BPOP - NASDAQ

Hello, everybody, and welcome to the Popular, Inc. Fourth Quarter 2025 Earnings Call. My name is Elliot, and I will be coordinating your call today. If you would like to register a question during today's event, please press 1 on your telephone keypad. I would now like to hand over to Paul Cardillo. Please go ahead.

Thank you, Javier. 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% ROC fee for the period and 13% ROC fee 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 ROX enumerator. 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 Roxy. Our current objective remains a sustainable 14% Roxy. 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 eight. 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 US treasury notes and bills. During the quarter, we purchased approximately $900 million of treasury notes with a duration of 2.1 years and an average yield of around 3.56%. We expect to maintain a two to three-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 cost 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 non-public customer deposit costs decreased by one 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 nine. Interest 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 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% 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 are pushing our teams to enhance profitability through ongoing incremental revenue initiatives and expense discipline. While we have made progress over the past two years in reducing our CET one ratio, there is 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 have $281 million remaining on our active share repurchase authorization. In addition to the common stock repurchases, we will 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 one 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 CT one goal of having levels consistent with mainland bank peers plus a buffer for geographic concentration. With that, I turn the call over to Lidio. Thank you, Jorge.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabatin with Hope Group. Your line is open. Please go ahead.

Wanted to start on the guidance and just thinking about the NII guide. And if I am reading it correctly, it kind of would suggest maybe slightly slower average balance sheet growth during 2026 and five to 10 basis points of margin expansion? And I know you guys do not like to give explicit margin guidance, but would that be within the realm of what you are looking at? And then just wanted to ask around the Roxy goal. You know, why would operating leverage that that might not increase a bit from here?

Okay. Thank you, Brett. Good morning. First, on the NII, first, we were 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 are 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 are looking at what drives one for the other, it really always revolves around low-cost deposit levels and our ability to reduce deposits in the US market. In terms of the ROC fee, you know, we have talked in the past, you know, that we want 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, you know, above 14% to be sustainable. There is enough uncertainty in the world, and we want to make sure that we are absorbing any ups and downs to the cycle. We are not quite there yet. We do feel that we have a lot of momentum and like, you know, the starting point where we are 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 are managing capital levels as well. And, you know, as I discussed in my prepared remarks.

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

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 have had some pretty good trends during the course of the year.

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

Okay. Thanks. That is 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 do not usually provide, you know, the spot rates, Jared.

Okay. Alright. Thanks.

We now turn to Benjamin Gerlinger with Citi. Your line is open. Please go ahead.

Hi. Good morning. I was wondering if we could touch base on expense. Good morning. So on the expense guide, I know you guys always give a GAAP basis. So it is inclusive of investment and things like that. I know that last year, you are also investing. And this year, I am assuming 27 yards, will are they going to because it is your size investment almost like a core. So I was kind of curious. Is this year on an investment basis kind of smaller or larger or anything you could frame up sort of timing and any expectations on that relative to kind of what we have seen previously or potentially starting new projects that are multiyear in nature?

I mean, I think the run rate that we are going is not changing much. It gets to a point then where we only have so much capacity and resources to be able to do so much at once. I think in certainly in '25, we were running at that capacity level. As things roll off and we go live, you know, for example, Javier talked about that we went live on a new ERP in January 1. That releases some resources, but then a lot of those resources get reallocated to the next big project and the next thing going on. You know? So I think we all feel fairly comfortable with the level and focus of the teams. You know, we can always certainly do more, but there is a reality that you can only have so much, you know, resource and management focus on these implementations.

Gotcha. That is helpful. I know we have talked about the pace of loan growth, and then also the reinvestment of the securities higher. I am just kind of looking at, like, just the average earning asset mix where it is today, and, obviously, if you could get securities into a loan, probably the best case scenario. But I am 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 or just kind of curious on just how you think about average earning asset mix down two, three, four, five years from now given that you also have the public deposits?

Yeah. I mean, certainly, we would prefer to make loans, not so much necessarily on a yield perspective, but we would rather have those relationships. Right? And we feel that, you know, we can have a deeper profit base with a lending relationship than we can just buying, you know, portfolio assets. But there is a reality that we have around 30% of our deposits in Puerto Rico that require it to be collateralized, and that will keep us in the portfolio business of buying investment securities. So as we go forward, we would like to see a lower loan to the or sorry, higher loan to deposit ratio, but it will depend on the composition of our balance sheet. But, you know, 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, you know, legacy pre-2023 investments, we still have a good upside pickup of yield in that investment portfolio. Like, current rates, the more recent purchases do not reset very far to where we bought them versus the uptake that we get in the more legacy portfolio. So we still see that as a strong tailwind going forward.

Gotcha. Okay. Thank you.

We now turn to Kelly Motta with KBW. Your line is open. Please go ahead.

Hey, good morning. Thanks for the question. Maybe turning back to Capital, I want to make sure I heard you correctly. It seems like you alluded to maybe additional tier one being lower than peers. Wondering if from a high level you can discuss, you know, it seems like maybe then leverage would be your guiding ratio, how you are thinking about that as we move ahead. Given the importance of capital return to the profitability improvement story? Thank you.

Sure. Thank you, Kelly. So we often talk with you all about CET1 and a lot of focus on CET1. We talked about, you know, our goal of getting that lower plus a buffer. One of the things that we do not very often talk about is that, you know, we have somewhat inefficient capital stack and that we really have very little additional tier one. Right? We have, you know, around five basis points when we look at peers, they have anywhere between 50 and 100 basis points of additional tier one. So we look at this as another lever that is an opportunity that we are evaluating and looking at. Perhaps there is an opportunity for something that is accretive without necessarily impacting the total tier one or total regulatory capital and being able to balance lowering CET1 with managed and board's intent to be more, you know, deliberate in reducing that capital over a prolonged period of time.

Okay. Alright. Fair enough. And maybe I think we have hit on this a bit, but turning to loans and yields, I was surprised. You know, your loan yields have held in really nicely even with the rate cuts. Can you remind us how much of your book floats and I do not believe you usually provide it, but I will try. Any, you know, new production rates would be really helpful here. Thank you.

Yes. So a couple of things on loan yields. We are still seeing loan growth in Puerto Rico on the consumer side to be, you know, flat or above and with the exception of credit card, but in the quarter, we still saw an improvement in auto yield and flat in personal loans. And, you know, we talked about in the past that, you know, we just have the low beta on the way up. You know, we did not pass through all the increases in the loan pricing, and we are seeing kind of the benefits. A little bit of the opposite behavior that we see in our deposit base in Puerto Rico. I do not, you know, I think last quarter, we talked about where I do not know how long that is going to continue. You know, 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 is 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, you know, the construction portfolio that floats. And in terms of new yields, we do not provide that.

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

Yep. Small correction, Kelly. I mean, we provided for 55 to 70 basis points. So the high end was a little bit lower than 75 basis points. Yeah. I mean, generally, before going to the details, I mean, we see have a very stable outlook. We think the Puerto Rico economy continues to be stable with moderate growth, and that is the outlook that we have for next year. Under that context, we believe that, generally, our consumer portfolio will continue to behave as they have in 2025. We do account for potentially some charge-offs of some larger commercial relationships that we have reserved for. So that is embedded in the range that we have provided to you. So that explains a little bit of the rationale.

Thank you so much. I will step back.

We now turn to Arren Cyganovich with Truist. Your line is open. Please go ahead.

Thank you. Sure.

We now turn to Gerard Cassidy with RBC. Your line is open. Please go ahead.

Yeah. The ads are fantastic. Good. But we will see.

We now turn to Emmanuel Navas with Kwatosanda. Your line is open. Please go ahead.

Hey. 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, Emmanuel, 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 appreciate it. In terms of market conditions, I mean, you know, we tend to do these on 10b5-1 plans. So, certainly, changes in market prices that, you know, could impact the grids that we use. So that is certainly something that is something unexpected, could be an accelerator or decelerator from the target number. But, also, you know, global political, macroeconomic environment, and these are all things that impact our perception, you know, of what is happening and how quickly we want to execute on the repurchases. But I will reiterate what Javier said. We believe that we find that our current share price is very attractive.

And the current share number in this quarter was nice. You like that pace. Correct?

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

Perfect. I appreciate that. Thank you, guys.

We now turn to Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

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 will 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 COVID, I mean, new auto sales in Puerto Rico, 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. 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 is a 9% down from the previous year. And the expectation for the industry is to be slightly down 5% from the numbers that we have. What I will say still, I mean, a year that is above 110,000 or close to 110,000, that is a great year for the industry in Puerto Rico.

Okay. Got it. Thank you. And then maybe asking the expense question a different way. I think, historically, you have 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 two being, simplify the franchise, improve the efficiency and then finally becoming a top-performing bank. I am guessing between or I am questioning, I guess, between phase one and phase two, the costs kind of associated with those, are they similar? And your comment that you had to delay some technology expenditures in '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 others?

Got it. Thank you.

We now turn to Brandon Bowman with Bank of America. Your line is open. Please go ahead.

Thank you. Good morning, everyone. 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. I was just hoping you would be able to dissect the drivers of that. Is it the planned investments that were delayed that is causing the 100 basis point difference in the growth rate? Or is it something else? Any breakdown would be helpful. Thank you.

Yeah. Thanks, Brandon. Thanks for the question. You know, 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 have implemented a lot of opportunities that are sustainable and will continue to generate savings, but we also had some wins that resulted in maybe a benefit that we see in '25 that we did not we will not see repeat '26, or we will see a lower level in '26 versus '25. Then when you add that to the continued investments in technology, you know, I think we have talked in the past how as projects go near live, you start doubling up on expenses as you are supporting two platforms. And kind of incurring, you know, the cost of licensing on the old platform and the cost of development and the new platform, etcetera. That tends to have some peaks and valleys, and that is part of the noise that you are seeing and comparing the run rate. But we will continue to invest in technology and continue to invest in our people and ensure 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.

Thank you very much. Have a good day.

Thanks.

We have a follow-up from Kelly Motta with KBW. Your line is open. Please go ahead.

Hey. Thanks for letting me circle back. I apologize. I forgot there are so many people on this call. Just to dig down a bit the NII guide and parsing that with your commentary for margin expansion. Thinking through the funding side, mainly deposits, you know, you had some declines in brokered. You gave the range for government. Are embedded in your NII guide, do you have any, you know, thoughts around or I guess, opportunity to run off some higher-cost funding given the strong cash flows you are generating off the securities portfolio? And overall outlook for, you know, core deposits in Puerto Rico here? Thank you.

You know, of course, our objective is not only to retain, you know, client deposits, but, you know, also increase them. Right? So we have been seeing good momentum in our retail network across all segments, you know, affluent, mass affluent, and mass. We have 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, you know, can we reduce the cost of the US deposits? And those are driven both by the competitive nature of online, you know, direct deposit, which are important funding sources for our US business. But we are also seeing strong competition in New York and the Florida markets. You know, the reality is that kind of for that incremental money and clients that are more rate sensitive, it is still very competitive out there, and it is our team's goal is we are very much focused on relationship growth and if that begins with the loan relationship in the US, making sure that that translates into deposit relationships. That, you know, 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. Both of our markets.

Got it. Thank you so much.