Popular, Inc. Aktie

Good day, and thank you for standing by. Welcome to the Popular, Inc. First Quarter 2026 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Investor Relations Officer at Popular, Inc. Paul Cardillo, please go ahead.

Good morning, and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge García; and our CRO, Lidio Soriano. They will review our results for the first 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 during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings credit quality, expenses, taxes and capital as well as statements regarding Popular's plans and objectives. These statements 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 discussed in today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com.

I will now turn the call over to Javier.

Thank you, Paul, and good morning, everyone. Please turn to Slide 4, where we share highlights of our strong operating performance in the first quarter. We reported net income of $246 million and earnings per share of $3.78, up $12 million and $0.25 per share from the fourth quarter. The improvement was driven by higher net interest income, margin expansion and lower operating expenses. Net income and EPS improved by 38% and 48%, respectively, compared to the first quarter of 2025. We continue to invest in our businesses and expand our capabilities in support of our strategic objectives.

When we deliver for our customers, our franchise strengthens and our shareholders benefit. Overall credit trends remained favorable with lower NPLs and improved NPL ratios. Quarterly net charge-offs increased primarily due to a single previously identified commercial relationship. We also demonstrated our commitment to returning capital to our shareholders by repurchasing $155 million in common stock and paying a quarterly common stock dividend of $0.75 per share. Our ROTCE was 15.5%, up from 14.4% in the fourth quarter of 2025 and 11.4% a year ago. We are very pleased with these returns and remain focused on reaching our 14% through the cycle objective.

Before turning the call over to Jorge, I will comment on the business environment in Puerto Rico. Business activity in Puerto Rico remained positive, supported by steady trends in employment and consumer activity with manufacturing, construction and tourism leading the way. We're closely monitoring ongoing geopolitical developments as sustained higher oil and commodity prices can impact our customer base. As of the end of the first quarter, we have not seen significant signs of economic stress.

The labor market remains healthy with the unemployment rate at 5.6%, stable near historic lows. 3 sectors have outperformed the broader labor market: construction, transportation and warehousing and leisure and hospitality. Consumer spending remains healthy. Combined credit and debit card purchase by Banco Popular customers increased by approximately 5% compared to the first quarter of 2025. We continue to see healthy demand for homes in Puerto Rico. Mortgage balances at Banco Popular increased modestly during the quarter. Momentum in the construction sector continues to be solid with public and private investment fueling higher employment and strong liquidity. We're optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds.

On the private side, real estate and tourism development projects and the renewed focus on reshoring to Puerto Rico by global manufacturing companies should continue to support economic growth on the island. The Tourism and Hospitality sector continues to be an important contributor to the Puerto Rico economy. Year-to-date through February, hotel occupancy increased to 83%, up from 76% in the same period last year. Over the same period, RevPAR increased 6%. Hotel demand averaged roughly 400,000 room nights, representing 10% growth versus the same month in 2025.

Passenger traffic at Luis Muñoz Marín International Airport was down 2% in the first quarter after a record year in 2025. JetBlue also announced an expansion of its San Juan Hub with 5 new nonstop domestic routes beginning in the spring of 2026. Cruise activity has also been a meaningful tailwind after record cruise arrivals in 2025, arrivals accelerated sharply in the first 2 months of 2026 with year-to-date arrivals through February up 40% year-over-year. In addition, the Puerto Rico Tourism Company announced a strategic partnership with Royal Caribbean, beginning in July of this year that would establish San Juan as the cruise lines home port.

Moving to our strategic framework. We continue to advance our 3 objectives, a growing number of initiatives are gaining traction simultaneously and the pace of execution is accelerating. One of our objectives is to be the #1 bank for our customers, by delivering exceptional service and products. A key part of that is making it easier for customers to engage with Popular through our digital channels. We recently launched an integrated marketplace within our digital app Mi Banco, one of Puerto Rico's most widely used mobile apps.

The platform gives our retail customers access to exclusive offers, discounts and benefits from a wide variety of merchants while enabling businesses, many of them small and medium-sized to reach a high volume of potential customers. This allows us to create meaningful connections between our retail and commercial customers and strengthens the value of banking with Popular.

We also launched 2 new corporate credit cards designed to facilitate payments and optimize cash flow. Both have gained traction and driven purchase volume. In addition to our core, retail and commercial efforts, we are advancing targeted segment strategies to improve service, enable more personal relationship-based engagement and position Popular as the primary bank earlier in our relationship with our customers. A recent example is our newly launched program designed to meet the unique financial needs of doctors, dentists and veterinarians. The momentum behind these initiatives reflects the energy and focus of our teams. We are encouraged to see that execution translating into stronger results, and we expect the benefits to become more visible over time.

And with that, I turn the call over to Jorge for more details on our financial results.

Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $12 million to $246 million, and our EPS improved by $0.25 to $3.78. Compared to adjusted net income in the fourth quarter, which excluded a partial reversal of the FDIC special assessment reserve, net income increased by $22 million. These results were driven by better NII, higher NIM and lower expenses partly offset by a slightly higher provision for credit losses. Our objective is to deliver sustainable financial results, and we are pleased to have generated a 15.5% ROTCE for the period. We will continue to use all levers to position the company as a top-performing bank when compared to our mainland peers.

Please turn to Slide 7. Net interest income of $670 million increased by approximately $13 million, driven by fixed rate asset repricing and a higher balance of investments due to higher deposit balances and lower deposit costs at both banks. Net interest margin expanded 5 basis points to 3.66% on a GAAP basis. On a taxable equivalent basis, the margin improved by 11 basis points to 4.14%, driven primarily by lower interest expense, including a meaningful reduction in the cost of Puerto Rico public deposits. Ending loan balances were essentially flat at $39.3 billion, down about $38 million from the fourth quarter, driven primarily by lower balances at Popular Bank due to paydowns in the construction segment and runoff from the exited residential mortgage business.

At BPPR, modest growth in the mortgage and commercial segments were somewhat offset by weaker trends in auto lending. Given the slower demand in the consumer and auto segments, we expect consolidated loan growth in 2026 to be at the low end of our original 3% to 4% range. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $1.9 billion of treasury notes with a duration of 2.6 years at an average yield of around 3.7%, taking advantage of a modestly steeper curve. Deposit balances ended the quarter at $67.6 billion, $1.4 billion higher than the fourth quarter. Retail and commercial deposits increased by $1.2 billion, driven by tax refund activity.

On an average basis, total deposits increased by $1.1 billion or by $384 million when excluding Puerto Rico public deposits. Puerto Rico public deposits increased by $250 million to end the quarter at $19.7 billion. We continue to expect public deposits to be in the range of $18 billion to $20 billion for the year. Total deposit costs decreased by 12 basis points quarter-over-quarter to 1.56%, with improvement in both of our banks. Excluding Puerto Rico public deposits, total deposit costs decreased by 5 basis points to 1.09%.

At BPPR, deposit cost decreased by 11 basis points mostly as a result of Puerto Rico public deposits repricing lower by 31 basis points due to lower short-term rates. At Popular Bank, the 16 basis point reduction in deposit costs was primarily related to lower online savings deposit costs and repricing of time deposits. Given positive deposit trends in Puerto Rico, we now expect 2026 net interest income growth at the upper end of our 5% to 7% guidance range.

Please turn to Slide 8. Noninterest income was $166 million, in line with Q4 and at the high end of our quarterly guidance, with solid performance across most of our fee-generating segments. Compared to the first quarter of 2025, noninterest income improved by 9%, driven by growth in debit and credit card fees of 14% and 6%, respectively, as well as 13% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We continue to expect quarterly noninterest income to be in the range of $160 million to $165 million.

Please turn to Slide 9. Total operating expenses were $467 million, a decrease of $6 million when compared to Q4. Excluding the FDIC reversal in Q4, operating expenses decreased by $22 million. The decrease was primarily driven by lower personnel costs, as the fourth quarter included a profit-sharing accrual of approximately $13 million, along with the impact of fewer calendar days in the first quarter. This quarter also benefited from lower employee healthcare-related costs.

We also saw lower seasonal business promotion expenses and lower professional fees, partly offset by higher technology and software expenses, reflecting our continued investment in technology and transformation initiatives. We expect full year expenses to increase by 2% to 3% compared to our original guidance of 3%. We will continue to prioritize investments in our people and technology and continue to target expense efficiencies. Our effective tax rate in the first quarter was 16%, unchanged from the fourth quarter. We now expect the effective tax rate for the year to be at the low end of our original 15% to 17% guidance range due to higher projected expense income.

Please turn to Slide 10. Tangible book value per share at the end of the quarter was $84.98, an increase of $2.33 per share driven by our net income and offset in part by our capital return activity. During the quarter, we repurchased approximately $155 million in common stock. We ended the quarter with $126 million remaining under our active repurchase authorization, which we expect to exhaust during the second quarter. As we have said in the past, we seek to maintain an active repurchase authorization in place and we are targeting an update on capital actions before the second quarter's earnings call. In addition to common stock repurchases, we also expect to continue evaluating capital optimization alternatives and pursue a dividend increase during the year. Of course, our plans are subject to market conditions, regulatory considerations and any required Board approvals.

With that, I turn the call over to Lidio.

Thank you, Jorge and good morning to all. Credit quality metrics remained stable during the first quarter with lower early delinquency, NPLs and inflows and higher net charge-offs. Despite the uncertain economic environment, our consumers' businesses remain resilient. We continuously monitor our portfolios for signs of stress where our data remain consistent with normal seasonal behavior and no deterioration.

Turning to Slide #11. Nonperforming assets and loans decreased by $37 million and $40 million, respectively, mainly due to Banco Popular de Puerto Rico. NPLs in BPPR decreased by $39 million. This was driven by reductions in the commercial portfolio due to an $11 million charge-off related to a commercial real estate facility classified as NPL in the third quarter of 2025 and consumer due to lower auto NPLs driven by increased payment activity. In the U.S., NPLs decreased by $2 million. Inflows of NPLs decreased by $7 million, with an improvement of $5 million in the U.S. and $2 million in BPPR. The ratio of NPLs to total loans held in portfolio was 1.17% compared to 1.27% in the previous quarter.

Turning to Slide #12. Net charge-offs amounted to $60 million or annualized 61 basis points compared to $50 million or 51 basis points in the prior quarter. Last quarter results included $5 million in recoveries from the sales of previously charged-off auto loans and credit cards. Excluding this, the net charge ratio for the fourth quarter was 57 basis points. Net charge-off in BPPR increased by $10 million, driven by the $11 million commercial net charge-off mentioned previously. Based on current trends and macroeconomic outlook, we reiterate our 2026 annual net charge-off guidance of 55 to 70 basis points.

The allowance for credit losses increased by $16 million to $824 million. The change was mostly in BPPR which had higher results in the commercial portfolio due to loan modifications and additional specific reserves from a single borrower in the telecommunication industry. Additionally, the ACL for the mortgage portfolio increased slightly due to changes in the macroeconomic scenarios. These increases were offset in part by a reduction in the ACL for consumer loans, mainly in the auto portfolio, reflecting improvements in credit quality. In the U.S., the ACL increased by $1.4 million from the previous quarter. The coverage ratio of the ACL to loans held in portfolio was 2.10% compared to 2.05% in the previous quarter, while the ratio of the ACL to NPLs held in portfolio increased to 180% from 162%.

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

Thank you, Lidio and Jorge, for your updates. We're happy with our strong first quarter results. We grew net interest income, expanded our margin and reduced operating expenses, all while continuing to invest in the franchise and advance our strategic priorities. While we are very pleased with the quarter, we remain focused on execution, growing deposits, originating loans and maintaining strong expense discipline. We are confident that the sustained execution of our strategy will advance our ultimate goal to be a top-performing bank with excellent talent, delivering sustainable profitable growth and long-term value to our shareholders.

On a more personal note, this past February marked a milestone for Popular. We brought together our 9,200 employees for the first time in over 20 years. And I have to say it was awesome. The event reminded each one of us, what it means to be part of Popular and connected us with our history. The excitement was palpable, and it was simply an unforgettable day. On behalf of my colleagues, I thank our clients and shareholders for their continued trust and support. We are very proud to be the leader in the Puerto Rico market. We're ready to answer your questions.

[Operator Instructions] And our first question comes from Jared Shaw of Barclays.

Maybe just starting with the great growth on the deposit side, how should we think about average in end of period deposits sort of over the next few quarters as some of the tax refunds maybe get spent?

Yes. So traditionally, we do see increases in ending deposits in the first quarter. This quarter, we saw also increases in average deposits that we're bringing in to strength from the fourth quarter results. Historically, in the second quarter, we would also expect ending balances to trend lower, but average balances higher after tax season overlaps the March and April and people kind of spend that money through the quarter. And then as you know, the third quarter is where we actually see ending balances coming down and then in the fourth quarter, we tend to see ending balances come back up historically.

So our guide increased towards the higher end of the guide because we are expecting more retention of those deposit balances. Our teams are very much focused not only retention but also in deposit growth. And so we -- while we would expect ending balances to perhaps come down from these levels, we do not expect them to see a runoff as we saw like in 2024, for example.

Okay. So I mean overall, though, I mean, you're still feeling like average account size is stabilized at a higher level and sort of like the magnitude of what, like you said in the past may not be as severe?

Yes. So I think we saw the peak in 2022, those averages are like 40% higher. Those have come down to like the third -- low 30s, 30%, 32% and has been stable for the last couple of years. We are bringing in new clients that's resulting in higher balances. We're seeing strength across not only the retail, but commercial, we see strength in our small and middle market clients. Our corporate clients also have a lot of liquidity, but they tend to be managing their treasury excess cash a little bit better. So overall, we've been very happy with the trends.

Okay. And then in the past, you've talked about looking for potential acquisitions in the mainlands that match up with your geographic focus. Any update on your thoughts there? And if you're not able to find something that fits, would we -- could we expect maybe more of an organic de novo expansion utilizing some of your capital?

I'm Javier, I'll go for the first one. No change in our outlook on M&A. Our primary focus continues to be our transformation efforts and growing profitability of the institution. You want to take the second one?

And Jorge, do you want to take the second one?

In terms of de novo growth strategy, I mean, it's tough to compete in the U.S. markets in retail, which is what normally you would see with de novos. We have been successful in expanding some of our national businesses through either team acquisition or team hires and maybe that's an opportunity. It's not unusual for banks our size to be looking at that, leveraging those niche businesses. But I think at this stage, we have opportunity to improve profitability in our U.S. operations organically, but not necessarily through investing in a big branch de novo expansion.

And in Puerto Rico, frankly, I mean we are the strongest in the market given our branch footprint. It's a differentiating factor for us, continues to be. In the United States, as Jorge was saying, our strategy is more commercial led. So I mean it's going to be difficult to actually expand in any major way our footprint in terms of branches. So that's where we're at.

Okay. And if I could just ask one final one. Just have you been seeing any spread compression on the loan portfolio or on new loans and where were you putting on new loans in the quarter?

If you look at the levels and yields, we continue to be successful in expanding and are keeping our loans yields fairly flat even with rates coming down. So we have not seen that broad-based. I mean we talked in the last call how competition, particularly in Puerto Rico and auto. And you've seen kind of with the trends in that portfolio that we could see it potentially maybe more competition in pricing. But so far, we've tried to get our teams to focus, particularly in the U.S. business, where we see maybe particularly the beginning of the year, more competitive pricing. We've tried to push our teams to be smart and provide profitable loan growth, not just loan growth and focus on relationship banking, making sure that those relationships are coming in with deposits. So that gives us kind of a fresh start on making sure that we're not chasing irrational pricing on loans.

And our next question comes from Brett Rabatin of StoneX Group.

Wanted to start on the NII guide. And it was great to see the first quarter higher NII than expected, lower expenses. Just thinking about the high end of the guide, with the slight growth in balance sheet would kind of imply the margin is fairly flattish, but you still have securities that are maturing. Any thoughts on -- I know you don't like to give margin guidance, but any thoughts on the margin? And then just as you see it, maybe the opportunities relative to NII growth from here?

We do expect the margin to grow by the end of the year. We had a nice expansion in the first quarter, driven a lot by the repricing of the public deposits. We don't expect that level of repricing to occur. That's going to be dependent on what happens to short-term rates. And certainly, the prices that lag. So I think I would expect the expansion of the margin to be slower in the second quarter, but then continue to expand as we drive to that higher NII guidance. So as you said, we do have the tailwinds of the fixed rate investment portfolio to continue to reprice. So that hasn't changed.

Okay. And if the Fed doesn't cut interest rates, would that put you above the higher end of the range on NII?

Our current guidance assumes no further cuts in 2026. For us, I'd love to see the steepening of the curve, but margin really depends on the mix of deposits, we are heavier on public deposits that will have an impact on that margin. Really, the NII guidance is kind of how we see it for now. Deposit balances will -- as we said, and the deposit costs are really kind of the drivers of that spread and being able to get above the -- our current guidance.

Okay. That's helpful, Jorge. And then the other question I had was just around capital and 15.9% CET1. It sounds like you're going to give a lot more color in 2Q. And I think it's great that you guys have kind of acknowledged that investors have wanted to see the capital base deployed. Any color that you can give us just around your thoughts on end of your capital ratios or targets or anything that as you're working through this, if you could share with us on your progress there?

We want them to be lower than they are now, unless we make a lot of money and not. But no, I mean, we really -- we are committed. We obviously have said in the past that we want this to be -- we want to do it in kind of over time in a controlled manner, but we certainly are committed to doing that. We're trying to be more intentful in our language and how we communicate about this. And we are committed to executing.

And our next question comes from Timur Braziler of UBS.

Going back to the profitability comment. 2 straight quarters now above that 14% objective. I guess, Javier I was a little surprised to kind of hear you reiterate that comment on remaining focused on reaching that 14% through the cycle objective. Are we not there yet? And I guess that phrase through the cycle, like how far out are we looking in terms of that level of sustainability?

Thank you for your question. I think that -- I mean 2 quarters, 2 great back-to-back roughly quarters, a trend doesn't necessarily make. So I mean, we like that to continue obviously. And I think that through the cycle comment refers to a period when, of course, we were seeing stress -- major stress in the economy. And so that we actually demonstrate that facing the sort of more sort of headwinds we deliver on profitability targets. So that's how we're thinking about it. Again, I think the teams are doing great, but we don't want to -- remember that we also use the concept of sustainability. It needs to be sustainable. So that will take a little bit longer for us to claim victory. And of course, once we get there, we're not stopping there. And that's important. I mean, remember that we used the 14% when we launched a little bit over 3 years ago, our transformation program. So again, very happy with the mindset and shift and what we're producing for shareholders, but we're not there yet.

Got it. Okay. That's good color. I appreciate that. Maybe sticking on the capital question. Any kind of color you can provide on just Basel III proposals, what type of impact that might have on your capital?

Yes. So as you know first, we're not subject to the category 4 with AOCI. So we're small enough that, that doesn't impact us. We've done the preliminary review, Timur. And basically, we're -- our estimates are consistent with what the Fed guidance is that will be the impact for smaller banks. Obviously, the end result will depend on our balance sheet when that goes into place and whatever the final rules have. But right now, it's consistent with the estimates. And that's a reduction in risk-weighted assets, basically.

Yes. Okay. And then just one more for me. I appreciate the full year guide on public funds. Just wondering, second quarter specifically, if there's any reason why we shouldn't be penciling in kind of a historical type run rate for the planned increase in public funds in 2Q?

I mean I don't want to speculate. I mean, as you know, it's over 200 different clients, thousands of accounts. We talk to our clients, our relationship officers talk to our clients. We have some visibility, but some of these are big numbers that move around. So we're going to stick to the $18 billion to $20 billion range.

Okay. And then sorry, I just want to make sure I'm understanding the Basel III impact. I think it was around 7% was the Fed guidance. Is that kind of what you're alluding to in terms of impact on RWA?

That is correct.

And our next question comes from Arren Cyganovich of Truist.

Just want to hear your views on onshoring manufacturing in Puerto Rico. Obviously, last year, there were a lot of large announced investments. I haven't really seen any kind of new wins yet this year. Anything that you're hearing in terms of new potential investments? And have you seen any actual benefits yet from the ones that were announced last year?

You're right, there hasn't been any new public announcements by the government, so we don't want to get in front of them. But they continue working through the grapevine. They continue working on more entities coming in. There's 2 more entities that we've heard about. So -- but again, looking at what's happening in the world, it's totally rational to believe that the momentum in continued investment, be it in big operations that are already located in Puerto Rico or new entities coming into Puerto Rico not only from United States but also from Canada and the Far East and Europe even should continue.

So we are, again, expecting announcements from Puerto Rico government on it. But we don't want to get in front of rumors, but -- so far, all the rumors we've heard before, the actual announcement from last year, the Eli Lillys, the Amgens of the world panned out. So we have our fingers crossed that the momentum will continue on reshoring for Puerto Rico. And as you know, manufacturing represents approximately 44% of our GDP. So it's an important contributor to our economy, not only direct jobs, but also indirect jobs, most importantly.

Have any of the ones that were announced last year started to get produced yet or any movement there? Is it going to take some time?

Yes, it will take some time. We have seen some new ones coming in and opening accounts with us and purchasing property and stuff like that. So they're setting up, typically it's a process where once they announced -- the government announced that means that they've got into an agreement with the companies and then the companies after that, start opening bank accounts, investing in real estate, getting third-party service providers coming in and doing the work. So we've seen some of that. So it has started. But as we've always said, it's going to take 3 to 5 years to actually get the actual numbers and the impact.

And the largest announcements are expansions of facilities so they will require some significant construction investment and time. So we will first see that impact on the construction side.

Great. And then lastly, just, Lidio, you had mentioned some loan modifications in commercial. Are these anything new abnormal increases, decreases? Just curious if you could give us a little color on that.

I mean nothing that I would characterize as being affecting the broader portfolio, just one-offs. Some clients are having some financial difficulty and we executed some loan modification, but nothing that impacts the whole portfolio.

And our next question comes from Kelly Motta of KBW.

Maybe to kick it off on expenses. I see -- I think you were very well controlled in the first quarter and the guidance range is brought down a bit. Just wondering if you can opine upon the drivers of that variance. I know there's some transformation efforts in play, wondering if some of those investments have been kicked out another year or 2.

Thank you, Kelly. I mean there's always part of projects that maybe are slow to start. I wouldn't say that anything has been canceled or that is resulting in that reduction. But we are seeing -- we did benefit from a handful of things, better negotiations, some adjustments to expected expenditures that were lower in the first quarter, we reduced some excess accruals from the incentive payouts for profit sharing from last year. So those are all the things that you see the benefit in the first quarter, and that benefit will sustain for the year.

There's others that are timing differences and -- but we'll continue to invest in technology. We'll continue to invest in people. We will continue efficiency efforts. Our expense targets for the year already included around $50 million of efficiency efforts. We continue to improve upon some of those. So that's all part of our embedded guidance. So there's just a lot of things going on, but at no moment, are we like pulling back on our technology and transformation efforts. There are shifts. For example, we went live on our ERP in January. So there are shifts in how those costs translate in terms of expenses, the things maybe were being capitalized before, now they're being amortized. But overall, we are happy with the level of focus of our teams on cost control and in execution.

Got it. And just as a point of clarification, I guess. This guidance range doesn't include any of that excess profit sharing. So if you were to say, beat your NII outlook, that's the type of thing where those expenses would kick in. Is that the correct way to think through that cadence?

That is the correct way. I mean we love to be able to pay profit sharing. We believe that those programs are aligned with our shareholders. That means that we are performing better than expectations. And if you assume that our original guidance are based in part by our expectations and budgets, and our interest should be aligned. Our current guidance does not include any profit sharing expense. But remember last year, even with a near $40 million profit sharing expense, we were able to deliver on our original expense guidance and of course, we always want to challenge our teams to be able to do more and absorb any incremental expenses that were not part of our plan.

Got it. Maybe last question, if I can just slip it in on the size of the balance sheet. Cash money market investments have come down year-over-year. They were relatively flat about $4.8 billion, $4.9 billion-ish the past 2 quarters. Is that a good level on a go-forward basis? Or would you anticipate continued roll into securities and loans off that $4.85 billion level?

I think we've had that level for the last 2 or 3 quarters. We're comfortable with where we're at on that. We still have -- yes, I'll leave it at that.

And our next question comes from Gerard Cassidy of RBC.

If I recall my credit ratings correctly, and looking at your slide deck, you showed that S&P and Moody's have you on watch list with a positive implications. And it looks like you're a notch below investment grade by those 2 rating agencies. I know Fitch, I think, is an investment grade. Can you share with us when do you think they'll determine whether they're going to lift that credit rating? And can you also remind us what was the last time Popular rated investment grade by Moody's or S&P?

Well, I'd love to be able to guess the answer the first question, Gerard. What I would say is that we are focused on discussions with the rating agencies. We had an advocacy effort to make sure we continue to educate them and spending time, making sure that they are up to date and everything that's going on with Popular and Puerto Rico. But I cannot begin to guess. We believe that our ratings should be better, frankly. But -- and how long has it been? And my guess is probably go back to 2005, 2006 before the financial crisis.

It's an insightful question. I think that if you -- we have sort of retaken the efforts to meet with S&P and Moody's and visit with them and sort of suggesting. If you look at the purely numerical thresholds for us to be considered investment grade. I mean, we were there. But there are other things that may come into their consideration of us as Puerto Rico's largest financial institution as they see Puerto Rico and so -- but I think, again, if you only -- if you were to look at us as a peer banks, given our performance, we would definitely be investment-grade rated.

But we'll take our positive outlook. We'll take that as momentum.

Yes. I agree. I agree. As a follow-up question, I know you guys talked about the price of oil. You haven't seen any significant signs of economic stress at these elevated price levels. Can you share with us a couple of things? Do you recall in the first quarter of 2022, when Russia invaded Ukraine, obviously, the price of oil shot up. What kind of impact did that have on credit quality back then?

And then second, if oil stays elevated at $125 a barrel, let's say, throughout the year, it would appear to weigh on the -- not only the Puerto Rican economy, but the U.S. economy as well. And what do you think that could do to credit quality? And then lastly, can you also remind us, I know the island is very dependent upon oil for its energy but I thought the island was moving to other alternative sources, maybe, natural gas, LNG, if you can update us on anything if I remember that correctly.

I would say, Gerard, this is Lidio. I will say that the answer to that is going to depend on the length where the price of oil stays at this level. I mean, similar to the -- in 2022, I mean, the situation was -- or the increase in oil prices was short-lived and that had very minimal impact in terms of the delinquencies and the credit quality of our portfolio. So for us, I think the key is and the key and the impact for Puerto Rico and our portfolio is going to be the length of time in which we have elevated oil prices in the island. As we noted in our prepared remarks, we are very comfortable with our portfolios. We have seen no deterioration in the credit quality. We're seeing normal seasonal patterns. And actually, our delinquencies are better than the last quarter, obviously, and much better than this time last year. So we're very, very pleased with our portfolios.

The premise -- Gerard, the premise of your question is spot on. I mean we're no different than financial institutions in the United States. If the conflict continues for a long time and oil doesn't come down, as you know, we're dependent on that to create generate electricity in Puerto Rico. There's been growth in other sources of energy for Puerto Rico, but I don't think we're going to be able to switch quick enough not to have higher oil prices for longer impact us and our customers. So far, we haven't seen it. I think the second quarter will be -- will tell the tale more accurately if, in fact, the conflict continues and the price continues to go up or stay higher for longer.

Very good. And Lidio, can I just circle back on your comment about delinquencies. Is it as simple as the health of the economy being as good as it is? You guys mentioned the unemployment rate is near record lows. Is it that straightforward that the health of the economy is the underlying factor why the delinquencies and credit are as strong as they are in the consumer books?

It's always a combination of factors. But certainly, I mean, the driver for the performance of consumer books is employment. In addition to that, as alluded by Jorge in his remarks, you also have them in the first quarter, refund activity in Puerto Rico, we have given -- based on data provided by the local IRS. They have returned -- refund to customers around $2.2 billion, which is slightly up ahead of the pace of last year, about $300 million ahead of the pace of last year. That's obviously impacted the liquidity of consumers in Puerto Rico and their ability to pay their loans.

[Operator Instructions] And our next question comes from Manuel Navas at Piper Sandler.

I think this builds off a little bit of the last commentary. But you added reserves on the commercial NPL from the third quarter. But most other loan buckets had lower reserves, especially with the auto and consumer, especially with delinquencies down, could there be some upside in provisioning from here? Reserves coming down? Or what do you -- how do you feel the progression should come -- go forward from here in credit costs?

Mean I like your thoughts. But I mean, I agree with you. I mean we had very strong performance from our consumer books, and that led to like the release of reserves, particularly in the auto portfolio. We have done a lot over the last few years in order to improve the performance. So it is not by chance, it's also by the work that we have done in the commercial book, as we have said in the past, this is mostly corporate book. So every now and then, we have a situation or one-off clients that we may need to reserve for.

We haven't seen anything that indicate that we have broad-based issues with our portfolios. We have dealt as we mentioned that in the third quarter of last year and to some extent in the first quarter of this year with 2 particular case, one related to commercial real estate in the U.S. and one related to telecom company in Puerto Rico. But we think if the economy stays where we are and that includes this level that there might be an opportunity in the quarters ahead. So we'll see.

And that opportunity could show up in a couple of different places. And I'm going to probably ask a question that has already been asked a couple of times is, do you anticipate the buyback accelerates?

I mean we'll be consistent. We'll come back to you and as to the levels, we'll be consistent in trying to bring down the level of capital. But frankly, I mean, we're looking at it over a multi-quarter period to try to get to levels -- target levels that make sense. And I'm not sure that any given quarter, any provision really changes in our projected provision or where we're at is going to make a difference in our repurchase strategy on it.

Understandable. Is the update that we're expecting at some point this quarter, would it include business line changes, anything beyond just an update on a reauthorization of shares?

We're talking about just our traditional kind of update on kind of authorization from our Board and perhaps dividend increases, et cetera.

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating, and you may now disconnect.

[Audio Gap] with our next fireside chat, Popular Inc., a company that has about $75 billion in total assets, market cap is around $8.5 billion. And we're very pleased and privileged to have Javier Ferrer, the President and CEO of Popular. He was President of Popular from, I guess, May of '24, and Chief Operating Officer from January '22 to June '25. He's been a Director at Popular or Popular Puerto Rico since 2015. So Javier, thank you so much for coming and most importantly, bringing the warm weather especially after this winter.

Well, thank you for having us. It's a privilege and an honor...

Great. Though it's early in the year, maybe you could share with us how the Puerto Rican economy is shaping up for you? How Popular is positioned to benefit from this economic growth? And then also tie in, if you don't mind, how important is the health of the U.S. economy to the Puerto Rican economy?

Sure. Well, I think we're doing fine in Puerto Rico, quite frankly. There's momentum in the economy, which I believe has not slowed down. Of course, given what's happened in the Middle East, people are watching, and the economy follows human psychology. So if there's uncertainty, people will begin to worry a little bit, but we haven't seen it in the numbers yet, frankly. So it's like we're going through a good period, low unemployment, high people -- high number of people employed, even though we have less folks on island. The percentage of people working has -- the participation rate is higher now. It's still in the low 40% -- 44%, 45%, which is still low, but 5% more than it was a few years back.

It's a broad-based recovery, I want to say, construction very strong, hospitality very strong, manufacturing very strong. And there's -- there used to be a -- the Puerto Rican economy used to move alongside the U.S. economy, frankly, until 2006 where we lost 936, a big sort of tax benefit for U.S. companies and foreign companies operating in Puerto Rico. So we decoupled and we went south and the United States continued going north. Right now, I think it's sort of like recoupled, let's say. So whatever happens in the United States obviously impacts Puerto Rico, particularly in the East Coast where we find a lot of folks visiting, and again, in a hospitality industry that continues to grow and contribute to jobs and to a bottom line in the economy.

But so far, there's momentum. We're happy about it. And given our size and footprint in the market and the fact that we've only been there for 132 years, 133 this year in October, we are the main player. We're very honored to be so. We've earned that place. We work hard. We're almost everywhere. Our stores, our branches are almost everywhere in Puerto Rico. So we will benefit from Puerto Rico's growth. We're a very active participant. We collaborate in policy decisions. We have good relationship with the government and the Fiscal Oversight Board, who has been in Puerto Rico for 10 years now. So all good, all good.

Yes. Maybe you could share with us -- there's been a move since the pandemic for onshoring in America, and there's obviously some benefits potentially for Puerto Rico. Can you share with us just some color on what you guys might be seeing down there?

Yes. I mean so that started with a promise of it actually happening to seeing results. Absolutely, we -- as we like to say, we're on the right side of the fence, right? So last year -- the new governor came in about a year ago. The economic development team is young, but very -- but experienced within their years, are very active. And last year, we've got a big announcements of companies either expanding investment in operations in Puerto Rico and also their employment base and people coming in, new people coming in. So last year was over $2.6 billion in new investment announced, close to 5,000 direct jobs in the past. That has generated a multiplier effect.

So the early innings of the onshoring into Puerto Rico are proving also to be productive. And so we have a good relationship between our current governor and the White House, which is also something that we didn't have in the first Trump administration, quite frankly. So that's also benefited the island so far.

Yes. Maybe another interesting aspect of what's going on in Puerto Rico is that because of the tax issues that you referenced in '06 when the advantages went away and Puerto Rico struggled with the economy, the out-migration of the population because the jobs weren't there. But that has -- from the numbers we've seen, it's kind of leveling off. What do you hear from either family, friends, businesses? Just -- it seems like -- could we actually maybe see in-migration at some point?

That's another good question. Absolutely it's leveled off, to your point. Anecdotically, we don't have the best sort of data gathering for precisely what's happening today. It's really -- we need some time to go before we have 6 months or a year before we actually have good data, or a quarter. It depends on precisely that I was seeking, but it is. It's leveled off. Anecdotally, this is -- there is a bunch of talented young folks, and for me young is anybody from 15 to 60, frankly, 50-something, wanting to come back. And we see it in high-paying jobs. We see it in high-tech jobs, data, technology, analytics, cyber, fraud, all the areas that we need to -- AI, all the areas that the banks need to grow, right, to compete.

So we're seeing a lot of young people wanting to come back to Puerto Rico. And some have come back. We've been successful in getting good talent in. And other people also are getting good talent from the outside into Puerto Rico. What's the issue? The same as some parts in the United States, affordability. Housing is an issue in Puerto Rico, affordable housing. It's something that is going to take a little while to sort of get sorted out because you need to, obviously, a couple of years to build certain projects that are now either on the works permitted and starting. So that's an issue. That's an issue. It's expensive to get new homes in Puerto Rico.

So -- but it's a good trend. There's also -- the government is also trying to help with specific tax extension decrease for young professionals, substantially lowering their tax obligation, which is something that's very good. I don't qualify. I don't qualify, unfortunately, but I'm glad to see, again, young talent come back to Puerto Rico.

Yes. That's very, very good. Shifting to a different area. We hear a lot about the Basel III Endgame, and there's talk about we'll hopefully get a proposal coming up in the next 2 to 3 weeks. And that's -- obviously the very large banks are very focused on it. But share with us just the regulatory environment from your perspective when you look at your size bank and how it's evolved over the last 8 -- 5 to 10 years?

Yes. Well, we're -- the Basel III is still -- is not applicable to us yet. I mean we are very conscious of what's happening out there in the regulatory side of things. I think our mindset -- I'm going to try to be precise and not misleading anybody here with this one. I think we take the regulatory aspects of our industry very seriously. What I mean by that is, we understand the benefits of a flexy mode regulatory mindset, but that doesn't mean that that's going to drive our strategy or how we operate, or contrary, I'd say. I mean we will -- I mean we have had situations where we'd have to fix certain things across our years. So we understand the weight of doing things right. It's in our DNA to try to operate correctly and within regulatory constraints. It's a pendulum of sorts. We feel that it may come back, right? If there's a change in Washington, you do have state regulation, which is relevant. Our U.S. bank is chartered by New York DFS.

So again, it doesn't inform how we strategize, but it's the risk aspect of it. It's important to us. Our risk group is very strong. So we try to keep a abreast of developments. We are going to be intelligent in how we maximize any business decision to tailor changes that may be productive on the regulatory side, but we're going to be cognizant of the fact that, that may change. We need to do the right thing by our customers, right? So rational regulation is good for the industry and is good for us.

Yes. No, you want to keep that 132-year streak alive.

Absolutely. Absolutely.

Maybe we could talk about capital. You're one of the best capitalized banks in your class. I think the CET1 ratio is just around 15.7%. And certainly, banks your size on the mainland are comfortable around 10% when their CET requirements are 7%. And we know there's a mainland buffer that needs to be included in there. Can you share with us what's your comfort range on the CET1 ratio? And how -- if it's lower than where it is today, how do you get there?

Yes. That's -- yes. Well, when you're on a road trip with kids and the question that you hear the most and continue hearing it is, are we there yet? Are we there yet? Well, so that's the kind of like psychology you will get around this question, which is, by the way, a very rational and good question, and it's a question that our investors ask us on almost every meeting. So we recognize that we -- some people say we're 500 to 600 basis points above where we need to be. I think it has to do with the fact that we are a conservative bank. And this is not because we woke up one day and decided to be like this. I mean it's a compendium of experiences. It's what facing a lot of big-ticket items such as hurricanes and earthquakes and issues with the economy, a bankruptcy of the state, all those things get to a certain mindset, right? So we are conservative.

We think that we understand that we need to -- if we can use the capital constructively to generate more shareholder value, we need to give it back, and we've put out a good repurchase program, which we've told the Street and our investors is the last quarter, the fourth quarter we said it's going to be around $150 million a quarter. I mean, we still think that the shares are priced, there's value in the stock price. So we'll continue with the program.

The dividend for us is also important that we continue to increase the dividend as we continue to provide sustainable profitability in the business and we can demonstrate earnings growth. So -- I mean, I'm saying, yes, you're right, we ought to lower the amount of capital. We can also rationalize our capital stack. We're thinking about doing that. I mean I think there's Tier 1, and there's space to do some more additional Tier 1, move the common to some other sorts of capital. We're thinking about that, how to optimize the capital stack. I'd say that's top of mind as well. So we will -- this is a good question, again, that we grapple with and with our Board at all times. And we will continue to handle it as time progresses.

So we'll have to get a bunch of investors in the station wagon to say, "Are we [indiscernible]," right?

Yes. Yes. I mean it's a fair point. It's a fair point, and we're very -- it's top of mind for us. But we can't do it -- I mean if -- I mean -- so for us, it's organic growth, right, and transformation, investing in those 2. And then other people may say, well, you should deploy it in M&A. Well, we can talk about that, I'm sure.

Sure. Yes. The stock has done very well over the last 5- and 10-year time periods. And maybe you can share with us what do you guys focus on to crate shareholder value? And how do you guys kind of measure it aside from the stock price doing well?

Well, I think that we -- the most important thing for us is making sure that we're good stewards of capital, right? And that we're growing, that we have positive leverage in our businesses, that we continue to grow rationally, that we are -- with transformation, we sort of heightened the importance of profitability in all business lines because when you're so successful, people forget what got you there. So it's important for our teams to understand the meaning of profitability by product, by segment, by service, what does that mean? That all adds up, the importance of service, the importance of excellent omnichannel experience, really mean it and really deliver that.

Ultimately, ROTCE is the measure that we put out there, right? There are others, as you know, ROA, ROE is also stuff we look at, but ROTCE is the public measure that we're sort of putting out there and in many ways, educating everybody from the person that comes in for the first day to whoever is sitting in the chair, that's what I call the CEO position, the chair. I just happened to be sitting on it now. But it's -- what does that mean, and how -- the importance of sustainable profitability. The fact that if we do that well, it will benefit not only our shareholders but also our employees, the communities we serve through our foundations. We provide a lot of help and assistance to that sector through our Popular -- Banco Popular Foundation and here at the United States, the same thing. So -- but we need to be profitable. And it needs to be sustainable. It can't be up and down, up and down. So that's a challenge that we put out to the teams.

And last year, we had a great year. Hopefully, this year, I mean we feel good about this year notwithstanding all the noise that's in the world, it's a tough world, particularly in some areas more than others, obviously. So that's it. I mean it's bottom down profitability, sustainable profitability, making good decisions, defending our turf, pricing appropriately, good yields, defending good customers. That's it.

Circling back to -- you mentioned M&A. Over the years, you've done different types of acquisitions and a nice loan portfolio acquisition from Wells Fargo from in the auto. During the financial crisis, you were able to pick up some great assets from the FDIC. What's your view as you look forward for -- and it does sound to be just depositories, but what's out there? Or could you find whether it's a loan portfolio or some other type of assets?

Well, you just gave 2 examples of something that we'd be looking at in the proper context, right? And FDIC is a transaction that's rightly priced, clearly. I mean, we've done that before in Puerto Rico. We do it in States if it makes sense. It's going to be difficult in Puerto Rico. I'm not saying impossible, but it's going to be difficult in Puerto Rico given our size, but in a [ system ] transaction, you never know, right?

So -- and you also mentioned the auto business that we sort of consolidated out of Wells Fargo. That took a while. That was a fantastic transaction. It took a while to sort of gel. So assets, portfolio of assets outside of whole loan banks. We're always looking at niche businesses in the States, teams, the same thing that others are looking at. I think the differentiating factor is actually delivering on that promise. We'll continue to look at that. Whole bank deal is difficult for us, frankly, right now because we're so invested in transformation, in making the bank better because we frankly compete with a bunch of people of all sizes coming into Puerto Rico. Some people think there's not a whole lot of competition in Puerto Rico, Well, I have news for you. There is a bunch of competition in Puerto Rico, and we to learn it every day.

So I mean, I'd say that in the States, a whole loan bank deal would be difficult at this point. It needs to be an incredible opportunity that we will have to look at it, right? Obviously, if it creates -- it's accretive, if it strengthens our deposit franchise, if it's close to our -- where we operate nowadays, the culture for us is critical. We've seen a lot of deals -- I mean you are the dean of this space. So the culture for me is critical. I mean you can't fix -- you can't change people just through a merger, right? So you need to share some values that make sense. I've been in this -- in some conferences, where I look a couple of CEOs talking just announce a merge and go like -- I mean I wish them the best, but it ain't look like it's going to work, but -- so culture is important. And we'll see. We'll see. Never say never, but right now, that's not our focus.

Yes. One of the uniquenesses of your balance sheet, of course, is the deposits from the government. Maybe can you share with us just the deposit outlook and just how that -- because it's a large amount from the government and the benefits that you receive from them, but also the challenges, block of deposits.

So, it's a bit of one. That block of deposits, obviously, it's a great relationship. We look at it more holistically, right? The deposits are a part of it. It's an important part, right? But you're talking about like 2,000 different accounts. So it's a whole -- so people know when the Puerto Rico government went under and filed for, I'd say, bankruptcy, although that's not the way it happened, but effectively that's what happened. There used to be an entity called the Puerto Rico Government Development Bank, which was a central bank for the island, and we essentially took the risk. And this -- and we could write a book about this, but I'm not going to bore people with details. But that actually is a very fascinating story how we became essentially the bank for the Government of Puerto Rico. So what I mean by that is, and this for us is an honor and it's something that we take very seriously. It's not only the deposit side, it's also the credit side and the services side. It's a relationship that we've had for a long, long time.

The pricing has to do with an agreement that we signed a long time ago. It comes and goes in terms of benefiting. We still make money on it. I mean it's a great relationship. So when will it -- I mean we have been very bad at projecting when it will come down in terms of the amount. I mean it $18 billion right now, $20 billion right now, $20 billion, $18 billion to $20 billion. They constantly bring new pieces to market and we bid for them. We also put together a tech system to be able to service those amounts. And it's a complex relationship. I mean -- so it's not one client, it's, again, over 2,000 accounts. And we've done very well. And I think the government also is getting a fair return on their cash, frankly.

Yes. Is there a -- can you estimate what a normalized level would be? Or is this the new normal that is going to be in the high teens, $20 billion?

As I said, we've been terrible at projecting that, as you know. I don't know. I think it will depend on stuff like what happens with the PREPA Bankruptcy, with the Power Authority bankruptcy. There's some who say that, in the past, the central government and the Fiscal Oversight Board would have never thought of using funds from the central government to pay the contributing to the resolution of your bankruptcy. What we hear is that, that view has changed. I don't think that that's going to necessarily materially alter the amount of money that's going to be leaving the bank. So it will depend on how quickly some of the money is used for reconstruction. There's like $17 billion, $16 billion, $17 billion, which is not all with us for the reconstruction of the power grid. Some of that is with us.

So I think it's going to take some time, quite frankly, for the money to leave. But when, to what level, we've been almost -- it's impossible to predict, quite frankly.

You mentioned the bankruptcy of PREPA. Any updates? I mean I know that's another...

This is the year. That's the update. This is the year. I mean every year, we get off the holidays in Puerto Rico, which, as you know, are fantastic with the promise that this is the year where PREPA gets resolved. Now this year, the drums are beating louder on that promise. We don't know if it's going to happen, but we get the sense that it may happen this year. I mean I think the different parties are making some noises to that effect. I think it's a highly complex situation. Obviously, bondholders want to get paid. That's okay. Puerto Rico needs to determine what it can pay and the Board is in the middle trying to ascertain what that is.

So it needs to be an amount that makes sense for Puerto Rico and Puerto Ricans and the economy because you don't want to kill the economy to then be a bondholder that has -- whether it be -- whoever cuts the deal and holds the bonds on day 1 or buys the debt, right, they don't want to be in the same position again anytime soon. So it needs to make sense. You need to have something that's sustainable. That's going to be the big challenge. And that's why we haven't had a deal. But again, the noise is in the halls of the Puerto Rico government and elsewhere that this is the year. So we'll see.

Good that I put that last chapter behind.

Absolutely. And psychologically, to your point, it'd be fantastic even if it's imperfect. It gets -- it attacks the problem and you can build on it, right, and continue iterating to make it better. But I think it would be a great thing because you can then say we're out of bankruptcy fully. So if anybody has any issues coming in, investors, whatever. And it also would provide a framework of what it will mean to operate in Puerto Rico going forward and also for our businesses and our people.

Yes, absolutely. You touched on 2026. Any thoughts about how the quarter is progressing for the first quarter of '26? Any color you'd like to add to that?

I mean, I'd love to answer that question, but I'm a corporate securities lawyer, so I don't want to be the first one to sort of issue any...

You just whisper into my ear...

I'd say that, I mean, we're happy with where Puerto Rico is at today. We can always do better. We need to do better, and in the bank, the same thing. We expect a good year this year. We expect a good year, not only on loan growth, even though we've tempered the projections, as you know, a little bit less than the prior 3 to 4 years, but we still think there's going to be growth in Puerto Rico. Credit feels okay, frankly. We think credit is going to be fine, bearing again, factors such as the ongoing conflict in the Middle East and others. I think Venezuela has been a good thing for Puerto Rico given the military investment in the -- U.S. military investment in Puerto Rico. It may be tactical, may not be for a long time. God knows what happens to Cuba. If something happens to Cuba, we will be in the mix, maybe not at the beginning, but it's more rational to have Puerto Rico partnering on a Cuba project than in Venezuela, quite frankly. So that's something that we're looking at very intently to see what's going to happen there.

So no, I think -- I mean, again, we expect a good year. And we expect to build on our recent success to continue delivering shareholder value and good profitability as you've told us and taught us. So absolutely. I mean we're good students. We're going to try to be good students.

That's great. And coming back to credit, obviously, it's benign. It's about everywhere, your's as well. Is there any particular areas that you always keep an extra eye on just because a slip up in the economy could lead to some deterioration, whether it's construction lending or some other type of lending?

Well, right now, we feel very comfortable with the construction of our portfolio frankly, not only the commercial, but also the individual. I think that initially, we're looking at this energy -- the energy prices, it may impact small businesses and that may spill over on to retail. It's too early to tell, frankly. We haven't seen anything yet, but nothing in particular. In the past, there's been a lot of banks burnt on commercial -- I mean on construction, to your point. I mean we feel there's no specific area where we feel that we are overexposed or that we have high FICO originations in our retail book. So you always need to be vigilant to credit and the impact to your assets. But right now, we feel we're in a good place. And again, we'll remain vigilant.

Got it. We're running out of time. So maybe the last question. What's the one core message you'd like about Popular's feature you want investors to take away from this conversation?

Well, I think that investors ought to realize that we're walking our talk, that we have very strong in Puerto Rico, that our presence is, we've been there for a long, long time. We know Puerto Rico. And we have a good operation in United States, investments outside in the Virgin Islands and passive investment in the Dominican Republic. But ultimately, our fortress is Puerto Rico. And that's not going to change, hopefully. We have to defend it every day, as I said before. And our people know that. We have great people doing it every day. So that's it. I mean, you can count on us. Top of mind for us through a transformation initiative is profitability, needs to be sustainable. When we get to 14%, we're not going to stop at 14%. And we're changing the way where everybody is looking at their jobs top to bottom in the institution. It's all about delivering value. It's all about delivering value.

So I would want people to take a look at us. We have an -- I think we're doing fine. We can do better. We have to do better. Competition is not going to get any smoother. It's going to be tougher. And we have an obligation, a deep obligation to the people of Puerto Rico. We've been there through thick and thin. We believe in the future of Puerto Rico, and also servicing other communities where we have operations outside Puerto Rico. But we're here for the long term. We're not going to do anything dumb, hopefully, anytime soon. So that's it. And again, I really appreciate the invite being here with you. It's an honor. So far, we've had great meetings with our investors, and we have more in the afternoon. And it's an interesting operation, Popular's. Great heart.

Absolutely. Javier, thank you so much. Really appreciate it. Join me in a round of applause thanking him.

Thank you. Thank you.

Hello, everybody, and welcome to the Popular, Inc. Fourth Quarter 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Paul Cardillo, please go ahead.

Good morning, and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge Garcia; and our CRO, Lidio Soriano. They will review our results for the full year and fourth 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 during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses taxes and capital as well as statements regarding Popular's plans and objectives. These statements 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 release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I will now turn the call over to our President and CEO, Javier Ferrer.

Thank you, Paul, and good morning, everyone. Please turn to Slide 4. In 2025, we delivered results that reflect the strength of our franchise and the continued stability of the Puerto Rico economy. Our annual net income of $833 million increased by $219 million or 36% compared to 2024. Our strong fourth quarter loan growth helped bring our total growth for the year to $2.2 billion, an increase of 6%.

Banco Popular generated loan growth across most business segments, led by commercial loans. Popular Bank achieved growth in commercial and construction loans.

Credit quality generally remained stable throughout 2025, aside from a couple of isolated commercial credit relationships in the third quarter. For the year, net charge-offs decreased by 16 basis points to 52 basis points.

Our capital levels are strong, ending the year with a common equity Tier 1 ratio of 15.7%. Our tangible book value per share of $82.65 increased by 21% year-over-year, primarily due to lower unrealized losses on investment securities and net income for the year, offset in part by dividends and our share repurchase activity. We repurchased approximately $500 million in common stock during 2025.

Since resuming buybacks in the third quarter of 2024 we have repurchased approximately $720 million worth of common stock. We continue to believe that our shares are attractive at current prices.

Additionally, in the fourth quarter, we increased our quarterly common stock dividend by $0.05 to $0.75 per share. Please turn to Slide 5, where we share highlights that reflect our strong operating performance in the fourth quarter.

We reported net income of $234 million and EPS of $3.53, an increase of $23 million and $0.38 per share, respectively. Our results were driven by higher net interest income and expanding net interest margin, strong loan growth and importantly, lower operating expenses.

Our credit metrics were stable in the quarter with lower NPLs and net charge-offs. We are very pleased to have exceeded a 14% ROTCE for the quarter and a 13% ROTCE for the full year. We demonstrated significant progress in our efforts to improve our sustainable returns towards our 14% objective. Please turn to Slide 6.

As of the end of the fourth quarter, business activity in Puerto Rico continued to be solid as reflected by favorable trends in total employment, consumer spending, construction, tourism and other key economic data.

The unemployment rate of 5.7% remained stable near all-time lows. Consumer spending remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 5% compared to the fourth quarter of 2024.

We also continue to see healthy demand for homes in Puerto Rico. Mortgage balances at Banco Popular increased by $115 million during the quarter.

The construction sector continues to show positive momentum with public and private investment fueling higher employment levels and driving cement sales to the highest level since 2021.

We are optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds publicly announced real estate and tourism development projects and the renewed focus on reshoring by global manufacturing companies.

The tourism and hospitality sector continues to be a source of strength for the local economy. In 2025, airport passenger traffic reached a record of 13.6 million, increasing by 3% compared to 2024. During the fourth quarter, passenger traffic remained stable at around 3 million passengers. And according to Discover Puerto Rico, in the fourth quarter, hotel demand reached nearly 350,000 room nights, marking 11% year-over-year growth and driving a 4% increase in total revenue.

We are executing on our strategic framework to be the #1 bank for our customers by strengthening relationships and providing exceptional service and products to our customers. We're also focused on delivering solutions faster and improving productivity while reducing costs. Ultimately, our goal is to be a top performing bank.

In addition to the rollout of a commercial cash management platform, we also deployed a new consumer credit origination platform in Puerto Rico and the Virgin Islands. This platform provides a fully digital origination process for personal loans and credit cards. We saw an upward trend in online originations during the fourth quarter and have originated approximately $36 million since launch in the third quarter.

We have continued to invest in our physical retail network to blend the speed and convenience of self-service with in-person support. Our branches continue to be an advantage in Puerto Rico and the Virgin Islands.

As we continue to modernize our channels and platforms, we are creating a more seamless experience to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs without compromising the quality of our service.

We're also seeing the results of our focus on being simple and efficient. We have sustained and continued to simplify our commercial credit origination and portfolio risk management. We are seeing faster cycle times, higher banker productivity a more seamless customer journey and loan growth in our small and middle market segments.

During the year, we also executed a series of sustainable efficiency initiatives, including exiting our mortgage business in the United States, optimizing our mortgage servicing business in Puerto Rico and transforming our ERP solution to a modern cloud platform that significantly improves agility and performance.

Currently, more than 800 of our colleagues are working on these projects, and we are very proud of the progress that we have made. I will now turn the call over to Jorge for more details on our financial results. Jorge?

Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $23 million to $234 million, and our EPS improved by $0.38 to $3.53.

Excluding the partial reversal of the FDIC special assessment, adjusted net income for the quarter was $224 million, an improvement of $13 million from Q3. These results were driven by better NII and lower expenses.

As we have mentioned before, our objective is to deliver sustainable financial results. While we benefited from the FDIC reversal, we are pleased to have exceeded 14% ROTCE for the period and 13% of ROTCE for the full year.

In 2025, we executed targeted initiatives to improve profitability by growing the top line and capturing sustainable cost efficiencies, both of which are key drivers of the ROTCE numerator.

Looking ahead for 2026 and beyond, we will build on this progress and continue to drive improvement in operating leverage and profitability.

At the same time, we see capital levels as a meaningful driver to improve ROTCE. Our current objective remains a sustainable 14% ROTCE. We will continue to use all available levers to position the company as a top-performing bank when compared to mainland peers. Please turn to Slide 8.

Our net interest income of $658 million increased by $11 million and was driven by higher loan balances, fixed rate asset repricing in our investment portfolio and lower deposit costs in both of our banks. For the year, NII increased by $259 million or 11%.

During the quarter, our net interest margin expanded by 10 basis points to 3.61% on a GAAP basis. Our fully tax equivalent margin improved by 13 basis points to 4.03% driven by higher loan balances and lower interest expense, primarily due to lower balances and cost of Puerto Rico public deposits.

Loan growth of $641 million in the quarter was strong with both banks contributing to that increase. At BPPR, we saw loan growth of $497 million, driven primarily by commercial and mortgage lending. At Popular Bank, we saw loan growth of $144 million, mainly driven by commercial lending.

For 2026, we expect consolidated loan growth of 3% to 4%. In our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $900 million of treasury notes with a duration of 2.1 years an average yield of around 3.56%. We expect to maintain a 2- to 3-year duration in the investment portfolio. Ending deposit balances decreased by $323 million and average deposit balances decreased by $880 million. This decline was mostly driven by anticipated outflows from Puerto Rico public deposits, which ended the quarter at $19.4 billion, a decrease of $662 million compared to Q3. We continue to expect public deposits to be in the range of $18 billion to $20 billion.

At BPPR, excluding Puerto Rico public deposits ending balances increased by $525 million, driven by growth of $430 million in commercial demand deposits. Average deposits increased by $192 million.

Total deposit costs decreased by 11 basis points at each bank. At BPPR, the decrease is mostly a result of Puerto Rico public deposits repricing lower by 22 basis points due to recent interest rate cuts by the Fed. While nonpublic customer deposit costs decreased by 1 basis point.

At PB, the reduction was mainly related to lower online savings deposit costs and repricing of time deposits. We anticipate 2026 NII will increase 5% to 7%, driven by continued reinvestment of lower-yielding securities and loan originations in the current rate environment. as well as lower cost of Puerto Rico public deposits and online deposits at Popular Bank. Please turn to Slide 9.

Noninterest income was $166 million, a decrease of $5 million compared to Q3 and in line with the high end of our guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity during the holiday season.

In 2026, we expect quarterly noninterest income to continue to be in a range of $160 million to $165 million. Please turn to Slide 10.

Total operating expenses were $473 million, a decrease of $22 million when compared to Q3. Excluding the FDIC reversal, operating expenses were $489 million.

Aside from the reversal, the largest quarter-over-quarter variance was related to a $13 million noncash goodwill impairment taken in the third quarter.

For the year, GAAP operating expenses increased by roughly 2.5% and which was below our original 4% guidance as we executed on a series of sustainable efficiency initiatives and also benefited from the delay of some expenditures that will occur in 2026.

In 2026, we expect total full year GAAP expenses to increase by approximately 3% compared to 2025 as we continue to invest in our people and technology.

Our effective tax rate in the fourth quarter was 16% and compared to approximately 15% in Q3. In 2025, our effective tax rate was 17% compared to 23% last year, driven by a higher proportion of exempt income.

In 2026, we expect the effective tax rate for the year to be in a range of 15% to 17%. Please turn to Slide 11.

Tangible book value per share at the end of the quarter was $82.65, an increase of $3.53 per share, driven by our net income and lower unrealized losses in our investment portfolio, offset in part by our capital return activity in the quarter.

During the fourth quarter, we paid a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q3.

As Javier noted earlier, we're pushing our teams to enhance profitability through ongoing incremental revenue initiatives and expense discipline. While we've made progress over the past 2 years in reducing our CET1 ratio, there's more we can do.

In Q4, we repurchased approximately $148 million in common stock. We believe this is a good run rate for the pace of buybacks going forward, subject to market conditions.

As of December 31, we had $281 million remaining on our active share repurchase authorization. In addition to the common stock repurchases, we'll continue to use capital for loan growth, and we also expect to pursue a dividend increase later this year.

Finally, we carry less additional Tier 1 capital than peers and see that as another opportunity to optimize our capital structure in the future.

We believe that these actions which are subject to market conditions and Board approval will help us achieve our long-term stated CET1 goal of having levels consistent with mainland bank peers plus a buffer for our geographic concentration. With that, I'll turn the call over to Lidio.

Thank you, Jorge, and thank you all for being with us. Turning to Slide #12. Credit quality metrics remained stable during the fourth quarter with lower NPLs and lower net charge-offs. Nonperforming assets and loans decreased by $4 million this quarter, mainly due to Popular Bank. U.S. NPLs decreased by $14 million as a $17 million mortgage relationship returned to accrual status, offset in part by higher commercial NPLs.

BPPR NPLs increased $5 million with commercial up $8 million and consumer up $3 million, offset in part by $8 million decrease in mortgage NPLs. Inflows of NPLs declined by $194 million primarily in BPPR, as the previous quarter included inflows from two unrelated commercial relationship totaling $188 million. The ratio of NPLs to total loans held in portfolio decreased 3 basis points to 1.27%. Turning to Slide #13.

Net charge-offs amounted to $50 million or annualized 51 basis points compared to $58 million or 60 basis points in the prior quarter. This quarter results include $5 million in recoveries from the sales of previously charged-off auto loans and credit cards. Excluding this, the net charge-off ratio was 57 basis points.

The net charge-off in BPPR decreased by $7 million driven by a decrease in commercial net charge-offs at the prior quarter included a $14 million charge-off related to a single borrower.

In 2025, net charge-offs were 52 basis points an improvement of 16 basis points from last year, driven by lower consumer net charge-offs.

For 2026, based on current trends and macroeconomic outlook, we expect annual net charge-off of 55 to 70 basis points. The allowance for credit losses increased by $22 million to $308 million, mostly in BPPR, due to higher reserves for the commercial portfolio, driven by higher balances, specific reserves and loan modifications, coupled with higher reserves for consumer loans due to changes in FICO mix.

The compression ratio of the ACL to loans in portfolio remained stable at 2.05%, while the ratio of the ACL to NPLs was 162% compared to 157% in the previous quarter.

The provision for loan losses was $71 million, down $3 million from $75 million in the prior quarter. For the BPPR segment, the provision was $72 million compared to $74 million in the previous quarter. With that, I would like to turn the call over to Mr. Ferrer for his conclude remarks. Thank you.

Well, thank you, Lidio and Jorge for your updates. Our fourth quarter results closed out the year on a high note. We are very pleased with our financial performance in 2025. We increased revenues, maintain expense discipline, generated strong loan growth and improved customer deposit trends.

I'm urging our teams to remain focused on deposit growth, loan generation and particularly on our expense discipline. Our strategy is grounded in customer primacy. We are focused on deepening relationships, delivering value across channels and simplifying how we operate.

Most importantly, it is focused on translating these efforts into tangible financial results and generating value for our shareholders.

In closing, I want to recognize our colleagues and their contribution to our results. I see what they do every day in our branches, call centers and centralized offices. We are pushing ourselves to deliver more for our clients every day and I am deeply grateful for their commitment and dedication. We are now ready to answer your questions.

[Operator Instructions] First question comes from Brett Rabatin with Hovde Group.

Hey, good morning, everyone. How are you doing? I wanted to start on the guidance and just thinking about the NII guide. And if I'm reading it correctly, it kind of would suggest maybe slightly slower average balance sheet growth during '26 and 5 to 10 basis points of margin expansion. And I know you guys don't like to give explicit margin guidance. But would that be within the realm of what you're looking at? And then just wanted to ask around the ROTCE goal, why with operating leverage that might not increase a bit from here?

Okay. Thank you, Brett. First, on the NII. First, we're very pleased with the 11% growth this year. The 11% growth in NII was driven by expanding the margin, being able to reinvest fixed rate investments in our portfolio into higher-yielding assets, loan growth and lower cost of deposits.

We believe all those three factors will continue into 2026, albeit at a smaller magnitude we will see a slowdown, for example, of the yield uptake that we will get on the reinvestment of the portfolio. But we're very comfortable with that 5% to 7% guide.

We are expecting margin to continue to expand throughout 2026. I think when you look at that range, if you're looking at what drives one for the other, really always revolves around low-cost deposit levels and our ability to reduce deposits in the U.S. market.

In terms of the ROTCE, we've talked in the past that we want ROTCE to be driven by the improvement in performance and net income, right? And again, we are very pleased with the results this year. We have a lot of momentum going into 2026. We expect that momentum to continue. We want that above 14% to be sustainable. There's enough uncertainty in the world, and we want to make sure that we are absorbing any ups and downs through the cycle. So we're not quite there yet. We do feel that we have a lot of momentum and like the starting point of where we're at, but that is something that we want to continue to focus on. And I think this year, we try to be more intent or deliberate in how we're managing capital levels as well. And as I discussed in my prepared remarks.

Okay. And then the other question I had was just around loan growth, which was better than I expected and pretty strong in commercial. When I think about that guidance for the coming year, I mean, you've had 6%-ish growth the past 2 years. 4Q was 7%. Is the slowness or slower level anticipated in '26. Is that just conservatism around consumer? Or any thoughts around that? And then as it relates to onshoring, you guys seeing any opportunities related to that?

Okay. So let's start first on the loan growth. As you said, we have seen loan growth around 6% for the last couple of years, led by growth in Puerto Rico. That growth in Puerto Rico was across all of our portfolio, right, commercial, mortgage and consumer.

As we look into 2026, we expect to continue to see commercial to lead the way and mortgage in Puerto Rico. But we do see a softening on the consumer, particularly around auto. So that is one part of the guide.

The other growth engine for us has been in the U.S. We are in good markets in the U.S. We like those markets. But we want to make sure that we are pricing for relationships and for profitable loan growth. There's some of that embedded.

As well as Brett, as you can imagine, there's always timing as loan transactions are focus is on larger clients. when those things close in terms of funding that you advance or when things slow down on expected payoffs that has an impact on those kind of year-over-year kind of changes. But we're confident on the 3% to 4% guide and the momentum that we've had over the last couple of years in both Puerto Rico and our U.S. markets.

We now turn to Jared Shaw with Barclays.

Maybe I guess, just sticking to the theme of growth outlook, when you look at fees, where do you see potential softness, I guess, in fees in that growth rate? You've had some pretty good trends during the course of the year.

Yes. Remember, Jared, one of the things that the 25 results included roughly $10 million of kind of unusual items, the recovery for prior periods of that tenant, and then we also had some refunds of federal taxes that were recognized in fee income. So that $10 million really if you look at the guide, you're making up for that $10 million next year. So there's a little bit more growth embedded in that guide than probably jumps out at you.

Okay. And then on capital, nice to see the buyback and the commentary around sort of the willingness to bring capital ratios down. How should we think about M&A with that backdrop? And you certainly have the capital and the growth to do something, I guess, in terms of potential sizes or anything like that? Any thoughts you could share with us?

Sure. This is Javier. Well, our primary focus continues to be our transformation program. That said, in the U.S., we're always open to opportunities to add on profitable niche businesses, teams and assets. So whole bank M&A is not a priority. However, it would be responsible for us to say that we would not evaluate opportunities to enhance shareholder value over the long term.

I think we said this before, there is a high threshold for any transaction that we may consider and we'll evaluate opportunities to grow inorganically as long as they meet the following criteria to complement our U.S. business.

First, it needs to be compelling enough for us to consider reallocating resources away from our transformation initiatives. We have a little bit over 800 employees who are currently focused on these efforts, and we would need to reallocate to whatever effort related to an M&A due diligence integration conversion. Number two, core deposits, any transaction we need to strengthen our deposit franchise and lower cost deposits with lower cost deposits. Number three, it needs to be commercial led, which is our key strategy in the United States. It needs to enhance our commercial led and niche business strategy and also provide some CRE diversification. Four, it needs to be geographically consistent. So create greater market penetration in our existing footprint, increasing opportunities for value creation through cost synergies or need to extend presence to adjacent markets or geographies.

And I think also, it needs to have the -- in terms of scale, it needs to be rightsized for our U.S. business. I have a preference for -- not for MOEs. I don't think I do of those, not that they can't work, but that is just my bias. I think the last item would be cultural fit, and it's last, but it's really top of mind. Whatever target needs to align to our culture of performance and employee well-being. So we are very mindful that not all customer demographics will make sense as a part of Popular. So I think very specifically, that's how we think today about M&A.

Okay. That's great insight. Just maybe finally for me. Do you just have the spot deposit costs and asset yields at the end of the year.

We don't usually provide the spot rates, Jared.

We now turn to Ben Gerlinger with Citi.

I was wondering expense -- so on the expense guide, I know you guys always give a GAAP basis, so that's inclusive of investments and things like that. I know that last year, you're also investing in this year, and I'm assuming '27 will are going to because if your size investment is almost like a core.

So I was just kind of curious, is this year on an investment basis, kind of smaller or larger? Or anything you could frame it sort of timing? And any expectations on that relative to kind of what we've seen previously or potentially starting new projects that are multiyear in nature.

I think the run rate that we're going is not changing much. It gets to a point, Ben, we only have so much capacity and resources to be able to do so much at once. I think certainly in '25, we were running at that capacity level. As things roll off and we go live, for example, Javier talked about that we went live on a new ERP in January 1. And that releases some resources, but then a lot of those resources get reallocated to the next big project on the next thing going on.

So I think we all feel fairly comfortable with the level and focus of the teams. We can always certainly do more, but there is a reality that you can only have so much resource and management focus on these implementations.

Got you. That's helpful. I know we've talked about the pace of loan growth and then also the reinvestment of the securities higher. But just kind of looking at like just the average ring asset mix where it is today? And obviously, if you could get securities into a loan is probably the best case scenario.

But I'm just kind of curious, is today's mix within kind of the guardrails that you want? Could you potentially see more loans down the road? Just kind of curious on just how you think about average earning asset mix down 2 or 3, 4, 5 years from now, given that you also have the public deposits.

Yes. I mean, certainly, we would prefer to make loans, not so much necessarily on a yield perspective, but we'd rather have those relationships, right? And we feel that we can have a deeper profit base with lending relationship than we can just buying portfolio assets.

But there is a reality that we have around 30% of our deposits in Puerto Rico that require to be collateralized and that will keep us in the portfolio business of buying investment security.

So as we go forward, we would like to see a lower loan to the -- sorry, higher loan-to-deposit ratio but it will depend on the composition of our balance sheet.

But as I said before, we do expect NIM to continue to grow and expand this year. And even as we go forward and we start combining maturities between our recent purchases and more legacy pre 2023 investments, we still have a good upside for pickup of yield in that investment portfolio at current rates, the more recent purchases don't reset very far to where we bought them versus the uptick that we get in the more legacy portfolio. So we still see that as a strong tailwind going forward..

We now turn to Kelly Motta with KBW.

Good morning. Thanks for the question. Maybe a I wanted to make sure I heard you correctly. It seems like you alluded to maybe additional Tier 1 being lower than peers. Wondering if from a high level you can discuss it seems like maybe then leverage would be your guiding ratio? How you're thinking about that as we move ahead, given that the importance of capital return to the profitability improvement story?

Sure. Thank you, Kelly. So we often talk with you all about CET1 and a lot of focus on CET1. And we talked about our goal of getting that lower plus a buffer.

One of the things that we don't very often talk about is that we have somewhat inefficient capital stack in that we really have very little additional Tier 1, right? We have around 5 basis points. And when we look at peers, they have anywhere between 50 and 100 basis points of additional Tier 1. So we look at this as another lever that's an opportunity that we're evaluating and looking at.

Perhaps there's an opportunity for something that's accretive without necessarily impacting the total Tier 1 or total regulatory capital and being able to balance lowering CET1 with management and Board's intent to be more deliberate in reducing that capital over a prolonged period of time.

Okay. All right. Fair enough. And maybe I think we've hit on this a bit, but turning to loans and yields. I was surprised your loan yields have held in really nicely even with the rate cuts. Can you remind us how much of your book float? And I don't believe you usually provide it, but I'll try. Any new production rates would be really helpful here.

Yes. So a couple of things on loan yields. We're still seeing loan growth in Puerto Rico on the consumer side to be flat or above with the exception of credit card. But in the quarter, we still saw an improvement in auto yield and flat in personnel -- I'm sorry, in personal loans.

And we talked about in the past that we just have the low beta on the way up. We didn't pass through all the increases in the loan pricing, and we're seeing kind of the benefits a little bit of the opposite behavior that we see in our deposit base in Puerto Rico.

I don't -- I think last quarter, we talked about where I don't know how long that's going to continue. As I said, in talking about loan growth, we do see a softening in consumer demand, particularly around auto. So it would seem logical to me that we start seeing some lower pricing there as people compete for the production.

In terms of variable, it's around 25% of our total loans are variable or floating. Most of that is commercial loans. I think both portfolios around 40% of commercial loans are floating. And then remember, we do have the credit card, we have the construction portfolio that float.

And in terms of new yields, we don't provide that.

Okay. Fair enough. Last one, if I can slip it in. I apologize if this was addressed already, but we've with the charge-off, 55 to 75 basis points is certainly lower than historically what we've seen in Puerto Rico, but a step-up from 2025. I would imagine that's mostly on the consumer side. But can you kind of piece together the outlook here of what you're seeing and how you came to that 55 to 75 basis point range. Any movement between now and what gets you to that higher range in '26.

Yes. Small correction, Kelly, I mean, we provide us for 55 to 70 basis points. So the high end was a little bit lower than 55, 70 basis points. Yes. I mean, generally, before going into the details, I mean, we see -- we have a very stable outlook. We think the Puerto Rico economy continue to be stable with moderate growth, and that's the outlook that we have for next year.

Under that context, we believe that generally, our consumer portfolio will continue to -- we continue to behave as they have in 2025. We do are accounting for potentially some charge-off of some of larger commercial relationship that we have reserved for. So that is embedded in the range that we have provided to you. So that explains a little bit our rationale.

We now turn to Arren Cyganovich with Truist.

Maybe you could talk a little bit about whether or not you're seeing any kind of deposit competition in Puerto Rico and your expectations for deposit growth in the year?

Well, I think clearly, there is competition in the market. You can see from our numbers that we've grown deposit balances, and we expect to do the same this year. But there are a few banks in the market and also credit unions.

So -- but we are not seeing any irrationality in the pricing. So on this cycle. So I would say that it's pretty steady and we will not, however, we said it before, we won't lose good clients to pricing on deposit pricing. So Again, we're going to be -- we're going to defend our position and particularly good relationships in all segments, but hopefully not do anything that's crazy.

Okay. That's helpful. And then maybe just kind of thinking broader picture, the U.S. has really stepped up military in the Caribbean. And wondering if you're seeing any increasing the presence and whether or not that's a positive from an economic standpoint to Puerto Rico?

Well, I would say that it's a net positive. We -- it's -- we have seen some increased activity, but it's mostly -- I wouldn't say in our branches I'm going to say it's in geographies adjacent to military bases or installations we've seen customers that are benefiting from relationships with the military throughout Puerto Rico, and we're seeing there are reports of the military entering into lease agreements for you may imagine, ports and airports.

And again, no of customers, clients of ours that smaller or middle market clients that have entered into contracts with the military. So that's why we believe it's net positive. Obviously, we're monitoring it. if you were to -- if military presence were to grow, that can only increase. So that's why I started by saying that it's a net positive, we'll see because it's dependent on, as you know, geopolitical and forces and decisions out of the White House.

[Operator Instructions] We now turn to Gerard Cassidy with RBC.

And at the risk of being called [indiscernible] again, as it was on a call with one of your peers, I have asked the question. I mean the outlook for you folks and your peers is quite good for 2026.

The economy is healthy, credit, as you guys pointed out, is resilient. We have a steeper positive slope yield curve, maybe it gets even more positive slope. We've got loan growth, as you pointed out as well.

When you look around corners, aside from the geopolitical risk that we're all aware of, when you guys have to look around corners, what are you watching out for so that we don't get a surprise this year that nobody is obviously expecting?

Well, that's a very good question. And of course, we think about it all the time. I think that one of the themes that's in the States as important to Puerto Rico is affordability, right? I mean we think about that and how it may impact certain segments of our clients, right? And it's something that obviously impacts home creation, let's say, and it may impact our customers if inflation would escalate. So that's something that we think about.

And the other item that we can control, but it obviously has an impact to our economy is the PREPA situation. The fact that the electric power authority bankruptcy is still pending. So anything having to do with generation of electricity is a concern because it's essentially a tax on economic growth.

Now we're also benefiting from the fact that gasoline is at very good levels. So we're benefiting from that. But I think those would be the two items that are they're kind of lurking and may bite us. But we're hoping that this is a year where the PREPA bankruptcy gets dealt with. And clearly, everybody recognizes that developing the grid and fixing this is critical for Puerto Rico's future. So we think that clear heads will prevail, and we'll get to a resolution that's rational for all the parties involved.

Very good. And then as a follow-up, stepping back for a moment, you guys touched on some of the economic statistics for Puerto Rico. Can you remind us and give us some color, the onshoring of America and the building of manufacturing plants that's taking place on the mainland, I believe Puerto Rico is seeing some of those benefits as well.

Can you give us some color on what you're seeing on the ground? Is there progress being made there and what that future might look like for the economy for Puerto Rico?

Yes. Well, we are -- we can comment on what's public and maybe provide -- offer some like thoughts on maybe stuff that we're listening to the grapevine. But you're absolutely right. Global manufacturers are increasingly prioritizing reshoring initiatives and Puerto Rico is very well positioned to benefit from this trend.

So during last year, multiple companies announced new investments or expansions in Puerto Rico, of all sizes. And that's representing about $2.2 billion in total capital investment and the creation of more than yes, 2,512 -- well, actually, I thought is 4,600 jobs.

So -- and I think the -- we called it the wail. I mean, there's, again, all sizes, but the well we call the Eli Lily's announcement which is a $ 1.2 billion commitment to modernize and expand its pharma manufacturing facilities in Carolina, and that's close to 1,000 -- 1,200 jobs -- new jobs. And Amgen's $650 million investment to expand its biopharm operations in Juncos, and that's another 750.

Now that said, we expect -- and this is a rate on now. That's what happened last year. And it's close to 17 nits that announced new investments in Puerto Rico through the onshoring or reshoring. But grapevine tells us that we ought to expect more announcements in 2026 and a few will be large. So -- but that just grapevine. So we think that, that trend will continue.

And of course, that will fuel our economy. It's not only the direct job, but as you know, this has a multiplier effect and any such investment will generate 3x what it typically generates indirect investments. So looking forward to more announcements from the government in '26. And of course, once that happens, you'll know right away.

Very good. And will there be any benefits from the half-time show at the Super Bowl?

We'll see.

More record sales?

We talk about -- it's interesting. [indiscernible] I see the ads. The ads are fantastic. But, we'll see.

That's good for Puerto Rico.

We now turn to Manuel Navas with Piper Sandler.

Most of my questions have been asked, but I just wanted to check in on what are the market conditions that would impact your buyback? Just is that valuation, pricing? Are you targeting some sort of total return target? Just any kind of color more on the buyback pace, please?

First, Manuel, I just want to welcome you to the call and thank you for picking up coverage for all the banks in Puerto Rico and supporting our island. So I appreciate it.

In terms of market conditions, I mean, we tend to do these on 10b5-1 plans. So certainly, changes in market prices that could impact the grids that we use. So that's certainly something unexpected, could be an accelerator or decelerator from the target number. But also global political, macroeconomic environment, and these are all things that impact our perception of what's happening and how quickly we want to execute on the repurchases.

I will reiterate what Javier said, we believe that we find that our current share price are very attractive.

And the current share number in this quarter was nice and you like that pace, correct?

We like the total volume -- total dollar that we spent to be a good baseline.

We now turn to Timur Braziler with Wells Fargo.

Trying to put a finer point on auto expectations, can you just give us a little bit of color here as to what current demand looks like. And as you start looking out throughout the course of 2026, do you see this being a tough comp year kind of throughout the year? Or do trends start getting better, maybe post April once you kind of lapse through some of the pull forward when tariffs first got announced last year?

I'll give you a little bit -- this is Lidio. I'll give you a little bit of perspective in terms of the auto industry and maybe a little bit of perspective in terms of the outlook for 2026.

I mean if you look historically, prior to cover, I mean new auto sales in Puerto Rico when you had a year above $100,000, that was a great year for the industry. over the recent years after COVID, numbers have been higher than that. I mean we had years of 120,000 was the record year for the industry.

This year, we are ending up the year around 111,000, which were 9% down from the previous year. And the expectation for the industry is to be slightly down 5% and the numbers that we have. But I will say, still, I mean, a year that it is above 110,000 or close to 110,000, but it's a great year for the industry in Puerto Rico.

Okay. Got it. And then maybe asking the expense question a different way. I think historically, you've broken it down kind of into three different phases. With the first phase being to kind of change the mindset of the employee base and focusing on the customer, Phase 2 being simplify the franchise, improve efficiency and then finally becoming a top-performing bank. I'm guessing between -- or I'm questioning, I guess, between Phase 1 and Phase 2, the cost kind of associated with those, are they similar and your comment that you had to delay some technology expenditures and '25 that are running in; '26. Like are those costs similar as well? Or is one of those phases implicitly more expensive maybe than some of these other?

I think the one thing that I would encourage us to think differently, there's no really Phase driven I mean this is an arms race every day, whether it is other banks, fintechs, other competitors that are competing, everybody is competing for a user experience very unique and omnichannel, et cetera, we can come up with all the different buzzwords.

We're happy with the level of investment that we're at. We know that there's more to do. And we're going to wake up tomorrow and have another new challenge that we'll have to evaluate and put on the queue for something else. I think that what's important is that we're very much focused on it. We have a strong investment discipline in terms of the projects that we're green lighting with our customer in mind, but also our employees. I think it's a combination that creates the operating leverage that we're looking for.

But I think we need to really kind of think of this as a steady state and how do we focus and shift to adding value from our decisions. But Tim, there's a lot of things here that just become table stakes that we've got to do or risk falling behind.

Yes. And I don't -- that I don't see it as Phases. I see it as a strategic framework which would help us, to Jorge's point, do our job, our jobs every day better, faster and quicker to tackle competition, which is not going to let down. As you know, everything is going quicker, faster. So we have a great position in Puerto Rico. We need to defend it, but also grow it. And that's exactly what we're trying to do every day.

We now turn to Brandon Berman with Bank of America.

Very nice quarter. I just wanted to build off of the last question on expenses. If we pull out the profit sharing incurred last year. It implies a little bit faster of a growth rate. And I was just hoping you'd be able to dissect the drivers of that. Is it the planned investments that were delayed that's causing the 100 basis point difference in the growth rate? Or is it something else? Any breakdown would be helpful.

Yes. Thanks, Brandon. Thanks for the question. First, I think if you look at where we ended up 2025 versus our original guide and even our guidance in the third quarter call, we did, I think, outpace or overperform in 2025. The teams have done a really good job to be focused on efficiency. We've done and implemented a lot of opportunities that are sustainable, and we'll continue to generate savings, but we also had some wins that resulted in maybe a benefit that we see in '25 that we won't see repeat in '26 or we'll see a lower level in '26 versus '25.

And then when you add that to the continued investments in technology, I think we've talked in the past how as projects go near live, you start doubling up on expenses as you're supporting two platforms and kind of incurring the cost of licensing on the old platform and the cost of development in the new platform, et cetera, that tends to have some peaks and valleys, and that's part of kind of the noise that you're seeing in comparing the run rate.

But we will continue to invest in technology and continue to invest in our people and making sure that we are attracting talent. And those are the two biggest drivers when we look at year-over-year and our expectation of expense growth.

We have a follow-up from Kelly Motta with KBW.

Thanks for letting me circle back. I apologize. I forgot there are so many people on this call. Just to dig down a bit into the NII guide and parsing that with your commentary for margin expansion. Thinking through the funding side, mainly deposits, you had some declines in brokered, you gave the range for government.

Embedded in your NII guide, do you have any thoughts around or, I guess, opportunity run off some higher cost funding, given the strong cash flows you're generating off the securities portfolio and overall outlook for core deposits in Puerto Rico here.

Of course, our objective is not only to retain client deposits but also increase them, right? So we have been seeing good momentum in our retail network across all segments, affluent, mass affluent and mass. We've seen strong deposit growth in commercial, really led by corporate and small business. So we expect some of those trends to continue.

I think the opportunity on that NII is can we reduce the cost of the U.S. deposits, and those are driven both by the competitive nature of online direct deposit, which are an important funding source for our U.S. business. but we're also seeing strong competition in New York and the Florida markets.

The reality is that kind of for that incremental money and clients that are more rate sensitive, it's still very competitive out there. And it's our team's goal that we're very much focused on relationship growth. And if that begins to the loan relationship in the U.S., making sure that, that translates into deposit relationships that maybe impacts our loan growth guidance as we want our team to be more focused on those relationships and that profitability.

But at the end, no secret in banking that the deposits and low-cost transactional accounts and primacy with those clients are going to be the driver of that guide. And when we look at the outperformance this year, it was really driven by the growth in deposits in both of our markets.

This concludes our Q&A. I'll now hand back to Javier Ferrer for any final remarks.

Well, thanks again for joining us and for your questions. We look forward to updating you on our first quarter results in April. Have a good day.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

Hello, everybody, and welcome to the Popular, Inc. Third Quarter 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. I'd now like to hand over to Paul Cardillo, Senior Vice President, Investor Relations Officer. Please go ahead.

Good morning, and thank you for joining us. With us on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge García; 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 during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses taxes and capital structure as well as statements regarding Popular's plans and objectives.

These statements 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 release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I now turn the call over to our President and CEO, Javier Ferrer. .

Thank you, Paul, and good morning, everyone. Starting on Slide 3, we share a few highlights that reflect our strong operating performance in the third quarter. We reported net income of $211 million and EPS of $3.15, an increase of $1 million and $0.06 per share, respectively. Our results were driven by higher revenues and expanding net interest margin, strong loan growth and importantly, stable customer deposit balances.

Our credit metrics were impacted by 2 large commercial loans which were related to isolated circumstances that do not reflect broader credit quality concerns. As Lidio will discuss in more detail in his remarks, I'd note that, excluding these 2 relationships, credit metrics remained stable.

For the second quarter in a row, we have demonstrated progress from our efforts to achieve sustainable returns above 12% this year and towards our longer-term 14% objective. Please turn to Slide 4. As of the end of the third quarter, business activity in Puerto Rico continued to be solid as reflected by favorable trends in total employment, consumer spending, tourism and other key economic data.

The unemployment rate of 5.6% continues to hover around all-time lows. Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 5% compared to the third quarter of 2024. Home purchase activity continues to be strong, as demonstrated by the $129 million increase in mortgage balances at Banco Popular during the quarter.

Momentum in the construction sector has been solid with both public and private investment fueling higher employment levels and cement sales. We are optimistic that this trend will persist given the backlog of obligated federal disaster recovery funds announced, real estate and tourism development projects as well as the renewed focus on restructuring by global manufacturing companies. One example of this is [ Amgen's ] recently announced $650 million manufacturing network expansion, which is expected to create roughly 750 direct new jobs in Puerto Rico.

Puerto Rico is also well positioned given its strategic geographic location considering current geopolitical focus in the Caribbean region. The tourism and hospitality sector continues to be a source of strength for the local economy. This summer, the sector benefited from Bad Bunny's 31 night concert residency at the Coliseum in San Juan, right next to our Popular Center Complex. This was more than just a series of concerts. The event also featured Puerto Rico as a destination, highlighting our music, natural beauties and culinary offerings.

The celebration of our culture generated significant media exposure for the island globally and led to a substantial increase in tourism activity during what is normally a seasonally slow period of the year.

Please turn to Slide 5. I would like to comment on our new strategic framework and transformation progress. Our strategy centers on 3 objectives. First, be the #1 bank for our customers by deepening relationships, earning trust, delivering value across all channels and providing exceptional service leveraging our very strong primacy and satisfaction scores in Puerto Rico. We are focused on advancing digital and payment solutions to further grow engagement.

Second, be simple and efficient. By working collaboratively streamlining operations and reducing costs, we are committed to making our processes simpler and more effective to deliver superior solutions for our customers. Finally, be a top-performing bank by attracting and retaining top talent and converting customer and operational success into shareholder value with a commitment to generating a sustainable 14% [ ROCE ] over the long term. This framework simple, yet powerful GUIDES our transformation, which continues to show steady and notable progress.

We are investing in seamless, secure banking solutions, expanding service channels and modernizing branches and digital platforms to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs. We plan to extend these digital capabilities to more products to further improve online and mobile experiences and support future growth.

Recent initiatives include the launch of a fully online personal and credit card loan origination process in Puerto Rico and the Virgin Islands and the expansion of digital deposit products in the U.S. Mainland. On the commercial side, we are improving cash management and credit delivery for small and midsized businesses. We are pleased with the progress we have made so far in our transformation and are convinced that these efforts will continue to unlock growth opportunities and efficiencies to drive sustained financial performance. I will now turn the call over to Jorge for more details on our financial results. Jorge?

Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $1 million to $211 million. Our EPS improved by $0.06 to $3.15 per share. These results were driven by better NII and noninterest income and a lower effective tax rate, offset somewhat by a higher provision for credit losses. As we have mentioned before, our objective is to deliver sustainable financial performance. While there is some noise in the current quarter's results, we're very pleased to have once again exceeded 13% ROTCE for the period. We continue to expect to achieve at least a 12% ROTCE in Q4 as well as for the full year.

Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity.

Please turn to Slide 7. Our net interest income of $647 million increased by $15 million and was driven by higher average deposit balances, fixed rate asset repricing in our investment portfolio and deposit pricing discipline in both of our banks. Our net interest margin expanded by 2 basis points on a GAAP basis and by 5 basis points on a tax equivalent basis, driven by a larger balance of loans and tax investment securities.

Loan growth of $502 million in the quarter was strong with both banks contributing to the increase. At BPPR, we saw loan growth of $357 million reflected across most portfolios, but driven primarily by commercial and construction lending. At Popular Bank, we saw loan growth of $145 million, also driven by the commercial and construction lending segment. Given that the underlying economic activity and demand for credit in both of our markets remains solid, we now expect consolidated loan growth in 2025 to be between 4% and 5% as compared to the original 3% to 5% guidance for the year.

Despite the expected headwinds in our U.S. construction balances, due to paydowns expected during the fourth quarter. In our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $2.5 billion of treasury notes with a duration of 1.4 years at an average yield of around 3.65%. We funded the purchases by reinvesting roughly $1 billion of bond maturities, along with redeploying $1.5 billion of cash reserves. We expect to continue to invest in treasury notes to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio.

Ending deposit balances decreased by $704 million, while average balances grew by $793 million. Puerto Rico public deposits ended the quarter at $20.1 billion, a decrease of $842 million when compared to Q2. We continue to expect public deposits to be in the range of $18 billion to $20 billion. At BPPR, excluding Puerto Rico public deposits, ending deposit balances decreased by $162 million and average deposits decreased by $44 million, demonstrating the impact of our continued focus on deposit retention strategies.

At Popular Bank, ending deposit balances increased by approximately $216 million, net of intercompany deposits. Total deposit costs increased by 1 basis point at both banks. The increase was mostly due to a higher average balance of public deposits. Given the results year-to-date, along with the anticipated NIM expansion in Q4 from repricing of our fixed-rate earning assets, we continue to expect to see NII growth of 10% to 11% in 2025.

Please turn to Slide 8. Noninterest income was $171 million, an increase of $3 million compared to Q2 and above the high end of our 2025 quarterly guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity. This quarter, we also benefited from a $5 million retroactive payment from a tenant related to an amended lease contract. Given the trends year-to-date, and particularly the stability in customer transaction activity, we now expect Q4 noninterest income to be in a range of $160 million to $165 million. This will result in total noninterest income between $650 million and $655 million for the year.

Please turn to Slide 9. Total operating expenses were $495 million, an increase of $3 million when compared to last quarter. Largest variance was related to a $13 million noncash goodwill impairment in our U.S.-based equipment leasing subsidiary due to lower projected earnings. Offsetting this was a $13.5 million quarter-over-quarter reduction in other operating expenses, driven by the effect of a reversal this quarter of a $5 million claims accrual recorded in Q2 and a similar reduction in operational reserves.

We also saw a $3.6 million increase in personnel costs, mainly due to annual salary and merit increases effective in July, along with the impact of employee termination benefits related to cost efficiency initiatives at Popular Bank. Specifically, as part of our ongoing efforts to improve profitability, we decided to exit the U.S. residential mortgage origination business and to close 4 underperforming branches in the New York Metro area.

We will remain focused on areas where we feel we can invest to achieve improved operating leverage. We continue to expect the increase in 2025 expenses to be between 4% and 5% when compared to last year. Our effective tax rate in the third quarter was 14.5% compared to 18.5% in Q2 driven by a higher proportion of exempt income. This higher exempt income, along with the impact of changes to Puerto Rico's tax code will result in an effective tax rate for Q4 in the range of 14% to 16% and for the year, we now expect the effective tax rate to be between 16% and 18%.

Please turn to Slide 10. Regulatory capital levels remain strong, our CET1 ratio of 15.8% decreased by 12 basis points, mainly due to loan growth and the effect of capital actions, net of our quarterly net income. Tangible book value per share at the end of the quarter was $79.12, an increase of $3.71 per share, driven by our net income and lower unrealized losses in our MBS portfolio, [ often in part ] by our capital return activity in the quarter.

During the third quarter, we declared a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q2. Finally, we repurchased approximately $119 million in shares during Q3. And as of September 30, still had $429 million remaining on our active share repurchase authorization. With that, I turn the call over to Lidio.

Thank you, Jorge. Good morning, and thank you for joining the call. Turning to Slide #11. The ratio of NPLs to total loans held in portfolio increased to 1.3% compared to 82 basis points in the prior quarter. Credit quality metrics were impacted by 2 unrelated commercial exposures in BPPR resulting in an increase in NPLs and net charge-offs. This impact relates to borrower-specific circumstances and do not reflect product credit quality concerns. The first loan is a commercial industrial facility, extended to the telecommunication company in Puerto Rico, experiencing reduced revenue due to operational challenges and client attrition following the business acquisition. .

As of September 30, we classified this loan as nonaccrual with a carrying value of approximately $158 million and drove the increase in provision expenses in the quarter. The second loan is a commercial real estate facility secured by hotel property in Florida. This loan has also been placed on nonaccrual status and carries a value of $30 million as of September 30, which includes a $14 million charge-off recognized during the quarter. Excluding these 2 cases, credit quality metrics were stable.

We continue to closely monitor the economic environment and borrower performance as economic uncertainty remains a key consideration. We are confident that the risk profile of our loan portfolio positions Popular to operate successfully under the current environment.

Turning to Slide #12. Net charge-off amounted to $58 million or annualized 60 basis points compared to $42 million or 45 basis points in the prior quarter. Net charge-offs in BPPR increased by $16 million, mostly due to the $40 million charge-off related to the $30 million commercial NPL inflow mentioned earlier. Consumer net charge-offs increased by $4 million, mostly due to higher auto loans, net charge-off by $6 million, partially offset by a $2 million reduction in credit card net charge-offs.

Given our credit performance year-to-date, and NPL inflows this quarter, we expect net charge-offs to be between 50 to 65 basis points for the full year. The allowance for credit losses increased by $17 million to $786 million, while the provision for credit losses increased by $29 million to $75 million. Both increases were driven by the impact of the 2 commercial exposure, offset in part by improvements in the credit quality of the consumer portfolio. The composition ratio of ACL to loans held in portfolio remained stable at 2.03%, while the ratio of ACL to NPLs was 157% compared to 247% in the previous quarter.

With that, I would like to turn the call over to Mr. Ferrer for his concluding remarks.

Well, thank you, Lidio, and Jorge for your updates. We are very pleased with our financial performance in the third quarter. We increased revenues, maintain expense discipline, generated strong loan growth and benefited from stable customer deposit trends. We are determined to close out 2025 on a high note as we continue to execute on our strategy, and I am urging our teams to remain focused on deposit retention, loan generation and particularly on our expense discipline. .

We will continue to generate value for our shareholders and deliver our ROTCE objective. We will achieve this by concentrating on our strategic framework, be the #1 bank for our customers, be simple and efficient and be a top-performing bank.

I want to give a shout out to our colleagues and recognize their hard work. I see what they do every day, in our branches, call centers and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions.

[Operator Instructions] First question comes from Jared Shaw with Barclays.

Maybe starting just on the margin and on asset yields. With the securities yields -- I'm sorry, with the securities purchases this quarter, should we assume that, that trend continues? And I guess where are the new purchase yields, it looks like maybe we won't be able to see net yield expansion much more from here if we see the rate cuts?

No. I mean let me first answer the yield extension. We do believe that we still have strong tailwinds. So you can see in our appendix we provide to you kind of the upcoming maturities in the investment portfolio, those are still coming off at 1 and change, and we expect to be able to continue to get a significant spread pickup on those maturities.

So while they may be priced lower as rates are coming down, if you remember that a large portion of our portfolio is also being financed, let's call it, [indiscernible] and fungible, but still being financed by public deposits and we would expect those public deposits should also benefit from lower -- the lower rate environment, giving us the opportunity to [ create ] that spread. So we do continue to expect our NIM to expand in the fourth quarter and beyond.

Okay. And then on the loan side, what about new loan yields this quarter -- sorry, go ahead.

Yes. On the new loan yields during the quarter, we still saw kind of the condition that we have been seeing for the last year where particularly in personal loans and auto lending, we still see some yield pickup quarter-over-quarter. I would expect Jerry, that maybe that would slow down a little, particularly in the auto, the auto volumes or new car sales activity is slowing down, and it's possible that wouldn't be unreasonable to believe that, that will result in more competitive pricing to maintain demand for other sales.

But as we said in the past, there's a lot of front and back book in that auto loan portfolio in particular. And when you look back, given the average life of those loans, assuming the same type of risk profile we still see opportunities of repricing given the current rate environment.

Okay. All right. And then maybe just shifting on the credit side, especially on the auto. There was an increase in delinquency, but it's still lower, I guess, year-over-year. How are you looking at the credit trends over the next few quarters within auto and consumer, I guess, more broadly?

I mean I will say the variation that you saw this quarter is within the seasonality of the portfolio. We'll continue to be very optimistic about the consumer, given the trends in in Puerto Rico, given the trends in employment, liquidity of our client base. And we see losses are about in the auto portfolio about 45 basis points below last year. So we're comfortable with our position and the outlook for the portfolio.

We now turn to Timur Braziler with Wells Fargo.

Sticking with the credit commentary, the large C&I loans, I guess what are the specific reserves that you set aside for that, the timing of resolution as you see it? And I'm just wondering why have we been to nonperformers right away instead of kind of upped the risk migration chain. Did they stop making payments? Or is that still accruing at this point, maybe start there.

I mean thank you for the question. They continue to make payments. So the loans are current from a payment standpoint. So that's that. In terms of our decision to -- I mean, it has actually a situation that has been deteriorated over time. We have been downgrading the loan over time. For us, I mean, we -- it is a business that carries a significant amount of debt, and management has indicated their intent to rightsize its capital structure, including liability -- management of the liability structure. So that drove our decision -- I'm sorry, that drove our decision to place that in nonaccrual status.

[Audio Gap]

Okay. And then I guess in terms of specific reserve and any kind of time line around planned resolution?

I think [ planned ] resolution most likely is next year. [indiscernible] next year. In terms of specific reserves, we are not -- we have not provided that information at this time.

You can assume that the driver of the variance in the quarter and provision was related to these loans.

Okay. And I mean, this is a little bit of a larger credit just maybe stack ranking the loan book. Is this one of the larger credits that you guys carry is this kind of typical size, just given your place in the Puerto Rico economy and maybe just talk a little bit more broadly as to the health of the economy from a business standpoint versus a consumer standpoint? And if there are any kind of signs that might be flash and yellow or any other kind of degradation?

If you look at our portfolio over the years, we shifted our portfolio from being more of an SME portfolio to a corporate credit type of portfolio. And we have seen strong trends over the last few years. And we are -- actually, if you look -- I think the last time we had 1 issue with a large bank -- a large group was in 2019. I think we will continue to focus in that segment and we think there are significant opportunities in Puerto Rico. They have performed very well over the years.

And that is the nature of our portfolio. And every now and then, you might see a situation, I think the important is we stick to our underwriting discipline. The performance of the portfolio has been very strong. We would feel comfortable with the [indiscernible] that we have today.

And if I may add to that, I mean, to your question about the macro, I think in our commentary, we were clear that we are not seeing any sort of yellow or reds or any insects in Puerto Rico referencing something that somebody said in the United States. It's -- we are seeing a strong economy. But as Leo just said, it so happens that we continue to focus on large commercial opportunities -- and from time to time, has happened this quarter and it hasn't happened a long time, there may be an isolated credit event that occurs due to idiosyncratic by specific issues that are unrelated to nderlying economic backdrop. And that's exactly how we feel.

So I can't really point to anything in the Puerto Rico economy that gives us any pause or worry or contrary, as they say across the ocean. We feel that the economy is performing well, and our big customers are investing and continue to move on with their projects.

That's great color. And then just lastly for me. encouraging to hear that margin expansion is going to continue here. I'm just wondering, from an NII standpoint, you guys reiterated the guidance. It is a little bit wide in terms of the range as it implies to 4Q, should we assume that margin expansion portends to NII kind of flat to up here as we go through these rate cuts? Or just given some of the lags, maybe NII growth stalls here over the next couple of quarters?

Yes. I think first, I want to reiterate that we continue to see the benefits of fixed asset repricing, loan growth, all those things should continue to contribute to improving and the expansion of the margin. As you mentioned, the guidance for NII, we left it where it was. Part of that has to do with our perspective on public deposit balances in the fourth quarter. We still expect to be within the range, but maybe not at the high end of the range where we are at and when we closed out Q3. You also mentioned the lag in pricing of these deposits.

We continue to be slightly asset sensitive , particularly in the early stages of moves of [ Fund III ]. But as we stated before, the cost of public deposits are linked to short-term market rates. And in general, they reprice on a quarterly lag. This is -- we've never given the index, but we're going to [indiscernible], and it's tied to 3-month treasuries obviously minus the spread. And so they are in a lag. So over time, we would expect to see the effect of changes in rates be reflected in the cost of deposits with a beta of [indiscernible] and that pricing structure will continue to support our success or repricing and the investment portfolio, making sure that we generate that improving spread on that investment.

But any time there's movement in the Fed, maybe there is a little bit of a lag, not always, right? We talked about that in the past that if the market and treasuries get ahead in anticipation of Fed moves, we might be able to benefit a little quicker. But we've kind of incorporated all that into our NII guidance for the fourth quarter, but we have a high level of confidence that as that stabilizes and the passage of time into 2026 and beyond, we'll continue our previous growth trend.

Our next question comes from Ben Gerlinger with Citi.

Not to belabor the point on credit because it's pretty clear that you guys are -- you're doing phenomenal relative to like the last 10 years. But I found it interesting that your guide, you kind of fine-tuned a lot, whereas the charge-off outlook, you just brought up the low end. So when you think about the 65 bps on the high end on a full year basis, that would imply something pretty draconian for the fourth quarter. I mean is that a possibility? Or how should we think about that considering the other guidance portions were fine-tuned?

I will say -- as we mentioned in the remarks, we took a reserve and a provision for some of the exposure. We charge off 1 of the 2 related exposure. There is a possibility that we may have to take charge-offs in the exposure that we reserve this quarter, which did not charge off, and that is driving the results. Overall, I mean, if you exclude that, we continue to expect a very solid performance out of the rest of our book. So that's the only thing that we are caveat in terms of the range that we provided to you.

Yes, Ben [indiscernible] we talked about this in the past where when we provide that spread in the guidance on net charge-off, we are trying to put in for idiosyncratic events that could happen in our portfolio at any given time. Certainly, the activity that we have seen year-to-date, as you say, don't reflect necessarily a lot of opportunities to get to the high end without it being a commercial loan.

Got it. Okay. That's helpful. And I know you guys have gone through quite a bit of initiatives on the expense front. Is there anything -- I know you're not going to give me a '26 guide, but is there anything in '26 that we could potentially prepare for outside of just kind of normal cost inflation?

Rick, you're right. We're not going to give you anything '26. We're very happy with the cost discipline and a lot of initiatives that are ongoing. We talked about it last -- in the last quarter's call. There's a lot of efforts around really just focusing on execution and really what Javier says, focus on excellence. And there's a lot of efforts that are ongoing that are maybe a lot of singles and bumps, but they add up. They add up. And this quarter, we saw some of those. We saw some of the actions we talked about the activity in the U.S. It's not easy impacting our colleagues, but we did make a decision to terminate our mortgage origination business in the U.S. We don't believe, given our funding profile and deposit franchise in the U.S., that's a business that we really want to be in at this time. And there are other things across the organization. I would say the important part is that those efforts are sustainable. They're not one-offs. And we do expect to see those benefits that would allow us to -- we reinvest in other things. We talked to you in the past about slowing down our expense growth rate. These are all the things that allow us to do that while continuing to invest in areas that we think will add value and get us closer to that 14% ROTCE.

We now turn to Kelly Motta with KBW.

I will pick up on that 14% ROTCE you mentioned. It's been above 13 in the next 2 quarters, the last few quarters. It seems like we have 14 in sight. I appreciate the guidance around at least 12 for the year, which seems very doable. Wondering if you have any update on the timing of the [ 14.1 ] And then two, given what you've laid out with your NII trajectory. Has there been any discussion in terms of whether 14 is the right place to stop as a sustainable ROTCE or

[indiscernible] of course,

Yes, Kelly, for certain, we're not going to stop at 14%. It is a guiding principle and we want to get there, but we're not going to stop there. And having said that, what we want to make sure is that sustainable performance. We've said that in the past. I agree with you, we're a lot closer today than we were a year ago when we pulled back that guide for this year. A lot of effort from a lot of people, a lot of things going right, and we just want to make sure that we continue to execute and more to come in terms of guidance and when and how we get there.

But the important part is we continue to believe strongly that we get there through improving our net income performance and our operating leverage and whatever we do on the capital side just adds to the opportunity to get there and surpass it.

Okay. Got it. That's really helpful. And then on the tax rate, the reduction in guide, you called out the higher proportion of tax-exempt income as well as some changes in the tax rate. And there is some noise and appreciating you're not giving 2026 guidance. I'm just hoping if you could kind of help us out with what is this full year 2025 a good core run rate ahead? Or can you expand upon -- the Puerto Rico tax rate change and how that kind of impacts the go forward? Just any kind of color on that would be helpful, given that there is a lot of moving parts here.

Yes. So I would ground on 2 things. One, this quarter, there were not any like real discrete events that impacted the effective tax rate this quarter. It was lower given the mix of taxable income and tax exempt income. We did benefit the $5 million other operating income number, those have a preferred tax treatment. So that helped. But I say that it is a good basis to start off.

And then when you look at the guidance for the fourth quarter, what we're talking about is saying we're reversing the change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year.

So Kelly, long story to say that the guide towards 2025 of 16% to 18% really ends up being a fairly clean number for us for this year. That guide does not really have a lot of noise of discrete events that are not part of our normal tax strategy. You can infer from that whatever you'd like. We can confirm it in January when we give you the '26 guide.

Fair enough. Last question, if I can sneak it in. Some of your competitors have noted increased competition on the deposit side. One was on government deposits. The other was some of the initiatives they're doing. Wondering if you could just expand upon market competition you're seeing in Puerto Rico, one? And two, like has there been any news of any new entrants to the island, specifically on the depository side?

Well, I'll take that. I'll start by saying not that we're aware of no new entrants in the [indiscernible] Puerto Rico. Competition, yes, I mean it's a vibrant market. And there is competition every day. We compete every day for our piece of the business and for customers. So but we're going to be rational while we're doing that. Yes, we won't lose any good clients on pricing and on terms. So we're seeing competition. It's normal. We have -- now you see how some of our esteemed bank competitors in Puerto Rico are sort of positioned themselves as challenger banks or whatever banks. But frankly, we like where we're at. And we like the fact that the franchise is has -- is certainly been reenergized -- and we're not behaving like 132-year bank and more to come on that, quite frankly. So we I don't know what I'll say other than we [indiscernible]

Our next question comes from Jared Cassidy with RBC.

this is Thomas Leddy standing in for Gerard. Loan growth in the quarter was strong, as you mentioned. And just on the back of the increased competition on the deposit side. I'm curious, in booking new C&I and CRE loans, have you seen a similar increase in competition, maybe resulting in less rigorous underwriting standards? In other words, anything you can tell us about changes in underwriting standards on loans you're originating now versus, say, a year ago?

I mean, I guess, each one of us can answer that. But no, the answer is no. And we have a very strong credit underwriting process and Lidio leads the risk side and then our business side as well. We are not going to do anything that doesn't make any sense, frankly. We tend to be a bit conservative by nature, quite frankly. But I'm not seeing anything in originations that points to our concern.

Yes. From talking to our bankers and listening to the teams, the pushback we gather and competition is more pricing, and we're seeing maybe particularly you're hearing in some entrants in the New York market and maybe South Florida, where people being a little more aggressive in pricing. And frankly, we -- if those loans are not through relationships, they're not coming with deposits. We're not going to pursue that, particularly in the U.S. In Puerto Rico, we might have a different strategy, echoing with what have previously said in his comments.

We now turn to Arren Cyganovich with Truist Securities..

Maybe we could just talk a little bit about, Javier, your commentary around investment initiatives that you have in your transformation plan or the second leg of your transformation plan. How are you thinking about all of the items that you kind of mentioned in your prepared remarks with regard to the cost in -- and would that be a step-up in cost? Or do you see some efficiencies that you'll be gaining that will help offset some of the further investment as you continue down that path?

Sorry, Arren, I mean the 1 thing I'll reiterate, our goal here is to be able to continue to invest and generating opportunities and efficiencies to be able to then continue to reinvest at the level of slowing down the overall level of expense growth.

Yes. So there's going to be the beginning and in certain periods, right, a disconnect, right, between initial investments and then results from those investments, which is what Jorge is referring to. And we think that's okay as long as as long as the actual investment makes sense to us. We're not going to do something dramatic or irrational. But we have to invest in our technology to continue to compete, not only in Puerto Rico, but we compete with folks that come from the United States, you may imagine, the big players are already here and they have the best technology. So we -- our program is rationally that way, and I think our expense base shows it. I don't perceive that we're going to go above and beyond a particular sort of [indiscernible] .

Yes. And what happens is, right now, we've got over 80 projects that are ongoing. Some of them have higher levels of current investments. Some are in capitalizing mode. But a lot of them are in dual expense mode. As you're developing, particularly with SaaS licensing agreements, you're paying for your new system and you're paying for your old system. So over time, as you start generating the cost avoidances and turning off old system, that allows us buffers to continue to reinvest following a business case and value-add analysis.

But when we talk about being able to slow down the rate of growth, that's the kind of thing that we're talking about is how do we shift and reallocate expenses and savings to continue to improve the business and add value to our shareholders.

And then I say and [indiscernible], that's a very important point that Jorge just made. We're not looking at this on a siloed view, right? So we're saying if we are going -- if we are investing in the transformation, we want to make sure that if we can generate some savings in other parts of the bank, which will, of course, kind of fund that transformation that's the mindset. And in many cases, we've been able to do that. And that minimizes the impact of the actual investment. .

Again, I mean, it's a broad-based program. We're very excited about it, and we're starting to see results and will continue because as I said, I mean, it's -- we're also creating a transformation mindset in our teams, right, we need to continue moving forward.

This concludes our Q&A. I'll now hand back to Javier Ferrer CEO, for any final remarks. .

Well, thank you. Thanks again, everybody, for joining us and for your questions. We appreciate that. We look forward to updating you on our fourth quarter results in January. Thank you.

Ladies and gentlemen, this call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

Well, thanks, everybody. Continuing with the mid-cap banks, we're very excited to have Popular to join us coming up from San Juan. We have Javier Ferrer, the President and Chief Executive Officer; and Jorge Garcia, Chief Financial Officer, with us. So thanks a lot. Thanks for coming.

Great to be here. We're enjoying so far.

Thank you for having us.

Maybe just to start off, just a little bit of an update how things are going in the summer, where you're seeing the state of things?

Well, I think it's steady as it goes. We are seeing a lot of good activity in Puerto Rico, a lot of momentum. The economy continues to be strong. I think that, of course, we're benefiting from the Bad Bunny residency and that not only has brought in a big, big spend and a lot of movement and music, and culture and food, but also a lot of visitors to Puerto Rico. Not only from the United States, but also from Spain, Dominican Republic, other parts of Europe. So it's been a pretty intense and beautiful summer, I got to say, so far in Puerto Rico.

You're new to your role as CEO since our conference last year, but you've been part of senior management at the bank for a while. How should we view your priorities now compared to maybe where the -- what the focus was before?

Well, I mean, I've been with the bank for 11 years now. So the last few years with very, very tight connection to the businesses and strategy and ultimately, as transformation program, which is running on its third year. This December will be the last year of the first leg, as we call it, of the transformation program.

So not many changes, I got to say, Jared, but definitely changes, if any, on focus. We have -- I think we're focusing on the next leg of transformation, and that has a lot to do with the new strategic framework that we unveiled a couple of weeks back to the leadership and also to everybody at Popular. And the idea behind it is to simplify what we're trying to accomplish within transformation and the strategy of the corporation, so that everybody can relate to what we're trying to accomplish. And I think that's very powerful.

And if you allow me, I'll just go over the 3 objectives. I don't think you'll fall off your share because, ultimately, it's about delivering value to our shareholders. The first one is be the #1 bank for our customers, and that has everything to do with primacy. We have very strong primacy numbers in Puerto Rico, our top market. We need to continue to defend and grow in certain segments of primacy. And it's about share of wallet, being there for customers, earning their trust, delivering value for them.

Second one is be simple and efficient. And that's exactly what it means. Very difficult to be simple, efficient, we need to make sure that we do things in a very cost-conscious way as we continue to invest in the company. And again, to deliver a best-in-class experience. The third one be a top-performing bank [ for price. ] And that's out there with what we're trying to achieve in terms of our ROTCE target. We put out a number. We continue to work towards trying to hit 12% by the end of the year, we've hit it. We've talked about 14%.

So -- but it's all about profitability and also the employee experience, understanding that we need to have the best talent to run the bank and continue growing. So -- and those 3 sort of objectives have underlying sort of areas of work. In some cases, it would be digital experience, data and analytics, payments, which is obviously key given our footprint in Puerto Rico. And -- but I think the beauty of it is that it puts together impact to our employees, our customers and ultimately our shareholders.

Our transformation has given us some very good early wins on the -- particularly on loan side products, small businesses being one of the segments that have been profitable for us transform. But again, I mean, we won't stop. Our north is to continue to become the most profitable bank we can become, and understand that we have a big responsibility Puerto Rico after 32 years working there, but there's still room for us to grow in Puerto Rico, the right way, we intend to do it.

As you said, Puerto Rico is benefiting from a sustained economic resurgence over the past few years with federal funding for infrastructure, potential benefits from onshoring due to tariffs and of course, Bad Bunny summer residency. How would you describe the current state of the economy and its resilience now?

Well, it's -- again, it's strong. Puerto Ricans are resilient. That's a great way of describing us and you're seeing in the economy. Clearly, there's some uncertainty out there given what's coming out of Washington, the tariffs and some inflation provoked by them. But again, I mean, we are not seeing any changes in the behavior of our customers. We are not seeing our commercial customers stop any of their big projects. We're seeing people investing both local, but also foreign investment and U.S. investment.

Certainly, the fact that we are on the right side of the tariff wall and given our very strong manufacturing base and talent in Puerto Rico, we think that we are positioned quite strongly to continue attracting investment. And in the last few months, there's been 6, 7, 8 new sort of investment opportunities for people coming into Puerto Rico, either de novo or expanding production in Puerto Rico.

So again, I mean, we are very, very nicely located. And also, we have the fiscal sort of flexibility of adding benefits to industries that want to move to Puerto Rico. It's no coincidence that we have 4 of the top 10 pharmaceutical companies operating from Puerto Rico, 3 or 4 of the top drugs in the world producing Puerto Rico currently, notwithstanding the fact that hurricanes may hit us once in a while. We've come back. That's why I love the resiliency, the word you used. It's defined us.

But right now, of course, no situation is perfect, but we like the trajectory of Puerto Rico. And I think it's going to continue. We don't see anything that ought to stop it in the near to midterm.

This past quarter, you announced a large public-private partnership. You've talked about the continued flow of capital into the island. What do the loan growth dynamics look like as we look out through the rest of the year and sort of a starting point for next year? Both on the commercial side and certainly on the consumer side as people have more money.

Jorge, do you want to take that?

Sure. So Jared, during the second quarter earnings call, we reiterated our 3% to 5% loan growth guidance for the year. That's driven primarily by commercial activity. But certainly, in Puerto Rico, we expect the consumer portfolio to continue to contribute, both in the auto lending and unsecured consumer product as well as mortgage.

If you look at the first half of the year, we've been very happy with the growth, both in the U.S. market and in Puerto Rico, both markets contributing to that. And as we look through the second half of the year, we continue to see some strong pipelines, large deals in both Puerto Rico and the U.S., but we are expecting a little bit of headwind in the U.S., particularly with paydowns on our construction portfolio.

Our construction portfolio is mainly focused in New York, and it's really a development that usually ends up in a term loan on multifamily CRE projects. We don't always participate on the takeout loans. And what we're seeing is given the reduced construction pipeline for some of the uncertainties that are well documented, we do expect projects to come to their end quicker, and we're expecting some paydowns in the second half, and that adds a little bit to a headwind to that and why we are in that 3% to 5% guide.

Is there any thought of changing the U.S. Mainland strategy of your portfolio? You have tons of capital, you have strong deposits. Are you comfortable with your exposure in the Mainland now? Or could you look at expanding that at all?

We always look at opportunities to expand our book in the U.S., particularly in the niche businesses we operate. They're very profitable, always looking for opportunities of expansion into other areas. Also -- but that's not -- it's what other people are doing. And we always look at how to grow our U.S. bank. It's something that we consider.

Okay. There's, what, almost $50 billion of Federal stimulus still to come. I think there is some concern before the election that a Trump presidency could be disruptive to Puerto Rico and the flow of capital for these rebuilding plans. What's the state of the relationship between Puerto Rico and the Federal government now? And what should we expect in terms of timing for the deployment of that capital?

The state of the relationship is strong. I recognize, and we all were sort of a bit trepidant when the President revaluated because we remembered that he had very public confrontations with a local politician, the Mayor of San Juan. And obviously, they made the news, and it was a big thing. But I have to say that our new governor focused with the Republican party when she was our elected representative to Congress for a couple of terms with our vote to the House of Representatives. So when she was inaugurated in Puerto Rico, President Trump sent a letter, congratulating her. So the relationship between the Puerto Rico government and the White House is productive.

So we did get some cuts at the beginning of the DOGE program. But they were not targeted to Puerto Rico. They were part of what was happening in the Mainland with Mr. Musk and his team. That has subsided. But none of them cut the obligated funds, which are close to $77 billion have to spend in Puerto Rico related to the hurricanes and COVID. Some of that -- some of the COVID will lapse. But we haven't heard anything that would lead us to think that, that's going to change.

Now there has been a change recently with the White House dismissing 6 of 7 members of the Puerto Rico Fiscal Oversight Board. And that we'll have to wait and see who the new members are, what that will mean for the PREPA bankruptcy and the rebuilding of the grid. But we think that what's been said is, it's been couch in terms of Make Puerto Rico Great Again, using the Board more proactively to generate economic activity. So we're looking forward to that.

And certainly, Popular has been a big participant in every single P3 project. And we've told the government of Puerto Rico, the Federal government and folks that are coming into the island to look for opportunities in that sector, in energy sector. But of course, we are best suited to be the local sort of partner for our financing. So again, I mean, we are looking forward to what the changes will bring, and we're hoping that it will be for the good of Puerto Rico.

It feels over the last few weeks, there's been a focus on the Caribbean in general from the military. And I saw that the Secretary of Defense or Secretary of War now, I was down in Puerto Rico and looking at expanding operations there. What's the potential? I know that there's really no info out there, but what type of stimulus could that be if there was more military spending coming through Puerto Rico? And could that accelerate some of the infrastructure improvements that are.

Yes and yes. Yes and yes. It's interesting that you make that you asked that question because in one of our meetings today, the question did pop up, absolutely. In Puerto Rico, there's always this issue of past history of using some of the land in Puerto Rico for military sort of training operations, and that the smaller islands that has raised political issues, obviously. But if you're reading the news, you're seeing the deployment towards the military -- deployment naval versus vis-a-vis Venezuela, right?

So I don't think -- I mean, I don't have an approval of it, but clearly, you can connect the stance, the administration stance on Venezuela and the practice -- the military practice that has occurred in Puerto Rico in the last couple of weeks. So it would definitely assuming that the military comes back into some of the bases and reactivate that side of his presence in Puerto Rico, it will be a net positive to the economy for sure.

We have a few questions for the audience. I think we can run through them, but it's end of the day. So we appreciate that it's -- everyone is a little bit tired. But right now, what's your current position in Popular shares? One, overweight or long; two, equal weight; three, short; or four, not involved.

So we have some opportunity to convince some people. And what would have the largest impact on improving the relative valuation of shares of Popular? One, better relative margin performance; two, above peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchase; or six, an accretive bank acquisition.

Interesting.

The loan growth and capital management agree with buybacks.

Yes.

All right. Any thoughts or comments on that?

No. I mean I think interesting to see the loan growth popping up here because when I think back of my tenure as Controller before I was in the CFO role and see Puerto Rico have struggled on loan growth and then to have experienced somewhere between 6% and 10% growth in the post-pandemic era, really outpacing our U.S., which has historically been our growth engine.

It's interesting to see that there because we're very proud with the growth that we've seen in Puerto Rico, the economic environment, how we've been supportive of that and still are bullish perspective for future growth in Puerto Rico, both from organic clients and deepening those relationships with our existing clients as well as new entrants into the market. So we certainly drive our teams to focus on loan growth. So good to see that's aligned with the participants here in the crowd.

In terms of active share repurchases, we do have an active program and continue to buy. We still believe our share price is attractive and continue to be active. So good alignment.

Great. Number three, what will organic loan growth be at Popular in 2026? One, 3% to 5%; two, 5% to 7%; three, 7% to 9%; or four, greater than 9%.

Good question.

Call it 3% to 7%, okay?

We'll give you the answer to that in January.

Yes, keep going like this.

Okay. And then our final question to what do you attribute the popular valuation discount relative to peers? One, elevated disaster risk in Puerto Rico; two, elevated credit risk due to higher consumer lending exposure versus peers; three, potential for weaker economic trends in Puerto Rico; or four, longer-term uncertainty around NII due to reliance on public funds. A little bit of a mix, including disaster.

Yes, let's open it to questions in the audience. I think there's a microphone that over and over. Just one second.

Could you actually comment on those 4 items in that -- on that slide, just as to what is the other side of it to eliminate the concern of those things that are called out?

Well, I'm going to start with [ one ], even though we got 0 because this is something that for me is it's a good result. We don't think -- we understand that where we are geographically, but I think our performance, not only the bank's performance, but also Puerto Rico's performance in bouncing back, clearly with Federal help like in any other disaster situation in the United States. I want to say the proof is in the pudding, and we continue reconstructing and rebuilding, but it's good to get this result because this is very real. And it speaks to the death of folks answering the question, right? It would be a very bad answer to have given a big percentage to #1. I'm going to go to 3. Jorge, you want to do 2, and I'll do 3.

Sure. Okay. So on elevated credit risk, I mean, I think when we look at our loan composition, we actually see that as a strength for Popular. I mean it really kind of differentiates us from other regional banks in the U.S. that maybe have a higher concentration in CRE, given our broad base, we participate in all financial products for our consumer and commercial base particularly in Puerto Rico.

So consumer lending, we might have a higher exposure. We see that as a strength. We got to look at risk-adjusted returns on that, particularly our exposure to auto lending. The yields that we get on auto lending in Puerto Rico on a risk-adjusted basis are probably represent maybe subprime lending in the U.S., while in Puerto Rico, it's really a prime borrower. You look at our originations are well above 700. So obviously, there's a history of Puerto Rico with maybe some mortgage losses and things like that, but that's pretty far in the rearview mirror.

And given unemployment rates of 5.5% compared to maybe historical double-digit unemployment rates, given the amount of investment in Puerto Rico from private sources as well as the impact of the federal reconstruction funds and everything else going on, increasing wages, et cetera, the consumer in Puerto Rico is in a much stronger position today. So we don't -- I mean, obviously, we are focused. We spend a lot of time on risk management in this portfolio, but this is not something that's at least not keeping me up at night.

Yes. And three is somewhat related to two. I'd say that, of course, there's always potential for weaker economic trends anywhere, right? But I think that the economy in Puerto Rico is well diversified. And it's had its bumps. But we don't see anything, again, in the short term to midterm, which will negate its momentum. The growth -- the projected growth is not going to be double digits or even high single digits, but it's projected to continue growing steadily or at least plateau at about 2%, 1.5%, 2%, 2.5%. It depends which economist or who you're talking to. There's a lot of opinions.

But we're thinking that given what we're seeing, the investment, the -- without considering events just like what Jared asked, which is a potential benefit to the economy. We feel that throughout time, the economy ought to do well, rebounding from the bankruptcy. Now there's certain things we don't control, right? We don't control, again, natural disasters. We don't control the quality of the public sector. We don't control some demographic trends, but Puerto Rico typically rebounds and grows now.

For us, the important thing is to be a good partner there and continue to be profitable as the economy continues to generate positive results. I don't believe that the bank is tethered to a potential -- to a growth rate. So there are people who say, well, if the economy is only growing 2%, the bank is capped at that. I don't believe that's the case. It has not necessarily been the case in the past. And if there's a downturn, the way we look at it is we would be the stronger -- we want to be the stronger bank so that we come out of the cycle bigger and more profitable. That's why this impetus on our ROTCE results and profitability is top of mind for the institution.

And not that it has changed dramatically, but I think the focus on it is what is changing or has changed in the near term in the last year or so. So again, if you live in a place, right, you do your darndest for it to grow and do better. There are no guarantees. But I see also the younger generation in Puerto Rico being a lot more entrepreneurs out of that generation, a lot of people thinking about exporting services and goods. So I don't think that it's a given that Puerto Rico necessarily will exhibit weaker economic trends in the near term, for sure. That's not what we're seeing.

Maybe, Jared, I'll have the last one.

If you want to.

On the last one, I think one of the first times I've seen kind of this concept of a negative long term on reliance on public funds. I want to first highlight that I think of the public funds almost like a repo book. I mean it is an important relationship. It's not one entity. It's not just the central government. It's over 200 public entities. These are real clients, and we have deep relationships with them.

And we can't really -- money is fungible, but all that money needs to be collateralized. It's all collateralized with U.S. treasuries or agency-backed securities. So it's not like we're using that money to deploy it in lending, for example. So it does not -- first, it doesn't represent a liquidity event and that we could either monetize a collateral or use it as collateral to borrow in any one of our off-balance sheet sources.

So right now, the public funds, first, we -- again, we like this relationship if -- but we've also extended the portfolios, right, in 2022, 2023. And that relationship actually is not providing the level of profitability than it did maybe in 2021 and 2022, given the extension. So over time, this is actually a tailwind that is providing for the investment thesis in Popular as a nice tailwind of improving our NII as our laddered investment approach that's funded by these deposits reprice.

And I invite the participants to look at our webcast deck, we provided quite a bit of information on there as to where we see the kind of the book maturing at what level and the yields on those maturities and versus current market rates and the improvement that we can get. So I actually see this in the midterm -- short to midterm as a source of strength and driver of NII profitability. And in the longer term, we do believe that this is a long-term relationship that will continue to provide higher profitability than what it is doing today.

Anyone else? I guess sticking with the consumer discussion. We've seen the consumer in Puerto Rico, the strength improved consistently over the past few years. We've seen average deposit balances steadily increasing as well. Do you think this is sustainable? And how should we think about baseline consumer deposit growth and seasonality now that we've...

Yes. So we saw like many banks, an increase in average deposit balances during the pandemic as our clients benefited from all the stimulus from the Federal government, and we saw increases of up to 150% of average balances pre and post-pandemic. Right now, we're around 30% higher balances than pre-pandemic. And we believe those levels are sustainable and really during that period of time, what we have seen is that minimum wages in Puerto Rico have increased by about 40%. Wages in the construction sector, which is an important part and one of the areas of growth in Puerto Rico has grown about 50% on the minimum wage there. And all those have bumping up effects.

And when we look at our client activity, particularly around direct deposits, which is really driven by payrolls and salaries, we've seen an increase of about 40%. So coincides with changes in the minimum wages and merit increases, et cetera, over that period of time. So we do believe kind of the levels where we're at, we don't expect to certainly see a lot of degradation in those average balances.

In terms of seasonality, we do see seasonality, and we expect that to continue. Traditionally, for the first half of the year see some increases in deposit balances as particular retail clients benefit from tax refunds. And then we see them kind of spend that in the third quarter. And then the fourth quarter has more stability with some bias towards higher balances. And some of those higher balances are driven by local laws that require employers to provide a Christmas bonus of at least $600 per employee.

Our clients get that in the fourth quarter, and that supports a little bit of that activity, plus you do get a little bit of a tendency of window dressing with commercial clients that might hoard some cash at the end of the year and to strengthen their balance sheet kind of for their audited financial statements. So that's the cyclicality. We expect that to continue. I think going forward, deposit growth in Puerto Rico probably driven more by general economic activity, obviously, inflationary effects and things like that.

On credit, credit trends have remained better than what we've seen has historically been the longer-term normalized level. Given the stronger health of the consumer that you just discussed and broader economic tailwinds, do you think these lower overall credit levels are sustainable?

I mean there's nothing that we're seeing as we've said various times today that we're seeing a shift or a change in the economic environment, the operating environment in Puerto Rico that would lead us to believe that, that should change. We've been very happy with how commercial portfolios and mortgage portfolios have performed. We did see some deterioration in the second half of 2023. We've reacted to that. We saw that normalization very quickly, particularly in the unsecured lending and auto portfolios throughout 2024 and the first half of this year.

So we -- there's nothing that within our parameter or focus right now that concerns us that would change that. With commercial loans, you always can get idiosyncratic issues with any individual borrower that have a temporary impact on that, but there's no industry or segment that we're really focused on right now that would concern us.

Then maybe on capital. Capital is very strong, continues to grow even though with some of the capital management tools you're utilizing. How are you thinking about optimal capital levels here? I know that you still want to run maybe a little richer just given some of the geographic concentration. But longer term, where do you think an optimal capital level is for the franchise?

I mean we do have operating targets internally. We run stress tests that are important in establishing those operating targets, but we don't make those public. And certainly, as a management team, we do agree that our CET1 levels are high. We do believe that we should be running at a higher level than our peers, the U.S.-based peers, given our geographic concentration in Puerto Rico, but we don't believe that needs to be 400, 500, 600 basis points and whoever you compare us to.

But we do like as a management team and as a Board, we do have a conservative approach. And we do like the flexibility and optionality that having higher levels of capital provide us, and we really want to bring those down over time. Second quarter, CET1 came down 20 basis points, and that was driven by growth -- loan growth, so increasing our risk-weighted assets, great opportunity to continue in that organic growth, strong buyback activity and then the dividends.

We want to continue to deploy those levers and bring down our capital levels over time. We don't really want to do step functions. But we do realize we know the math. If you reduce the denominator and ROTCE goes out, we understand the benefits of that. But we are very much focused on improving the numerator, making sure that we improve profitability. We've been doing that. We understand the impact of reducing capital. That's not -- we're not blind to that. We are focused on that. It's just -- we believe that's more transactional versus the sustainability, it's going to really come from our investments and our efforts on the profitability side.

Great. Well, thanks. Any closing remarks?

No. It's been a great day. Thank you for having us. We've had fantastic conversations in one-on-ones, and I appreciate the opportunity to be here.

Well, thanks for joining us, and thanks, everybody, for joining us today. And with that, thanks.

Great. Thank you, Jared.

Thank you, Jared.

Hello, everybody, and welcome to the Popular Inc. Second Quarter 2025 Earnings Call. My name is Elliot, and I'll be your coordinator today. [Operator Instructions]

I'd now like to hand over to Paul Cardillo. Please go ahead.

Good morning, and thank you for joining us. With us on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge Garcia; and our CRO, Lidio Soriano. They will review our results for the second quarter and then answer your questions. Other members of our management team will also be available during the Q&A session.

Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses, taxes and capital structure, as well as statements regarding Popular's plans and objectives. These statements 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 release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com.

I will now turn the call over to our President and CEO, Javier Ferrer.

Good morning, everybody. I'm happy to be here with you in my first earnings call as CEO. I'd like to take a moment to recognize the impact by my predecessor, Ignacio Alvarez, had on this company during his tenure as well as on me as a colleague and a friend. It is an honor to follow such a great leader. So thank you, Ignacio, for your partnership.

I am humbled by the opportunity to lead this iconic Puerto Rican institution. For over 130 years, Popular has consistently demonstrated a deep commitment to Puerto Rico, its institutional values and putting our customers at the heart of everything we do. I joined Popular almost 11 years ago. I knew that if I wanted to make a meaningful contribution, this was the place to be. This idea, simple and yet powerful, continues to inspire me.

Before I discuss the highlights for the second quarter, I am pleased to report that we recently announced 2 capital actions, a new incremental common stock repurchase program of up to $500 million and a 7% increase in our quarterly common stock dividend to $0.75 per share. These actions evidence the strength of our capital position, which allows us to continue to invest in our franchise and serve the needs of our customers while also returning capital to our shareholders.

On Slide 3, we share a few highlights from the period that reflect our strong operating performance in the second quarter. We reported net income of $210 million, an EPS of $3.09 per share, an increase of $32 million and $0.53 per share, respectively, compared to the first quarter. Importantly, the improvement in our bottom line resulted in a very strong 13.3% return on tangible common equity.

Our results were driven by higher net interest income and expanding net interest margin and strong loan and deposit growth. We maintained our credit discipline, and credit quality continued to improve. I would like to commend the lending teams at Popular, which grew loans by more than $900 million during the quarter. As a notable example, we served as agent bank for a $425 million loan to the private sector entity that operates and maintains several toll roads in Puerto Rico. This transaction is one of the largest infrastructure [indiscernible] in Puerto Rico executed entirely by local financial institutions.

Please turn to Slide 4. As of the end of the second quarter, business activity in Puerto Rico continued to be solid, as reflected by favorable trends in total employment, consumer spending and other key economic data. The unemployment rate of 5.5% continues to hover around all-time loans.

Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 4% compared to the second quarter of 2024. Home purchase activity continues to be strong, as demonstrated by the $158 million increase in mortgage balances at Banco Popular during the quarter. While demand for new cars slowed somewhat after a very strong first quarter, we saw our auto loan and lease balances increase by $76 million during the period.

The tourism and hospitality sector continues to be a source of strength for the local economy. This summer, the sector is benefiting from an added tailwind during what is usually a seasonally slow period due to Benito Martinez Ocasio, also known as Bad Bunny's 39-concert residency at the Coliseum in San Juan, right next to our Popular center complex. Conservative estimates indicate that it will lead to approximately $200 million in additional local economic activity. It is also generating significant media exposure for the island, adding to its strong image as a compelling destination for travelers. The Popular brand is very well represented in the residency.

Additionally, some colleagues and I recently had an opportunity to attend the rebranding of an emblematic hotel property in San Juan and tour one of the island's new luxury hotel and residential community development being built on the East Coast. It's encouraging to see the scale of private investments being made on the island. And last, but certainly not least, we continue to expect that the ongoing disbursements of federal disaster recovery funds will support economic activity for several years to come.

Given what we see every day, I am convinced, there are opportunities for growth in Puerto Rico and that we are uniquely positioned to leverage them. We do not take our market position for granted. We compete for it every day and are strongly committed to promoting the island's progress as we have done for over 130 years.

Before turning it over to Jorge, I would like to briefly comment on the status of our transformation. These efforts are designed to enhance our customers' lives through more personalized and seamless experiences, increased employee performance and satisfaction with more agile work processes, modernize the company's technology to enable greater innovation and security and generate sustainable and profitable growth for our shareholders. A company-wide multiyear program such as this one requires commitment, focus and patience.

We are pleased with the substantial progress we have made so far. We have modernized branches to enhance customer experience and operational efficiency, reduce loan processing times for small and midsized commercial customers at Banco Popular and launched a new digital platform to improve our commercial cash management services. These are only a small sample of the many efforts completed and in process that will ensure we are the #1 bank for our customers.

I am confident that we can improve how we work by becoming simpler, more productive and more efficient. We will continue to leverage our position to size additional opportunities for growth in Puerto Rico. I am convinced there are many to drive increased profitability and continue enhancing our performance in the coming years.

It's only been a couple of weeks since I officially began in this role, but I'm excited to show everyone what we can achieve together with even greater strategic focus and agility. I will now turn the call over to Jorge for more details on our financial results.

Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarter net income increased by $32 million to $210 million, and our EPS improved by 21% to $3.09 per share. These results were driven by better NII and noninterest income and a lower provision for credit losses, offset somewhat by higher operating expenses.

There are numerous positives to highlight this quarter. The most significant for us is that the improvement in net income, coupled with our repurchase activity, which resulted in a 13.3% ROTCE for the period, an increase of 190 basis points from last quarter. As we have mentioned before, our objective is to deliver sustainable financial results. Our prior guidance of achieving at least a 12% ROTCE in Q4 of this year still stands. Additionally, given this quarter's results and credit outlook, we are increasingly confident we should exceed a 12% ROTCE for the full year, and not just in Q4. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity.

Please turn to Slide 6. Our net interest income of $632 million increased by $26 million and was driven by balance sheet growth, asset repricing in our investment portfolio and lower deposit costs in both of our banks. Our net interest margin expanded by 9 basis points on a GAAP basis and 12 basis points on a tax equivalent basis, driven by lower deposit costs and a larger balance of loans and tax-exempt investment securities.

After a slow Q1, loan growth of $931 million in the quarter was very strong, with both banks contributing to the increase. At BPPR, we saw loan growth of $681 million, reflected across all portfolios, but driven primarily by commercial and construction lending. This includes the $265 million that we retained from the toll roads financing that Javier described earlier.

At PB, we saw loan growth of $251 million, driven by commercial and construction lending. Last quarter, we guided to the lower end of the 3% to 5% loan growth range due to expected payoffs in our construction portfolio and the uncertainty in the economic environment. However, given the loan growth realized in Q2 and continued demand in Puerto Rico and in our niche lending businesses in the U.S., we reiterate our original 3% to 5% guidance.

In our investment portfolio, we continued to reinvest proceeds from maturities into treasuries, targeting a yield of at least 4%, while trying to manage the duration of the portfolio. During the quarter, we purchased approximately $2.4 billion of treasuries at an average yield of around 4%. The duration of these was closer to 1.5 years, as we felt the yields on that part of the curve were more attractive, particularly when considering the extension we achieved through our loan growth. We expect to continue to invest in treasuries to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio.

Ending deposit balances increased by $1.4 billion, while average balances grew by $499 million. Puerto Rico public deposits ended the quarter at $20.9 billion, an increase of approximately $1.3 billion compared to Q1. We continue to expect public deposits to be in the range of $18 billion to $20 billion.

At BPPR, excluding Puerto Rico public deposits, ending deposit balances decreased by approximately $60 million end-to-end, and average deposits grew by approximately $440 million, with noninterest-bearing deposits accounting for $93 million of that increase. At PB, ending deposit balances increased by approximately $150 million, net of intercompany deposits.

Total deposit costs decreased by 5 basis points. At BPPR, deposit cost decreased by 3 basis points to 1.52%, mostly due to a 10 basis point reduction in the cost of market-linked public deposits. At Popular Bank, deposit cost decreased by 14 basis points as we continued our efforts to reduce the cost of our U.S. deposits.

We're very happy with the efforts of our teams and their focus on deposit retention and growth strategies. However, we continue to expect third quarter deposit balances in BPPR to reflect historical seasonality and decrease as our retail plan base spends Q1 and Q2 tax refunds. That said, given the results in the first half of the year, along with the anticipated NIM expansion for the rest of the year from repricing of our fixed rate earning assets and deposit retention strategies, we now expect to see higher NII growth of 10% to 11% in 2025.

Please turn to Slide 7. Noninterest income was $168 million, an increase of $16 million compared to Q1 and above the high end of our 2025 quarterly guidance. There were two primary drivers of the delta versus our expectations: better fees related to customer transaction activity as a result of higher credit and debit card spending and higher other operating income, which was mostly due to a $3 million increase in income from equity method investments and approximately $3 million related to a reimbursement from the IRS. Based on the quarter's results, we now expect quarterly noninterest income for 2025 to be at the high end of the $155 million to $160 million range.

Please turn to Slide 8. Total operating expenses were $493 million, an increase of $22 million when compared to last quarter. The largest expense variance in the quarter was the $17 million increase in personnel costs. We've had a very good first half of 2025. As can recently assumed by our improved outlook for NII and credit, our internal net income forecast for the full year are now outpacing the original 2025 budget expectations by a significant enough margin to prompt us to begin to accrue profit sharing expense. During the quarter, we accrued $13 million for profit sharing in addition to other performance-related incentives. If we continue to outperform for the remainder of the year, the total profit sharing expense will be capped at approximately $40 million, or approximately 2% of our expense base.

Being in a position to share profits with all of Popular's full-time employees is a terrific outcome and allows our teams to benefit from the acceleration and the improvement of our profitability. This expense was not included in our original 4% expense growth guidance at the beginning of the year. However, we're working to mitigate the impact of these costs on our total expenses for the year with sustainable efficiency efforts. We now expect the increase in 2025 expenses, including profit sharing, to be between 4% and 5% when compared to last year. In other words, excluding profit sharing, we should see expense growth below our original 4% expectation.

Please turn to Slide 9. Regulatory capital levels remain strong. Our CET ratio of 15.91% decreased by 20 basis points from Q1, mainly due to loan growth during the quarter and the effects of capital actions net of quarterly net income. Tangible book value per share at the end of the quarter was $75.41, an increase of $3.39 per share from Q1, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity in the quarter.

During the second quarter, we repurchased approximately $112 million in shares at an average price of $99 per share. As of July 15, we had $33 million remaining on the share repurchase authorization announced in July of 2024, in addition to the incremental $500 million announced last week.

With that, I turn the call over to Lidio.

Thank you, Jorge, and good morning. Credit quality metrics improved during the second quarter with lower NPLs, lower inflows and lower net charge-offs. Our mortgage and commercial loan portfolios continue to drive the results, with credit metrics significantly below pre-pandemic levels, coupled with improved performance from our consumer portfolio.

Over the years, we have managed credit under different macroeconomic and operating environments. And more recently, we have taken several credit tightening actions to reduce our exposure to riskier segments. We continue to carefully monitor the performance of our book and response to the environment accordingly. However, we are confident that the improvement in the risk profile of our loan portfolios positions Popular to operate successfully on the more difficult economic conditions.

Turning to Slide #10. Nonperforming assets and loans decreased slightly during the quarter, driven by Banco Popular. NPLs in Banco Popular decreased by $4 million, reflected across all loan segments. NPLs in Popular Bank increased by $2 million, driven by a $3 million commercial NPL inflow during the quarter. OREOs decreased by $6 million, driven by sales of residential real estate properties in Puerto Rico.

Inflows of NPLs decreased by $4 million quarter-over-quarter. In Banco Popular, inflows decreased by $5 million, driven by the commercial portfolio. In Popular Bank, NPL inflows remained flat. The ratio of NPLs to total loans held in portfolio decreased 2 basis points to 82 basis points.

Turning to Slide 11. Net charge-offs amounted to $42 million or annualized, 45 basis points, compared to $49 million or 53 basis points in the prior quarter. Net charge-offs in Banco Popular decreased by $7 million, driven by lower auto loans and personal loans, offset in part by a commercial loan recovery recognized in the first quarter. In Popular Bank, net charge-offs remained flat.

Given our credit performance during the first half of the year and our outlook for the second half, we now expect net charge-offs to be between 45 to 65 basis points for the full year, below our original guidance of between 70 to 90 basis points. The allowance for credit losses increased by $7 million to $770 million, driven by higher reserves from portfolio growth and less favorable economic assumptions, offset in part by revised [ probability ] weights and changes in credit quality.

We leverage multiple scenarios to estimate our ACL. In the second quarter, which slightly reduced the pessimistic weight, resulting in a $4 million decrease in the ACL. In Banco Popular, the ACL increased by $3 million, driven by auto loans due to changes in credit quality and changes in the economic scenarios, offset in part by improvements in the [ current ] quality of our commercial portfolios and changes in probability weights.

In Popular Bank, the ACL increased by $4 million, driven by the changes in economic forecast and higher qualitative reserves for the CRE portfolio. The [ cooperation ] ratio of the ACL to loans held in portfolio was 202 basis points compared to 205 basis points in the prior quarter, while the ratio of the ACL to NPL was 247% compared to 243% in the prior quarter. The provision for credit losses was $50 million compared to $65 million in the prior quarter. In BPPR, the provision was $10 million lower, while in Popular, the provision was $7 million lower.

The combined provision to net charge-off ratio for the quarter was [indiscernible] 17%. To summarize, credit quality metrics improved during the second quarter. We are attentive to the evolving environment, but are confident that the improvement in the risk profile of our loan portfolios will allow us to operate successfully under different economic conditions.

With that, I would like to -- I would like to turn the call over to Javier for his concluding remarks.

Thank you, Lidio and Jorge, for your update. I am extremely pleased with our financial performance in the second quarter. We increased net interest income, grew loans and deposits and maintained strong credit metrics. We have had a strong first half of the year. We will continue to execute on our objectives, and I am urging our teams to remain focused on deposit retention, loan generation and particularly on our expense discipline.

We are committed to generating value for our shareholders and to achieving our ROTCE objectives. We will continue to execute our transformation program, determined to be the #1 bank for our customers and to simplify our operations to improve efficiency and drive sustained performance. We're also focused on reinvesting in the communities we serve and believe we are making a meaningful difference. These efforts are highlighted in our Corporate Sustainability Report, which we published in June.

I want to give a shout out to our colleagues and recognize their hard work. I see what they do every day in our branches, call centers and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions.

[Operator Instructions] First question comes from Gerard Cassidy with RBC.

This is actually [ Ford Hamilton ] in Gerard's place for today. Nice quarter. And just one quick question. There's been a lot of recent highlights and headlines on stable coins. And I was just curious how you guys see stable coins potentially impacting Popular's business and deposits and kind of the medium- to long-term outlook?

Well, thank you for that question. I just want to say that we're looking at it given that the [indiscernible] Act was approved. We put together a team to do deeper dives and start to think about potential use cases. So that's where we are. We did it. We realized that it's coming and it will have an impact in the industry. It's early innings, but we have started moving on the opportunity.

Okay. Great. Thank you. And that's it for me for today.

We now turn to Timur Braziler with Wells Fargo.

Good morning. Looking at the level of current accruals for the profit sharing, I'm just wondering what the interplay is between the $13 million that's accrual today versus the max of $40 million and the revenue guide that's out there. Does the revenue guide imply that current accrual is the right number, and you need to top that in order to get closer to the $40 million? Or as we get closer to hitting that new guide, that accrual should continue inching higher?

So first, I'll remind you, Timur, the way the profit sharing works is that we have to beat our budget by -- of net income by at least 3%. And if that number increases and the payoff gets greater, it's capped off up to 8% of our employees' salary up to a maximum total compensation of $70,000. That's where the 8% applies to. So if you make more than $70,000, you don't keep accruing. And this is a great opportunity for us to share in with our employee base when we really exceed plan. When everybody executes and exceed plan and we feel that our interests are aligned between shareholders and our employees.

Having said that, the guide that we have provided, which includes increasing net interest income as well as increasing expenses, the expense rates that we have, we are certainly expecting to accrue the max of property sharing, and that's embedded in our guidance. So we don't take lightly Javier's comments of making sure our teams continue to be focused on executing.

Okay. Great. I appreciate that color. And then maybe a 2-part question on deposits. I think I heard commercial deposit competition was maybe picking up on the island, driving some of the higher costs there. And then I appreciate the comments on typical seasonality in 3Q. I'm just wondering if you can frame how that seasonality looks in 2025 versus what we saw last year?

In terms of competition, Javier likes to say we compete every day for our customers for our business. We do it on service and sometimes some price as well, right? And I would say that on the commercial side, we don't see as much yield-seeking behavior or pushback. I think a lot of that has been embedded in our baseline.

On the retail clients, there are still many discussions and still some yield-seeking behavior. We continue to see outflows of roughly $100 million a month into our Popular Security subsidiary. So there's still some yield seeking behavior and from our retail clients.

The one thing that is different than last year for your question is that our teams are much more focused on deposit gathering and deposit retention strategies in our branches. As you know, we adjusted our compensation plans, we adjusted targets to really make sure that we were incentivizing the deposit retention behavior. When we look back pre-pandemic, where you don't have all the noise that we saw during the pandemic, it is clear that there's a trend where our client base gets more inflows in the first half of the year. They tend to spend some of that in the third quarter and then you see stability and maybe an uptick in the fourth quarter. We expect those trends to continue.

But I would also say, when we look at the inflows of our clients, particularly in the first half of the year, our clients have received more tax refunds than they did last year. And even though last year, we had the special onetime rebate from the Puerto Rico government. And inflows outside of the tax proceeds are about 6% higher. So people are earning more. So it really does go to demonstrate the strength of the consumer in Puerto Rico. So we are confident in our teams, but there is a seasonality. We have over 1 million retail clients that are very difficult to understand their -- predict their spending behavior. But that all is accounted in our NII guide, Timur.

Our next question comes from Kelly Motta with KBW.

I thought maybe kicking it off to the loan side of things, you had a really strong quarter, and you highlighted the larger infrastructure project. I believe the guidance bakes in some planned runoff in the U.S. Can you give us a bit more color as to what that is, one? And two, the activity in Puerto Rico, I feel like the second half of the year usually is better for you. So I'm wondering if you could help provide additional color on both parts of the business.

Thanks, Kelly. So we do see strong pipelines, particularly into the third quarter in both Puerto Rico and the U.S. It also -- so like what we're seeing, still continue to see large transactions that make a difference in those [ jumps from ] point to point.

In the U.S., we continue to expect that we will see some payoff in the construction portfolio. The speed at which that portfolio has been growing and the pipeline behind it, we expect that eventually is going to come down. As you know, those construction loans end up -- they're mostly multifamily projects. And we don't always succeed in retaining the take out the term loans after the construction project is completed. So we do expect that decrease to happen more likely in the fourth quarter than in the third quarter.

Got it. That's helpful. And on the funding side, it looks like most of the deposit growth was on the government side, and you took out some borrowings to bridge the gap. Wondering, especially with the deposit seasonality as you look ahead, the expected cash flows cover the loan growth you're expecting? Or would you anticipate necessitating some more borrowings here to fund your growth outlook?

Right. So a couple of things. I mean, let me -- I just want to clarify a couple of things. We did see end-to-end growth, that was mostly the public funds. But on an average basis, the public funds were -- I think they grew maybe $50 million, $60 million. Really, the nonpublic deposits grew almost $500 million on an average basis in the quarter, including about $150 million in noninterest-bearing accounts, about $100 million of that in Puerto Rico, $50 million in the U.S.

So the deposit franchise was strong. We did do some borrowings in the U.S. short term Federal Home Loan Bank borrowings that we do at any time as part of our liquidity. We have over $25 billion in off-balance sheet and on balance sheet liquidity in both banks combined. And so it's more about being able to fund. As you know, in the U.S., the alternative area of growth for us has been direct deposits on the Internet online channel. We'll continue to use that, just as we have flexibility to fund quicker or at a better price on a short-term basis than Federal Home Loan Bank, we will do that. In Puerto Rico, we did not have any change in our wholesale borrowing.

Got it. Last quick question from me is on the expense side. You rightly pointed out that with the profit sharing expense, your operating expenses are actually lower than what you had previously expected. Wondering if you could offer what's driving that? Are you pushing out some of the transformational expenses next year or realizing greater efficiencies with what you've done so far?

It really is all of the above. I mean, we are -- we do have -- as part of the transformation efforts, we do have work streams that are focused on efficiency. We are finding opportunities and sustainable efficiencies that are operational and technology expenditures, just managing data purge exercises, how we manage different operational accounts with more precision and urging our teams for a commitment of excellence and not being just being on top of their responsibility and making sure that we have that discipline. We are incentivizing people on expense control, and that usually warrants people to start paying attention in our focus on that.

On the transformation, there are projects that get delayed, and that impacts our total expense base. Some of it is delayed because of things that we do. Other things are delayed because of bigger picture things like there's a recent conversion in Fed wires that impacted the entire banking sector and that got delayed about a quarter. So you see some of that in our expense delays.

So it really is a combination of a lot of different things. But our teams are focused, and we want to make sure that we get to pay out on that profit sharing and also mitigate the total expense base for Popular.

[Operator Instructions] We now turn to Jared Shaw with Barclays. Your line is open. Please go ahead.

Hey, good morning. Maybe on the loan growth, you highlighted the large deal that you led. Are you now at the point where you're starting to see the federal stimulus money or federal investments really start to get traction? Should we start to expect more of these larger deals? And I guess what's your comfort with sort of the upper end of hold size on this?

Well, we are seeing -- talking to the government agencies that are handling the federal funds and also for our customers, we are seeing deployment of those funds in Puerto Rico. We expect to have more projects announced in the next few weeks to months. I don't think that we're going to be seeing in the next few weeks, anything on public partnership activity. That doesn't mean that there won't be more. But I want -- I wouldn't want to mislead you to tell you there's a pipeline on public partnership transactions or financings of that nature.

There are certain things that are being discussed in Puerto Rico. And definitely, we are the go-to bank locally when the government and third parties want to come in and participate in P3 projects. So again, I don't think that I can share at this moment, things that are being discussed, but we're committed to financing and participating in those deals. So I mean -- and I want to say also, I think the government is very much focused on economic development, permitting agility. And given their good relationships with the Trump administration, what we hear and see is encouraging.

Okay. All right. Maybe shifting just to the fee income guide, should we assume basically sort of steady trends from here, excluding maybe in the equity investment adjustment and the refund, that $6 million and other? Or is there any other areas that are seeing outsized opportunity?

I mean, there are cyclical cycles -- I'm sorry, for the double there. But if you look historically, second quarter and fourth quarter tend to be higher. You have more transactional activity in the second and fourth quarter, some insurance fees that happen that come in, in the second and fourth quarter as well. Certainly, we highlighted the IRS refund. That's not something that we would -- that's something unusual.

But the equity pickup, there was nothing unusual about that. It just had a slower first quarter and picked up in the second quarter. So we feel good about the updated guidance for the year and just -- you can do the math, it just signifies top end of the guidance for the second half of the year as well.

Okay. Okay. And then just finally on the capital and the buybacks, a good level of buybacks this quarter. Is this sort of a pace you feel comfortable with, given the broader capital backdrop and growth outlook?

I think it's a reasonable pace, and we still feel that our share price is very attractive at these levels.

This concludes our Q&A. I'll now hand back to Javier Ferrer, CEO, for any final remarks.

Well, thanks again for joining us and for your questions. We look forward to updating you on our third quarter results in October. Thank you.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.