficial to the stock price.

There is nothing to update I mean, our appetite remains the same if we get shown.

Those are assets that are within our wheelhouse and other geographies and segments that we like.

And we think the opportunity we'll take a very close look at them, but you don't have anything to report we are looking and people bring us opportunities all the time, sometimes they are outside of our credit box, we're answering our geographies.

Yes.

Often.

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.

Broderick Preston: I do kind of think about, you know, securities restructuring and using capital at this point. Now, we are aware. We've done the numbers. You know, we do something that we review periodically. You know, one of the, one of the non-immaterial considerations when we're thinking about the things is the fact that, you know, if nothing changes and we do nothing, we get roughly a third of AUCI by the end of next year.

On the fee income side about $1 $55 million to $160 million. This 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 youre seeing on the fee side any any give or take there.

Yes, I mean, we still think that's the right range currently 135 to 168.

I would say.

One of the reasons, we like to talk about what that range is at any given lining our fees will be up and down every quarter, but the summation is actually a lot less volatile on the individual lines.

Broderick Preston: So, so that's, you know, that starts when you start comparing, I'm not taking execution risk, not taking market risk, not taking a number of things, and having that outcome, you know, it gets difficult to sometimes do alternative things, but we have looked at it. We continue to look at it.

<unk>.

I think that range is still is still the right range.

Any given quarter.

Phoenix is credit cards, they come down with the facing something else will go up and that may be the opposite of the following quarter. So they move around a lot, but the summation actually is a pretty steady stream of business. So 155 to 160 is still looks like the right range for us.

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

Broderick Preston: Thank you very much for taking my questions.

Broderick Preston: I appreciate it.

Kelly Motta: Thank you. On next question comes from Kelly Motler of KBW Kelly the line it's yours. Hi, good morning. Thanks for the question. Karla, from that last point, I want to make sure I got that right. So, one third of AUCI comes back by the end of next year if no change in rates. Yes, that's what we've, that's our best estimate. Yes, that number is consistent with what we've been discussing for the last quarter or so when we take the calculation. It's roughly, probably what I think is going to be. Pretty fast, tangible book value accretion.

Thank you so much I'll step back.

Thanks.

As a reminder.

Mind, you that star followed by one to register a question.

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

Hello.

They're already there.

Your answer your line is open.

Our next question comes is a follow up from Alex <unk> of Piper Sander, Alex. Please go ahead.

Kelly Motta: Can you remind us why the cash flows are off the securities portfolio and where you're prioritizing that money, whether it's just sticky and cash, yielding higher rates versus loan growth versus paying down some of the higher cost borrowings that you have. Yeah, it's about a billion dollars and quarters still that mature in the bond portfolio. And, you know, I think this quarter is a nice example where we did, you know, everything you mentioned, essentially, because we mostly fund that long growth, which is our preference.

Thanks, just a couple of follow ups just back on the fee comment there are you able to disclose the level or you're a level of interchange fees in any given quarter.

Yes.

Do.

If if the reason for your question as newly announced.

Proposed changes.

Interchange debit fees.

The proposal if implemented as it stands.

We're probably being something in the neighborhood of $3 million a quarter to us and reduced income.

You nailed it thats exactly what I was asking.

Kelly Motta: 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, you know, the preference would be to fund client activity to the extent we can. And, hopefully, that the man will be there for that to occur.

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 loans and the FDIC selling and a number of them come in.

Kind of unique structures. The JV structures is that something that you'd be willing to be willing to take a look at or would you only really consider cash purchases.

No.

Kelly Motta: Yeah, no, in addition to that, there's one public and you could see it on the presentation on page 8. You know, we have around a billion dollars worth of like treasury notes and MBS that free pay any given quarter. You know, that's being then reinvested at market rates and T bills. So you kind of see about a billion dollars going off of the term portfolio and going into short term T bills, which, you know, currently have very attractive yields. And especially that they're exempt for Puerto Rico tax purposes as well. So you get that incremental push every quarter. Got it. That's super helpful.

We look at everything I mean, the JV structures might produce fee income if it makes sense.

So we're looking at everything.

Shy about sharing losses with the FDIC given prior experiences.

We'll look at everything I mean, if the deal is right in its price, we'll take a look at.

Got it alright, thanks for taking my follow ups.

Thank you.

We have no further questions on the phone line, so I'll hand back to Ignacio Alvarez.

Hey, 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 and thank you very much.

Kelly Motta: I was hoping I know portfolio loan portfolio purchases or something you've discussed in the past is, you know, things that you're looking at. Just wondering if there's any update there, any, any, you know, appetite or potentially potential changes in what you're seeing in an 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 and other is geographies and segments that we like and we think the opportunity will take a very close look at them.

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

[music].

Kelly Motta: 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 yeah, we're open and we will continue to be opportunistic if the right opportunity comes our way. Got it.

Kelly Motta: Last question for me and then I'll step back. I think on prior calls, you said on the fee income side about 155 to 160 million a quarter was a good runway. And this quarter was really strong. If you back at the MSR gain, you're, you're right in the middle of that. Just wondering if you could provide an update on what you're seeing on the fee sign, any, any give or take there.

Kelly Motta: Yeah, I mean, we still think that's the right range. Kelly, 155 to 160. As you know, 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 video lines. So, you know, I think that range is still the right range in any given quarter. You know, the fees in credit cards may come down when 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. So 155 to 160 still looks like the right range, for us.

Kelly Motta: Thank you so much, I'll sit back. Thanks.

Unknown Executive: As a reminder, that star followed by one to register a question.

Gerard Cassidy: Our next question comes from Gerard Cassidy of RBC, Gerard the Gerard, your line is open. Our next question comes is a follow-up from Alex Twerdahl of Piper Sanla, Alex, please go ahead. Thanks. Just a couple follow-ups, just up back on the fee comment there. Are you able to disclose the level or your level of interchange fees in any given quarter? Yeah, we do. If the reason for your question is newly announced proposed changes on interchange fee, the proposal, if it's limited as it stands, would probably mean something that they were about $3 million a quarter to us in reduced income.

Gerard Cassidy: 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 loans are the FDIC selling and a number of them come in unique structures, the JV structures. Is that something that you'd willing to take a look at? Would you only really consider cash purchases? No, we would look at everything.

Gerard Cassidy: The JV structures might produce the income if it makes sense. So we would look at everything. We're a little bit shy about the sharing losses with the FDIC given prior experience, but we'll look at everything. I mean, if the deal is right and it's price right, we'll take a look at it. Got it. All right. Thanks for taking my follow-ups.

Unknown Executive: We have no further questions on the phone lines, so we'll hand back to Ignacio Alvarez. Thanks again for joining us today and for your questions. We look forward to updating you on our four-year results in January and happy weekend to all of you. Thank you very much.

Unknown Executive: Ladies and gentlemen, this concludes today's call. Thank you for joining.

Unknown Executive: You may now disconnect your lines.