BPOP - NASDAQ

Good day, and thank you for standing by. Welcome to the Popular, Inc. first quarter 2026 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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 J. 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 filing.

You may find today's press release and our SEC filings on our webpage 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 remain 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. Three 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 high employment and strong activity. 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 months 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 five 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 two 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 line's home port. Moving to our strategic framework, we continue to advance our three 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 number one 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 two 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.

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 remained 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 number 11. Non-performing 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 number 12. Net charge-off 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-off 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 55-70 basis points.

The allowance for credit losses increased by $16 million to $824 million. The change was mostly in DPR, which had higher reserves in the commercial portfolio due to loan modifications and additional specific reserves for 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 the 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 our 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.

Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Jared Shaw of Barclays. Your line is open.

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

Yeah. In Puerto Rico, frankly, we're 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 is saying, our strategy is more commercially led. It's going to be difficult to actually expand in any major way our footprint in terms of branches. That's where we're at today.

Okay. All right. Thanks.

Thank you. Our next question comes from Brett Rabatin of StoneX Group. Your line is open.

Yes. Okay. Great. Appreciate the color. Thanks, guys.

Thank you. Our next question comes from Timur Braziler of UBS. Your line is open.

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

Well, thank you for your question. I think that two great back-to-back ROIC quarters, a trend doesn't necessarily make. We'd like that to continue, obviously. I think that through-the-cycle comment refers to a period when, of course, we were seeing major stress in the economy. That we actually demonstrate that facing these more sort of headwinds, we deliver on profitability targets. That's how we're thinking about it. Again, I think the teams are doing great. Remember that we also use the concept of sustainability. It needs to be sustainable. That will take a little bit longer for us to claim victory. Of course, once we get there, we're not stopping there. That's important. Remember that we used the 14 when we launched a little bit over three years ago, our transformation program.

Again, very happy with the mindset shift and what we're producing for shareholders. 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 base?

Yeah. First, we're not subject to the category four with AOCI, so we're small enough that that doesn't impact us. We've done the preliminary review, Timur, and basically 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 rule has. Right now it's consistent with the estimates. That's a-

Great.

It's a reduction in risk-weighted assets, basically.

Yep. Okay. Just one more for me. 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 a historical type run rate for the planned increase in public funds in 2020?

I don't want to speculate. 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. We're going to stick to the $18 billion-$20 billion range.

Okay. 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.

Okay. Thank you.

Thank you. Our next question comes from Arren Cyganovich of Truist. Your line is open.

Thanks. Just want to hear your views on the on-shoring of manufacturing in Puerto Rico. Obviously last year there were a lot of large announced investments. I haven't really seen any kind of new ones yet this year or anything that you're hearing in terms of new potential investments. Have you seen any actual benefits yet from the ones that were announced last year?

Hold up. 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. They continue working through the grapevine. They continue working on more entities coming in. There's two more entities that we've heard about. But 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 relocating Puerto Rico or new entities coming to Puerto Rico, not only from the United States, also from Canada and the Far East, and Europe even, should continue. We are, again, expecting announcements from the Puerto government on it. We don't want to get in front of rumors. So far, all the rumors we've heard before, the actual announcements from last year, the Eli Lilly, the Amgens of the world, panned out. We have our fingers crossed that the momentum will continue on reshoring for Puerto Rico. 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, or is it going to take some time?

It's going to take some time. We have seen some new ones coming in and opening accounts with us and purchasing property and stuff like that. They're setting up. Typically, it's a process where once the government announce, that means that they've gotten to 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. We've seen some of that. It has started. As we've always said, it's going to take three to five years to actually get the actual numbers, and the impact.

The largest announcements are expansions of facilities. They will require some significant construction investment and time. We will first see that impact on the construction side.

Great. 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.

Okay. Thank you.

Thank you. Our next question comes from Kelly Motta of KBW. Your line is open.

Got it. Maybe last question, if I can just slip it in on the size of the balance sheet. Cash and money market investments have come down year-over-year. They're relatively flat, about $4.8-$4.9 billion-ish the past two 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 level? Thanks.

Yeah. I think we've had that level for the last two or three quarters. We're comfortable with where we're at on that. We still have

Got it.

Yeah. I'll leave it at that.

Okay, thank you so much.

Thank you. Our next question comes from Gerard Cassidy of RBC. Your line is open.

Hi, how are you? Hi, Jorge.

Hello, Gerard. Good morning.

Yeah, we'll take that as momentum.

Yeah. 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? Then second, if oil stays elevated at $125 a barrel, let's say, throughout the year, it would appear to weigh on not only the Puerto Rican economy, but the U.S. economy as well. What do you think that could do to credit quality?

Lastly, can you also remind us? I know the island's 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. Thank you.

I would say, Gerard, this is Lee. I would say that the answer to that is going to depend on the length where the price of oil stays at this level. Similar to 2022, 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. For us, I think the key and the impact for Puerto Rico on 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've seen normal seasonal patterns. Actually, our delinquencies are better than the last quarter, obviously, and much better than this time last year.

We're very pleased with our portfolios.

The premise, Gerard, in your question is spot on. 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 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 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. 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 in credit are as strong as they are in the consumer books?

As always, a combination of factors. Certainly, 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, based on data provided by the local IRS, they have refunded to customers around $2.2 billion, which is slightly 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.

Great. Thank you, guys.

Thank you.

Thank you. As a reminder, if you have a question, please press star one one. Our next question comes from Manuel Navas at Piper Sandler. Your line is open.

I think this builds off a little bit of the last commentary. You added reserves on the commercial NPL from the third quarter. 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 how do you feel the progression should go forward from here in credit costs?

I like your thoughts. I agree with you. We have very strong performance from our consumer books, and that led to a release of reserves, particularly in the auto portfolio. We have done a lot over the last few years in order to improve the performance. 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. Every now and then, we have a situation with one of our 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 in the third quarter of last year, and to some extent in the first quarter of this year, with two particular case, one related to commercial real estate in the U.S. and one related to a telecom company in Puerto Rico. We think if the economy stays where we are and the delinquency at this level, that there might be an opportunity in the quarters ahead. We'll see.

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

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. Frankly, we're looking at it over a multi-quarter period to try to get to target levels that make sense, and I'm not sure that any given quarter, any provision relief, changes in our projected provision or where we're at is going to make a difference in our repurchase strategy, Manuel.

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, etcetera.

Okay. I appreciate it. Thank you.

Thank you.