Popular Inc 2026 Q3 Earnings Call

Please go ahead. Good morning, and thank you for joining us.

With me on the call today are our President and CEO, Jorge García, and our CFO, Lidio Soriano. They will review our third quarter results and then answer your questions. Other members of our management team, including our CRO, Luis Sousa, 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 earnings release and our SEC filings on our website at popular.com. I will now turn the call over to Jorge.

Thank you, Paul, and good morning, everyone. Please turn to slide 4 to discuss the highlights of another solid quarter. We reported net income of $266 million and earnings per share of $4.21, a decrease of $0.14 per share from the second quarter. Results reflected higher net interest income and stable underlying credit trends, partially offset by higher operating expenses and lower non-interest income. Compared with the third quarter of last year, earnings per share increased by 34%. Our ROTCE was 15.8% compared with 17% in the second quarter and 13.1% in the third quarter of 2025. Loans held in portfolio increased by $293 million, driven by growth in commercial and mortgage lending. Total deposits decreased by $1.5 billion, primarily reflecting lower Puerto Rico public sector balances.

Excluding public funds, customer balances decreased by approximately $289 million. The delta was consistent with our expectations and third-quarter seasonality. Credit performance remained stable. Net charge-offs declined from the second quarter, while non-performing loans increased, primarily reflecting a commercial relationship at BPPR that was placed on non-accrual. We continued to return capital to shareholders, repurchasing $179 million of common stock in the quarter. We also increased the quarterly dividend to $0.90 per share, beginning with the payment on October 1. While some indicators have moderated from the strong levels experienced over the last several years, economic conditions and business activity in Puerto Rico remain stable. The labor market continued to be healthy.

Total employment increased to approximately 1.26 million in September, its highest level of the year, as the labor force grew by roughly 24,000 people in the quarter while employment grew by 18,000 jobs. The unemployment rate increased modestly to 6.2%, largely reflecting a higher participation rate rather than job losses. Job growth was strongest in leisure and hospitality, with most other sectors showing modest growth or broadly stable conditions. Consumer spending was solid during the quarter, as evidenced by Popular's customers' debit and credit card sales volume, which increased by approximately 7% year-over-year. Tourism was another source of meaningful support for the Puerto Rico economy. Through August, hotel occupancy improved by more than 4 percentage points to approximately 79%. Cruise passenger arrivals increased by 27% through September.

Air passenger traffic has moderated from record levels but remained healthy, declining approximately 3% year-over-year. Construction activity is supported by public and private investment, including the ongoing deployment of federal disaster recovery funds and a growing pipeline of private sector projects. We continue to see demand in the energy sector as well as in warehousing and logistics. Overall, Puerto Rico's economic environment is stable, supported by healthy employment, tourism, infrastructure investment, and private sector development. At the same time, we are monitoring affordability pressures that are being driven by inflation and the higher cost of fuel and energy. We continue to focus on the three objectives we have shared previously. Being the number one bank for our customers, being simple and efficient, and being a top-performing bank. We are on the right path, and we will continue to execute with discipline.

Being the number one bank for our customers means building stronger relationships and continuing to strengthen our deposit franchise, one of our most important competitive advantages. That starts with giving customers the flexibility to bank through the channel that best meets their needs while continuing to enhance our products and maintain our high service standards. On the retail side, this quarter we launched a simpler deposit product that encourages behavior such as direct deposits to eliminate banking fees that will help us build deeper relationships over time. We also launched an account for college students to establish relationships earlier in their financial journey. These efforts advance our segment-led strategy, which leverages specialized offerings to unlock opportunities and deepening customer relationships. Our successful healthcare professional program is one example of this segment-led approach. The program supports deposit retention and has also generated more than $90 million in new loans this year.

On the commercial side, we completed the final wave of customer onboarding to our new cash management platform, concluding a multi-year effort. The platform provides greater flexibility and mobile access and enhanced money movement capabilities for our commercial clients. This strengthens our value proposition for business clients and further differentiates our commercial banking franchise in Puerto Rico and gives us a platform to continue to enhance functionality. Together, these initiatives demonstrate that our strategy is translating into tangible results. I look forward to building on this momentum with our teams as we continue advancing our objectives. I will now turn the call over to Lidio for more details on our financial and credit performance.

Thank you, Jorge, and good morning, everyone. As Jorge said, we delivered another solid quarter. Our focus on generating sustainable returns remained evident this quarter with ROTCE of 15.8%, compared with 17% in the second quarter. Please turn to slide 7. Net interest income increased by $6 million to $699 million, driven by higher income from investment securities and commercial loans. On a GAAP basis, net interest margin declined by 3 basis points to 3.63%, and on a tax equivalent basis, NIM was 4.16%, 1 basis point lower than last quarter. Ending loan balances increased by $293 million, driven by commercial and mortgage loans. We now expect full-year loan growth for 2026 of approximately 2%, primarily reflecting lower auto and lease activity and more moderate commercial growth. In our investment portfolio, we have maintained our strategy of reinvesting proceeds from US Treasury note maturities into 2 and 3-year notes.

During the quarter, we invested approximately $1.4 billion with an average duration of 2.7 years and average yield of approximately 4.3%. This represented a pickup of approximately 206 basis points on the notes that matured during the quarter. Ending deposits were $68.7 billion, down $1.5 billion from the second quarter. Puerto Rico public deposits decreased by $1.2 billion to $21.5 billion. On average basis, total deposits increased by $502 million. Excluding Puerto Rico public deposit, average customer deposits decreased by $619 million. Customer balances were consistent with historical patterns and continue to reflect the strength of our deposit franchise. We continue to expect Puerto Rico public deposits to remain between $20 billion and $22 billion for the rest of the year. Total deposit costs increased by 7 basis points to 1.64%, primarily reflecting higher rates on market-linked Puerto Rico public deposits that increased by 11 basis points.

Excluding these balances, deposit costs increased by 3 basis points to 1.13%, including an increase of 2 basis points in private sector deposit costs at BPPR and a 1 basis point increase at Popular Bank. For the year, we expect net interest income to increase by approximately 8.5%. Please turn to slide 8. Non-interest income decreased by $5 million to $176 million, but remained above our guidance range. The quarter included a $5 million benefit associated with a commercial loan refinancing. Compared with the third quarter of 2025, non-interest income increased by 3%, reflecting growth in debit and credit card fees of 10% and 8%, respectively, and a 60% increase in brokers and asset management fees. These results demonstrate the benefit of our broad product offering. We expect fourth quarter non-interest income of approximately $170 million. Please turn to slide 9.

Operating expenses increased by $21 million to $506 million. The increase was primarily related to higher personnel costs, including annual salary adjustments, higher profit sharing expenses, and increased performance-based compensation linked to the corporation's financial results. Based on current trends, we now expect full-year operational expenses to increase by approximately 2%, including the maximum profit-sharing contribution. Our effective tax rate was 14% during the quarter, driven by higher tax-exempt income. For the full year, we expect an effective tax rate of 14%. Turning to credit. Overall credit quality was stable during the third quarter. Consumer performance remained favorable, with net charge-offs continuing at a historical low level despite a seasonal increase in auto losses. Mortgage performance also remains strong, with historically low delinquencies and net recoveries. Commercial credit metrics were influenced by developments involving two unrelated commercial and industrial relationships.