Popular, Inc. (BPOP) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Popular, Inc. Second Quarter 2026 Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, the Investor Relations Officer at Popular, Paul Cardillo, please go ahead.

Good morning. Thank you for joining us. With me 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 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 filings. You may find today's press releases and our SEC filings on our web page at popular.com. I will now turn the call over to Javier.

Well, thank you, Paul, and good morning, everyone. Before going into our results, I'd like to comment briefly on this morning's announcement about my retirement at the end of August. After close to 12 incredible years at Popular and with the organization in a very strong position, I have decided to focus on my health and spending meaningful time with main family and close friends. I do so with great pride about what we have accomplished as a team and with complete confidence that Popular is left in the best possible hands. Jorge has the experience, the vision and the heart to lead this organization forward, with strength and care. He's not only a great professional, but even a better human being. I will work closely with him in the coming weeks in what will surely be a successful transition. Jorge also has the support of an extraordinary management team, which includes, among other talented and dedicated leaders, Lidio, as the new CFO, and Luis Sousa as the new CRO. I extend my most sincere congratulations to the three of them. Disappointments reflect a thoughtful succession process and demonstrate the depth, experience and strength of our leaders. It's not about one person, it's about the whole institution and the quality of its people. Okay. With that, please turn to Slide 4 to discuss the highlights of a very strong quarter. We reported net income of $278 million and earnings per share of $4.35, an increase of $0.57 per share or 15% from the first quarter. Results reflected higher net interest income, solid fee generation, continued balance sheet growth and strong capital generation. Compared to the second quarter of last year, earnings per share increased by 41%. Our ROTCE improved to 17% during the quarter. We are very pleased with these results and remain focused on delivering sustainable through-the-cycle shareholder returns. Loans held in portfolio increased by $460 million during the quarter, driven by growth in commercial, construction and mortgage lending. While deposits increased by $2.6 billion, primarily reflecting higher balances of Puerto Rico public deposits. Credit performance remained stable with lower consumer net charge-offs. Nonperforming loans declined during the quarter, reflecting the resolution of a telecom relationship. We continue to return capital to shareholders, repurchasing $125 million of common stock fully utilizing our prior $500 million authorization and paying our quarterly dividend of $0.75 per share. Earlier this morning, we announced a planned 20% increase in our quarterly dividend to $0.90 per share and a new $1 billion share repurchase authorization. Before turning it to Jorge, I will comment on the business environment in Puerto Rico briefly. Business activity in Puerto Rico remained stable during the second quarter, while some indicators have somewhat moderated from the strong levels experienced over the last several years, overall economic conditions continue to be supported by a healthy labor market, strong tourism activity, ongoing infrastructure investment and strong consumer spending. The labor market is healthy with unemployment at 5.8% in June, employment remained broadly stable and continue to benefit from strength in construction, leisure and hospitality. Consumer spending remains strong. Popular's debit and credit card sales volume increased by more than 7% year-over-year, demonstrating continued activity across the customer base. Mortgage balances at Banco Popular increased modestly during the quarter, and demand continues to be supported by strong underlying fundamentals, although affordability remains a constraint. Construction activity remains strong and is being supported by both public and private investment, including the continued deployment of federal disaster recovery funds and a growing pipeline of private sector projects. We are encouraged by the onshoring and manufacturing investment activity. Since 2025, the manufacturing sector has announced approximately $2.3 billion of investments and more than 5,000 direct jobs across pharmaceutical, aerospace, logistics, technology and advanced manufacturing sectors. Tourism continues to be a major source of strength for the Puerto Rico economy. Hotel demand approached 2 million room nights or 81% occupancy from January through May of this year, increasing approximately 7% versus the same period in 2025. To boot, cruise passenger arrivals increased approximately 45% year-over-year through May. Air passenger traffic and [ Luis Manuel Lending Airport ] moderated a bit from record levels, declining approximately 4% year-over-year during the quarter. However, Puerto Rico continues to benefit from airline expansion announcements, including new routes and increased service from JetBlue, Southwest, Frontier and Avelo Airlines, which should support future visitation and economic activity. Moving to our strategic framework. We continue advancing our three objectives: to be the #1 bank for our customers, to be simple and efficient and to be a top performing bank. Our strategy is centered on delivering innovative, relevant solutions to our clients that deepen relationships improve their experience in every interaction with us and support sustainable growth across the markets we serve. To achieve this, we are focused on providing our clients with the flexibility to interact with Popular through the channel that best meets their needs while maintaining our high service standards. Frankly, it comes down to delivering great experiences. To blend the speed and convenience of self-service with personalized support in the human touch, we have continued to invest in our physical and digital channels. Key examples are the ongoing modernization of our retail network to enhance branch appearance and improved technological capabilities. Our extensive branch network provides us with a competitive advantage in Puerto Rico and the Virgin Islands. We are pleased that more than half of Puerto Rico's Banco Popular de Puerto Rico's branches have been upgraded to our new look and feel. We also continue to leverage digital tools to strengthen engagement with our retail customers and help them make informed financial decisions. These initiatives are delivering measurable results. On the commercial side, our modernized cash management platform, improving the client's experience through mobile functionality and enhanced money movement capabilities. Also, our newly launched corporate credit card solutions continue to gain traction and already account for nearly half of our commercial purchase volume. We continue to expand our targeted segments strategy by tailoring our offerings to the unique needs of specific client groups throughout their personal and professional journeys. In Puerto Rico, we are deepening relationships with health care professionals and pursuing opportunities in other attractive high-value segments. In the U.S., we're working to enhance our Community Association Banking business developing capabilities that simplify the customer experience and enable business growth. Together, these initiatives reinforce the strategic intent behind our new institutional campaign, a key [ creakireses ]. The campaign reflects our conviction that Popular is uniquely positioned to support the growth of our customers, businesses and communities we serve. As they grow, we grow. I will now turn the call over to Joe for more details on our financial results. Jorge?

Thank you, Javier. Good morning, and thank you all for joining the call today. Before covering the quarter's results, I want to thank Javier for his leadership, guidance and collaborations over the last few years. I've worked with him for over a decade and learn a lot from him. I am grateful for his friendship above all else. I look forward to working closely with him through the transition and continuing to benefit from his advice as he gets ready to enjoy a well-deserved retirement. I'm also excited to continue working alongside Lidio in his new role as CFO. I know firsthand that he will bring experience, analytical rigor and an innovative perspective to the finance organization. On a personal level, I am honored by the opportunity to lead this great organization. After more than 20 years working across our U.S. and Puerto Rico operations, I have learned that what makes Popular special is our people. This is an organization with many leaders who help sustain its success. I am fortunate to take on this role at a time of great momentum and enthusiasm. I do not take this responsibility lightly and I hope to inspire my colleagues to continue building on that momentum for years to come. As Javier said, this was a very strong quarter. We performed ahead of our expectations across nearly all categories as our teams continue to be focused on executing their business plans in support of our key strategic objectives. Results reflected higher net interest income, stronger fee income, expense disciplines and a lower provision expense. Our profitability continues to improve. ROTCE increased 17%, up from 15.5% in the first quarter and 13.3% a year ago. Given the strength of our results, and confidence in our ability to deliver sustainable returns, we are establishing a higher annual ROTCE objective of 14% to 17%. We will continue to use all available levers to position the company as a top-performing bank relative to mainland peers and to deliver attractive returns through the cycle. Please turn to Slide 7. Net interest income increased by $23 million to $693 million, driven by the loan growth, fixed asset repricing and higher investment balances supported by deposit growth at BPPR. On a GAAP basis, NIM remained stable at 3.66%. On a taxable equivalent basis, NIM expanded 3 basis points to 4.17% primarily reflecting a higher contribution from tax-exempt assets in the quarter. Ending loan balances increased by $460 million, including growth in commercial and construction lending across both banks and continued mortgage growth at BPPR. Our loan growth guidance remains consistent from last quarter at the low end of the 3% to 4% range. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $1.1 billion of treasury notes with a duration of 2.8 years at an average yield of around 3.9%. Deposit balances ended the quarter at $20.2 billion, increasing by $2.6 billion compared to the first quarter. Puerto Rico public deposits increased by approximately $3 billion, while customer deposits, excluding public funds, declined by approximately $400 million. The point-to-point decreases in balances is consistent with historical seasonality as our clients spent the windfall from tax refunds. This activity also drove the lift in interchange income during the quarter. On an average basis, total deposits increased by $1.9 billion or by $800 million when excluding Puerto Rico public deposits. Despite some seasonal movement in customer balances, overall, deposit trends remain stable and continue to reflect the strength of our franchise. Puerto Rico public deposits ended the quarter at $22.7 billion. We expect public deposits to be in the range of $20 billion to $22 billion for the rest of the year. Total deposit costs increased by 1 basis point to 1.57%, demonstrating continued stability of our funding base. At BPPR, deposit costs increased by 1 basis point, driven by a 2 basis point increase in nonpublic customer deposits as a result of targeted retention strategies, while public deposit costs decreased by 5 basis points. At Popular Bank, deposit costs increased by 4 basis points, reflecting competitive conditions in our markets and online deposit space. Given the favorable funding trends in Puerto Rico and balance sheet growth, we now expect net interest income to increase between 8% and 9% for the year. While higher balances of Puerto Rico's public deposits contribute to NII growth, their higher cost is expected to temper some of the benefit to margin. Therefore, we expect NIM to remain generally stable for the rest of the year. Please turn to Slide 8. Noninterest income increased by $15 million to $181 million and was above our guidance range. Compared to the second quarter of 2025, noninterest income improved by 7%, driven by growth in debit and credit card fees of 13% and 7%, respectively, as well as a 7% increase in asset management and insurance fees, demonstrating our ability to benefit from our breadth of product offerings. We now expect quarterly noninterest income to be in the range of $165 million to $170 million for the year, reflecting continued strength in interchange income from the debit and credit card activities and including growing contributions from our corporate credit card offerings. Please turn to Slide 9. Operating expenses increased by approximately $17 million to $484 million. The increase was primarily related to higher personnel costs, including profit sharing expense and performance-based compensation linked to the corporation's financial results. Business promotion expenses also increased due to higher credit card loyalty program activity. We continue to invest in technology, digital capabilities and transformation initiatives along with our annual salary increases and are expected to impact personnel expenses during the second half of the year. Based on current trends, we expect full year expense growth to remain at approximately 2% to 3% for the year including profit sharing expenses. Our effective tax rate was 14% during the quarter, driven by higher tax exempt income. We now expect the effective tax rate for the year to be between 14% and 15% due to higher projected exempt income. Please turn to Slide 10. Tangible book value per share increased by $2.96 to $87.94 while CET1 increased 16 basis points to 16.1%, reflecting strong internal capital generation. During the quarter, we returned a total of $174 million to shareholders with approximately $125 million coming from common stock repurchases. Year-to-date, we have repurchased $280 million in common stock. And as at the end of the second quarter, have fully utilized the $500 million common stock repurchase authorization approved in 2025. Earlier today, we announced a 20% increase in our quarterly dividend to $0.90 per share beginning in the fourth quarter. Subject to board approval as well as a new share repurchase authorization of up to $1 billion. During the remainder of 2026, we expect to repurchase an additional $300 million to $400 million in common stock. Our capital actions continue to reflect a balanced approach between supporting growth, maintaining capital strength and returning excess capital to shareholders. With that, I turn the call over to Lidio.

Thank you, Jorge, and good morning. Before turning to credit, I would like to previously acknowledge the leadership transition we announced today. First, I want to express my sincere gratitude to Javier for his leadership, guidance, dedication to Popular and friendship to me. I'm also excited and humbled to take on the CFO role, succeeding Jorge, and I look forward to supporting him as he steps into the CEO role. Finally, I want to congratulate Luis Sousa, who will succeed me as Chief Risk Officer. Luis has been a trusted partner, and I'm confident he will do an outstanding job leading our risk organization. With that, credit quality remained stable during the second quarter, supported by continued improvement in consumer credit performance, stable mortgage trends and the resolution of a previously disclosed commercial loan. In the consumer portfolio, performance continued to improve. Consumers remained resilient despite elevated gas prices and inflation, supported by higher tax refunds and a solid labor market. Net charge-offs benefited from lower losses in the auto portfolio, and the allowance for consumer loans declined, reflecting improved credit quality in auto and credit cards. Mortgage performance continued to be strong with historical low delinquency levels and net recoveries. While underlying consumer mortgage trends continue to improve, reported credit metrics this quarter were primarily influenced by two significant commercial developments. First, we resolved our largest nonperforming relationship, a $155 million commercial loan that have been classified as nonperforming since the third quarter of 2025. During the quarter, we recognized a $71 million charge-off and transferred the remaining $84 million balance to loans held for sale. The sale was completed on July 2 for $84 million. From a credit quality perspective, this resulted and removed the corporation's largest nonperforming commercial exposure. Separately, two unrelated commercial and industrial relationship totaling approximately $129 million were placed on nonaccrual status. These were borrower-specific situations and are not indicative of broader deterioration in the portfolio or in the industries in which those borrowers operate. Turning to Slide 11. Total nonperforming loans decreased by $45 million to $413 million, and the NPL ratio improved to 1.04% compared with 1.17% in the prior quarter. BPR NPLs decreased by $52 million, while NPLs in Popular Bank increased by $8 million, primarily driven by commercial NPLs. Excluding consumer loans, NPL inflows increased by approximately $137 million, primarily reflecting the two C&I relationships I discussed. We continue to monitor commercial trends closely. However, the activity remains isolated to a small number of borrowers. Turning to Slide #12. Net charge-offs were $104 million or annualized 1.05% compared to $60 million or 61 basis points in the prior quarter. The increase was primarily driven by the $71 million charge-off associated with the resolve commercial relationship. Excluding this commercial charge-off, the net charge-off ratio was 33 basis points driven by continued improvement in consumer performance, including lower auto losses and net recoveries in our mortgage portfolio. Given our year-to-date commercial charge-offs and NPL inflows this quarter, we now expect net charge-offs to be in the range of 65 to 80 basis points for the full year. The decline in allowance was largely driven by the resolution of the telecommunication relationship and continued improvement in consumer portfolio performance. These benefits were partly offset by reserves established for the new commercial inflows and continued loan growth. Our allowance coverage remained strong. The ACL to loss ratio was 1.97% and the ACL to NPL ratio increased to 190% from 180% in the prior quarter. To summarize, while the quarter included a few discrete commercial credit events, the underlying trends in our portfolio remains stable, supported by continued strength in the consumer and mortgage portfolio. We have proactively addressed our largest nonperforming exposure, maintain strong reserve coverage and continue to monitor our loan book. 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 kind words and updates. We are very happy with our second quarter results. During the quarter, we delivered strong earnings growth, stable margin performance, continued balance sheet growth and announced meaningful increases in capital return to our shareholders. At the same time, we continue to advance our strategic priorities and invest in the long-term growth of our franchise. A source of pride for me and our employees is supporting our communities through investments and partnerships that create long-term social, environmental and economic value. This effort and the progress achieved in 2025 are detailed in our corporate sustainability report published in June. Some highlights include the deployment of more than $1.1 billion in loans to support small businesses and entrepreneurs across our regions and the launch of Mi Crédito to help customers better understand and improve their credit profile. Together with our financial performance on our three strategic objectives, these efforts reflect our commitment to creating long-term value for our customers, employees, communities and shareholders. On behalf of my colleagues, I thank our clients and shareholders for their continued trust and support in Popular. On a personal note, I want to express my profound gratitude to everyone that has been a part of my extraordinary journey at Popular. A journey full of challenges overcome, shared learnings and above all, relationships with special people that I will always treasure. I am especially grateful to my colleagues at Popular for their support, trust and dedication throughout the years. Leading this organization has been truly a privilege. I leave with enormous satisfaction and grateful as I see Popular solid, united and moving forward with a clear purpose and strategy. And with that, we are now ready to answer your questions.

And our first question comes from Jared Shaw at Barclays.

Congratulations on your retirement and Jorge, Lidio and Luis, looking forward to working with you in your new roles as well. Yes. I guess there's a lot of good things in this quarter, I guess, to talk about. But when you look at the target for ROTCE and the buyback that's announced, I mean, have you changed your underlying expectations for optimal capital levels? And should we think of that $1 billion as a 12-month goal for buybacks?

So first, the authorization does not have a time limit. So I want to clarify that it is not a 12-month deadline or anything like that. We did say that we would be executing buybacks for the rest of the year in the $300 million to $400 million range. If you add that to the dividends expected with the increase in the third and fourth quarter, along with the activity that we've had year-to-date, that will cover around 100% of the 2025 net income. So we like kind of that pace. We understand the math. They don't let the balance sheet grow and that certainly help reduce the CET1 as we go forward. We're still open to optimizing our capital stack, we're still out there considering the additional Tier 1 capital to strengthen that part and create that efficiency in our capital stack. But frankly, the market rates are just not in our favor right now, and there's no reason for us to do that given the size of capital that we have and that really is just an optimization strategy. Other than that, I mean, we continue to commit it. We've tried to be more intentful in our discussions to reduce the CET1, but we continue in our philosophy that we want to do this over time. We want to have that flexibility. But certainly, we understand.

Okay. All right. And then looking at loan growth, it sounds like, clearly, the underlying economy still is strong and you're in a really good position there. What would have to happen, I guess, either in your business to see loan growth expectations move higher or even up to the higher end of the range given what we've seen so far this year?

Yes, we did have the strong growth in both markets this quarter. In the U.S., we've talked about our construction portfolio that has seen some continued increase. We do still believe that there are headwinds there in the timing of payoffs as people term out those construction loans versus the pipeline and the speed at which particularly in our New York multifamily development market is moving. So there's a little bit of headwind in Puerto Rico over the last few years and including in the second quarter, we benefit from some large ticket loans. And if we look at the pipeline, while there's still a lot of activity and a lot of good opportunities. We do see fewer of those large ticket loans. So that is something that we have in mind. As we look maybe further out, we do expect probably more spending in public works infrastructure projects, certainly, we approach a political -- an election year in 2028, there is a lot of activity like that in Puerto Rico. And as you know, given our size, we usually get the first look at all these projects. We're always going to pursue them. We're not always going to win but we're going to have a good chance to be selective, and we continue to intend to do that. One thing I'll note on our guidance, certainly, resolving the $155 million loan this quarter, that also reduces the net growth of the loan portfolio. So.

Yes. Okay. And I guess just if I could ask one more just on the inflow of those two loans that you called out. Any thought around loss content could be there? If you have a specific reserve? Or is that just something that you think you work out over time, but not necessarily a lot of loss content?

I think a lot of the driver for the provision this quarter was those two loans actually. So I mean, when you look at the real performance of our credit book was actually positive. We said we -- there was improved performance, credit metrics from our consumer portfolio and continued strong performance of our mortgage book. So a lot of the provision that we have was related to those loans. We did not specifically talked about the amounts. But we think -- I mean, the adequately reserve based on the information that we have as of today.

Our next question comes from Brett Rabatin of StoneX Group.

And I'll add my congratulations to everyone on their new endeavors and roles. So congrats. Good to be back. Wanted to, I guess, first, just talk about the competitive landscape, and it sounded to me like a little bit like perhaps you were seeing some increased competition. Can you just talk about both the U.S. and Puerto Rico and what you guys are -- what you guys are seeing, if there's any increased competitive levels on the island in particular?

Yes. I'll share some thoughts and then Jorge,obviously, will chime in. I mean, I think we've been saying in the last few quarters that we've seen competition, there's always competition for Puerto Rico. I mean I don't get this idea that this is a is a market where competition is not present. We compete every day for what we do. And not only local competition but also competition from big banks and fintechs and other financial institutions that come in and compete in different segments and products and services. But that said, I mean, competition is still rational. So we also said that we will defend our turf and price rationally and reasonably, both on the deposit and the credit products. So -- because we don't want to do anything that does make any sense and sometimes we'll let some opportunities pass if they will make sense to us, right, considering all things considered. So in the United States, Jorge, if you want to add anything?

Yes. So in the U.S., we are seeing continued competition, particularly in Florida and New York and Florida, we see competition from smaller community banks, more localized players and then in the New York market, it tends to be from bigger players. We're also seeing tough competence in the online channels where really the yield is your competitive advantage there. So in Puerto Rico, our deposit costs did go up on the non-published 2 basis points. Is this something that we have kind of -- or forecast or predicted to you guys in these conversations. And they're just reflective of our kind of targeted focus on retaining relationships. And we've been since, I guess, the end of 2024, just revised kind of our focus, the structures, incentives as well as exception pricing matrices that allows us -- and it's been very successful for us to retain good clients.

Yes. Okay. That's really helpful. And then on the expense guidance for the year, you obviously tweaked it down. But even at the higher in particular of the 2% to 3%, it implies a pretty good pickup from here even with the higher incentive compensation-related stuff in 2Q, is -- are there any projects related in the back half of the year that would raise professional fees? Or can you talk about the inflection in the back half versus 2Q in particular?

Sure. We do expect expenses to go higher in the second half. The one big item, as I mentioned in my prepared remarks, is our annual salary increases. They're effective in July. So that probably adds $4 million to $5 million a quarter just on that. And then we continue to work on our transformation efforts. And as we've said in the past, you have kind of this ebb and flow of projects that get done and move on. And certainly, that's all part of the guide. One part that's important, and I think the significant change is that the guide does include the range of profit sharing, including if we had to max out on the profit sharing, it still fits within the range that we're providing you.

Our next question comes from Arren Cyganovich of Truist Securities.

Best wishes Javier. I really enjoyed meeting you last year while I was kind of re-ramping on the name. And I think your passion and your intensity definitely stands out, and I'm sure your family is going to look forward to that in the...

I can't be in the house so much because my wife won't like it, but yes, thank you for those very kind words.

And congratulations to Jorge, Lidio and Luis. Definitely look forward to continue working with you. On the deposit side, ex government, they were down. I know you just talked about some of the competition. It looked like demand deposits was the area that -- where there was a little bit of a decline. Any color in terms of that any kind of seasonality, et cetera?