Popular, Inc. Stock

Great. Well, good morning. Thanks for sticking with us. We're pleased to have Popular, BPOP up next. And Jorge Garcia is joining us as the new CEO and former CFO. So congratulations on your new role. Thanks for joining us.

Thank you, Jared.

Maybe just kicking it off, this is your first conference appearance as CEO, while you've been deeply involved in the strategy and execution for many years. As you step into the role, what do you think investors should understand about the next chapter for Popular in the areas where you're most focused today?

Sure. I mean I think the first thing investors should know is that Popular is not about any one single leader. It's about a great organization that's led by many different people, whether that's leaders in our branches, in our call centers, in our offices. So in terms of the momentum and all the great trends that we're seeing, they're really driven by a much larger organization.

We'll continue to focus on our strategic objectives, which are be the #1 bank for our clients, be simple and efficient and be a top-performing bank. We talk about top performing, we're talking about not only ROTCE, but also being able to attract and retain top talent in Puerto Rico and in the markets we serve, and that's not changing. And we want to have a little bit of continuity. We just launched this focus last year. And certainly, the management team and the core team, including myself, were important parts of developing that focus. So that's not really changing. We've emphasized that to our teams, and we've emphasized the continued sense of urgency and the progress that we made. We have good momentum. We're in a good spot, and let's keep moving forward on that.

Great. Over the last several years, Popular has steadily improved profitability, increased capital return and advanced in its transformational efforts. As you think about the franchise today, what excites you most about its current position?

Like I said, great momentum. It's not often that you see a CEO change in such a great moment in time. And that's not that there aren't challenges ahead of us. And -- but there is great momentum. There is a sense of urgency in the team, a competitive spirit. I think Javier did a great job in kind of awakening that giant and our focus on servicing our clients, adding value in those interactions and really a focus on being active participants in the growth and the improvement of Popular and being focused on key performance indicators, this focus on ROTCE that it may seem like a simple thing, but we used to kind of have a broad-based target of double-digit returns and being able to narrow down to a specific number and being able to guide people towards that goal and educating people has really helped kind of remain -- have our teams focused.

We're very much focused on those deposit relationships. We have done a great job, I think, since the end of 2024, where we saw a decrease in our deposits, kind of awaken kind of that focus. We had been -- all of our transformation efforts have been geared towards improving our loan origination. And we've continued to do that, but at the same time, being able to continue to emphasize to our people that trust with our client, that relationship with our clients starts with that deposit relationship.

So as I look through, I'm excited about our position in Puerto Rico. I'm excited about the progress we're seeing in our U.S. business. I'm excited that people are focused and have the level of urgency to make sure that we continue on the trends. As we said on our second quarter call, we haven't peaked. We have more opportunities to come.

You remained constructive on Puerto Rico throughout the cycle and many of the economic indicators on the island continue to look favorable. What are you seeing today in terms of consumer activity, employment, tourism and business investment? I guess how would you characterize the resilience of the local economy?

Yes. We continue to see stable environment. You just kind of talked to some of the metrics that we focus on, unemployment is still in the low historic levels. We have more people working today. So the participation rate is higher. We have -- even though we have about 10% fewer population, we actually have more people working than we did 10 years ago. We've seen wage increases over the last few years that has helped mitigate some of the inflationary impacts that we're seeing in the economy. So we see the stability.

If you looked at our second quarter results, the net charge-offs on our consumer loan portfolio were very, very strong, low -- and the reality is that there's good momentum in Puerto Rico, a lot of people betting on Puerto Rico. We are cautious. I mean, certainly seeing oil prices where they continue to be very high. The increase that we've seen in the last couple of days, that is something that the longer that persists, it will put pressure on the local economy. We import a lot of things. So oil prices impact all of our commerce.

And on top of that, you have the tariffs that we are subject to all the U.S. tariff rules. We are within the tariffs wall of the U.S. So that also makes daily life more expensive for our clients. So that is something that we are paying attention to. So far, we haven't seen any significant impact of that. We were talking earlier today, just Puerto Rico sees a little bit of that same K-shaped economy. It's no different in the U.S. But it is something that we are vigilant. But so far, there's nothing that's alerting us or worrying.

You touched on it, but consumer credit trends have remained remarkably healthy and spending activity continues to be strong. What do you think have been the biggest contributors to that resilience? And how sustainable do you think it is?

I think it's -- the diversity of where we're seeing investment in Puerto Rico, certainly on the construction side from whether those are funded through federal money on disbursement still recuperation funds from the hurricanes or private investment, we're seeing just a diversity. Areas of growth continue to be in construction, leisure, so tourism and -- sorry, construction, leisure, tourism and warehouse and logistics. So that diversity helps quite a bit.

In terms of tourism, we are seeing a lot of opportunities for people through the investments in Airbnb and the ability for ecosystem that is driven by self-employment where we see kind of the Puerto Rican spirit of trying to be self-employed and be able to diversify sources of income for people, whether it's through creating tourism activities or in managing these Airbnbs, et cetera. So it's just the diversity. It's not a one-trick pony kind of thing for the Puerto Rico economy right now.

And by the way, on top of that, there's been about $3 billion of announcements of investments from major pharma companies, including Eli Lilly and Amgen that add to the diversity, right, of Puerto Rico, sometimes we forget about 40%, 50% of the economy in Puerto Rico's manufacturing base and a large part of that is still pharma and biotech.

Yes. I was going to ask about that with the tariffs that seem to have created a big opportunity to bring more manufacturing in those sectors into Puerto Rico. Any update on some of that spending and what the expectation is? Is that going to drive net new employment? Are you seeing people moving back to the island?

We -- so in terms of the announcements, one of the things that I love about those announcements is that the largest investments have been of companies that have been operating in Puerto Rico for a long time. And they understand the Puerto Rico market, the labor market, the infrastructure challenges that sometimes people highlight and yet they're making the investments, right? They're making those commitments. So I think that goes towards the level of confidence and resilience of Puerto Rico.

Those announcements right now are heavy on the construction side or expansion of production facilities. So first, we will see that on the construction side and then eventually on the employment. To me, that's important. It's a sustainable employment, right, that will take -- will go beyond kind of the federal reconstruction projects. On the other hand, these tend to be capital-intensive projects, not necessarily huge labor focus, right, particularly today in modern manufacturing. But it's a great momentum for that industry.

Great. Loan growth has remained solid, but you continue to guide to the low end of the 3% to 4% growth range. What are you seeing in the pipelines today? And which parts of the portfolio are generating the most attractive opportunities?

Yes. We see growth in commercial -- in the commercial side in both our U.S. and Puerto Rico market. In terms of the second quarter guide on the lower end, we do have some headwinds with our construction portfolio in the U.S., but we are expecting some payoffs. And while pipelines there are good and productive, they do have some long process to kind of get going and seeing those disbursements and those impact while when you're doing a takeout loan or those concern, you take a big chunk out. So the replacement rate is a little bit slower.

In Puerto Rico, we -- the one portfolio that we see some headwind is in the auto lending portfolio. We have seen some declines quarter-over-quarter in that portfolio, and that's really driven by a reduced -- a reduction in new car sales, and that goes back to the previous conversation about the impact of tariffs and higher costs around cars in Puerto Rico. I think the average car in Puerto Rico is now in the $48,000 to $49,000. And that is a significant investment for the average household in Puerto Rico, and that's reflected there.

We continue to see growth in our mortgage portfolio. As you know, we stopped selling our originations and retaining particularly FHA guaranteed loans, given some structural benefits of retaining those in portfolio in Puerto Rico. And we continue to see enough demand there that, that portfolio keeps growing.

How would you compare what you're seeing in Puerto Rico today versus the Mainland operations? And is borrower sentiment and loan demand evolving differently across those markets?

I mean one of the neat things of coming into the role is that I've been spending a lot more time with clients than I used to. I guess when I was CFO, they kept me hidden a little bit more. So now I have no choice. But I've been able to spend time with clients, and you do see, I think, in both markets, people see the opportunities, and they're willing to bet on those opportunities. And it gives us a chance to add value and strengthen our relationship with those clients.

And I don't really see a significant difference in sentiment. Certainly, it requires a much more focused effort in Puerto Rico. I know-how for us, a track record is very important in those conversations. But right now, I don't see a significant difference in sentiment. Of course, everybody is very aware of kind of these macroeconomic forces, global forces outside of whether it's the New York market, Florida or Puerto Rico.

You've spoken in the past about being increasingly selective on larger relationships and focusing on returns in today's environment, where are you most willing to say no?

Yes. We -- one of the things as we try to tell kind of our teams, it's not about saying no. It's what makes us comfortable to say yes, right? So creating that balance of what structure or what terms we want to see to be able to support a client and support our communities. And there are times that the client is unable to come to terms to how we are going to feel comfortable, right? And those are the times where we have to really think and decide to walk away. We can't do every transaction. And that discipline is important. We want to make sure that our teams have long memories, but also understand what it is our need to support growth in Puerto Rico and growth in the markets we serve, but particularly in Puerto Rico.

We compete very hard every day. Don't think for a second that Puerto Rico is not a competitive environment. It is. We are in a position where we do get a chance to see a lot of deals. We're often the first person people will come, particularly with larger transactions when they're looking to invest in Puerto Rico. And it's on us to try to make that work. And we don't want to give up our size and our competitive advantage in Puerto Rico. We want to make sure that we do it profitably and not kind of lose sight of that.

Shifting to deposits. The sustainability of the deposit franchise continues to be one of the most differentiated aspects of the Popular story. What gives you confidence in the long-term durability of that funding base?

Yes. I mean I think it's the commitment that I see in our employees to their communities, to service, to Popular, we just had our -- we have -- we celebrate the years of service, we call them like anniversary celebrations. And even then you have people that -- a number of people have been working for Popular for 25, 30, 40 years and the level of enthusiasm that they have in these celebrations gives me a lot of optimism that, that same enthusiasm is reflected in the relationships in their communities and with their clients.

As I said before, we had kind of focused more people on loan generation and trying to grow and kind of maybe let our eye off the ball on that deposit relationship. That's not going to happen again, right? And I think in every conversation that we have, we reinforce that. We reinforce the opportunity to not only retain a client, but make sure that those are opportunities for getting more of their funds and the deposits into Popular. We're able to offer a diverse group of products with our broker subsidiary. As we see people looking for higher yields, we have that opportunity to provide that service and integrate our teams. We have a lot of new efforts that are focused on personalization.

And for example, we launched an effort that is focused on health care. So where we're targeting doctors, dentists, vets, et cetera. And we started a very early time in their careers, and we've developed programs that support not only that med student, but also that doctor that's retiring is looking for maybe a succession strategy and be able to monetize their practices. And we've created teams that are composed of retail, commercial, insurance and broker teams to be able to provide a breadth of services, and we've seen great traction in those efforts in terms of increasing deposits.

So it's continuing to find those segments and those opportunities within the Puerto Rico ecosystem that we can continue to add value. That is the important part. We don't want to compete exclusively on price. We know that's important. And at times, you have to step up on price, but the important part is that our clients sees a lot more value across the platform and not just on a yield on a deposit.

Deposit balances can be influenced by seasonality, tax refunds and public fund flows. When you look beyond the short-term movements, what trends are you seeing in customer behavior and relationship growth?

Yes. I mean I think that's always going to be a challenge in a small island, right, that as we look forward, there aren't a lot of catalysts for significant deposit growth beyond increasing our market share. I mean as we look through, I think we need to expect Puerto Rico deposits to grow 1%, 2% range with the general economy or inflation in Puerto Rico. I mean that's the natural. So it's on us to be able to make sure that we create those relationships.

One of the things that has been different, at least in the last few years in Puerto Rico is that I think our clients used to be exclusively with one bank. Now after the hurricanes and the pandemic, they've learned a little bit to diversify and have multiple banks. So that creates an opportunity for us as well. Once we have those clients on board, we want to continue to be that primary bank, right, the bank for those clients, having access to that client that maybe was at a different bank before and gives an opportunity to bring more of that relationship with us. At the same time, we have the onus to keep the main relationship with our existing clients.

But -- those trends are consistent as long as the Puerto Rico economy is growing, we should see that reflect in deposits, but no significant trigger given the migration. You asked about the population growth. We continue -- the outbound migration of people leaving Puerto Rico that we saw earlier in, I guess, between 2010 and 2020 has slowed down, but our mortality rate is still higher than our birth rate. So we're still not seeing necessarily population growth in Puerto Rico.

As you think about the franchise several years from now, what does the optimal deposit mix look like? And where do you see the best opportunity to improve profitability?

I mean I think in terms of Puerto Rico, I mean, we're happy with the deposit mix. I mean we you have to look at our book in -- we look at it in 2 different ways. We have our public funds, right, that are an important source of income for us and it's an important -- very important set of clients. It is more expensive deposit for us, but we do like that deposit relationship. They do provide a significant contribution to our profitability. And then you have the nonpublic funds. And those nonpublic funds, as you've alluded, are very transactional based, low-cost deposits, and they really are the strength of the franchise. So we aren't necessarily as focused on the deposit mix in Puerto Rico as we are in continuing to maintain and grow that deposit. We're doing a lot of things to be able to make sure that we grow and retain those balances.

In terms of profitability, I think we have still opportunities. First, we have some tailwinds in our investment portfolio still, particularly in the rate environment that we're in. We continue to reprice kind of our ladder investment strategy, both in terms of the legacy investment portfolio that's maturing every quarter as well as the more recent vintages that we purchased that in today's environment, provide a little bit of a potential lift there in their yield. So that's certainly a tailwind. We continue to see commercial and general loan demand in our market. So that's an opportunity.

And then we still have opportunities in creating efficiencies in Puerto Rico. We -- our current expense base for this year included a reduction of about $50 million in expenses that we are right on target for those. For next year, we expect that to increase to about $70 million cumulative. So -- and our teams are pretty focused. And those are not big restructuring or heavily labor reduction efforts. These are just having a commitment to excellence to really pay attention on how we procure, how we manage our technology, how we manage data, just little things that add up. And that's permeated across the organization.

And so -- and then certainly, when we look at our U.S. business, the trends there continue to demonstrate improved profitability. And we just recently had a switch in our leadership in the U.S. Our new U.S. Market Director is -- used to run our Florida business, and now he's running the U.S. business. And he's very much focused on improving the deposit strength in the U.S. As you know, that's been an area -- a challenge for us in the U.S. is the deposit franchise. The teams are ultra focused on that as well. We're managing, changing our compensation structure to make sure that we're providing more focus on deposit gathering and low-cost deposit gathering.

And all these things will help continue to drive profitability. And then, of course, we need to manage our capital and be able to optimize our capital levels will certainly result in a better ROTCE as we reduce that denominator.

I know you're CEO now, but you were CFO, so I feel like I can ask this question, too. This time last year, we were talking about the potential for rate cuts. Now we're talking about the potential for rate hikes. How is the balance sheet dynamics changed over that year? And how are you positioned for that and with the lens of the margin backdrop?

Yes. So the reality is our balance sheet is fairly neutral. If you look over the last few quarters, we tend to switch between slightly asset to slightly liability sensitive depending on the level of public funds. So this last quarter, the second quarter, we tended to be slightly liability sensitive because of the increase in public funds. So we've tried to manage our portfolio. We haven't extended to make sure that we feel comfortable with our rate position. Right now, the fairly neutral position gives us some comfort that our profitability is not really driven on some scenario that may or may not occur.

Great. Popular has invested significantly in digital capabilities, branch modernization, cash management tools and customer-facing technology. What have you learned from those investments so far? And where are you seeing the most tangible productivity benefits?

Well, I've learned that there's no new technology that's cheaper than the old obsolete technology. That's one thing. It is a heavy investment, but it creates a lot more resilience. Obviously, the functionality of our new investments and the experience for our clients and for our employees is significantly better. I'm very excited about the efforts that we have done with the deployment of our commercial treasury and cash management product. We're coming towards the end of finally rolling out to all of our clients in Puerto Rico. And we see the tangible difference in that.

We -- in the at the end of the first quarter, we started launching some corporate credit card products that we saw a lot of uptake in the second quarter. We saw the benefits in our noninterest income in the second quarter. We continue to expect to see some of that going forward. So the investment, it takes time. It's patience, but it brings in talent. It keeps people engaged. It creates a lot of buzz for our clients, and we will continue to do that to differentiate ourselves. Again, we don't -- we want to be able to add value in those relationships and not focus so much on just one item of price with our client relationship.

As part of that, I guess, AI continues to evolve rapidly. Where do you see the most promising applications inside the bank today? And how do you think AI could improve customer engagement, productivity or profitability over time?

Yes. So we are in the early stages of our efforts with AI. We started by creating a governance and infrastructure that try to create some guardrails around the AI deployment and AI use. And then we combine that with top-down initiatives and bottom-up initiatives. The top-downs are center-led and these are focused on 5 work streams. One of it is software development, one is BSA, cybersecurity, claims management and fraud. All those have strong value cases that we're focused. They're in different stages. I would say that where we are prioritizing right now is in cybersecurity and software development. And then the bottoms-up approach are more kind of guerrilla warfare, the teams being able to bring to the management team opportunities, whether that's leveraging broad-based tools like Copilot agents or other embedded solutions like in Salesforce or SAP within the context of that governance, right? And we're trying to be very strict in monitoring and making sure that we don't have any unauthorized use of tools that are not part of our stack. For us, the integrity of data and the cybersecurity is critical.

In terms of the benefits, it's too early. I mean, of course, when you look at the opportunities and the improvement in productivity, that's clear, whether -- when and how those translate to lower cost or efficiencies will probably take a little bit more time given kind of where we're at. We certainly watch what competitors and some of the larger banks are doing and announcing as opportunities. We've got to make sure that also you have a base of control. This token economy of all these AIs, I want to make sure that we don't get a situation where all of a sudden, we realize that we're spending more than we're actually saving. But the early stages, we do see that this kind of human in the middle concept that some of the efficiencies that we're creating, for example, software development, create a funnel somewhere else.

So as we're using AI, for example, to move some legacy systems to new coding in a new platform for like maybe something all going to like a Salesforce, AI can help us in that software development very quickly. But at the end, you still need human in the middle. You still need quality control and reviews, so you create the funnel somewhere else down the stream. So we haven't necessarily seen the speed to market yet, but sure we'll get better at it and start seeing some benefits.

I guess one of the most important developments in the second quarter was the introduction of a long-term ROTCE target of 14% to 17%. Walk us through the key building blocks behind that framework, if you can? And what gives you confidence that those returns are sustainable through the full cycle?

Yes. So when we look -- I mean, first, when we look at 14% to 17%, we live in -- unfortunately in this quarterly reporting, right? So that's important that any given quarter, I mean, $5 million of net income gets annualized. So that's about 30 basis points in ROTCE. So there is some natural drift in those results for what would normally not be a big number.

But in terms of what gives us confidence, we look at the efforts and the sustainability of those efforts in deposits in expense control in the diversity of our fee income, and it gives us opportunities to use different levers. So as we see growth in income on credit cards, for example, that gives us the flexibility or the ability to then maybe shift our deposit structure a little bit and maybe reduce fees on deposits to make that an opportunity to increase deposit balances, right, give us that confidence that we can replace some of that income. And you see all that momentum at the same time that we've been intentful with managing capital and that denominator is a clear opportunity to improve on the ROTCE target, right? So it is a lever that is available to us. So -- and to give you a sense about $100 million in lower capital CET1 is it translates to about 20 basis points improvement in ROTCE.

So when you have all those levers available to you, then you start getting some confidence in the momentum and the focus of the team and that sense of urgency, this concept of being an active participant in making these opportunities happen and these results happen, and that gives us confidence to go out and put that target. And frankly, as I said earlier, it helps us manage that messaging internally and keep people focused. What we found is that sometimes people were focused on a budget and you'd have conversation with people, Jorge, why do you keep pushing for this campaign or efficiency effort. We've already hit the budget. It's like we haven't hit the profitability. Let's go. Let's keep going. So being able to have that mindset makes a big difference in a large organization.

I guess you're already operating near the upper end of that range today. As you think about the next several years, what are the biggest opportunities to continue to improve returns to sustain?

Yes. I think we talked about that earlier. It's just the focus on deposits, the investment portfolio repricing still provides a tailwind for us. The improvement and focus and profitability in the U.S. operations contribute to that and capital management.

Great. On credit, consumer credit performance remains favorable. Mortgage quality remains strong and many headline credit metrics continue to improve. What areas of the portfolio are you monitoring most closely today?

Yes. I mean I think the second quarter was a really strong quarter. We -- there is nothing in our portfolio that's flashing any warning lights at this point. Certainly, with a high cost environment with where oil prices are, gasoline prices in Puerto Rico, that translates to everything in daily life in Puerto Rico. So we'll continue to monitor that. I think the area we talk about where we would see that potentially impacting first would be in small business. We've been focused on that. We don't see anything coming out in that group yet.

We hope that stability continues, the resiliency continues in Puerto Rico, but we're not naive. We want to make sure that we are prepared. We have strong capital base. We have strong reserves. We have a very strong team. We have efforts in our collections efforts that are geared towards being prepared for anything to get worse. But so far, there is nothing that's worrying us. The diversity of investment coming into Puerto Rico, the diversity of employment, we don't foresee any significant changes in that. But we do see life -- everyday life in Puerto Rico getting more expensive. So how do we help our clients prioritize that debt repayment in their quality of life and all that, that will be very important. But so far, we don't see any changes in the trend of Puerto Rico.

Great. Let me see if there's any questions in the audience, Charlie?

Yes. [indiscernible].

Yes. So we do look at this on a quarterly basis. And as you can imagine, Charlie, we -- when you're looking at the DTAs, you're looking at what we call positive and negative evidence towards being able to generate those NOLs, use those NOLs. And because you are forecasting into the future, that makes it very difficult. But it is something that we consider and we balance certainly the continuity and the sustainability of those results would give us confidence to be able to readjust the DTAs. That's normally how it works.

If you look back, I think the last time we made adjustments in the DTA was in 2024, if I remember correctly, '23 or '24. So it's really about looking at all the positive and negative evidence and the level of comfort that you have in the sustainability of it. But we do look at it every quarter. But what you described is essentially if you have a high level of confidence that you're going to be able to generate an amount of profit above and beyond what we already have reserved against the DTAs, then we would then release the reserves.

But remember, I mean, when we're looking at this, it's not at a point in time, right? So we are forecasting and some of the results that we're at, we have visibility into that in the assessment of those -- the realization of those NOLs. So it's not just a moment in time.

Great. I guess looking at capital at roughly 16% CET1 -- you continue to operate with one of the strongest capital positions in the peer group with the new $1 billion authorization and the dividend increase, how are you thinking about the optimal long-term capital structure?

Yes. We certainly want it to come down. And we've been more intentful in our messaging and our actions to be able to bring that capital down. We just increased our dividends to $0.90, right? It's declared this quarter. And we continue to do our buybacks. We said in the second quarter call that we expected the buybacks for the rest of the year to be in the $300 million to $400 million range. When you add that to what we've already purchased in the first half and the dividends, you're getting fairly close to 100% return for the prior year's net income.

So -- we want to reduce capital. We want to do it in a steady and patient way. We have a conservative management team and a conservative Board that have long memories. And we appreciate the flexibility of having capital levels if things get either require the level or provide opportunities that you can act in a turmoil, right? So we get it. We understand. I'd love to be able to say this is our target. This is what we're going to get to. We're not there yet to announce anything like that beyond the fact that we want to make it lower. We want to look more like our peers, but always with a buffer for the level of geographic concentration that we have in Puerto Rico. We wholeheartedly believe that that's necessary.

We do still have levers. When we look at CET1, we are higher than peers. But when you look at our additional Tier 1 capital, we are lower than our peers. So we have to fund that -- essentially that Tier 1 with common. And that's one area that we continue to explore where we see opportunities where we could have a preferred issuance that would replace common stock. Unfortunately, the market where rates are, it's just not something that we're willing to do at these levels. And I guess we're not at the level of precision. It's a good to have, not a must-have at this point, given our level of return -- capital return to our shareholders right now and where we're at on our capital stack.

How does M&A play into the discussion around capital? You've talked about your U.S. presence in the past. And how should we think about?

Yes. I mean, listen, we're not naive. We're not going to say we're never going to do M&A or we're not open to M&A, right? We -- there's always opportunities out there and sometimes we look. But the reality is that our M&A for us needs to attend to a handful of things, and that creates a really high bar, right?

First and foremost, it has to improve our deposit franchise in the U.S. So any potential target would have to provide for low-cost deposits. Number two, it has to be a commercial-led organization. We like niche businesses that can be profitable and that's not just exclusively focused on CRE. We like the geographies that we're in. So we want to be near those geographies or adjacent. So talking South Florida, Central Florida or New York metro area, adjacent areas, right? We don't want to jump on. I'm sure there's plenty of good banks in Iowa or Montana that we're not going to pursue.

It has to be a good cultural fit. And culture for us is not only the culture of the employees of the organization, but also the culture of the clients. I want to make sure that, that target would be comfortable with being owned by a bank in Puerto Rico, right? We want to make sure that we're not trying to a challenge of integrating a client base.

And then the last thing is size. When we look at acquisition target, you have to find a sweet spot, do small acquisition doesn't do anything. It's not worth it. And when we look at a target, we see Popular Bank, a $14 billion, $15 billion bank buying a bank, not Popular Inc., a $75 billion institution buying a bank. So the size of it. And when you put all those things together, there just aren't a lot of options out there that are attractive at this point. And so we will continue to prioritize our capital distribution through loan growth, organic loan growth and through dividends and buybacks for our shareholders.

Great. Well, thanks. With that, we'll end it, but thank you very much for joining us, and thanks to you.

Thanks, Jared.

Good day, and thank you for standing by. Welcome to the Popular, Inc. Second 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 your first speaker today, the Investor Relations Officer at Popular, 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 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 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 releases and our SEC filings on our web page at popular.com.

I will now turn the call over to Javier.

Well, thank you, Paul, and good morning, everyone. Before going into our results, I'd like to comment briefly on this morning's announcement about my retirement at the end of August. After close to 12 incredible years at Popular and with the organization in a very strong position, I have decided to focus on my health and spending meaningful time with my family and close friends. I do so with great pride about what we have accomplished as a team and with complete confidence that Popular is left in the best possible hands.

Jorge has the experience, the vision and the heart to lead this organization forward with strength and care. He's not only a great professional, but even a better human being. I will work closely with him in the coming weeks in what will surely be a successful transition. Jorge also has the support of an extraordinary management team, which includes, among other talented and dedicated leaders, Lidio as the new CFO, and Luis Sousa as the new CRO. I extend my most sincere congratulations to the 3 of them. These appointments reflect a thoughtful succession process and demonstrate the depth, experience and strength of our leaders. It's not about one person. It's about the whole institution and the quality of its people.

Okay. With that, please turn to Slide 4 to discuss the highlights of a very strong quarter. We reported net income of $278 million and earnings per share of $4.35, an increase of $0.57 per share or 15% from the first quarter. Results reflected higher net interest income, solid fee generation, continued balance sheet growth and strong capital generation. Compared to the second quarter of last year, earnings per share increased by 41%. Our ROTCE improved to 17% during the quarter. We are very pleased with these results and remain focused on delivering sustainable through-the-cycle shareholder returns.

Loans held in portfolio increased by $416 million during the quarter, driven by growth in commercial, construction and mortgage lending, while deposits increased by $2.6 billion, primarily reflecting higher balances of Puerto Rico public deposits. Credit performance remained stable with lower consumer net charge-offs. Nonperforming loans declined during the quarter, reflecting the resolution of a telecom relationship. We continue to return capital to shareholders, repurchasing $125 million of common stock, fully utilizing our prior $500 million authorization and paying our quarterly dividend of $0.75 per share. Earlier this morning, we announced a planned 20% increase in our quarterly dividend to $0.90 per share and a new $1 billion share repurchase authorization.

Before turning it to Jorge, I will comment on the business environment in Puerto Rico briefly. Business activity in Puerto Rico remained stable during the second quarter, while some indicators have somewhat moderated from the strong levels experienced over the last several years, overall economic conditions continue to be supported by a healthy labor market, strong tourism activity, ongoing infrastructure investment and strong consumer spending. The labor market is healthy with unemployment at 5.8% in June. Employment remained broadly stable and continue to benefit from strength in construction, leisure and hospitality.

Consumer spending remains strong. Popular's debit and credit card sales volume increased by more than 7% year-over-year, demonstrating continued activity across our customer base. Mortgage balances at Banco Popular increased modestly during the quarter and demand continues to be supported by strong underlying fundamentals, although affordability remains a constraint. Construction activity remains strong and is being supported by both public and private investment, including the continued deployment of federal disaster recovery funds and a growing pipeline of private sector projects. We are encouraged by the onshoring and manufacturing investment activity. Since 2025, the manufacturing sector has announced approximately $2.3 billion of investments and more than 5,000 direct jobs across pharmaceutical, aerospace, logistics, technology and advanced manufacturing sectors.

Tourism continues to be a major source of strength for the Puerto Rico economy. Hotel demand approached 2 million room nights or 81% occupancy from January through May of this year, increasing approximately 7% versus the same period in 2025. To boot, cruise passenger arrivals increased approximately 45% year-over-year through May. Air passenger traffic at Luis Munoz Marin Airport moderated a bit from record levels, declining approximately 4% year-over-year during the quarter. However, Puerto Rico continues to benefit from airline expansion announcements, including new routes and increased service from JetBlue, Southwest, Frontier and Avelo Airlines, which should support future visitation and economic activity.

Moving to our strategic framework. We continue advancing our 3 objectives: To be the #1 bank for our customers, to be simple and efficient, and to be a top-performing bank. Our strategy is centered on delivering innovative, relevant solutions to our clients that deepen relationships, improve their experience in every interaction with us and support sustainable growth across the markets we serve. To achieve this, we are focused on providing our clients with the flexibility to interact with Popular through the channel that best meets their needs while maintaining our high service standards. Frankly, it comes down to delivering great experiences. To blend the speed and convenience of self-service with personalized support and the human touch, we have continued to invest in our physical and digital channels.

Key examples are the ongoing modernization of our retail network to enhance branch appearance and improve technological capabilities. Our extensive branch network provides us with a competitive advantage in Puerto Rico and the Virgin Islands. We're pleased that more than half of Puerto Rico's -- Banco Popular de Puerto Rico's branches have been upgraded to our new look and feel. We also continue to leverage digital tools to strengthen engagement with our retail customers and help them make informed financial decisions. These initiatives are delivering measurable results. On the commercial side, our modernized cash management platform is improving the clients' experience through mobile functionality and enhanced money movement capabilities.

Also, our newly launched corporate credit card solutions continue to gain traction and already account for nearly half of our commercial purchase volume. We continue to expand our targeted segment strategy by tailoring our offerings to the unique needs of specific client groups throughout their personal and professional journeys. In Puerto Rico, we are deepening relationships with health care professionals and pursuing opportunities in other attractive high-value segments. In the U.S., we're working to enhance our community association banking business, developing capabilities that simplify the customer experience and enable business growth. Together, these initiatives reinforce the strategic intent behind our new institutional campaign, Aqui Creces. The campaign reflects our conviction that Popular is uniquely positioned to support the growth of our customers, businesses and communities we serve. As they grow, we grow.

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. Before covering the quarter's results, I want to thank Javier for his leadership, guidance and collaborations over the last few years. I've worked with him for over a decade and learned a lot from him. I am grateful for his friendship above all else. I look forward to working closely with him through the transition and continuing to benefit from his advice as he gets ready to enjoy a well-deserved retirement. I'm also excited to continue working alongside Lidio in his new role as CFO. I know firsthand that he will bring experience, analytical rigor and an innovative perspective to the finance organization.

On a personal level, I am honored by the opportunity to lead this great organization. After more than 20 years working across our U.S. and Puerto Rico operations, I have learned that what makes Popular special is our people. This is an organization with many leaders who help sustain its success. I am fortunate to take on this role at a time of great momentum and enthusiasm. I do not take this responsibility lightly, and I hope to inspire my colleagues to continue building on that momentum for years to come.

As Javier said, this was a very strong quarter. We performed ahead of our expectations across nearly all categories as our teams continue to be focused on executing their business plans in support of our key strategic objectives. Results reflected higher net interest income, stronger fee income, expense discipline and a lower provision expense. Our profitability continues to improve. ROTCE increased to 17%, up from 15.5% in the first quarter and 13.3% a year ago. Given the strength of our results and confidence in our ability to deliver sustainable returns, we are establishing a higher annual ROTCE objective of 14% to 17%. We will continue to use all available levers to position the company as a top-performing bank relative to mainland peers and to deliver attractive returns through the cycle.

Please turn to Slide 7. Net interest income increased by $23 million to $693 million, driven by the loan growth, fixed asset repricing and higher investment balances supported by deposit growth at BPPR. On a GAAP basis, NIM remained stable at 3.66%. On a taxable equivalent basis, NIM expanded 3 basis points to 4.17%, primarily reflecting a higher contribution from tax-exempt assets in the quarter. Ending loan balances increased by $460 million, including growth in commercial and construction lending across both banks and continued mortgage growth at BPPR. Our loan growth guidance remains consistent from last quarter at the low end of the 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 $1.1 billion of treasury notes with a duration of 2.8 years at an average yield of around 3.9%. Deposit balances ended the quarter at $70.2 billion, increasing by $2.6 billion compared to the first quarter. Puerto Rico public deposits increased by approximately $3 billion, while customer deposits, excluding public funds, declined by approximately $400 million. The point-to-point decreases in balances is consistent with historical seasonality as our clients spent the windfall from tax refunds. This activity also drove the lift in interchange income during the quarter.

On an average basis, total deposits increased by $1.9 billion or by $800 million when excluding Puerto Rico public deposits. Despite some seasonal movement in customer balances, overall deposit trends remain stable and continue to reflect the strength of our franchise. Puerto Rico public deposits ended the quarter at $22.7 billion. We expect public deposits to be in the range of $20 billion to $22 billion for the rest of the year. Total deposit costs increased by 1 basis point to 1.57%, demonstrating continued stability of our funding base. At BPPR, deposit costs increased by 1 basis point, driven by a 2 basis point increase in nonpublic customer deposits as a result of targeted retention strategies, while public deposit costs decreased by 5 basis points.

At Popular Bank, deposit costs increased by 4 basis points, reflecting competitive conditions in our markets and online deposit space. Given the favorable funding trends in Puerto Rico and balance sheet growth, we now expect net interest income to increase between 8% and 9% for the year. While higher balances of Puerto Rico public deposits contribute to NII growth, their higher cost is expected to temper some of the benefit to margin. Therefore, we expect NIM to remain generally stable for the rest of the year.

Please turn to Slide 8. Noninterest income increased by $15 million to $181 million and was above our guidance range. Compared to the second quarter of 2025, noninterest income improved by 7%, driven by growth in debit and credit card fees of 13% and 7%, respectively, as well as a 7% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We now expect quarterly noninterest income to be in the range of $165 million to $170 million for the year, reflecting continued strength in interchange income from the debit and credit card activities and including growing contributions from our corporate credit card offerings.

Please turn to Slide 9. Operating expenses increased by approximately $17 million to $484 million. The increase was primarily related to higher personnel costs, including profit sharing expense and performance-based compensation linked to the corporation's financial results. Business promotion expenses also increased due to higher credit card loyalty program activity. We continue to invest in technology, digital capabilities and transformation initiatives along with our annual salary increases and are expected to impact personnel expenses during the second half of the year. Based on current trends, we expect full year expense growth to remain at approximately 2% to 3% for the year, including profit sharing expenses. Our effective tax rate was 14% during the quarter, driven by higher tax-exempt income. We now expect the effective tax rate for the year to be between 14% and 15% due to higher projected exempt income.

Please turn to Slide 10. Tangible book value per share increased by $2.96 to $87.94, while CET1 increased 16 basis points to 16.1%, reflecting strong internal capital generation. During the quarter, we returned a total of $174 million to shareholders with approximately $125 million coming from common stock repurchases. Year-to-date, we have repurchased $280 million in common stock and as of the end of the second quarter, have fully utilized the $500 million common stock repurchase authorization approved in 2025. Earlier today, we announced a 20% increase in our quarterly dividend to $0.90 per share beginning in the fourth quarter, subject to Board approval as well as a new share repurchase authorization of up to $1 billion. During the remainder of 2026, we expect to repurchase an additional $300 million to $400 million in common stock. Our capital actions continue to reflect a balanced approach between supporting growth, maintaining capital strength and returning excess capital to shareholders.

With that, I turn the call over to Lidio.

Thank you, Jorge, and good morning. Before turning to credit, I would like to briefly acknowledge the leadership transition we announced today. First, I want to express my sincere gratitude to Javier for his leadership, guidance, dedication to Popular and friendship to me. I'm also excited and humbled to take on the CFO role, succeeding Jorge, and I look forward to supporting him as he steps into the CEO role. Finally, I want to congratulate Luis Sousa, who will succeed me as Chief Risk Officer. Luis has been a trusted partner, and I'm confident he will do an outstanding job leading our risk organization.

With that, credit quality remained stable during the second quarter, supported by continued improvement in consumer credit performance, stable mortgage trends and the resolution of a previously disclosed commercial loan. In the consumer portfolio, performance continued to improve. Consumers remained resilient despite elevated gas prices and inflation, supported by higher tax refunds and a solid labor market. Net charge-offs benefited from lower losses in the auto portfolio and the allowance for consumer loans declined, reflecting improved credit quality in auto and credit cards. Mortgage performance continued to be strong with historical low delinquency levels and net recoveries. While underlying consumer and mortgage trends continue to improve, reported credit metrics this quarter were primarily influenced by 2 significant commercial developments.

First, we resolved our largest nonperforming relationship, a $155 million commercial loan that had been classified as nonperforming since the third quarter of 2025. During the quarter, we recognized a $71 million charge-off and transferred the remaining $84 million balance to loans held for sale. The sale was completed on July 2 for $84 million. From a credit quality perspective, this resolved and removed the corporation's largest nonperforming commercial exposure. Separately, 2 unrelated commercial and industrial relationships totaling approximately $129 million were placed on nonaccrual status. These were borrower-specific situations and are not indicative of broader deterioration in the portfolio or in the industries in which those borrowers operate.

Turning to Slide #11. Total nonperforming loans decreased by $45 million to $413 million, and the NPL ratio improved to 1.04% compared with 1.17% in the prior quarter. BPPR NPLs decreased by $52 million, while NPLs in Popular Bank increased by $8 million, primarily driven by commercial NPLs. Excluding consumer loans, NPL inflows increased by approximately $137 million, primarily reflecting the 2 C&I relationships I discussed. We continue to monitor commercial trends closely. However, the activity remains isolated to a small number of borrowers.

Turning to Slide #12. Net charge-offs were $104 million or annualized 1.05% compared to $60 million or 61 basis points in the prior quarter. The increase was primarily driven by the $71 million charge-off associated with the resolved commercial relationship. Excluding this commercial charge-off, the net charge-off ratio was 33 basis points, driven by continued improvement in consumer performance, including lower auto losses and net recoveries in our mortgage portfolio. Given our year-to-date commercial charge-offs and NPL inflows this quarter, we now expect net charge-offs to be in the range of 65 to 80 basis points for the full year.

The decline in allowance was largely driven by the resolution of the telecommunication relationship and continued improvement in consumer portfolio performance. These benefits were partly offset by reserves established for the new commercial inflows and continued loan growth. Our allowance coverage remains strong. The ACL to loans ratio was 1.97% and the ACL to NPL ratio increased to 190% from 180% in the prior quarter.

To summarize, while the quarter included a few discrete commercial credit events, the underlying trends in our portfolio remained stable, supported by continuing strength in the consumer and mortgage portfolio. We have proactively addressed our largest nonperforming exposure, maintained strong reserve coverage and continue to monitor our loan book.

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 kind words and updates. We are very happy with our second quarter results. During the quarter, we delivered strong earnings growth, stable margin performance, continued balance sheet growth and announced meaningful increases in capital return to our shareholders. At the same time, we continue to advance our strategic priorities and invest in the long-term growth of our franchise. A source of pride for me and our employees is supporting our communities through investments and partnerships that create long-term social, environmental and economic value. These efforts and the progress achieved in 2025 are detailed in our corporate sustainability report published in June.

Some highlights include the deployment of more than $1.1 billion in loans to support small businesses and entrepreneurs across our regions and the launch of Mi Credito to help customers better understand and improve their credit profile. Together with our financial performance and our 3 strategic objectives, these efforts reflect our commitment to creating long-term value for our customers, employees, communities and shareholders. On behalf of my colleagues, I thank our clients and shareholders for their continued trust and support in Popular. On a personal note, I want to express my profound gratitude to everyone that has been a part of my extraordinary journey at Popular, a journey full of challenges overcome, shared learnings and above all, relationships with special people that I will always treasure.

I am especially grateful to my colleagues at Popular for their support, trust and dedication throughout the years. Leading this organization has been truly a privilege. I leave with enormous satisfaction and grateful as I see Popular solid, united and moving forward with a clear purpose and strategy.

And with that, we are now ready to answer your questions.

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

Javier, congratulations on your retirement. And Jorge, Lidio and Luis, looking forward to working with you in your new roles as well.

Jared, thank you. It's been a privilege. Thank you.

Yes. I guess there's a lot of good things in this quarter, I guess, to talk about. But when you look at the target for ROTCE and the buyback that's announced, I mean, have you changed your underlying expectations for optimal capital levels? And should we think of that $1 billion as a 12-month goal for buybacks?

Jared, it's Jorge. So first, the authorization does not have a time limit. So I want to clarify that it is not a 12-month deadline or anything like that. We did say that we would be executing buybacks for the rest of the year in the $300 million to $400 million range. If you add that to the dividends expected with the increase in the third and fourth quarter, along with the activity that we've had year-to-date, that will cover around 100% of the 2025 net income. So we like kind of that pace. We understand the math and let the balance sheet grow and that certainly help reduce the CET1 as we go forward. We're still open to optimizing our capital stack. We're still out there considering the additional Tier 1 capital to strengthen that part and create that efficiency in the capital stack.

But frankly, the market rates are just not in our favor right now, and there's no reason for us to do that given the size of capital that we have, and that really is just an optimization strategy. Other than that, I mean, we continue to be committed. We've tried to be more intentful in our discussions to reduce the CET1, but we continue in our philosophy that we want to do this over time. We want to have that flexibility. But currently, we understand.

Okay. All right. And then looking at loan growth, it sounds like clearly, the underlying economy still is strong and you're in a really good position there. What would have to happen, I guess, either in your business to see loan growth expectations move higher or even up to the higher end of the range given what we've seen so far this year?

Yes. We did have a strong growth in both markets this quarter. In the U.S., we've talked about our construction portfolio that has seen some continued increase. We do still believe that there are headwinds there in the timing of payoffs as people term out those construction loans versus the pipeline and the speed at which particularly in our New York multifamily development market is moving. So that's a little bit of a headwind. In Puerto Rico, over the last few years and including in the second quarter, we benefit from some large ticket loans.

And as we look at the pipeline, while there's still a lot of activity and a lot of good opportunities, we do see fewer of those large ticket loans. So that is something that we have in mind. As we look maybe further out, we do expect probably more spending in public works or infrastructure projects as certainly we approach a political -- an election year in 2028. There is a lot of activity like that in Puerto Rico. As you know, given our size, we usually get the first look at all these projects. We're not always going to pursue them. We're not always going to win, but we are going to have a good chance to be selective, and we continue to intend to do that. One thing I'll note on our guidance, certainly, resolving the $155 million loan this quarter, that also reduces the net growth of the loan portfolio.

Yes. Okay. And I guess just if I could ask one more, just on the inflow of those 2 loans that you called out. Any thought around what loss content could be there if you have a specific reserve? Or is that just something that you think you work out over time, but not necessarily a lot of loss content?

I think a lot of the driver for the provision this quarter was those 2 loans actually. So I mean, when you look at the overall performance of our credit book was actually positive. We said we -- there was improved performance credit metrics from our consumer portfolio and continued strong performance from our mortgage book. So a lot of the provision that we have was related to those loans. We did not specifically talk about the amounts. But we think, I mean, they're adequately reserved based on the information that we have as of today.

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

I'll add my congratulations to everyone on their new endeavors and roles. So congrats.

Thank you. Thank you, Brett, and welcome back. And thanks for picking up coverage again.

Yes. Good to be back. I wanted to, I guess, first, just talk about the competitive landscape, and it sounded to me like a little bit like perhaps you were seeing some increased competition. Can you just talk about both the U.S. and Puerto Rico and what you guys are seeing, if there's any increased competitive levels on the island in particular?

Yes. I'll share some thoughts and then Jorge obviously will chime in. I mean I think we've been saying in the last few quarters that we've seen competition -- there's always competition in Puerto Rico. I mean I don't get this idea that this is a market where competition is not present. We compete every day for what we do. And not only local competition, but also competition from big banks and fintechs and other financial institutions that come in and compete in different segments and products and services. But that said, I mean, competition is still rational. So we've also said that we will defend our turf and price rationally and reasonably both on the deposit and the credit products. So -- because we don't want to do anything that doesn't make any sense. And sometimes we'll let some opportunities pass if they don't make sense to us, right, considering all things considered. So in the United States, I don't know, Jorge, if you want to add anything?

Yes. So in the U.S., we are seeing continued competition, particularly in Florida and New York. In Florida, we see a lot of competition from smaller community banks, more localized players. And then in the New York market, it tends to be from bigger players. We're also seeing tough competition in the online channels where really the yield is your competitive advantage there. So in Puerto Rico, our deposit cost did go up on the nonpublic 2 basis points. This is something that we have kind of forecast or predicted to you guys in these conversations. And they're just reflective of our kind of targeted focus on retaining relationships. And we've been since, I guess, the end of 2024, just revised kind of our focus, the structures, incentives as well as exception pricing matrices that allows us -- and it's been very successful for us to retain good clients.

Okay. That's really helpful. And then on the expense guide for the year, you obviously tweaked it down. But even at the higher end in particular of the 2% to 3%, it implies a pretty good pickup from here even with the higher incentive compensation-related stuff in 2Q. Are there any projects related in the back half of the year that would raise professional fees? Or can you talk about the inflection in the back half versus 2Q in particular?

Sure. We do expect expenses to go higher in the second half. One big item, as I mentioned in my prepared remarks, is our annual salary increases. They're effective in July. So that probably adds $4 million or $5 million a quarter just on that. And then we continue to work on our transformation efforts. And as we said in the past, you have kind of this ebb and flow of projects that get done and move on. And certainly, that's all part of the guide. One part that's important, and I think the significant change is that the guide does include the range of profit sharing, including if we had to max out on the profit sharing, it still fits within the range that we are providing you.

And our next question comes from Arren Cyganovich of Truist Securities.

Best wishes, Javier. I really enjoyed meeting you last year. I was kind of re-ramping on the name. And I think your passion and your intensity definitely stands out, and I'm sure your family is going to look forward to that...

I can't be in the house too much because my wife won't like it. But yes, thank you for those very kind words.

And congratulations to Jorge, Lidio, and Luis. Definitely look forward to continue working with you. On the deposit side, ex government, they were down. I know you just talked about some of the competition. It looked like demand deposits was the area where there was a little bit of a decline. Any color in terms of that, any kind of seasonality, et cetera?

Yes. Thank you. There is seasonality. I mean, I think we go through and what we've said in the past is that we see in the first quarter that ending balances go up, average balances are flattish. They can -- they move along. The second quarter, we see higher average balances and ending balances start coming down. And it's just really the cycle of tax refunds and then people using those tax refunds. Third quarter, we would expect the ending balances to come down, and we would also expect average balances to come down. That's been our kind of trend over the last few years. And in the fourth quarter, we see that the ending balances come up and average balances are more stable.

So the second quarter really behaved as we would have expected based on those seasonal trends, averages were significantly up, ending balances did come down. I think excluding nonpublic in Puerto Rico, it's around $250 million. When we look at and double-click on the activity from our clients, frankly, where we see the big increase in outflows is in POS, so interchange. And that's consistent with the fee income that you saw increase in debit card and credit card fee that's, I think, 7%, 13% up year-over-year. So we truly see our clients really using this money and spending it. We did see some higher payments to governments or higher tax payments from some of our clients. And again, that's consistent with the increase that we saw in public funds that a large part of that increase was driven by estimated tax payments, particularly from pharmaceuticals and manufacturing companies.

Okay. I appreciate that. And then maybe in terms of the consumer credit continuing to be very strong. Was that also impacted by the onetime tax benefit to individuals in the quarter in Puerto Rico? And any kind of sustainable benefit? Or is that more of just kind of a onetime for the quarter?

I think in the same token, there is seasonality in deposits. There's also seasonality in our consumer performance. What I think we're most encouraged is the level of delinquencies and charge-offs are below the same period last year. So it's not only that we see the seasonality, which is driven by tax return, you see lower losses and lower delinquencies in the first half of the year than the second half. But in this first half of the year, it's actually lower than what we had last year. So we are very, very encouraged by the trends in our consumer portfolio.

And our next question comes from Timur Braziler of UBS.

Maybe again, looking at the back end of the year, I was going to ask on the deposit trends as well, just if the second quarter end of period decline is any kind of indication one way or another to the magnitude of third quarter seasonality. And I guess, in a similar light, you had mentioned margin flat for the rest of the year with some moving dynamics around fixed asset repricing and maybe some higher costs on the public fund side. I guess with the 3-month moving up, the 3-month treasury yield moving up during 2Q, is the expectation that margin is flat in each of the next 2 quarters? Or could you see that tick down in 3Q and then recover in 4Q as some of those public funds are wound down?

Yes. I mean when we say stable, we do mean stable for the rest of the year based on what we're seeing now. The first driver is the mix, right? We've increased our target for public funds by 10%. So that's our highest or the most costly deposit that we have in Puerto Rico at size. So that's not unreasonable to see that they would have an impact on NIM. The other thing is just exactly what you talked about is that the 3-month treasuries have been going up. That's not necessarily being reflected in a move in federal funds.

So we're not getting -- there's a little bit of basis risk there that narrows the spread on that. We'll continue our strategy of investing in treasury T-bills and notes that will mitigate some of that. But clearly, as we look out, both our NII guidance and our NIM guidance are taking into consideration kind of what we're seeing in futures right now. We're not assuming any changes by the Fed, by the way, in that scenario.

Okay. That's helpful. And then one more on the updated ROTCE range. Obviously, seasonally strong quarter. I think adjusted ROTCE this quarter was like 16.5% or so. I guess where are we now kind of in your mind from a core standpoint? And as you think about the strength that the bank and the island have been enjoying over the last couple of years, are we nearing that kind of peak-ish level here right now? Or is the expectation if you kind of normalize the last couple of quarters that ROTCE in this current environment can continue grinding higher?

I'm just going to say -- I'm going to react to the peak comments. I mean I don't think we're nowhere near our peak, and what we can achieve as a franchise. I just want to say that. And then maybe Jorge may add some rational numbers. I mean we're not stopping here, quite frankly. I think we've only begun. I mean we're seeing the efforts of a lot of work in our transformation program over the last 4 years. Teams are energized. So I mean, I think we can't really talk about a peak. I mean, as I said, we're just beginning.

I'm not sure that I need to add anything to that.

That's great. And then just last for me on capital return. So you upsized the buyback here. I'm just wondering in terms of Mainland M&A, if I'm not mistaken, you have some NOLs that are beginning to expire in 2028. I'm just wondering where that factors in to the potential for doing Mainland M&A? And then on the buyback, would you need to optimize that capital stack prior to really leaning into it? Or is this kind of back end of the year run rate a good one to extrapolate for the time going forward?

Let me answer the question about the DTA first, and then I'm sure Javier can talk about M&A. But I'm not sure I quite understood the last part of that question. So please let's set that aside, we'll go back to it, if you don't mind. On the DTA, you're right, the NOLs to begin to expire in 2028. The best way to realize the benefit of those is to increase our profitability. We are focused on doing that. We are not going to drive an acquisition strategy to realize the benefit of that DTA. What -- as you know, the part of the DTA or the NOL that we're not going to utilize is reserved. So it's not part of our tangible book value at this stage. It is certainly a benefit if you were to look at an M&A acquisition, but it's not going to be the driver for buying something. So I don't know, Javier.

Yes. Thank you, Jorge. I think you've heard us say that our primary focus continues to be on our transformation efforts. We're always looking for opportunities to add profitable niche businesses and teams and assets in the U.S., as we've stated. So -- but whole bank M&A is not a priority. And we've also said that there is a high threshold for any transaction that we may consider, and we level the opportunities to grow inorganically as long as they meet a few criteria and compelling enough for us to consider relocating resources away from transformation being one. Core deposits, it needs to strengthen our deposit franchise with lower cost deposits.

It needs to be commercially led. It needs to enhance our commercial-led niche business strategy. It needs to be consistent geographically, create greater market penetration in our existing footprint, increasing opportunities for value creation through cost synergies or extend presence to adjacent markets or geographies. The scale is going to be important or would be important, should be rightsized for our U.S. business. And for me, most importantly, of course, is the cultural fit. It needs to be aligned to our culture of performance and employee well-being. So we're very mindful of it. So that's our stand on M&A.

And by the way, you can imagine we're very collaborative around here. We put those together as a team. I don't think that the answer will be much different in the next quarter. So you had a third part to your question related to preferred. Can you repeat that so we can address it.

Yes. I guess maybe -- and thank you for the color on M&A. I guess maybe another way of asking the buyback question is if you do issue preferreds, if you do capital or optimize the capital stack, would you be more inclined to use those proceeds to maybe front load or upsize the amount you're willing to buy back in any given quarter?

Absolutely. Absolutely. I mean for us, optimizing capital would mean we're shifting CET1 to additional Tier 1 and whatever proceeds would be used to promptly or quickly reduce the CET1 by a similar amount.

Perfect. Javier, again, congratulations on the well-earned retirement and looking forward to working with you, Jorge, in your new role and the new team.

And our next question comes from Kelly Motta of KBW.

At the risk of beating a dead horse, just congrats again, Javier, on your retirement. Congrats to Jorge and Lidio on your subsequent promotions. I hope, Javier, you have something really fun planned and looking forward to working with Jorge and Lidio in your expanded roles.

Thank you, Kelly. Any ideas you can share of that? I'm all ears, but...

I always have some fun ideas, maybe offline. Maybe taking it off on expenses, like you reiterated your guide on expenses, but clearly, the NII outlook is better, fee outlook is better. Presumably, you guys are getting some higher profit sharing expenses with that. Wondering understanding that aspect of it, I'm wondering if there were potentially projects that were pushed out or additional savings realized. Just hoping even though the overall isn't changed, if we could kind of work through the moving pieces of that.

Yes. I mean we definitely have efficiency efforts that are ongoing. In our kind of baseline number this year, we had about $50 million in savings across the organization. None of these are huge big splash projects. These are really asking people to take an extra step and focus on excellence, operational excellence and things as simple as we note that teams will hoard computers because they're worried that they have a computer crash and they can have a spare. Well, if you have a lot of people keeping spare computers for an emergency, it adds up a lot of cost. So we've gone back out and destroyed them, sold them, whatever we need to do to dispose of them, that has a lot of savings on just on an ongoing basis.

And this is just an example of the kind of aspects. We are not managing the transformation or the large technology project-driven investments to manage our expenses. I mean, certainly, we create budgets and we have an appetite of the level of work we're going to do. But we're not trying to slow down a project to try to meet an expense guidance. We believe in the efforts of the team and the priority that this has and the value to our shareholders. So truly, it's some things, maybe you slow down your hiring process or a project gets delayed or you get lucky on something you thought where you're going to cost to dispose and it didn't cost to dispose it. All these little things make a difference in our range.

Got it. That's helpful. And then maybe one for Lidio. I'm going to throw out a credit question. I think pre-COVID, you guys used to always talk about maybe an 80 to 120 basis point normalized net charge-off ratio. Clearly, even with the -- it was nice to see the cleanup you had of that like large NPL that this quarter that impacted net charge-offs. But clearly, the underlying net charge-off ratio continues to stack lower relative to historical norms. Any update on how you guys are thinking about what normalized net charge-offs looks like at Popular now that we're 6 years out of the start of the pandemic?

I think we are providing guidance of our expectation for the year that should help inform that decision. And I agree with you. I mean, we have seen strong performance from our book, particularly our mortgage book. Our mortgage back in the days, when you're citing the 100 to 120 basis points, that book had losses of around 1%. Over the last 3 or 4 years have been net recoveries rather than losses. And that performance, I think, is driving the good results that you're seeing from our book.

Congrats again to all.

[Operator Instructions] And our next question comes from Gerard Cassidy of RBC.

And he seems to have changed his mind. So this concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.

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.