Popular, Inc. Q2 FY2025 Earnings Call

Hello, everyone, and welcome to the Popular, Inc. Second Quarter 2025 Earnings Call. My name is Elliot, and I will be your coordinator today. I would now like to pass it over to Paul Cardillo. Please continue.

Good morning, and thank you for joining us. With us on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge Garcia; and our CRO, Lidio Soriano. They will review our results for the second quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses, taxes and capital structure as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our President and CEO, Javier Ferrer.

Thank you, Paul. Good morning, everybody. I'm happy to be here with you in my first earnings call as CEO. I'd like to take a moment to recognize the impact that my predecessor, Ignacio Alvarez, had on this company during his tenure as well as on me as a colleague and a friend. It is an honor to follow such a great leader. So thank you, Ignacio, for your partnership. I am humbled by the opportunity to lead this iconic Puerto Rican institution. For over 130 years, Popular has consistently demonstrated a deep commitment to Puerto Rico, its institutional values and putting our customers at the heart of everything we do. I joined Popular almost 11 years ago. I knew that if I wanted to make a meaningful contribution, this was the place to be. This idea, simple and yet powerful, continues to inspire me. Before I discuss the highlights for the second quarter, I am pleased to report that we recently announced two capital actions, a new incremental common stock repurchase program of up to $500 million and a 7% increase in our quarterly common stock dividend to $0.75 per share. These actions evidence the strength of our capital position, which allows us to continue to invest in our franchise and serve the needs of our customers while also returning capital to our shareholders. On Slide 3, we share a few highlights from the period that reflect our strong operating performance in the second quarter. We reported a net income of $210 million, an EPS of $3.09 per share, an increase of $32 million and $0.53 per share, respectively, compared to the first quarter. Importantly, the improvement in our bottom line resulted in a very strong 13.3% return on tangible common equity. Our results were driven by higher net interest income and expanding net interest margin and strong loan and deposit growth. We maintained our credit discipline and credit quality continued to improve. I would like to commend the lending teams at Popular, which grew loans by more than $900 million during the quarter. As a notable example, we served as agent bank for a $425 million loan to the private sector entity that operates and maintains several toll roads in Puerto Rico. This transaction is one of the largest infrastructure financings in Puerto Rico executed entirely by local financial institutions. Please turn to Slide 4. As of the end of the second quarter, business activity in Puerto Rico continued to be solid as reflected by favorable trends in total employment, consumer spending, and other key economic data. The unemployment rate of 5.5% continues to hover around all-time lows. Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 4% compared to the second quarter of 2024. Home purchase activity continues to be strong as demonstrated by the $158 million increase in mortgage balances at Banco Popular during the quarter. While demand for new cars slowed somewhat after a very strong first quarter, we saw our auto loan and lease balances increased by $76 million during the period. The tourism and hospitality sector continues to be a source of strength for the local economy. This summer, the sector is benefiting from an added tailwind during what is usually a seasonally slow period due to Benito Martinez Ocasio, also known as Bad Bunny's 30-night concert residency at the Coliseo in San Juan, right next to our Popular center complex. Conservative estimates indicate that it will lead to approximately $200 million in additional local economic activity. It is also generating significant media exposure for the island, adding to its strong image as a compelling destination for travelers. The Popular brand is very well represented in the residences. Additionally, some colleagues and I recently had an opportunity to attend the rebranding of an emblematic hotel property in San Juan and tour one of the island's new luxury hotel and residential community developments being built on the East Coast. It's encouraging to see the scale of private investments being made on the island. And last, but certainly not least, we continue to expect that the ongoing disbursement of Federal Disaster Recovery Fund will support economic activity for several years to come. Given what we see every day, I am convinced there are opportunities for growth in Puerto Rico and that we are uniquely positioned to leverage them. We do not take our market position for granted. We compete for it every day and are strongly committed to promoting the island's progress as we have done for over 130 years. Before turning it over to Jorge, I would like to briefly comment on the status of our transformation. These efforts are designed to enhance our customers' lives through more personalized and seamless experiences, increase employee performance and satisfaction with more agile work processes, modernize the company's technology to enable greater innovation and security, and generate sustainable and profitable growth for our shareholders. A company-wide multiyear program such as this one requires commitment, focus and patience. We are pleased with the substantial progress we have made so far. We have modernized branches to enhance customer experience and operational efficiency, reduce loan processing times for small and midsized commercial customers at Banco Popular, and launched a new digital platform to improve our commercial cash management services. These are only a small sample of the many efforts completed and in process that will ensure we are the #1 bank for our customers. I am confident that we can improve how we work by becoming simpler, more productive, and more efficient. We will continue to leverage our position to seize additional opportunities for growth in Puerto Rico. I am convinced there are many to drive increased profitability and continue enhancing our performance in the coming years. It's only been a couple of weeks since I officially began in this role, but I'm excited to show everyone what we can achieve together with even greater strategic focus and agility. I will now turn the call over to Jorge for more details on our financial results.

Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $32 million to $210 million, and our EPS improved by 21% to $3.09 per share. These results were driven by better NII and noninterest income and a lower provision for credit losses, offset somewhat by higher operating expenses. There are numerous positives to highlight this quarter. The most significant for us is that the improvement in net income, coupled with our repurchase activity, which resulted in a 13.3% ROTCE for the period, an increase of 190 basis points from last quarter. As we have mentioned before, our objective is to deliver sustainable financial results. Our prior guidance of achieving at least a 12% ROTCE in Q4 of this year still stands. Additionally, given this quarter's results and credit outlook, we are increasingly confident we should exceed a 12% ROTCE for the full year, and not just in Q4. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity. Please turn to Slide 6. Our net interest income of $632 million increased by $26 million and was driven by balance sheet growth, asset repricing in our investment portfolio, and lower deposit costs in both of our banks. Our net interest margin expanded by 9 basis points on a GAAP basis and 12 basis points on a tax-equivalent basis, driven by lower deposit costs and a larger balance of loans and tax-exempt investment securities. After a slow Q1, loan growth of $931 million in the quarter was very strong, with both banks contributing to the increase. At BPPR, we saw loan growth of $681 million, reflected across all portfolios, but driven primarily by commercial and construction lending. This includes the $265 million that we retained from the toll roads financing that Javier described earlier. At PB, we saw loan growth of $251 million, driven by commercial and construction lending. Last quarter, we guided to the lower end of the 3% to 5% loan growth range due to expected payoffs in our construction portfolio and the uncertainty in the economic environment. However, given the loan growth realized in Q2 and continued demand in Puerto Rico and in our niche lending businesses in the U.S., we reiterate our original 3% to 5% guidance. In our investment portfolio, we continued to reinvest proceeds from maturities into treasuries, targeting a yield of at least 4%, while trying to manage the duration of the portfolio. During the quarter, we purchased approximately $2.4 billion of treasuries at an average yield of around 4%. The duration of these was closer to 1.5 years, as we felt the yields on that part of the curve were more attractive, particularly when considering the extension we achieved through our loan growth. We expect to continue to invest in treasuries to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio. Ending deposit balances increased by $1.4 billion, while average balances grew by $499 million. Puerto Rico Public deposits ended the quarter at $20.9 billion, an increase of approximately $1.3 billion compared to Q1. We continue to expect public deposits to be in the range of $18 billion to $20 billion. At BPPR, excluding Puerto Rico Public deposits, ending deposit balances decreased by approximately $60 million end-to-end, and average deposits grew by approximately $440 million, with noninterest-bearing deposits accounting for $93 million of that increase. At PB, ending deposit balances increased by approximately $150 million, net of intercompany deposits. Total deposit costs decreased by 5 basis points. At BPPR, deposit cost decreased by 3 basis points to 1.52%, mostly due to a 10 basis point reduction in the cost of market-linked public deposits. At Popular Bank, deposit cost decreased by 14 basis points as we continued our efforts to reduce the cost of our U.S. deposits. We're very happy with the efforts of our teams and their focus on deposit retention and growth strategies. However, we continue to expect third quarter deposit balances in BPPR to reflect historical seasonality and decrease as our retail plan base spends Q1 and Q2 tax refunds. That said, given the results in the first half of the year, along with the anticipated NIM expansion for the rest of the year from repricing of our fixed-rate earning assets and deposit retention strategies, we now expect to see higher NII growth of 10% to 11% in 2025. Please turn to Slide 7. Noninterest income was $168 million, an increase of $16 million compared to Q1 and above the high end of our 2025 quarterly guidance. There were two primary drivers of the delta versus our expectations: better fees related to customer transaction activity as a result of higher credit and debit card spending and higher other operating income, which was mostly due to a $3 million increase in income from equity method investments and an approximately $3 million related to a reimbursement from the IRS. Based on the quarter's results, we now expect quarterly noninterest income for 2025 to be at the high end of the $155 million to $160 million range. Please turn to Slide 8. Total operating expenses were $493 million, an increase of $22 million when compared to last quarter. The largest expense variance in the quarter was the $17 million increase in personnel costs. We've had a very good first half of 2025. As can recently be assumed by our improved outlook for NII and credit, our internal net income forecast for the full year are now outpacing the original 2025 budget expectations by a significant enough margin to prompt us to begin to accrue profit sharing expense. During the quarter, we accrued $13 million for profit sharing in addition to other performance-related incentives. If we continue to outperform for the remainder of the year, the total profit-sharing expense will be capped at approximately $40 million, or approximately 2% of our expense base. Being in a position to share profits with all of Popular's full-time employees is a terrific outcome and allows our teams to benefit from the acceleration and the improvement of our profitability. This expense was not included in our original 4% expense growth guidance at the beginning of the year. However, we're working to mitigate the impact of these costs on our total expenses for the year with sustainable efficiency efforts. We now expect the increase in 2025 expenses, including profit sharing, to be between 4% and 5% when compared to last year. In other words, excluding profit sharing, we should see expense growth below our original 4% expectation. Please turn to Slide 9. Regulatory capital levels remain strong. Our CET ratio of 15.91% decreased by 20 basis points from Q1, mainly due to loan growth during the quarter and the effects of capital actions net of quarterly net income. Tangible book value per share at the end of the quarter was $75.41, an increase of $3.39 per share from Q1, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity in the quarter. During the second quarter, we repurchased approximately $112 million in shares at an average price of $99 per share. As of July 15, we had $33 million remaining on the share repurchase authorization announced in July of 2024, in addition to the incremental $500 million announced last week. With that, I turn the call over to Lidio.

Thank you, Jorge, and good morning. Credit quality metrics improved during the second quarter with lower NPLs, lower inflows, and lower net charge-offs. Our mortgage and commercial loan portfolios continue to drive the results, with credit metrics significantly below pre-pandemic levels, coupled with improved performance from our consumer portfolio. Over the years, we have managed credit under different macroeconomic and operating environments. And more recently, we have taken several credit tightening actions to reduce our exposure to riskier segments. We continue to carefully monitor the performance of our book and respond to the environment accordingly. However, we are confident that the improvement in the risk profile of our loan portfolios positions Popular to operate successfully on the more difficult economic conditions. Turning to Slide 10. Nonperforming assets and loans decreased slightly during the quarter, driven by Banco Popular. NPLs in Banco Popular decreased by $4 million, reflected across all loan segments. NPLs in Popular Bank increased by $2 million, driven by a $3 million commercial NPL inflow during the quarter. OREOs decreased by $6 million, driven by sales of residential real estate properties in Puerto Rico. Inflows of NPLs decreased by $4 million quarter-over-quarter. In Banco Popular, inflows decreased by $5 million, driven by the commercial portfolio. In Popular Bank, NPL inflows remained flat. The ratio of NPLs to total loans held in portfolio decreased 2 basis points to 82 basis points. Turning to Slide 11. Net charge-offs amounted to $42 million or annualized, 45 basis points, compared to $49 million or 53 basis points in the prior quarter. Net charge-offs in Banco Popular decreased by $7 million, driven by lower auto loans and personal loans, offset in part by a commercial loan recovery recognized in the first quarter. In Popular Bank, net charge-offs remained flat. Given our credit performance during the first half of the year and our outlook for the second half, we now expect net charge-offs to be between 45 to 65 basis points for the full year, below our original guidance of between 70 to 90 basis points. The allowance for credit losses increased by $7 million to $770 million, driven by higher reserves from portfolio growth and less favorable economic assumptions, offset in part by revised probability weights and changes in credit quality. We leverage multiple scenarios to estimate our ACL. In the second quarter, which slightly reduced the pessimistic weight, resulting in a $4 million decrease in the ACL. In Banco Popular, the ACL increased by $3 million, driven by auto loans due to changes in credit quality and changes in the economic scenarios, offset in part by improvements in the credit quality of our commercial portfolios and changes in probability weights. In Popular Bank, the ACL increased by $4 million, driven by the changes in economic forecast and higher qualitative reserves for the CRE portfolio. The corporation ratio of the ACL to loans held in portfolio was 202 basis points compared to 205 basis points in the prior quarter, while the ratio of the ACL to NPL was 247% compared to 243% in the prior quarter. The provision for credit losses was $50 million compared to $65 million in the prior quarter. In BPPR, the provision was $10 million lower, while in Popular, the provision was $7 million lower. The combined provision to net charge-off ratio for the quarter was 117%. To summarize, credit quality metrics improved during the second quarter. We are attentive to the evolving environment, but are confident that the improvement in the risk profile of our loan portfolios will allow us to operate successfully under different economic conditions. With that, I would like to turn the call over to Javier for his concluding remarks.

Thank you, Lidio and Jorge, for your update. I am extremely pleased with our financial performance in the second quarter. We increased net interest income, grew loans and deposits, and maintained strong credit metrics. We have had a strong first half of the year. We will continue to execute on our objectives, and I am urging our teams to remain focused on deposit retention, loan generation, and particularly on our expense discipline. We are committed to generating value for our shareholders and to achieving our ROTCE objectives. We will continue to execute our transformation program, determined to be the #1 bank for our customers and to simplify our operations to improve efficiency and drive sustained performance. We're also focused on reinvesting in the communities we serve and believe we are making a meaningful difference. These efforts are highlighted in our Corporate Sustainability Report, which we published in June. I want to give a shout out to our colleagues and recognize their hard work. I see what they do every day in our branches, call centers, and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions.

First question comes from Gerard Cassidy with RBC.

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

Thank you for your question. We are currently evaluating the situation following the approval of the GENIUS Act. We have assembled a team to conduct in-depth analyses and explore potential use cases. We recognize that this development is significant for the industry. Although it's still early in the process, we have begun to pursue the opportunities it presents.

We now turn to Timur Braziler with Wells Fargo.

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

So first, I'll remind you, Timur, the way the profit sharing works is that we have to beat our budget of net income by at least 3%. And if that number increases and the payoff gets greater, it's capped off up to 8% of our employees' salary up to a maximum total compensation of $70,000. That's where the 8% applies to. So if you make more than $70,000, you don't keep accruing. And this is a great opportunity for us to share in with our employee base when we really exceed plan, when everybody executes and exceeds plan. We feel that our interests are aligned between shareholders and our employees. Having said that, the guide that we have provided, which includes increasing net interest income as well as increasing expenses, the expense rates that we have, we are certainly expecting to accrue the max of profit sharing, and that's embedded in our guidance. So we don't take lightly Javier's comments of making sure our teams continue to be focused on executing.

Thank you for the insight. I have a two-part question about deposits. I heard that competition for commercial deposits might be increasing on the island, resulting in higher costs. I also appreciate your comments on the typical seasonality in the third quarter. Can you provide some context on how you expect that seasonality to change in 2025 compared to what we experienced last year?

In terms of competition, Javier likes to say we compete every day for our customers, for our business. We do it on service and sometimes some price as well, right? And I would say that on the commercial side, we don't see as much yield-seeking behavior or pushback. I think a lot of that has been embedded in our baseline. On the retail clients, there are still many discussions and still some yield-seeking behavior. We continue to see outflows of roughly $100 million a month into our Popular Security subsidiary. So there's still some yield-seeking behavior from our retail clients. The one thing that is different than last year for your question is that our teams are much more focused on deposit gathering and deposit retention strategies in our branches. As you know, we adjusted our compensation plans, we adjusted targets to really make sure that we were incentivizing the deposit retention behavior. When we look back pre-pandemic, where you don't have all the noise that we saw during the pandemic, it is clear that there's a trend where our client base gets more inflows in the first half of the year. They tend to spend some of that in the third quarter, and then you see stability and maybe an uptick in the fourth quarter. We expect those trends to continue. But I would also say, when we look at the inflows of our clients, particularly in the first half of the year, our clients have received more tax refunds than they did last year. And even though last year, we had the special one-time rebate from the Puerto Rico government, inflows outside of the tax proceeds are about 6% higher. So people are earning more. So it really does go to demonstrate the strength of the consumer in Puerto Rico. So we are confident in our teams, but there is a seasonality. We have over 1 million retail clients. It is very difficult to understand their spending behavior. But that all is accounted in our NII guide, Timur.

Our next question comes from Kelly Motta with KBW.

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

Thank you, Kelly. We are observing robust pipelines, particularly in the third quarter in both Puerto Rico and the U.S. We continue to see significant transactions that impact these areas. In the U.S., we expect to see some benefits from the construction portfolio. The growth of that portfolio and the pipeline associated with it should eventually slow down. As you know, these construction loans are primarily for multifamily projects, and we don't always succeed in securing the term loans after the construction is finished. Therefore, we anticipate a decrease in these loans is more likely to occur in the fourth quarter rather than the third quarter.

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

We observed end-to-end growth primarily due to the public funds, which saw an increase of around $50 million to $60 million on average. In contrast, the nonpublic deposits experienced significant growth, totaling nearly $500 million on average for the quarter. This included about $150 million from noninterest-bearing accounts, with $100 million coming from Puerto Rico and $50 million from the U.S. Our deposit franchise remains robust. We also engaged in some borrowings from the U.S., specifically short-term Federal Home Loan Bank borrowings, as part of our liquidity strategy. We currently have over $25 billion in liquidity across both on-balance sheet and off-balance sheet resources in our banks. Our focus is on funding; in the U.S., our growth alternative has been through direct deposits via the online channel, which we will continue to utilize. If we find we can fund more quickly or at a better price in the short term compared to the Federal Home Loan Bank, we will pursue that option. In Puerto Rico, there have been no changes to our wholesale borrowing.

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

It really encompasses everything. As part of our transformation efforts, we have work streams dedicated to enhancing efficiency. We are identifying opportunities for sustainable efficiencies in our operational and technology expenditures, managing data purges, and handling various operational accounts more accurately while encouraging our teams to commit to excellence and stay accountable in their responsibilities. We are also incentivizing expense control, which tends to motivate people to pay closer attention to that area. In terms of transformation, some projects have been delayed, affecting our overall expense base. These delays arise from our actions as well as external factors, such as a recent Fed wires conversion that impacted the entire banking sector and pushed back timelines by about a quarter. So, the delays stem from a mix of various factors. However, our teams remain focused, and we aim to ensure the profit-sharing payout while also working to manage our total expense base effectively.

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

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

We are engaging with government agencies managing federal funds and our customers, and we are observing the deployment of those funds in Puerto Rico. We anticipate additional project announcements in the coming weeks to months. However, I do not expect to see any public partnership activity in the near term. This does not imply there won’t be more opportunities, but I want to be clear that there is no current pipeline for public partnership transactions or financing of that kind. There are discussions happening in Puerto Rico, and we are regarded as the primary bank locally for government and third-party participation in P3 projects. While I can't disclose specific discussions at this time, we are dedicated to financing and being involved in those deals. Additionally, the government is significantly focused on economic development and permitting flexibility, and their positive relations with the Trump administration provide us with encouraging insights.

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

Historically, the second and fourth quarters typically show higher activity. There is more transactional activity during these quarters, along with some insurance fees that come in at that time. We mentioned the IRS refund, which is not a regular occurrence. However, the equity pickup was normal; we just experienced a slower first quarter and saw improvement in the second quarter. Therefore, we are confident in our updated guidance for the year, and based on the calculations, it indicates a strong outlook for the second half of the year.

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

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

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

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

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