Popular Q1 2025 Earnings Call Transcript

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Operator

Hello, and welcome to the Popular Incorporated First Quarter twenty twenty five Earnings Call. My name is Elliot. I'll be your coordinator today. I would now like to hand over to Paul Gardello, Investor Relations Officer. Please go ahead.

Paul Cardillo
Paul Cardillo
Senior VP & Investor Relations Officer at Popular

Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez our President and COO, Javier Ferrer our CFO, Jorge Garcia 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 and 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.

Paul Cardillo
Paul Cardillo
Senior VP & Investor Relations Officer at Popular

These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause 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 CEO, Ignacio Alvarez.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Thank you, Paul. Good morning to all. Before I begin, I'd like to apologize. Not probably hearing my voice. I'm not feeling 100% today.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

I'm bit out of the weather. So I've asked Javier to cover the business highlights. But before turning over to him, I would like to make some comments regarding the announcement we made in February about my upcoming retirement on June 30 and the board's appointment of Javier as my successor. Javier is a proven leader and has assumed increasing responsibilities and has demonstrated that he has the experience and vision to lead Poblaria. He fosters a collaborative, high performance culture and will infuse new energy while ensuring a smooth transition into a CEO role.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

I am grateful for his support and friendship, which began close to thirty five years ago, and I am confident that under that under his leadership, Popular will continue to drive. I have spent fifteen fifteen incredibly rewarding years at Popular. Leading this extraordinary organization since 02/2017 has been a privilege and the opportunity of a lifetime. I'm immensely proud of what we have achieved in recent years. Thanks to the dedication and the hard work of our entire team.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

While there's no perfect time to retire, I am confident that the timing is right for this transition. Popular is in a strong position and well prepared for the future. With that, I hand it over to Javier.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

Good morning. Thank you, Nacho, for those incredible words. It has been one of my life's true privileges, a gift to enjoy your company as a mentor, a dear friend, and a partner. That said, please turn to Slide three to discuss highlights of the first quarter. Our net interest income increased by 15,000,000 and the net interest margin expanded by five basis points to 3.4%, mainly driven by lower deposit costs.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

Loan balances increased by 146,000,000 primarily driven by the commercial and construction segments in Popular Bank. Deposit balances grew by $935,000,000 with both banks contributing to the increase. Credit quality improved led by lower net charge offs and early delinquency. During the quarter,

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

we

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

repurchased $122,000,000 in shares at an average price of roughly $96 per share. To date, we have repurchased $340,000,000 of our current $500,000,000 authorization. Tangible book value per share increased by nearly $4 to approximately 72 driven by our quarterly net income and lower unrealized losses in our investment portfolio, offset in part by share repurchase activity and dividends in the period. Please turn to Slide four. Before commenting on the business activity for the quarter, we would like to address the recent volatility due to tariff uncertainty, which has impacted markets and raised recession concerns.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

We are closely monitoring the situation and communicating with clients about its potential effects. Regardless, our strong balance sheet, diversified business mix and extraordinary team have consistently enabled us to perform well in uncertain times. This is the time to be focused on supporting and serving our clients and to demonstrate the strength of our great institution. As of the end of the first quarter, business activity in Puerto Rico continued to be solid as reflected in the favorable trends in total employment, consumer spending and other key economic data. The current employment rate of 5.5% continues to hover around the all time lows.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 6% compared to the first quarter of twenty twenty four. Mortgage loan balances at Banco Popular increased by $136,000,000 in the first quarter, driven primarily by home purchase activity. Our auto loan and lease balances increased by $21,000,000 compared to the fourth quarter as demand for new cars continued to be strong in Puerto Rico. The tourism and hospitality sector continues to be a source of strength for the local economy.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

When compared to the same period a year ago, passenger traffic at the San Juan International Airport increased by 11% during the quarter. And as of February, the average daily rate and revenue per available room or RevPAR increased by 109% respectively. Hotel occupancy exceeded 75%. We continue to expect that the ongoing disbursement of federal disaster recovery funds will support economic activity in Puerto Rico for several years. And on that note, I turn the call over to Jorge for more details on our financial results.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Thank you, Javier. Good morning and thank you all for joining the call today. Please turn to Slide five. We're very pleased with the quarter's results, particularly with deposit activity, the NII growth and the expansion of the NIM. Despite all the uncertainty in the economic outlook, we've started the year on a strong footing.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Net interest income increased by $15,000,000 driven by asset repricing in our investment portfolio as well as lower deposit costs in both banks. As anticipated, loan growth in the quarter was slower after a very strong Q4. Loan balances increased by $146,000,000 led by The U. S. Segment.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

At PB, we saw increases in commercial and construction lending and at BPPR, we continue to see an increase in mortgage loans. However, as discussed in our Q4 webcast, we received some large commercial loan repayments that impacted the ending balances. Ending deposit balances increased by $935,000,000 while average balances grew by $1,400,000,000 At the end of the first quarter, Puerto Rico public deposits were $19,600,000,000 an increase of approximately $160,000,000 when compared to Q4. We continue to expect public deposit to be in the range of 18,000,000,000 to $20,000,000,000 At BBPR, excluding Puerto Rico public deposits, ending in average deposits each grew by approximately $400,000,000 And at PB, ending deposit balances increased by approximately $250,000,000 net of intercompany. We're very happy with the successful efforts of our teams and their focus on deposit retention and growth strategies.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Our net interest margin expanded by five basis points on a GAAP basis and 11 basis points on a tax equivalent basis, driven by lower deposit costs and a larger balance of tax exempt investment securities. Non interest income was $152,000,000 a decrease of $13,000,000 compared to Q4 and below the low end of our 2025 quarterly guidance. The primary reason for the delta versus our expectations was a $3,000,000 unfavorable variance in the fair value adjustment of our MSRs and lower than anticipated income from equity method investments. We continue to expect quarterly non interest income to be in a range of 155,000,000 to $160,000,000 during 2025. As Lida will cover in detail, credit metrics improved across the board during the quarter.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Total operating expenses were $471,000,000 an increase of $3,000,000 when compared to last quarter. The largest expense increase in the quarter was related to higher personnel costs, driven by annual incentive awards and payroll taxes that are normally higher in Q1, offset in part by lower business promotion expenses, which tend to be seasonally higher during the fourth quarter. We continue to expect full year 2025 expenses to increase by approximately four percent when compared to 2024. Our effective tax rate in the first quarter was 20% flat with Q4. In 2025, we expect the effective tax rate for the year to be in a range of 19% to 21%.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Please turn to Slide six. We continue to reinvest the maturities of our U. S. Treasury note portfolio in two and three year treasuries, buying approximately $900,000,000 at an average yield of around 4.2% during the quarter. We expect to continue this strategy to lessen our sensitivity to lower rates while maintaining a similar duration in the investment portfolio.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

In BBPR, deposit cost decreased by 12 basis points to 1.55%, mostly due to a 38 basis point reduction in the cost of market linked public deposits. At Popular Bank, deposit cost decreased by 11 basis points during the quarter. While we have made progress in reducing the cost of our U. S. Deposits, we continue to see a lag in the reduction of deposit costs due to the competitive landscape of our U.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

S. Footprint and online deposit space, as well as the high proportion of time deposits, which take longer to reprice. When we provided loan growth guidance in January, we expected the rate of growth to accelerate as the year progressed. Despite growing uncertainty about the economic outlook, demand for credit in Puerto Rico remains strong. In our U.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

S. Market, demand for credit was stable during the first quarter as we continue to benefit from draws from ongoing construction projects and loan growth in our healthcare and community association lending business. While the impact of tariffs on economic activity may affect loan demand, we believe that we can achieve our original loan growth guidance of 3% to 5% for 2025. However, given the overall environment, now we see the lower end of that range as a more likely scenario. We expect NII to increase by 7% to 9% this year and anticipate further NIM expansion driven by continued reinvestment of maturing lower yielding securities and loan originations in the current rate environment, as well as lower cost of online deposits at Popular Bank.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Please turn to Slide seven. Regulatory capital leverage remained strong. Our CET1 ratio of 16.1% increased by eight basis points from Q4, mainly due to quarterly net income that was somewhat offset by capital actions during the period. Tangible book value per share at the end of the quarter was $72.02 an increase of $3.86 per share from Q4, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity during the quarter. During the first quarter, we repurchased approximately 122,000,000 in shares at an average price of $96 per share.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And as of the March, we had $160,000,000 remaining of our existing $500,000,000 authorization. Return on tangible common equity for the quarter was 11.4%, an increase of 14 basis points from last quarter, driven by stable net income and buyback activity. We continue to anticipate at least a 12% ROACE in the fourth quarter of this year. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity. With that, I turn over the call to Lidio.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

Thank you, Jorge, and good morning. Credit quality metrics improved during the first quarter with lower early delinquencies, NPLs, inflows and net charge offs. Our mortgage and commercial loan portfolios continue to reflect credit metrics significantly below pre pandemic levels. As we have discussed in previous calls, we have been encouraged by the performance of our most recent consumer vintages. During the quarter, our consumer portfolio reflected lower delinquencies, NPLs and net charge offs driven by our auto and personal loan portfolios.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

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 borrowers. We continue to carefully monitor the performance of our book and respond to the environment accordingly. We are confident that the improvements in the risk profile of our loan portfolios positions Popular to operate successfully under more difficult economic conditions. Turning to Slide number eight.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

Nonperforming assets and loans decreased during the quarter, driven by PPNR. NPLs and BVPR decreased by $30,000,000 driven by lower auto, mortgage and commercial loans. Commercial NPLs decreased driven by 9,000,000 single loan payoff during the first quarter of twenty twenty five. NPLs in Popular Bank decreased by $7,000,000 driven by a single loan sale. OREOs decreased by 5,000,000 driven by sales of residential real estate properties in Puerto Rico.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

Inflows of NPLs decreased by $16,000,000 quarter over quarter. In BVPR, total inflows decreased by $11,000,000 driven by lower mortgage inflows. In Popular Bank, a decrease of $7,000,000 was driven by lower commercial inflows. The ratio of NPLs to total loans held in portfolio decreased 11 basis points to 84 basis points. Turning to Slide number nine.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

Net charge offs amounted to $49,000,000 or annualized 53 basis points compared to $67,000,000 or 74 basis points in the prior quarter. Net charge off in DBPR decreased by $60,000,000 driven by lower consumer by $11,000,000 and lower commercial related to the commercial NPL payoff I mentioned earlier. In Popular Bank, net charge offs decreased by $3,000,000 In our prior webcast, we provided guidance for the twenty twenty five full year net charge offs estimating a range of between 70 basis to 90 basis points. Considering the performance of the loan portfolio in the first quarter and short term outlook, we could lower our guidance. However, given the uncertainty and fluidity of the current environment, we're not changing our estimate at this time.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

Please turn to Slide number 10. The allowance for credit losses increased by $16,000,000 to $762,000,000 The increase in the ACL was driven by changes in the probability weights of economic scenarios, coupled with increases in qualitative reserves, offset in part by improvements in credit quality and changes in portfolio mix. We leveraged multiple scenarios to estimate our ACL. In response to the current economic uncertainty, we increased the weight assigned to the pessimistic scenario, causing an $18,000,000 increase in the ACL. In the EPR, the ACL increased by 6,000,000 driven by the change in probability weights, offset in part by improvements in the credit quality of our commercial and consumer portfolio.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

In Popular Bank, the ACL increased by $11,000,000 driven by the change in probability weight and higher qualitative resource for the CRE portfolio. The corporation ratio of the ACL to loans held in portfolio was two zero five basis points compared to two zero one basis points in the prior quarter, while the ratio of the ACL to NPL was 243% compared to 213% in the previous quarter. The provision for credit losses was $64,000,000 compared to $66,000,000 in the prior quarter. In BBBR, the provision was $53,000,000 compared to $67,000,000 while in Popular Bank, the provision was $13,000,000 compared to $2,000,000 in the prior quarter. The combined provision to net charge off ratio for the quarter was 133%.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

To summarize, credit quality metrics improved during the first quarter. We're attentive to the evolving environment. We are confident that the improvements in the risk profile of our loans portfolio will allow us to operate successfully under more difficult economic conditions. With that, I would like to turn the call over to Ignacio for his concluding remarks. Gracias.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Thank you, Lidio. We thank Javier, Lidio and Jorge for their updates. We are extremely pleased with our strong financial performance in the first quarter. We increased our net interest income, grew loans and deposits and maintained strong credit metrics. We also expanded our customer base and continue making progress on our transformation program.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

I want to express my sincere gratitude to our employees for all their hard work and support during my tenure. I am grateful for our achievements as well as the challenges we face and conquered together. I wish Javier great success in his new role for which I believe he is more than ready. I'm confident Javier and the team will take Popular to even greater heights. It has been an honor and a privilege to serve as CEO these last eight years, and I look forward to celebrating Popular's successes, albeit from a different vantage point for many years to come.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

We are now ready to answer your questions.

Operator

Thank you. Our first question comes from Frank Schiraldi with Piper Sandler. Line is open. Please go ahead.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Morning.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Good morning, Frank.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

First, yes, congrats to both

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

of you, Javier and Ignacio. I wanted to start with kind of a broader question. You mentioned the macro uncertainty, the tariffs. Obviously, the news flow seems to change every day, but there's some obvious concerns there. There's also talks of potential benefits for the island and specifically,

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

you

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

hear about the comparative advantage in pharmaceuticals. Obviously, still early days and trying to figure all this out, but and again, are changing quickly. But just wondering what you guys are hearing, seeing on the ground from clients in terms of talk of potential new investment on the island? And how significant a headwind are are things like the issues with the power grid?

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

The the power grid is is I I hate to answer it this way, but the power grid is not a a that a significant issue because Puerto Rico has, over time, become very resilient to power outages. I was going to the airport the other day, and I was shocked during the outage on how much light there was. So I don't I don't think it's gonna meet for the industries that are here. It may be something that people have to think about when they when they decide to invest in Puerto Rico. But many people are are in Puerto Rico, especially in the pharmaceutical and medical device sectors, are doing their own CHPs and and, you know, power plants.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

So I think that's relative cost of that for the benefit is small. So I don't think we've seen a new pharmaceutical yet. Don't I don't You were talking to someone from the industry the other day. Right?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Yeah. So so there's definitely I mean, this is a priority for for the government and and for the team

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

of that's

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

tasked with bringing in investment to Puerto Rico. This is an area where where we believe Puerto Rico, you know, stands out and that it's a a known entity for companies considering reshoring. We have the proven skilled talent pool in Puerto Rico. And the the financial incentives are are still more attractive than any stateside option. Remember, Puerto Rico, depending on how you measure it, is either the number one or number two exporter of pharma products in The United States.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So there's definitely a robust industry. We still have capacity both from existing companies in Puerto Rico and for plans that were here before that may be, kind of white box at this point. There's also CMO organizations in Puerto Rico that can, you know, ramp up to do, third party manufacturing. So it is it is an area that that could be a highlight. I'd I'd love to give you, you know, some example of a big win.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

But, you know, all we can talk right now is the strength of the industry and the anecdotal focus of the of the government and the and the teams that are supposed to that task with bringing this to Puerto Rico.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Gotcha. Okay. No. That's helpful. And then

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

just switching gears as a follow-up. Just Jorge, I wonder if you could update us on your broad thoughts on deposit flows. I mean, obviously, you had the outflows in the third quarter of last year, I think it was. You talked about 600,000,000 to $800,000,000 additional at risk. Where are we now on that?

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

You've had a couple of positive quarters on deposits. How seasonal is the growth in 1Q? And just your thoughts on flows through the year here.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Sure. So first of all, happy with the efforts of the teams and their focus on deposit gathering. So the teams have reacted as as as they usually do, and we're very happy with those results. There's a lot of momentum. During the first quarter, as you know, we do have historically some seasonality related to tax refunds.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So we did see that in our in our retail business. We're running around 200,000,000 ahead of last year in terms of of tax refunds in our client accounts. We continue to expect more tax refunds in April and maybe a little bit into May. You know, in terms of of the deposits, when we look at our balances today, we're about 35% higher on average balance when compared to pre pandemic. You may remember that the peak was 50%.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And that was in 2022 when our clients were benefiting from a lot of federal stimulus. One of the interesting things that we see is that when we compare the inflows into our our clients' accounts that have continued after 2022, our clients are actually getting more inflows today than they were in 2022. And that's driven by the higher earnings and higher wages, higher economic activity that's ongoing in Puerto Rico. So that gives us some confidence that the baseline is is tracking to where we think it would be. When we look at, you know, you know, retail clients getting tax refunds, we do expect some of them to to spend some of those refunds like they did last year.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So we'll see how how the trends, whether they repeat, and to what magnitude in the second or third quarter. But also given the uncertainty in in the environment right now, we we would also expect some clients to counteract that with maintaining higher balances or perhaps curtailing some of their spend activity. So, you know, I think the bottom line, we we we are outpacing where we thought we would be in deposit at this time of the year. Very happy with the efforts and our team's focus, and we'll see where we turn out in the second and third quarter, but glad to be starting from this point forward.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Great. And just thinking about the seasonality again, is it still fair to think that 3Q is probably the trough from a seasonality standpoint for deposits?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

That's what we saw in 2024. You know, you know, we'll to see how how it goes. We would expect continued tax refunds, you know, like I said, through through early May. You know, last year, we did begin to see some of the spend occur in the second quarter, so it will just depend on the speed and magnitude. But, again, we think the the the point of baseline, you know, should trend higher.

Frank Schiraldi
Frank Schiraldi
Managing Director at Piper Sandler Companies

Gotcha. Okay. Appreciate the color. Thanks.

Operator

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

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Thank you. Ignacio, congratulations on your retirement. And Javier, congratulations on taking over the new role.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

With that, Javier, you're welcome.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Javier, can you

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

share with us your view of where you see Popular under your leadership? Will it differ at all from the last three or four years? What do you see for Popular in a big picture?

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

Well, continue to see Popular as a preeminent financial institution in Puerto Rico. I think we're only getting stronger. Our transformation efforts continue to show results and accelerate. I I see I see us becoming stronger in certain areas such as payments or, you know, money money movement. I see us strengthening our market leading omnichannel experience for our customers.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

So and executing executing our, you know, our strategy. I I don't I I think it's gonna be about execution, building on what the team has done under Ignacio's, you know, great leadership. So stay as it goes with with with those, sort of nuanced areas that I just described. And, of course, you know, we're we're going for that 12% at the end of this year, RoTCE. And and as as I think, Ignacio and Jorge have said it before, we have you to get to the 14% RoTCE on a sustainable basis.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

So that's what I that's what that's what I see.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Very good. And I know on these calls in the past, discussions about capital levels always come up and share repurchases. You announced a hundred and 22,000,000 in buybacks this quarter. The authorization continues of course into the remainder of 2025. In view of, it appears from The U.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

S. Regulatory standpoint that the regulators are going to maybe loosen the course around the banking industry to ease up on maybe some of the capital requirements. Do you guys see for you folks, your CET1 ratio even with the buyback went higher this quarter, any way of kind of projecting for us what's a comfortable level above you know, your peers? So I know there's the Puerto Rico kind of premium or excess that you need to carry, but it seems like your capital levels are are so strong or too strong that you could lower them maybe more optimally with a stronger buyback over the next twelve to eighteen months?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Gerard, good morning. It's Jorge. You know, you know, we we share in in your perspective and that, we have robust capital and and certainly our our, you know, we've spoken in the past about having a a cushion or a spread against peer averages given our geographic concentration in Puerto Rico. We don't believe that it needs to be, you know, five or 600 basis points depending how you measure it today. However, on the other hand, you know, we have also said that, we will be measured in our reduction of capital and doing over time.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

You know, we do have an active authorization. I will correct, you know, the authorization is open ended. It does not expire in in 2025. Our intent is to make sure that that we're always working with some level of open authorization that we can execute upon and have the flexibility to to do that. I I read you and and and we hear it from many of our investors is trying to have a target of CET one out there.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

I think when when we can share that along with a path and a plan to get to those targets, I think that will be the right time for us to kind of stick that flag with a level of confidence and and and a path to get there. But in in the meantime, you know, focus on return on the level of capital that we have, focus on executing and making sure that that we are active in returning capital to our shareholders both in, you know, organic growth inorganic growth and in capital returns through dividends and repurchases.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Very good, Hooray. And just as a quick follow-up on your comment about the open authorization. Once you've satisfied the $500,000,000 that you were authorized from the, I think, the third or fourth quarter of last year, once you satisfy that amount, what's the procedure to increase the authorization further?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So for for us, you know, we we, you know, have a a process that we run. It it's not diff not much different than than than we used to raise heavily based on our internal stress test based on, you know, the Fed, scenarios and and, obviously, adjusted for Puerto Rico. You know, talking to our board, looking at our our organic growth brands, looking at our strategic plans, and making sure that we consider, you know, the the the overall environment in going to our board and, and communicating with our regulators, of our plans.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Very good. Thank you.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

You're welcome, Gerard.

Operator

Our next question comes from Timo Braziler with Wells Fargo. Your line is open. Please go ahead.

Timur Braziler
Timur Braziler
Director - Mid-Cap Bank Equity Research at Wells Fargo

Hi, good morning. Good morning. Starting on NII, impressive start to the year, just looking at first quarter performance versus guidance and your thoughts around maybe upper versus lower levels of the guide? And what would you actually need to see for the pace of the top line growth to slow into that kind of lower end range?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

I mean, I think, you know, certainly, we have some tailwinds in the reinvestment of our investment portfolio. Certainly, in addition to that, loan originations, the demand for loans, you know, adds to to that NII growth. But ultimately, the deposit mix and the deposit cost are a big driver team here. So, you know, like I said, you know, we're very happy with the levels of deposits. We'll we'll see kind of, client behavior and and the efforts or continued efforts of our teams.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

But, certainly, that that mix cost and and levels will will have an impact on on where we end up in that seven to 9% range.

Timur Braziler
Timur Braziler
Director - Mid-Cap Bank Equity Research at Wells Fargo

Okay. That's that's helpful. And then I guess just on deposits, looking at DDAs in specific, just end of period versus the average discrepancy, Is the expectation that some of that build towards quarter end exits in 2Q? And then just as you think about this massive fluent strategy, can you kind of ring fence the portion of DDA that might be at risk of migrating into higher cost categories as the strategy plays out?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Yeah. One one thing

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

I I wanna remind you is that in the fourth quarter, we launched a new product, targeted to our mass affluent client base, And we have reclassified, I think it was around 600,000,000 from demand non interest bearing demand deposits to a low cost, interest bearing, transaction account. So that's why you're seeing kind of the discrepancy where you see a a a significant reduction in average balances of the demand, but you don't see it in in ending balances because that had already been embedded in the year end numbers. So that is to say that I wouldn't expect that trend to to repeat organically. Right? So in terms of, you know, the cannibalization of people moving to higher cost deposits, we haven't really seen that in Puerto Rico.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

We do see it in The US. It's more prevalent in our US business, not in Puerto Rico. And and part of that is driven by, you know, average balances, you know, the levels of average balances in Puerto Rico, our commercial and and corporate clients, you know, working capital requirements, etcetera. So

Timur Braziler
Timur Braziler
Director - Mid-Cap Bank Equity Research at Wells Fargo

Okay. And then just last for me, a follow-up on the buyback. Popular was one of the more conservative banks when when rates started hiking and pausing the buyback. Level of uncertainty is higher today. Does this rise to that same kind of level or maybe you guys would pause and take a step back and gauge what's going on in the macro?

Timur Braziler
Timur Braziler
Director - Mid-Cap Bank Equity Research at Wells Fargo

Or is the comfort level internally enough where the buyback resumes here despite of some of this near term uncertainty?

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Yeah. This is Ignacio. These are discussions we have on a constant basis with our board. I don't see anything today that would cause us to do that. But obviously, we're very vigilant.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

If something really bad happened, we would take action.

Timur Braziler
Timur Braziler
Director - Mid-Cap Bank Equity Research at Wells Fargo

Great. Thank you. And congratulations both Nacho and Javier.

Javier D. Ferrer
Javier D. Ferrer
President & COO at Popular

Thank you. Thank you. Thank you.

Operator

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

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Hey, good morning. Thanks for the questions. And just to echo everybody's congratulations as well for me. And Ignacio, I hope good luck with your next steps.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Thank you

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

very I

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

think maybe looking at potential opportunity for onshoring in Puerto Rico, is there anything else, any other incentives the government's offering to apart from the pharma industries? Is there an opportunity to attract new industry? Or is it really most of the efforts focused around pharmaceuticals?

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Well, know, the the the the incentives are not directed only to the pharmaceuticals. They are across different industries the government is trying to promote. However, because of the huge amount of money that they make, it's much more attractive for the pharmaceutical company. Now these two two other areas that that have been gaining traction. One is the medical device, and again, they have good they have good profit margins.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

And recently, aerospace. And aerospace has a different incentive because not much of what the aerospace industry produces in Puerto Rico is for The US for the US military. And, you know, by by law, that has to be made in The US. So that's that's an advantage we have there.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And more recently too, we we have seen some technology focused organizations coming to Puerto Rico given that some of the r and d credits apply to to software development, and that is attractive to to some of those folks, particularly in AI and and kind of those unique area.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Great. Thanks. And then maybe just a little more detail on the expectations around construction growth. Is that something we should be thinking continues to sort of grow at an accelerated pace here?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So I think there's a couple of things there. One, we are seeing our clients and most of their construction portfolio is focused in New York and it's a start to multifamily development projects. We are seeing behavior where because the pipelines are slower or or or less. So developers are able to dedicate more people to accelerate the construction efforts. They're doing this to try to reduce the impact of the higher rates, borrowing rates, mitigate their their increasing cost of development, etcetera.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So, you know, we are we are at some point expecting to see where we'll see some payoffs and there there won't be the pipeline to kind of, you know, continue the level of growth that we have seen. When that happens, you know, yet to be determined. Right? There's, you know, obviously, a lot of different projects that are ongoing at the same time. Meanwhile, as our teams are going out and continue to develop, you know, business.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

So hopefully, we get enough runway that that it becomes a little transparent, but there is that nature. Remember, you know, while we make compete in some of the takeout loans, they're not we're not, you know, our construction loans are not contingent on the takeout loans. Sometimes we don't want the takeout loan, so it's not certain that you would end up, you know, moving from construction to CRE, for example, or multifamily.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

I will also add that in Puerto Rico, we expect at some point in time to see the benefit from some of the FEMA funds that are being allotted to construction of low housing in Puerto Rico, low income housing in Puerto Rico. The timing is a little bit difficult to to to say, but we think that that's going to it's going to happen here this year and next year.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And and one other area where we're demand in The US is in our community and condo association lending, particularly in South Florida, but there are some legislative requirements for condo boards to address, you know, maintenance on any building that's higher than three floors and 30 years old. And there's a lot of activity in that area. That shows up more in our C and I portfolio rather than the construction given the nature of the collateral and the way those loans are made.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Great. Thank you.

Operator

Our next question comes from Ben Gurlinger with Citi. Your line is open. Please go ahead.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Hey, good morning.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Good morning.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Hi, Ben. Good morning.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Everything we kind of talked through here on loan growth in the longer term seems to be pretty positive. But in your commentary, you're kind of towards the lower end of the guidance range. I'm just kind of curious, is it more so just being prudent and conservative? Or is it just like elevated payoffs and people not utilizing lines at the pace we're thinking? I'm just kind of trying to marry the two of like positive outlook for lower loan growth.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Yeah. I mean, I I

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

I think, you know, first, there's there's payoffs in our in our, you know, kind of runway that that that we see. So, obviously, that's money that needs to be, you know, replaced. We've said it in the past, you know, for example, our auto portfolio, you know, our our run rate is somewhere in the 400,000,000 in originations. It just stay running in place. So it's you know, we we we talk a lot about growth, but the machinery that that has to support that growth is is extensive as well.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

I I think when we talk about our low end of of the range, it is driven by not only disability to our pipeline, but conversation with our clients. And most of our our clients are, you know, confident with the projects that are ongoing, but the uncertainty certainly gives pause for people. I mean, the the the the lack continuously, we hear people saying it's a fluid environment, very dynamic changes every day. That uncertainty gives people pause, you know, you know, particularly with projects that are that are longer term. People just wanna understand what it is that they're building into, committing into, buying into, etcetera.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Okay. That is helpful. And then I think in the kind of previous discussions, you talked through federal refund taxes and returns and just the overall deposit pool that you normally see is getting a little bit better or better than it had been over the past couple of years. I mean when you kind of look at the credit trends, you guys seem to have been a little bit more proactive on kind of the retail portion across those lines of business. Are you seeing those refund checks go directly to paying off delinquent loans, or is it kind of two different ships passing in?

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Both are positive. I'm just trying to see if one hand is going right to the other.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

I will say that that that that will be a natural tendency for it to occur as people become more liquid. They use some of that liquidity to deleverage themselves. But I think what we have seen this quarter is a function of some of the actions that we took back in 2023 related to tightening some of our riskier borrowers and management effort that we have put forth in collections has really paid off this quarter.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And and when we look at the delta of balances in the first quarter this year versus last year, you know, versus the increase in in, you know, in in taxes, those those seem to to be consistent. So whatever behavior we're seeing, it it is not out of, you know, out out out of sync with what we have seen traditionally. So it's it so if people are using, you know, to pay and and become current, we're still seeing the deposit balances grow. So that you're you're getting two positives there, guess, is the better way of saying it.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Gotcha. That's helpful. Appreciate the time. And also, slide 17. It was it was great.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Thank you, Paul.

Operator

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

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Hi, good morning. I just wanted to echo everybody's congratulations to you, Ignacio, on your retirement. It's been such a pleasure working with you and Javier on congrats on the new gig coming up. So

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

So

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

let's see. You know, I I I would like to talk a bit. I I know it seems like the credit is holding in a lot better than perhaps you may have expected a quarter or two ago. And one thing we've been talking about the past several quarters has been this normalization of the consumer. Can you just, it sounds like there's the potential of net charge offs maybe dropping below the end of the range depending on how this goes.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

I'm just wondering where we stand on that normalization of the consumer and life cycle there. There still the potential of you know, some of those losses tick ticking higher, or or has that, you know, addressing the the FICO scores on on that kind of contained that back more towards the normal end of the range? Just trying to kind of frame where we are in what we've been talking about the past several quarters.

Lidio Soriano
Lidio Soriano
Executive VP & Chief Risk Officer of Corporate Risk Management Group at Popular

I think as we mentioned in the prepared remarks, we're very pleased and very happy with the performance of our loan book this quarter. We also mentioned that given the performance in the first quarter and the outlook the short term outlook for our book, we could be in a position to lower the range. However, given the operating environment, the fluidity uncertainty that we're not changing our estimates. So we echo your positivism in terms of what we see in terms of results for the quarter and outlook for the rest of the year. However, given the uncertainty, we're holding off from changing the estimate at this time.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Okay. That's helpful. Then maybe stepping back, I think I caught that you reiterated your intermediate term outlook for eventually getting to that 14%, ROTCE. In in order to get there, can you can you help frame would that would that take a more substantial return on capital beyond these, you know, opportunistic share repurchases you have here?

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

I'm just trying to square the, you know, 11 and a half, call it, ROTZ, you're you're at here versus the improvement you would need to see. Is that is that fair to say that you would need something a bit beyond just these normal share repurchases and kind of at a high level, what what it take what would it take to get there?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Yeah. I mean, I I think that, you know, part of the reason of extending and then making that a target, right, and not giving a time onto that target, it it is that it requires us to execute across the entire, let's call it, p and l and balance sheet. Right? It will require us to maintain our our focus on deposit growth, our mix of deposits, our expanded NIM, expense control, strategic decisions, and including, you know, our capital stack. So it's really all of the above, Kelly, and it just goes to the nature of the effort and focus that our management team has to have as active participants in making sure that we make decisions towards that goal.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Great. I'll step back. Thank you very much.

Operator

We now turn to Anir Bohan with Hovde Group. Your line is open. Please go ahead.

Ynyra Bohan
Equity Research Associate at Hovde Group

Hi. Good morning. Just a second Talking about your fee income, do you expect your total fee income to rebound from here after the slight decrease this quarter, and have the mortgage banking income uptick again?

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Yeah. We we do it as as we said in the guidance that expect to finish the year between 01/01/1955 to $1.60 per quarter. And we when we look at year end, so that would signify, as you say, a pickup. There is some seasonality in some of those fee lines, you know, for example, transactional accounts, credit cards, you know, we we would expect higher activity as the year goes by. The you know, our equity method investments, you know, we would expect there there to add to that increase going forward.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

And then there's also other cyclical fees from our insurance company that get paid some in the second quarter and others in the fourth quarter. So when you put that all together, there are levers in our business mix that should help take that off to the levels that we're guiding to.

Ynyra Bohan
Equity Research Associate at Hovde Group

Perfect. Well, thank you so much.

Jorge Garcia
Jorge Garcia
Executive VP & CFO at Popular

Thank you. You're welcome.

Operator

This concludes our Q and A. I'll now hand back to Ignacio Aldeyrez, CEO, for any final remarks.

Ignacio Alvarez
Ignacio Alvarez
CEO at Popular

Once again, thank you. It's been a pleasure working with you, and we appreciate the interest that you have in our company. And while we may not always agree, we always listen. So thank you, and I look forward to listening to the next webcast. Take care.

Operator

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

Executives
    • Paul Cardillo
      Paul Cardillo
      Senior VP & Investor Relations Officer
    • Javier D. Ferrer
      Javier D. Ferrer
      President & COO
    • Jorge Garcia
      Jorge Garcia
      Executive VP & CFO
    • Lidio Soriano
      Lidio Soriano
      Executive VP & Chief Risk Officer of Corporate Risk Management Group
Analysts
Earnings Conference Call
Popular Q1 2025
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