Popular, Inc. ($BPOP)

[Audio Gap] with our next fireside chat, Popular Inc., a company that has about $75 billion in total assets, market cap is around $8.5 billion. And we're very pleased and privileged to have Javier Ferrer, the President and CEO of Popular. He was President of Popular from, I guess, May of '24, and Chief Operating Officer from January '22 to June '25. He's been a Director at Popular or Popular Puerto Rico since 2015. So Javier, thank you so much for coming and most importantly, bringing the warm weather especially after this winter.

Well, thank you for having us. It's a privilege and an honor...

Great. Though it's early in the year, maybe you could share with us how the Puerto Rican economy is shaping up for you? How Popular is positioned to benefit from this economic growth? And then also tie in, if you don't mind, how important is the health of the U.S. economy to the Puerto Rican economy?

Sure. Well, I think we're doing fine in Puerto Rico, quite frankly. There's momentum in the economy, which I believe has not slowed down. Of course, given what's happened in the Middle East, people are watching, and the economy follows human psychology. So if there's uncertainty, people will begin to worry a little bit, but we haven't seen it in the numbers yet, frankly. So it's like we're going through a good period, low unemployment, high people -- high number of people employed, even though we have less folks on island. The percentage of people working has -- the participation rate is higher now. It's still in the low 40% -- 44%, 45%, which is still low, but 5% more than it was a few years back. It's a broad-based recovery, I want to say, construction very strong, hospitality very strong, manufacturing very strong. And there's -- there used to be a -- the Puerto Rican economy used to move alongside the U.S. economy, frankly, until 2006 where we lost 936, a big sort of tax benefit for U.S. companies and foreign companies operating in Puerto Rico. So we decoupled and we went south and the United States continued going north. Right now, I think it's sort of like recoupled, let's say. So whatever happens in the United States obviously impacts Puerto Rico, particularly in the East Coast where we find a lot of folks visiting, and again, in a hospitality industry that continues to grow and contribute to jobs and to a bottom line in the economy. But so far, there's momentum. We're happy about it. And given our size and footprint in the market and the fact that we've only been there for 132 years, 133 this year in October, we are the main player. We're very honored to be so. We've earned that place. We work hard. We're almost everywhere. Our stores, our branches are almost everywhere in Puerto Rico. So we will benefit from Puerto Rico's growth. We're a very active participant. We collaborate in policy decisions. We have good relationship with the government and the Fiscal Oversight Board, who has been in Puerto Rico for 10 years now. So all good, all good.

Yes. Maybe you could share with us -- there's been a move since the pandemic for onshoring in America, and there's obviously some benefits potentially for Puerto Rico. Can you share with us just some color on what you guys might be seeing down there?

Yes. I mean so that started with a promise of it actually happening to seeing results. Absolutely, we -- as we like to say, we're on the right side of the fence, right? So last year -- the new governor came in about a year ago. The economic development team is young, but very -- but experienced within their years, are very active. And last year, we've got a big announcements of companies either expanding investment in operations in Puerto Rico and also their employment base and people coming in, new people coming in. So last year was over $2.6 billion in new investment announced, close to 5,000 direct jobs in the past. That has generated a multiplier effect. So the early innings of the onshoring into Puerto Rico are proving also to be productive. And so we have a good relationship between our current governor and the White House, which is also something that we didn't have in the first Trump administration, quite frankly. So that's also benefited the island so far.

Yes. Maybe another interesting aspect of what's going on in Puerto Rico is that because of the tax issues that you referenced in '06 when the advantages went away and Puerto Rico struggled with the economy, the out-migration of the population because the jobs weren't there. But that has -- from the numbers we've seen, it's kind of leveling off. What do you hear from either family, friends, businesses? Just -- it seems like -- could we actually maybe see in-migration at some point?

That's another good question. Absolutely it's leveled off, to your point. Anecdotically, we don't have the best sort of data gathering for precisely what's happening today. It's really -- we need some time to go before we have 6 months or a year before we actually have good data, or a quarter. It depends on precisely that I was seeking, but it is. It's leveled off. Anecdotally, this is -- there is a bunch of talented young folks, and for me young is anybody from 15 to 60, frankly, 50-something, wanting to come back. And we see it in high-paying jobs. We see it in high-tech jobs, data, technology, analytics, cyber, fraud, all the areas that we need to -- AI, all the areas that the banks need to grow, right, to compete. So we're seeing a lot of young people wanting to come back to Puerto Rico. And some have come back. We've been successful in getting good talent in. And other people also are getting good talent from the outside into Puerto Rico. What's the issue? The same as some parts in the United States, affordability. Housing is an issue in Puerto Rico, affordable housing. It's something that is going to take a little while to sort of get sorted out because you need to, obviously, a couple of years to build certain projects that are now either on the works permitted and starting. So that's an issue. That's an issue. It's expensive to get new homes in Puerto Rico. So -- but it's a good trend. There's also -- the government is also trying to help with specific tax extension decrease for young professionals, substantially lowering their tax obligation, which is something that's very good. I don't qualify. I don't qualify, unfortunately, but I'm glad to see, again, young talent come back to Puerto Rico.

Yes. That's very, very good. Shifting to a different area. We hear a lot about the Basel III Endgame, and there's talk about we'll hopefully get a proposal coming up in the next 2 to 3 weeks. And that's -- obviously the very large banks are very focused on it. But share with us just the regulatory environment from your perspective when you look at your size bank and how it's evolved over the last 8 -- 5 to 10 years?

Yes. Well, we're -- the Basel III is still -- is not applicable to us yet. I mean we are very conscious of what's happening out there in the regulatory side of things. I think our mindset -- I'm going to try to be precise and not misleading anybody here with this one. I think we take the regulatory aspects of our industry very seriously. What I mean by that is, we understand the benefits of a flexy mode regulatory mindset, but that doesn't mean that that's going to drive our strategy or how we operate, or contrary, I'd say. I mean we will -- I mean we have had situations where we'd have to fix certain things across our years. So we understand the weight of doing things right. It's in our DNA to try to operate correctly and within regulatory constraints. It's a pendulum of sorts. We feel that it may come back, right? If there's a change in Washington, you do have state regulation, which is relevant. Our U.S. bank is chartered by New York DFS. So again, it doesn't inform how we strategize, but it's the risk aspect of it. It's important to us. Our risk group is very strong. So we try to keep a abreast of developments. We are going to be intelligent in how we maximize any business decision to tailor changes that may be productive on the regulatory side, but we're going to be cognizant of the fact that, that may change. We need to do the right thing by our customers, right? So rational regulation is good for the industry and is good for us.

Yes. No, you want to keep that 132-year streak alive.

Absolutely. Absolutely.

Maybe we could talk about capital. You're one of the best capitalized banks in your class. I think the CET1 ratio is just around 15.7%. And certainly, banks your size on the mainland are comfortable around 10% when their CET requirements are 7%. And we know there's a mainland buffer that needs to be included in there. Can you share with us what's your comfort range on the CET1 ratio? And how -- if it's lower than where it is today, how do you get there?

Yes. That's -- yes. Well, when you're on a road trip with kids and the question that you hear the most and continue hearing it is, are we there yet? Are we there yet? Well, so that's the kind of like psychology you will get around this question, which is, by the way, a very rational and good question, and it's a question that our investors ask us on almost every meeting. So we recognize that we -- some people say we're 500 to 600 basis points above where we need to be. I think it has to do with the fact that we are a conservative bank. And this is not because we woke up one day and decided to be like this. I mean it's a compendium of experiences. It's what facing a lot of big-ticket items such as hurricanes and earthquakes and issues with the economy, a bankruptcy of the state, all those things get to a certain mindset, right? So we are conservative. We think that we understand that we need to -- if we can use the capital constructively to generate more shareholder value, we need to give it back, and we've put out a good repurchase program, which we've told the Street and our investors is the last quarter, the fourth quarter we said it's going to be around $150 million a quarter. I mean, we still think that the shares are priced, there's value in the stock price. So we'll continue with the program. The dividend for us is also important that we continue to increase the dividend as we continue to provide sustainable profitability in the business and we can demonstrate earnings growth. So -- I mean, I'm saying, yes, you're right, we ought to lower the amount of capital. We can also rationalize our capital stack. We're thinking about doing that. I mean I think there's Tier 1, and there's space to do some more additional Tier 1, move the common to some other sorts of capital. We're thinking about that, how to optimize the capital stack. I'd say that's top of mind as well. So we will -- this is a good question, again, that we grapple with and with our Board at all times. And we will continue to handle it as time progresses.

So we'll have to get a bunch of investors in the station wagon to say, "Are we [indiscernible]," right?

Yes. Yes. I mean it's a fair point. It's a fair point, and we're very -- it's top of mind for us. But we can't do it -- I mean if -- I mean -- so for us, it's organic growth, right, and transformation, investing in those 2. And then other people may say, well, you should deploy it in M&A. Well, we can talk about that, I'm sure.

Sure. Yes. The stock has done very well over the last 5- and 10-year time periods. And maybe you can share with us what do you guys focus on to crate shareholder value? And how do you guys kind of measure it aside from the stock price doing well?

Well, I think that we -- the most important thing for us is making sure that we're good stewards of capital, right? And that we're growing, that we have positive leverage in our businesses, that we continue to grow rationally, that we are -- with transformation, we sort of heightened the importance of profitability in all business lines because when you're so successful, people forget what got you there. So it's important for our teams to understand the meaning of profitability by product, by segment, by service, what does that mean? That all adds up, the importance of service, the importance of excellent omnichannel experience, really mean it and really deliver that. Ultimately, ROTCE is the measure that we put out there, right? There are others, as you know, ROA, ROE is also stuff we look at, but ROTCE is the public measure that we're sort of putting out there and in many ways, educating everybody from the person that comes in for the first day to whoever is sitting in the chair, that's what I call the CEO position, the chair. I just happened to be sitting on it now. But it's -- what does that mean, and how -- the importance of sustainable profitability. The fact that if we do that well, it will benefit not only our shareholders but also our employees, the communities we serve through our foundations. We provide a lot of help and assistance to that sector through our Popular -- Banco Popular Foundation and here at the United States, the same thing. So -- but we need to be profitable. And it needs to be sustainable. It can't be up and down, up and down. So that's a challenge that we put out to the teams. And last year, we had a great year. Hopefully, this year, I mean we feel good about this year notwithstanding all the noise that's in the world, it's a tough world, particularly in some areas more than others, obviously. So that's it. I mean it's bottom down profitability, sustainable profitability, making good decisions, defending our turf, pricing appropriately, good yields, defending good customers. That's it.

Circling back to -- you mentioned M&A. Over the years, you've done different types of acquisitions and a nice loan portfolio acquisition from Wells Fargo from in the auto. During the financial crisis, you were able to pick up some great assets from the FDIC. What's your view as you look forward for -- and it does sound to be just depositories, but what's out there? Or could you find whether it's a loan portfolio or some other type of assets?

Well, you just gave 2 examples of something that we'd be looking at in the proper context, right? And FDIC is a transaction that's rightly priced, clearly. I mean, we've done that before in Puerto Rico. We do it in States if it makes sense. It's going to be difficult in Puerto Rico. I'm not saying impossible, but it's going to be difficult in Puerto Rico given our size, but in a [ system ] transaction, you never know, right? So -- and you also mentioned the auto business that we sort of consolidated out of Wells Fargo. That took a while. That was a fantastic transaction. It took a while to sort of gel. So assets, portfolio of assets outside of whole loan banks. We're always looking at niche businesses in the States, teams, the same thing that others are looking at. I think the differentiating factor is actually delivering on that promise. We'll continue to look at that. Whole bank deal is difficult for us, frankly, right now because we're so invested in transformation, in making the bank better because we frankly compete with a bunch of people of all sizes coming into Puerto Rico. Some people think there's not a whole lot of competition in Puerto Rico, Well, I have news for you. There is a bunch of competition in Puerto Rico, and we to learn it every day. So I mean, I'd say that in the States, a whole loan bank deal would be difficult at this point. It needs to be an incredible opportunity that we will have to look at it, right? Obviously, if it creates -- it's accretive, if it strengthens our deposit franchise, if it's close to our -- where we operate nowadays, the culture for us is critical. We've seen a lot of deals -- I mean you are the dean of this space. So the culture for me is critical. I mean you can't fix -- you can't change people just through a merger, right? So you need to share some values that make sense. I've been in this -- in some conferences, where I look a couple of CEOs talking just announce a merge and go like -- I mean I wish them the best, but it ain't look like it's going to work, but -- so culture is important. And we'll see. We'll see. Never say never, but right now, that's not our focus.

Yes. One of the uniquenesses of your balance sheet, of course, is the deposits from the government. Maybe can you share with us just the deposit outlook and just how that -- because it's a large amount from the government and the benefits that you receive from them, but also the challenges, block of deposits.

So, it's a bit of one. That block of deposits, obviously, it's a great relationship. We look at it more holistically, right? The deposits are a part of it. It's an important part, right? But you're talking about like 2,000 different accounts. So it's a whole -- so people know when the Puerto Rico government went under and filed for, I'd say, bankruptcy, although that's not the way it happened, but effectively that's what happened. There used to be an entity called the Puerto Rico Government Development Bank, which was a central bank for the island, and we essentially took the risk. And this -- and we could write a book about this, but I'm not going to bore people with details. But that actually is a very fascinating story how we became essentially the bank for the Government of Puerto Rico. So what I mean by that is, and this for us is an honor and it's something that we take very seriously. It's not only the deposit side, it's also the credit side and the services side. It's a relationship that we've had for a long, long time. The pricing has to do with an agreement that we signed a long time ago. It comes and goes in terms of benefiting. We still make money on it. I mean it's a great relationship. So when will it -- I mean we have been very bad at projecting when it will come down in terms of the amount. I mean it $18 billion right now, $20 billion right now, $20 billion, $18 billion to $20 billion. They constantly bring new pieces to market and we bid for them. We also put together a tech system to be able to service those amounts. And it's a complex relationship. I mean -- so it's not one client, it's, again, over 2,000 accounts. And we've done very well. And I think the government also is getting a fair return on their cash, frankly.

Yes. Is there a -- can you estimate what a normalized level would be? Or is this the new normal that is going to be in the high teens, $20 billion?

As I said, we've been terrible at projecting that, as you know. I don't know. I think it will depend on stuff like what happens with the PREPA Bankruptcy, with the Power Authority bankruptcy. There's some who say that, in the past, the central government and the Fiscal Oversight Board would have never thought of using funds from the central government to pay the contributing to the resolution of your bankruptcy. What we hear is that, that view has changed. I don't think that that's going to necessarily materially alter the amount of money that's going to be leaving the bank. So it will depend on how quickly some of the money is used for reconstruction. There's like $17 billion, $16 billion, $17 billion, which is not all with us for the reconstruction of the power grid. Some of that is with us. So I think it's going to take some time, quite frankly, for the money to leave. But when, to what level, we've been almost -- it's impossible to predict, quite frankly.

You mentioned the bankruptcy of PREPA. Any updates? I mean I know that's another...

This is the year. That's the update. This is the year. I mean every year, we get off the holidays in Puerto Rico, which, as you know, are fantastic with the promise that this is the year where PREPA gets resolved. Now this year, the drums are beating louder on that promise. We don't know if it's going to happen, but we get the sense that it may happen this year. I mean I think the different parties are making some noises to that effect. I think it's a highly complex situation. Obviously, bondholders want to get paid. That's okay. Puerto Rico needs to determine what it can pay and the Board is in the middle trying to ascertain what that is. So it needs to be an amount that makes sense for Puerto Rico and Puerto Ricans and the economy because you don't want to kill the economy to then be a bondholder that has -- whether it be -- whoever cuts the deal and holds the bonds on day 1 or buys the debt, right, they don't want to be in the same position again anytime soon. So it needs to make sense. You need to have something that's sustainable. That's going to be the big challenge. And that's why we haven't had a deal. But again, the noise is in the halls of the Puerto Rico government and elsewhere that this is the year. So we'll see.

Good that I put that last chapter behind.

Absolutely. And psychologically, to your point, it'd be fantastic even if it's imperfect. It gets -- it attacks the problem and you can build on it, right, and continue iterating to make it better. But I think it would be a great thing because you can then say we're out of bankruptcy fully. So if anybody has any issues coming in, investors, whatever. And it also would provide a framework of what it will mean to operate in Puerto Rico going forward and also for our businesses and our people.

Yes, absolutely. You touched on 2026. Any thoughts about how the quarter is progressing for the first quarter of '26? Any color you'd like to add to that?

I mean, I'd love to answer that question, but I'm a corporate securities lawyer, so I don't want to be the first one to sort of issue any...

You just whisper into my ear...

I'd say that, I mean, we're happy with where Puerto Rico is at today. We can always do better. We need to do better, and in the bank, the same thing. We expect a good year this year. We expect a good year, not only on loan growth, even though we've tempered the projections, as you know, a little bit less than the prior 3 to 4 years, but we still think there's going to be growth in Puerto Rico. Credit feels okay, frankly. We think credit is going to be fine, bearing again, factors such as the ongoing conflict in the Middle East and others. I think Venezuela has been a good thing for Puerto Rico given the military investment in the -- U.S. military investment in Puerto Rico. It may be tactical, may not be for a long time. God knows what happens to Cuba. If something happens to Cuba, we will be in the mix, maybe not at the beginning, but it's more rational to have Puerto Rico partnering on a Cuba project than in Venezuela, quite frankly. So that's something that we're looking at very intently to see what's going to happen there. So no, I think -- I mean, again, we expect a good year. And we expect to build on our recent success to continue delivering shareholder value and good profitability as you've told us and taught us. So absolutely. I mean we're good students. We're going to try to be good students.

That's great. And coming back to credit, obviously, it's benign. It's about everywhere, your's as well. Is there any particular areas that you always keep an extra eye on just because a slip up in the economy could lead to some deterioration, whether it's construction lending or some other type of lending?

Well, right now, we feel very comfortable with the construction of our portfolio frankly, not only the commercial, but also the individual. I think that initially, we're looking at this energy -- the energy prices, it may impact small businesses and that may spill over on to retail. It's too early to tell, frankly. We haven't seen anything yet, but nothing in particular. In the past, there's been a lot of banks burnt on commercial -- I mean on construction, to your point. I mean we feel there's no specific area where we feel that we are overexposed or that we have high FICO originations in our retail book. So you always need to be vigilant to credit and the impact to your assets. But right now, we feel we're in a good place. And again, we'll remain vigilant.

Got it. We're running out of time. So maybe the last question. What's the one core message you'd like about Popular's feature you want investors to take away from this conversation?

Well, I think that investors ought to realize that we're walking our talk, that we have very strong in Puerto Rico, that our presence is, we've been there for a long, long time. We know Puerto Rico. And we have a good operation in United States, investments outside in the Virgin Islands and passive investment in the Dominican Republic. But ultimately, our fortress is Puerto Rico. And that's not going to change, hopefully. We have to defend it every day, as I said before. And our people know that. We have great people doing it every day. So that's it. I mean, you can count on us. Top of mind for us through a transformation initiative is profitability, needs to be sustainable. When we get to 14%, we're not going to stop at 14%. And we're changing the way where everybody is looking at their jobs top to bottom in the institution. It's all about delivering value. It's all about delivering value. So I would want people to take a look at us. We have an -- I think we're doing fine. We can do better. We have to do better. Competition is not going to get any smoother. It's going to be tougher. And we have an obligation, a deep obligation to the people of Puerto Rico. We've been there through thick and thin. We believe in the future of Puerto Rico, and also servicing other communities where we have operations outside Puerto Rico. But we're here for the long term. We're not going to do anything dumb, hopefully, anytime soon. So that's it. And again, I really appreciate the invite being here with you. It's an honor. So far, we've had great meetings with our investors, and we have more in the afternoon. And it's an interesting operation, Popular's. Great heart.

Absolutely. Javier, thank you so much. Really appreciate it. Join me in a round of applause thanking him.

Thank you. Thank you.