BPOP - NASDAQ

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. [Operator Instructions] I'd now like to hand over to Paul Cardillo, Senior Vice President, Investor Relations Officer. Please go ahead.

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 a 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-exempt 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 segments. Given that the underlying economic activity and demand for credit in both of our markets remain 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 and 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 on an 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. At BPPR, 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 the 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. The 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, offset 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 have $429 million remaining on our active share repurchase authorization. With that, I turn the call over to Lidio.

[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 expansion. We do believe that we still have strong tailwinds. 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, remember that a large portion of our portfolio is also being financed, let's call it, money fungible, but still being financed by public deposits. And we would expect those public deposits to also benefit from 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 -- okay, on 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, Jared, that maybe that would slow down a little bit, particularly in the auto volumes or new car sales activity is slowing down, and it's possible that it wouldn't be unreasonable to believe that, that will result in more competitive pricing to maintain demand for auto 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.

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 would say the variation that you saw this quarter is within the seasonality of the portfolio. We continue to be very optimistic about the consumer, given the trends in Puerto Rico, given the trends in employment, liquidity of our client base. 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 loan, 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 it moved into nonperformers right away instead of kind of up the risk migration chain. Did they stop making payments? Or is that still accruing at this point? Maybe start there.

Okay. 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 situation has been deteriorated over time, and we have been downgrading the loan over time. For us, 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, liability structure. So that drove our decision to place it in nonaccrual status.

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. In terms of specific reserves, we are not -- we have not provided that information at this time. So...

Yes, Timur, you can assume that the driver of the variance in the quarter in 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 flashing yellow or any other kind of degradation?

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 just 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 NII 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 when we closed out Q3. We also mentioned the lag in pricing of these deposits. We continue to be slightly asset sensitive, particularly in the early stages of moves of Fed funds rate. 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. Because the -- we've never given the index, but we're going to do call a favor, and it's tied to 3-month treasuries, obviously minus a spread. And so they are in a lag. So over time, we would expect to see the effects of changes in rates be reflected in the cost of public deposits with a beta of near 1, and that pricing structure will continue to support our fixed asset 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 will continue our previous growth trends.

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, in similar word, we talked about this in the past where when we provide that spread in the guidance of 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?

Yes, you're right. We're not going to give you anything '26...

Good try, good try, good try...

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 bunts, 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 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.

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We now turn to Kelly Motta with KBW.

I will pick up on that 14% ROTCE you mentioned. You've been above 13% in the next 2 quarters -- the last 2 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%, one? 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 should we see that a bit higher.

I would say that 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 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 a 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, does have a tax -- 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 this change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year. I tell you this whole long story to say that the guide for 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 guidance.

Our next question comes from Gerard Cassidy with RBC.

Yes. From talking to our bankers and listening to the teams, the pushback we gather in 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 true relationships and 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 what Javier previously said in his comments.

We now turn to Arren Cyganovich with Truist Securities.

Javier, you.

Thank you for picking up Puerto Rico Bank.

Good to be back. 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?